European Wax Center Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 8, 2023

There are 9 speakers on the call.

Operator

Morning, ladies and gentlemen, and thank you for standing by. Welcome to European Wax Center's 3rd Quarter Fiscal 2023 Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a Q and A session. In If you have additional questions, you may rejoin the queue.

Operator

At this time, I would like to turn the conference over to Bethany Jones, Director of Investor Relations. Ma'am, You may begin.

Speaker 1

Thank you, and welcome to European Wax Center's 3rd Quarter Fiscal 2023 Earnings Call. With me today are David Willis, Chief Executive Officer and Stacy Shirley, Chief Financial Officer. For today's call, David Willis will provide a brief of our Q3 performance and discuss our priorities for fiscal 2023. Then Stacy will provide additional details regarding our Q3 financial performance and our fiscal 2023 outlook. Following the prepared remarks, David and Stacy will be available to take questions.

Speaker 1

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 could 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 opinion only as of the date of this call, and we take no obligation to revise or We'll be releasing results of any revision to our forward looking statements in light of new information or future events.

Speaker 1

Also during this call, we will discuss non GAAP financial measures, which 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 will now turn the call over to David Willis.

Speaker 2

Thank you, Bethany, and good morning, everyone. It's a pleasure to be speaking To you all for the first time in my new role as European Wax Center's Chief Executive Officer, and I want to thank you for joining us today. As we shared in our press release this morning, we delivered another quarter of new unit top line and bottom line growth in Q3. Our strong and committed franchisees drove more than 12% unit growth through 23 net new center openings and continue to add to our pipeline of future new units. We generated $241,000,000 in system wide sales, $56,000,000 in total revenue and $19,000,000 in adjusted EBITDA, each representing growth over the Q3 of fiscal 2022 despite a challenging macro environment.

Speaker 2

Furthermore, we delivered a 3.4% same store sales increase driven by positive comps in both ramping and mature centers. We're grateful to our associates, franchisees and in center partners for their relentless commitment to excellence. While we delivered organic growth in each of these metrics, Our Q3 did not materialize as we expected. I'll take a minute to talk about how business trends evolved as the quarter progressed. I'm pleased to say that throughout Q3, our wax pass holders and routine guests remain committed to their waxing routines, Driving consistent visit frequency and spend, just as they have in previous quarters.

Speaker 2

Both of these groups demonstrates strong brand loyalty and represent predictable recurring revenue. We remain Focused on continuing to grow these loyal guest cohorts who together comprise about 75% of network sales And increased share of wallet from them. We also remain focused on engaging our episodic guests to contribute a smaller portion of network sales, but whose behavior has been less predictable amid a difficult macro environment. During the Q2, we deployed several initiatives through our CRM and data warehouse tools to reengage episodic guests, which were effective. As we noted in our earnings call in August, we were pleased with their performance as we exited Q2.

Speaker 2

Additionally, solid sales trends entering Q3 gave us confidence in reiterating our fiscal year outlook, which assumed continued momentum. However, 3rd quarter survey work confirmed that while substantially all guests Continue to be pleased with their experience at European Wax Center and plan to return, a portion of them report that economic concerns are impacting their waxing As planned in the Q3, we increased our digital ad spend focused on driving reservations across all guest cohorts in lieu of broad or unnatural promotional activity that could impact 4 wall margins. However, These media efforts proved less effective than planned, leading to top line trends below our expectations. As a result, we are updating our guidance for the remainder of the year to reflect current transactional run rates. We have also retained a new media agency that is implementing new strategies, which we believe have the potential to favorably impact Reservation trends over time.

Speaker 2

However, our revised guidance for fiscal 2023 has prudently not assumed A near term change in trend from Q3 and Q4 to date. Stacy will provide more color on our outlook momentarily. We are very encouraged that our wax pass and routine guests remain committed to our brand and underscore the strength and consistency of the European Wax Center model. We recognize that we have an opportunity to not only better engage existing episodic guests, but also drive new customers to our brand, which I'll dive into shortly. To that end, we are more focused than ever on our 2 growth vectors, Expanding our footprint through new center growth and driving in center sales to benefit both system wide and same store sales growth.

Speaker 2

Turning first to unit growth. Our consistent execution of new center openings remains unchanged. We believe that both our pipeline of new locations and the health of our franchisees remains strong and demand from franchisees of all sizes remains robust. In the Q3, we opened 23 net new centers across 12 different states, all of which were in existing markets. Through Q3, we have already opened more than 80% of our expected Fiscal 2023 new centers.

Speaker 2

We are not seeing our franchisees slow their interest or new unit development. As a result, we continue to feel confident in our outlook of more than 10% unit growth this year, our multi year pipeline and our long term unit growth algorithm. Given the relatively modest initial investment for our centers, Our franchisees have sufficient access to capital to fund their growth even in an elevated interest rate environment. We believe our franchisee base is well capitalized with access to lenders who recognize our model strong Cash on cash returns and are committed to supporting network expansion. Additionally, our development team has worked tirelessly to offset industry wide inflation in the construction process, both through value engineering and by leveraging our scale to drive savings with vendors.

Speaker 2

We are incredibly focused on managing franchisee upfront costs and ultimately return on capital, which has encouraged continued reinvestment from our existing franchisees who are driving nearly all of our new center openings this year and comprised more than 90% of our forward looking pipeline. With these franchisees in mind, our teams are hyper focused on driving Top line in four wall performance through various initiatives, including staffing pipeline efforts, Facilitating network best practices, advising franchisees on how to address controllable costs, Implementing grassroots marketing efforts and identifying center specific sales benchmarks to drive incremental revenue opportunities. And as always, the team continues to build our pipeline of wax specialists to support near term and long term growth. During Q3, we hosted a gathering of more than 100 franchisees, which featured several helpful sessions on associate recruitment and retention. Wax specialist utilization in centers has improved year over year and 3rd quarter staffing levels were in line with targets.

