European Wax Center, Inc.

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to European WAC Center's fourth quarter and fourth year fiscal 2023 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a Q&A session. In order to facilitate as many participants as possible, we ask that you please limit yourself to one question and one follow-up during the Q&A session. If you have additional questions, you may rejoin the queue. On the call today are David Willis, Chief Executive Officer, and Stacey Shirley, Chief Financial Officer, and Andrea Wasserman, Chief Commercial Officer. I would now like to turn the conference over to Stacey for opening remarks. You may begin.

Thank you, and welcome to European WAC Center's fourth quarter fiscal 23 earnings call. For today's call, David will begin with a brief review of our fourth quarter and full year performance and discuss our priorities for fiscal 2024. Then I will provide additional details regarding our fiscal 2023 financial performance and our fiscal 2024 outlook. Following the prepared remarks, we will be available to take questions. Before we start, I would like to remind you of our legal disclaimer. We will make certain statements today which are forward-looking within the meaning of the federal securities laws. including statements about the outlook of our business and other matters referenced in our earnings release issued today. These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially. Please refer to our SEC filings as well as our earnings release issued today for a more detailed description of the risk factors that may affect our results. Please also note that these forward-looking statements reflect our opinions only as of the date of this call and we take no obligation to revise or publicly release the results of any revision to our forward-looking statements in light of new information or future events. Also during this call, we will discuss non-GAAP financial measures which adjust our GAAP results to eliminate the impact of certain items. You will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP to GAAP measures in our earnings release. A live broadcast of this call is also available on the investor relations section of our website at investors.waxcenter.com. I'll now turn the call over to David Willis.

