Release Date: November 14, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- European Wax Center Inc (EWCZ, Financial) reported third-quarter financial results in line with expectations, demonstrating stability in a challenging macroeconomic environment.
- The company has a strong asset-light and recurring revenue model, which generates significant cash flow.
- A new partnership with Delaro Digital aims to overhaul guest acquisition and engagement strategies, potentially improving marketing efficiency and effectiveness.
- The company is focusing on attracting new guests and increasing ticket sales, which are expected to enhance unit economics and franchisee returns.
- European Wax Center Inc (EWCZ) has a robust liquidity position, allowing for flexibility in share repurchases, dividends, and potential debt paydown.
Negative Points
- The company is experiencing challenges in attracting new guests and increasing ticket sales due to a tough macroeconomic environment.
- There is a potential for more center closures, with 16 closures year-to-date and an expectation of 5 to 10 more by the end of the year.
- Higher than expected rent and wage costs are impacting franchisee profitability, particularly in high-cost areas like California.
- The company anticipates that closures may offset unit growth on a net basis in 2025, indicating potential negative net unit growth.
- Non-routine expenses related to executive severance, reorganization, and other efforts increased SG&A expenses by 21.6% year-over-year.
Q & A Highlights
Q: What are the common factors causing underperformance in certain units, and how does this relate to real estate choices?
A: David Berg, Executive Chairman of the Board, explained that the underperformance is not primarily due to real estate issues but rather macroeconomic conditions such as higher rent and wage costs. Some franchisees are optimizing their portfolios or choosing not to renew leases due to these pressures. The focus is on improving visibility into franchisee financial health and renegotiating multi-unit development agreements where necessary.
Q: Are there any changes in franchise terms or strategies for opening new centers, and how is the consumer behavior regionally?
A: David Berg stated that there are no anticipated changes in franchise agreements. The focus remains on keeping units open and successful. The core guest behavior remains consistent, accounting for 75% of revenue. California faces higher costs, impacting productivity, and pricing strategies are being considered to offset these costs.
Q: What are the expectations for net unit growth in 2025, and how is the company planning to attract new franchisees?
A: David Berg mentioned that while gross openings are expected, closures might exceed them, potentially leading to a net negative number. The company is focusing on discussions with current franchisees and has hired new team members to attract new franchisees, emphasizing the attractive returns of the model.
Q: How does the company plan to balance profitability with growth infrastructure if unit growth stalls in 2025?
A: Stacie Shirley, CFO, indicated that the company expects to sustain gross margins around 73% and will leverage its cost structure as top-line growth occurs. The focus remains on maintaining financial discipline and leveraging existing infrastructure.
Q: What criteria are used to assess whether a unit should be closed, and is there potential for corporate acquisition of units?
A: David Berg explained that the company has a closure policy and works closely with franchisees to explore opportunities for improvement. The company is considering using its cash flow to acquire units from franchisees who wish to exit, but this will be done thoughtfully to maintain an asset-light model.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