Thank you, Stacey, and good morning, everyone. Thank you for joining us today. We ended 2023 on a strong note with fourth quarter performance in line with our expectations. We made progress on our strategy of expanding net new centers and driving in-center sales which are both key to the European WAC Center growth story. Additionally, we were pleased with our ability to drive in-center reservations during the quarter, which capped off a solid year of growth for European WAC Center. In 2023, we opened 100 net new units driven by our committed franchisees and are proud to have delivered meaningful top line and bottom line growth across the board. generating $955 million in system-wide sales, $221 million in revenue, and $76 million in adjusted EBITDA. Even in a challenging macroeconomic environment, the European WAC Center business model is consistent, anchored by the resiliency of our core guests whose commitment to their personal care routines did not waver throughout the year. Reflecting on my first six months as CEO, I could not be prouder of our teams. I want to thank our associates, franchisees, and in-center partners for their relentless focus on the work that drives results for our network and for living our values every day. This year, we're excited to celebrate the 20th anniversary of the European Wax Center brand. In 2004, Our founders created this category of out-of-home waxing when they realized that waxing was an essential and recurring service, often performed in salons as an afterthought. They introduced a high standard of professionalism by creating a business concept solely focused on a consistent, hygienic, and efficient wax experience. Twenty years later, we remain the undisputed leader in this industry. I believe that our leadership team and board have advanced our founders' vision and set our company on a path to unlock the true potential of European WAC Center with an asset-light, predictable, high-growth franchise model. In 2023, we achieved several milestones as a brand from strengthening our leadership team to deepening our relationships with our core guests and franchisees to innovating our product offerings. We work to position European WAC Center for further growth. Importantly, we delivered on both of our key growth vectors, expanding our footprint through new net center openings and driving in-center sales, which benefits system-wide sales and same-store sales growth. I'll discuss both of these in more detail now. I'll start with our unit growth vector. In 2023, we delivered over 10% unit growth for a second year in a row, surpassing 1,000 centers nationwide, and we are incredibly pleased to have met the high end of our fiscal 2023 net new unit guidance. We ended the year strong in Q4 by opening 18 net new centers across 13 different states, 100% of our new center openings in 2023 came from existing franchisees, which speaks to the commitment and excitement they continue to have for the European WAC Center brand and our business model. Looking ahead in 2024, we expect to deliver 75 to 80 net new units in line with our high single digit unit growth algorithm. We're pleased that our franchisees remain well capitalized and committed to growing with our brand. Their continued demand underpins a robust development pipeline of over 370 commitments and provides us visibility to be able to continue to deliver against our high single digit unit growth algorithm for 2025 and over the long term. In partnership with our franchisees, We are focused on growing the top line in existing centers, particularly through new guest acquisition, while taking a deliberate approach to new center openings in 2024 with focus on markets with less development activity over the last few years. To support our franchisees, our operations team is putting an even greater focus on refining and evolving our new center opening best practices. which in turn enhances our already strong unit economics. One initiative we're particularly excited about is the network-wide launch of our improved data-driven pre-opening playbook. This playbook highlights some of our best-in-class centers that opened on day one with both the right number of new guests in their file and appropriately trained staff, which led to higher sales, revenue, and predictability compared to centers that opened without these elements. We believe this playbook will be a powerful tool for our franchisees moving forward. Before I turn to our next growth vector, I wanted to touch on our recent brand conference. Just two weeks ago, our teams were in Las Vegas with our franchisees. We spent the time hearing from those across our team and our network, sharing best practices and aligning on areas of focus for the brand and franchisees moving forward. We celebrated the wins we've had over the last year, but more importantly, kept our focus on the growth and opportunity we have together ahead. Our franchisees walked away from the conference feeling excited and confident in the direction of European Wax Center. Turning to our second growth vector, driving in-center sales, which benefits system-wide sales and same-store sales growth. I'll start with our guest trends in Q4. As expected, our core guests, which include both wax pass and routine guests, remain consistent in their frequency and spend. These guests remain committed to their personal care routines and represent a recurring and reliable revenue stream for our brand. In addition, Exiting our third quarter earnings call, transactions among our less frequent guests remained stable. Driven by these stable transaction trends and our refined media strategy, full year 2023 system-wide sales, revenue, and same-store sales came in above the midpoint of the guidance we provided in November. As we discussed last quarter, We remain focused on driving visits from both new and existing guests as well as attracting more guests to the brand through our attract more, buy more, visit more marketing strategies under Andrea's leadership. We believe that our evolved approach to our commercial and data insights capabilities as well as our data-driven marketing and media strategy will allow us to deliver a year of in-center sales growth at 5% to 7% for system-wide sales and 2% to 5% same-store sales growth in 2024. There continues to be a vast opportunity to drive new guests to the brand. And as discussed last quarter, we engaged a new media agency focused on implementing a streamlined media strategy across all of our paid digital channels and search efforts. This strategy launched in Q4 with a singular focus of driving more guest reservations in centers. A key pillar of our strategy is to optimize our approach to paid media by improving the efficiency of our media spend. I'm pleased to share that since our new media search and performance creative agency took over in Q4, we've seen an improvement in our average cost per reservation across various search engines and social media platforms. While it is still early, and we understand it will take time for this strategy to be fully implemented, we are off to a solid start and have good early reads on the reach, frequency, targeting, and creative that will drive further efficiencies in these channels. We also see several areas of opportunity for us to continue to increase share of wallet from our existing guests. We previously shared that we've been testing brow tinting in select centers. Historically, guests may have waxed their brows at European Wax Center, but went somewhere else to get them tinted. Our team has worked to develop a proven brow tint formula, which guests have enthusiastically responded to. We've been very encouraged by our ongoing tests as we've learned that it is a lever to bring new guests to the brand, and we look forward to expanding this service to our network soon. Increasing frequency among our existing guests and converting non-core guests to WaxPass users also remains a priority. As you know, WaxPass holders visit more than twice as often and spend more than twice as much with the brand compared to our less frequent guests. making the WaxPass membership program our most powerful frequency driver. As we've evolved our data and technology functions, we've implemented key communication flows to encourage WaxPass consideration and purchase in our marketing channels. Last quarter, WaxPasses and gift cards were available online for the first time in our brand's history, which proved successful in retaining both new and existing guests. In addition, through our guest survey work, we've learned that while guests are attracted to the Wax Pass, they are less likely to commit to purchasing a full nine plus service Wax Pass until they visited and experienced the services we provide a few times. To encourage conversion and increase frequency and loyalty, We tested a three plus one wax pass offered only to new guests to incentivize trial by driving additional visits. We were pleased with the results of the test in the fourth quarter and plan to roll out this network wide this spring. On the operations side, we have implemented new leadership to oversee the local marketing team that supports and works directly with our franchisees. We've also repositioned our field trainers by embedding these experts in local markets to further aid and coach franchisees and center associates in driving ticket value and frequency in centers. These, in turn, drive system-wide sales. Ultimately, we are confident in our ability to drive new guests to the brand while increasing average ticket value and frequency among existing guests through the initiatives I've outlined, which we believe will help us achieve another strong year of top line growth in 2024. Before I pass it to Stacy, I wanted to touch on our laser hair removal pilot. As we've discussed over the last two quarters, we believe that offering additional hair removal modalities could be an effective method of attracting new guests to the brand, increasing share of wallet from existing wax guests in enhancing already robust four-wall economics over time. We launched our pilot laser test in six New York area centers in Q4 and have been pleased with the results seen thus far. We were able to generate strong sales from both new and existing guests while minimalizing cannibalization of existing core waxing services. Based on results today, We are expanding our pilot test to more centers in New York this quarter and planning to make additional investments to support this test in other select states throughout the year. Stacy will provide more detail on this shortly. While we see this as a potential additive opportunity to expand our brand and the model, European WAC Center remains the dominant player in our category with the strong and resilient core service offering waxing. As we introduce laser on a pilot basis, we believe we are uniquely positioned to leverage our scale and our footprint as the experts in out-of-home hair removal. With that, I'd like to hand the call over to Stacey Shirley to review our financial performance and our guidance details for fiscal 2024. Stacey? Thanks, David.

Before I begin my remarks, I'd like to remind everyone that in some instances, I will speak to adjusted metrics on this call. And as I mentioned, you can find reconciliation tables to the most comparable gap figures in our press release and 10-K filed with the SEC today. Turning to our financial performance, as David mentioned, we delivered strong results in line with expectations, thanks in part to our core guests remaining committed to their waxing routines. Q4 system-wide sales increased 7.2% to $241.7 million, and total revenue increased 5.2% to $56.3 million. Topline growth was primarily a result of unit expansion, including 18 net new centers during the quarter. Same-store sales also increased 1.3%. From a profit standpoint, fourth quarter gross margin improved approximately 240 basis points to 72%, primarily due to favorability in our wholesale margins. Fourth quarter SG&A decreased 6% to $13.7 million, and as a percent of revenue was 24.4% compared to 27.3% last year. This decrease was driven by lower technology and insurance costs for the quarter. partially offset by increases in payroll and benefits and expenses related to the pilot of laser hair removal. Q4 adjusted EBITDA was $19.3 million, an increase of 0.3% versus last year. Fourth quarter adjusted EBITDA margins decreased 170 basis points to 34.2%, driven by higher advertising, some of which was a shift into the fourth quarter, and expenses related to our laser pilot. GAAP net income increased 59.1% to $3.6 million, while adjusted net income declined from $48.7 million in Q4 2022 to $6 million in Q4 2023, primarily due to the income tax benefit recognized in fiscal 2022 from the release of a valuation allowance on deferred tax assets. For the full year, we opened 100 net new centers, approximately 10.6% unit growth, above our long-term high single-digit growth target. System-wide sales increased 6.3% to $955 million, and total revenue increased 6.6% to $221 million. And same-store sales increased 2.9%. Top line growth was driven by new centers opened and increased spending by guests at our centers. Full year SG&A increased 0.9% to $59.5 million and as a percent of revenue was 26.9% compared to 28.4% last year. This improvement was driven by lower professional fees and technology costs for the year. Adjusted EBITDA was $76 million, an increase of 6.1% compared to $71.6 million in fiscal 2022. Adjusted EBITDA margins decreased slightly by 10 basis points year over year to 34.4%, partially due to increased corporate marketing and expenses related to our Laser Pilot. Full-year interest expense increased to $26.7 million from $23.6 million in 2022 primarily as a result of higher interest rates following our refinancing, which closed in April 2022. Lastly, adjusted net income declined to $22.5 million in 2023 from $71.5 million in 2022 due to the income tax benefit we recognized in fiscal 2022 related to the release of the evaluation allowance on deferred tax assets. and GAAP net income decreased to $12.3 million from $13.6 million the prior year. Turning to the balance sheet, we ended the quarter with $52.7 million in cash and $394 million outstanding under our senior secured notes. Our $40 million revolver remains fully undrawn. Net leverage at the end of fiscal 23 was 4.4 times adjusted EBITDA. Keep in mind that we spent $30 million in fiscal 2023 to buy back stock. Excluding this, we would have been approximately four times levered. Over the past 14 months, we fully utilized our $40 million stock buyback authorization. For fiscal 2024, we plan to continue to delever nearly an additional full term to approximately 3.5 times based on our fiscal guidance that I'll give shortly. Net cash provided by operating activities was $55.6 million in fiscal 2023 compared to less than $1 million in investing outflows, a staple of our asset light, capital light model. Turning now to our updated outlook for 2024. As a reminder, both fiscal years 2022 and 2023 included a 53rd week. We will return to a 52-week year in fiscal 2024. We estimate that the contribution of the 53rd week is approximately equal to an average fourth quarter week. As David mentioned earlier, we plan to open 75 to 80 net new center openings in 2024. Nearly all of our 2024 openings will be from existing franchisees. Looking at the current development schedule and commitments, the timing of these openings will be back half-weighted, with an estimated one-third in the first half and approximately two-thirds in the second half. We expect seven net new openings in Q1. From a top-line standpoint, we expect system-wide sales between $1 billion and $1.25 billion, which represents a growth rate of approximately 6.5% to 9% on a 52-week adjusted basis, and total revenue between $225 million and $232 million. Beginning in 2024, we will remove a surcharge to franchisees that we put in place during COVID to help offset elevated supply chain costs, which will impact full-year 2024 revenue. We expect system-wide sales and revenue to be the lightest in Q1 and heaviest in Q2, consistent with last year, and slightly more weighted towards Q3 versus Q4 compared to prior year. We also expect two to 5% same store sales growth for the year. We anticipate Q1 to be the lowest with a consistent ramp up in same store sales throughout the year as the in-center sales initiatives that David mentioned take root. Our overall top line outlook assumes that our growth initiatives will help drive new guests to the brand and increase average ticket and frequency among existing guests as we progress through the year. We expect to drive relatively modest gross margin expansion. Our model naturally generates meaningful SG&A expense leverage, and we are reinvesting a portion of this in 2024 to support our strategic initiatives and growth. Our adjusted EBITDA outlook is approximately $75 million to $80 million. First, this range includes the full-year impact from investments we made in key strategic hires in 2023. Second, this range includes approximately $4 million of operating expenses, which are foundational and mostly one-time in nature to support our expanded laser hair removal pilot that David discussed. The majority of these expenses will be incurred in the back half of this year. As David mentioned, we are still in the early stages of this pilot, and while we've seen encouraging results so far, we remain focused on our strong and resilient core service offering, waxing. Excluding the laser investment, we would expect to see approximately 130 basis points of adjusted EBITDA margin expansion for our core waxing business in 2024. We expect approximately $28 million of interest expense this year. We currently believe our 2024 effective tax rate will decrease to approximately 25% before discrete items. Given our capital structure, we expect our blended statutory tax rate will be 21% and expect it to increase over time as pre-IPO shareholders exchange their Class B shares for Class A shares. As a result, we expect adjusted net income between $22 million and $25 million. In summary, we are entering 2024 with confidence in the strength of our resilient asset-light model, recurring predictable visits from our core guests, and well-capitalized franchisee base. We are pleased with the progress we've made in our in-center sales growth strategy and will focus on driving and obtaining new guests in 2024. We believe we are making investments in the right areas to extend our position as the undisputed hair removal category leader and continue to take share in its highly fragmented category. We'd now like to open up the call for questions. Operator?

Thank you. Ladies and gentlemen, to ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced. To enjoy a question, simply press star 11 again. And as a reminder, in order to facilitate all participants in the queue, please limit yourself to one question and one follow-up. If you have any additional question, you may rejoin the queue. Please stand by while we compile the Q&A roster. And our first question, coming from the line of Randy Koenig with Jefferies, your line is now open.

Thanks a lot, and good morning, everybody. I guess, David, maybe we could get a little bit more of a deeper discussion on learnings from the brow test, the continued testing of laser. Maybe give us some perspective on what you're seeing in terms of lift in revenue per visit. What are you seeing in the differences in the type of guests entering to test those products? Are they already waxed customers that are now trying an additional service or vice versa. Just be really helpful to understand what you're seeing more specifically. And then as it relates to just long term store growth, you know, we're coming off a year where you had, you know, peak, I think, unit openings ever showing a lot of underlying strength in demand from existing franchisees. What do you think is a kind of a doable long-term kind of thought around openings per year? Would we be thinking this 75 to 80 is kind of the most realistic to think through over the medium term? Just that would be helpful as well. Thanks, guys.

Sure, Randy. Good to talk to you. Let me maybe take those in reverse order, if that's okay. Okay. As it relates to kind of our view on new units per year, the high single-digit outlook for 2024 is in line with our long-term growth algorithm. We're taking a deliberate approach on markets this year. As you mentioned, Randy, we were well ahead of our high single-digit algo the last two years, and we plan to focus on markets this year that have had less development activity over the last couple of years to allow those markets that were most active time to absorb those centers. We believe delivering the high single digit unit growth after two years of exceeding these targets is candidly a testament to the strength of the overall model. We have a robust pipeline of licenses that gives us confidence and visibility to delivering high single digit unit growth, not just for 2024, but for 2025 and beyond. So overall, I think we continue to feel really good about kind of our unit growth algorithm. As it relates to laser, you may recall we had a handful of initial objectives we wanted to pressure test in this pilot. One is can we attract more new guests to the brand with laser? Second is can we increase share of wallet from our existing waxing guests? And the overall assessment was can we enhance what we think are already robust four-wall economics? So the trends to date have demonstrated encouraging results on all of these, the one franchisee that is participating in our pilot in the six center pilot up in New York is seen enough to want to extend to some additional centers in the same market. We still have some things to learn. So we do plan the purpose of extending the pilot into other centers and other markets this year is to really further learn some of the items that we you know, haven't figured out with 19, 20 weeks into our initial phase of the pilot. I do want to remind Randy, you, and everyone that we continue to view laser as additive and accretive to our core business. We do remain the dominant player in our category, and we think our core business remains very strong. As it relates to brow tinting, the original thought there was can we use brow tinting as a basket driver to increase dollars per ticket for our guests. And ultimately, we would like to use that as a behavioral change where we can maximize revenue in the same 15-minute window that we're using for the eyebrow. Eyebrows are number two service of all of our core service SKUs. So the play there is really can we get folks to buy two services and we optimize the same 15-minute window We've seen enough there in the tests. Our wax specialists are really encouraged by the brow tinting. The new formula is resonating with our guests. That's what's really driving our decision to roll this out network-wide later this year.

Hopefully, Randy addressed most of your care. Super helpful. Just a quick follow-up on just on capital structure. How do we You bought back a nice amount of stock. You've fully completed the authorization on the share of purchase program. How do you want us to think about optimal leverage ratios, your thirst in the board for future share of purchase activity? Just kind of remind us how you think about capital structure in the business, given the healthy amount of strong and predictable cash flow. Thanks, guys.

Yeah, thanks, Randy. So our asset-like, capital-like model does continue to enable us to generate meaningful free cash flows. So I think it really gives us flexibility. We will continue to evaluate best options on excess cash, how to deploy that and drive value for shareholders. We'll continue to evaluate that with our board, Randy. Thanks, guys.

Thank you. And our next question coming from the line of Lorraine Hutchinson from Bank of America. Your line is now open.

Hi, this is Melanie. I'm for Lorraine. I was just hoping you could break down the components of the 2024 comp guidance. You know, what are the puts and takes to achieve the low end versus the high end? And is there any implication for price changes per the year? Thanks.

Yes. Hi, Melanie. This is Stacey. Thanks for being on the call. You know, the guidance we gave was 2% to 5% for the year. And as we look at that over the course of the year, we'll ramp as the number of initiatives that David spoke about, both in-center and from a marketing perspective, as those continue to gain traction. And so think of that as you go through the year. Q1 will be the lowest, and we'll continue to ramp. From a system-wide sales perspective, similarly, Q1 will be our lightest quarter. with Q2 being the heaviest quarter, which is similar to what we've seen in the past. From a pricing perspective, we have not baked in kind of an EWC corporate, you know, enterprise-wide guidance into our guide on the top line. However, as you know, our franchisees often take price where they think that it is appropriate, and we will continue to monitor, you know, is there opportunity, whether that is, again, a broad-based price increase recommendation or even service by service. But today, that's not necessarily baked in into those projections.

Thank you.

Thank you.

Thank you. One moment, please, for our next question. And our next question coming from the lineup, Scott Ciccarelli from Truist. Your line is open.

Hey, good morning. This is actually Josh Young on for Scott. So another one on that 24 sales guidance.

know what have you guys baked in in terms of trends for the different guest cohorts specifically around that more episodic guest so we don't really break that out as far as you know how that would come into play on the guidance but what i would tell you is as we exited two four i think you know from macro perspective not big changes right not necessarily deterioration but not really an improvement um we had started to see an improvement in that you know, call it non-core guests as we entered into Q4 as a result of the number of things that we were doing. But we haven't really, we're not breaking that out. Our wax pass or core guests, right, which is wax pass and our routine guests, those continue to be very strong and their behavior has not changed as it relates to their spend and their frequency of visit. Again, that represents a little more than 75% of our total system-wide sales. Anything to add?

No, the only thing I would add to that, Josh, is as we had mentioned in our prepared remarks, we've onboarded this new media agency that's hyper-focused on driving in-center reservations. We have a number of initiatives focused on driving new guests to the brand. And we also, candidly, in this macro environment, believe we can control the things that we can control. So we're redeploying our field trainers to embed them in markets, working with our franchisees to drive impact at the local level. Now, a number of those initiatives we would expect to see materialize in terms of tickets and transaction growth throughout the year. So we feel very good about our overall guidance, but we do expect that to build throughout the year.

Yeah, that's helpful. Thank you. And then one more follow-up. If you could talk about the trends you're seeing in terms of hiring, retaining WAC specialists, And then any thoughts there as it relates to the outlook for 24?

You bet. So, candidly, we ended the year, we think, in a very healthy position in terms of overall network levels of staffing. The average center had the requisite number of – target number of wax specialists. Our operations and industry relations teams supporting our franchisees made some good headway throughout 2023 in actually elevating the mix of our more experienced waxers – relative to our less experienced waxers. We've extended our beauty school partnership programs. I think we're now in 31 schools in eight different states. So overall, I think we feel like the network is adequately staffed, and we are well positioned to support continued growth for the brand. Got it. That's helpful. Thank you.

Thank you. And our next question, coming from the line of Corinne Wolfmeyer with BIPOC Settler Yolanda Selfin.

Hey, good morning team. Thanks for taking the questions. I'd like to touch a bit on the expectations for EBITDA for the year. I think you said about like excluding the laser investment, about 130 basis points of margin expansion. Is that how we should be thinking about the expansion beyond 2024? And then as you continue to roll out laser, Should we expect further investments in the out years to help support that? Or is this more of a one-time thing here in 2024? Thank you.

So we, you know, we haven't given guidance obviously outside of 2024, but I think as you think about that, right, we show, typically we, you know, show leverage on our SG&A and then I would consider, you know, some level of margin expansion, gross margin expansion would be built into those numbers. So you would expect some level of expansion year over year for sure. From a laser perspective, the investment that we're making this year, some of those are just one-time foundational type investments, some of which are also to build the infrastructure that we would need to expand this test and to further centers. So there would continue to be investments, but not, I wouldn't assume, at this level.

Very helpful. Thank you. And then if you could just touch a little bit on what's driving the improvement that you saw in Q4 for those episodic guests. How much of it do you think is attributed to your increased marketing efforts that you've been implementing versus just general market improvement? Thanks.

Hi, thanks for the question. This is Andrea. I'll take that one. So when we think about our marketing efforts, it's really focused on two segments of our guest population. First and foremost, bringing new guests to the brand, and secondarily, making sure that we're increasing the conversion of wax paths once we have guests in the fold. And so that really is our focus, as opposed to the smaller segment of the guest population that is more episodic, as you said. That said, we do think about what will motivate that population, and we know which portion of that segment is responsive to promotions. We can be very tailored in doing that so that we're not promoting more often than necessary or doing things in in a blanket way and so some of that certainly certainly does help as we think about the right times and tactics to use in increasing visits among that episodic guest very helpful thank you thank you and our next question coming from the lineup

Dana Telsey with Telsey Advisory Group. Your line is open.

Hi, good morning, everyone. As you think about market pricing, how do you think about it this year as compared to last year? How do you think of pricing, whether it's for WaxPass, for different services, and given that you set the market pricing, any changes that you expect as we go through the year? And then I believe that one thing you were working on was launching a new center opening playbook in its upcoming first quarter. Where do you stand on that? What will be the differences? And is there a different cadence this year of the timing of new center openings versus last year? Thank you.

Hey Dana, this is David. Let me start with the NCO playbook and then I'll hand it off to Andrea on pricing. So I think we've talked on prior calls that we've been studying new centers that have opened over the last couple of years that have performed the best. We've refined our playbooks, we've made additions. These are not wholesale new written playbooks, but in some cases we've dramatically modified. These modifications are informed with data to be a bit more prescriptive on the pre-opening spend requirements in the channels where our franchisees should spend. All of that is important to ensure that they open with the requisite number of new guests in their file on day one. We also want to ensure post day one opening that they continue What are the marketing activities and the digital channels they should be using to ensure they can continue to drive momentum? And then finally, we've analyzed kind of both the headcount numbers and the levels of experience for our WAC specialists and our center managers. And we've seen, so we're being more prescriptive on what does the staffing model need to look like in day one? What does it need to look like in month three, in month six? ultimately these centers have driven higher sales and greater predictability versus the average benchmark and they're just faster revenue ramps so we've dialed out the playbook we shared uh that this was coming with our franchisees at our vegas at our vegas conference a couple of weeks ago so we will be rolling this out across the network this year as it relates to pricing as you know dana we always evaluate this. And when we make a recommendation to our network, it's typically informed with either guest survey work or price elasticity work. As it relates to the things we're looking at in 2024, I'll pass it over to Andrea to address that.

Sure. Hi, Dana. So in thinking about what the network needs to hear from us in terms of pricing insights, we're obviously looking at past trends for how the market has reacted, how the how our target audience has reacted to price changes. We're looking at the latest transaction trends, certainly thinking about our costs as well as very, very importantly for wall margins for our franchisees. And then also thinking about what, what the rest of the market may be doing and what elasticity, as David said, we think that there is at this time. So we're always looking at that, always pulling in a wide array of data points. to determine what insights we want to provide to our franchisees.

Dana, I think you also asked the question about the timing of the new centers. Yes. And so it'll be back half-weighted, you know, a third roughly in the first half and two-thirds in the second half. And then we also talked about Q1 that we expect to open seven in net centers.

Thank you. Thank you. One more next question. And our next question coming from the lineup, Simeon Goodman from Morgan Stanley. Your line is open.

Hey, good morning, everyone. First question, Stacey, the extra weeks that we had, are you suggesting that sales and EBITDA are the right way? They were even, or is there a greater EBITDA contribution? And if you could just remind us, why do we have 53 weeks, two years in a row?

So the contribution, yeah, I think in rough estimates is about an average fourth quarter week is what we're using for kind of top line and bottom line guidance. And the reasons we had it for two years, I was not here for that. David, this was to get onto a regular retail calendar. The first year was, do you recall what that?

I think the second year was just to align with everyone else's retail calendar.

Okay. Okay. No worries, that's a minor question. The other one, this is back to the two and a half comp, which you've got in a lot of different ways, because if 75% of your business is relatively recurring, trying to think about it in different buckets, meaning is the WaxPass customer, is it frequency or is there some ticket? I know you mentioned we don't explicitly think about it that way or ticket. Trying to understand what is driving the business. Is it mature versus immature stores? Any other breakdowns that you can provide?

Well, so, you know, as is typical when we look at our comp, I mean, the ramping centers are the biggest driver of that comp as we, you know, move into the 13th, you know, month. So that we would expect to be continue in the new year.

No, Randy, I mean, you're familiar enough with our model. Ramping is usually and has an outsized impact on the overall comp in terms of the number, and we're expecting this year that the ramping centers will be a bigger contributor to the comp than the mature centers. Okay.

Thank you.

Sure.

Thank you. And our next question, coming from the lineup, John Heinsbacher with Guggenheim Securities. Your line is open.

So guys, I want to start with, it looks like adjusting for the extra week, right? But AUV sort of flat in 24 versus 23. So my guess, down in the first half, up in the second. Would that be right? And when I think about the drivers of that, is that more the units that have opened in the last two years picking up or better performance from centers this year? And then I guess the last part of that, right, if I think about maybe, David, touch on the maturation curve, right? Because I think normally you've opened up at maybe 450 in year one. Do you think with the playbook we can now do 500, 500-plus in year one?

I would tell you, John, on this most recent point on NCS, that would be the goal. We want to ramp faster. Yeah. are not immune to the elevated construction costs. When we went public in 2021, the average build-up cost was 350. That's crept up to 400 to 450. I think our development teams have done a great job value engineering cost out of the fixtures to partially absorb some of the elevated construction costs. But when you factor that in with elevated labor costs in various markets, we want to ramp faster. And the 450 has been our historical ramp. Candidly, that's been consistent cohort to cohort to cohort. But the purpose of the NCAA playbook is to drive the average center to be north of that so our franchise owners can get to the very attractive cash on cash returns faster. In terms of your questions on AUVs being flat in terms of the overall drivers. I would say we're focused on, as we outlined in our prepared remarks, new guest acquisition across the brand for every center and driving greater rate and frequency throughout the system. So if I put aside the ramping centers, which you can kind of get lost in how much of that is just natural ticket growth because of the maturation. We do expect to drive, our mature centers continue to drive strong four wall profitability, but the initiatives that we've outlined for 2024, we expect to drive both more tickets, more guests into those centers and a greater spend from the average ticket within those centers. So I don't know if that's directly addressing your question, John, but our goal this year with the priorities and initiatives that we've outlined is to drive improvement in what we think are already robust four-wall economics, but to drive improvement in our mature centers through both the addition of new guests and increased spend from existing guests.

Well, as a follow-up, you raised the point of higher capex. So I think about, and I know you've done this in the past with the ancillary supplies What else can you do to reduce the cost of operations, right, for a franchisee? And that kind of brings us back to, I know you've been thinking about over the years, supply chain on wax and getting that cost down and passing that along. You know, is that now more urgent than it might have been or same?

You know, I would say we've always viewed that with a high priority. I mean, we recently, I think Stacey touched on this in her prepared remarks, is we've been monitoring ocean freight A couple years ago, we put in place this freight surcharge to cover those elevated costs. Those have dropped down to a level where we could remove that, and that should generate a couple million dollars on an annualized basis of savings. If you think about all the stuff that doesn't sound that exciting, but literally the wax applicator blades, the table paper, the gloves that estheticians use in providing the service, we are constantly monitoring the markets. and working with our vendor partners to drive those costs down on an individual service basis. It's a few cents here and there, maybe a dollar, but that ultimately adds up for our franchisees. So our supply chain team is, candidly, it's not a new priority or an elevated priority. We've been doing this over the last several years, pre-COVID and post-COVID, to ensure we can control what we can control to help our franchisees maximize profitability within their four walls.

Thank you, guys.

Sure.

Thank you. And as a reminder, ladies and gentlemen, to ask a question, please press star 1-1. Our next question coming from the lineup, Jonathan Kump with Baird. Elon is open.

Yeah. Hi. Good morning. David, I wanted to just follow up a little further on the development plans you touched on. you know, a few markets sort of digesting the growth the last few years. And can I just ask, are you seeing any divergences in the opening performance or volumes when you look across markets? And then as we think about the plans this year, just, you know, two-thirds back-weighted on openings. Can you comment on the visibility, since that looks quite a bit different from last year?

Yeah, I would say, John, thank you for the question, that Overall performance, as Heinbacher just mentioned in our question and answer session there, you know, we continue to see AUBs at 450, but we want those to be higher to get our, you know, new centers faster to break even and a faster ramp to get to the very robust cash-on-cash return. So we haven't seen a degradation in opening performance, but I would say we are motivated to open with faster ramps than our brand has experienced over the last several years. I wouldn't look too much into the timing. The demand remains incredibly robust from both our existing partners, our growth partners, and we still have a number of folks looking for entry points into our network. So in terms of the timing and shaping of the NCOs, I think first quarter last year we were at 34. There was no real magic to that. delivering 34 and, you know, our seven that we've guided to this year, just given we're so close to the end of the first quarter, we wanted to be a bit more prescriptive. But I wouldn't look too much into the, you know, one-third front half, two-thirds back half. That's truly where just kind of the timing of what we've slated to open this year is expected to fall.

Okay, that's really helpful. And one follow-up, if I could just ask on the laser initiative. It looks like, you know, corporate started recruiting last month for a fairly senior role to lead that effort. So, David, I'm wondering if you could just comment on what we should read into maybe, you know, the multi-year aspirations as you start to line up. It looks like maybe some more corporate resources behind that division.

Yeah, John, great. Of course. Great question. As I had mentioned earlier, we do view laser as an accretive and additive component to our core business. Our franchisee has been an amazing partner in terms of the effort and resources he's invested to help us pilot this in the handful of centers in New York. Candidly, for our corporate staff, we have maintained focus on delivering our core business and supporting our franchisees and our core waxing business. So while this laser pilot, we've given this a fair amount of air cover as we didn't want to catch anyone off guard that we're dabbling in this, but it's been a little bit of a night and weekends project for our corporate staff. We've seen enough in the trends to say it's certainly worth making a few investments in some dedicated resources to ensure we can further support this extended pilot. I hope that helps, John.

Yep, very helpful. Thanks again.

Thank you. And I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. David Willis for any closing remarks.

Livia, thank you for hosting today, and thank you, everyone, for your time on the call today. We look forward to speaking with you in the days and the weeks to come. Have a great day.

Ladies and gentlemen, that does end our conference for today. Thank you for your participation. You may now disconnect.