Speaker 2

We are also making progress towards the brand's optimal mix of more experienced wax specialists. We remain confident in our ability to support both existing centers and new center growth through our wax specialist initiatives for years to come. Turning to our 2nd growth vector, increasing both system wide and same store sales by driving in center sales. As I mentioned last quarter, We were pleased to welcome Andrea Wasserman to our executive team earlier this summer as our first ever Chief Commercial Officer. While our marketing pillars remain attract more, buy more and visit more, under Andrea's leadership, We are evolving our approach to marketing and media with an even greater discipline around driving visits from both new and existing guests, as well as attracting more guests to the brand.

Speaker 2

We recently engaged a new media agency focused on implementing a streamlined media strategy across all our paid digital channels and search efforts. Our revised approach launched this month with a singular focus, driving more guest reservations in centers. We continue to leverage enhanced guest insights to better refine the audiences we target, deliver the right creative at the right frequency And drive high conversion rates. To drive more visits from existing guests, we have already implemented additional action messaging to target guests that are at risk of lapsing. We are also testing additional channels in Q4 to learn even more about the most Effective method of driving reservations among both new and existing guests regardless of cohort.

Speaker 2

As I've shared before, wax pass holders visit more than twice as often as episodic guests, making the wax pass our most powerful frequency driver. With that in mind, we have recently developed key communication flows to encourage wax pass consideration and purchase through our marketing channels, not just in sensors. In fact, wax passes and gift cards are now available online For the first time in our brand's history, just in time for the holidays in our semi annual wax pass promotional period. Lastly, as we mentioned last quarter, we believe that offering additional hair removal modalities Could be an effective method of attracting more guests to the brand, encouraging more visits and getting guests to buy more products and services over the long term. Our belief is that laser hair removal has the potential to both capture an incremental customer demographic And increased share of wallet from existing wax guests, in turn, enhancing already robust 4 well economics over time.

Speaker 2

We are in the very early stages of this effort and officially launched our laser test in 6 New York area centers about a month ago. While we plan to share initial test results further in 2024, We're pleased with the enthusiasm from both franchisees and guests during these early days. As we think about our longer term opportunities And corporate responsibilities, I also want to highlight the 3rd quarter release of our inaugural ESG report, detailing our efforts to build a more confident, inclusive and sustainable community, as well as our first brand wide fundraising campaign supporting the National Domestic Violence Top Line. Both of these efforts underscore our commitment to sustainability and living our values as a company every day. With that, I'd like to hand the call over to Stacy Shirley to review our financial performance and updated guidance for the balance of fiscal 2023.

Speaker 3

Stacy? Thanks, David, and good morning. Before I begin my remarks, I'd like to remind everyone that in some instances, I will speak to adjusted metrics on this call. You can find reconciliation tables to the most comparable GAAP figures in our press release and 8 ks filed with the SEC today. Let's begin with our Q3 financial results.

Speaker 3

We were pleased with how we exited Q2 and entered Q3, which began largely as we expected. However, as David described, a challenged macro environment impacted transactions and our media efforts were less effective than planned, causing top line trends to trail our expectations as we move through the quarter. Nonetheless, we still delivered continued growth over the prior year period. Q3 system wide sales increased 2.4 percent to $240,700,000 and total revenue increased 1.2% to $55,700,000 Year over year growth rates reflect the impact of a reporting calendar that shifted some of our largest wax pass promotional days into Q2 this year instead of Q3. And as a reminder, Payments for wax passes are a component of system wide sales and trigger royalty revenue for us as a franchisor.

Speaker 3

Overall, top line growth was driven by our 2 growth vectors, including 12.6% unit growth over the Q3 of last year. Same store sales also increased 3.4%, driven by both our ramping and mature centers. Consistent with the first half of this year, Higher average tickets were the primary comp driver. From a profit standpoint, 3rd quarter gross margin of 71.8% was largely in line with our expectations. 3rd quarter SG and A was $14,400,000 and as a percent of revenue was 25.8%, 100 basis points higher than Q3 last year, driven by an increase in corporate funded marketing.

Speaker 3

Q3 adjusted EBITDA increased 3.4 percent to $19,300,000 Adjusted EBITDA margin was 34.6 percent, representing an 80 basis point improvement year over year and exceeding our low 30s expectations, primarily due to the timing of advertising and Professional fees that shifted into the 4th quarter. Below the line, adjusted net income was $6,100,000 This differs from $19,300,000 in adjusted EBITDA due to 3 primary factors. First, interest expense was $6,500,000 a slight decrease from $6,800,000 in Q3 2022 due to additional short term interest income this year. 2nd, Q3 depreciation and amortization expenses were $5,000,000 Consistent with prior quarters, the vast majority of this line item relates The non cash amortization of intangible assets such as franchisee relationships and area representative rights that were established prior to our IPO. And 3rd, income taxes.

Speaker 3

We released our valuation allowance on deferred tax assets at the end of 2022. As a result, we expect to recognize annual income tax expense compared to negligible expense incurred during the period covered by the valuation allowance. For Q3, GAAP net income reflects $1,800,000 of tax expense And adjusted net income reflects $1,700,000 of adjusted tax expense. And now to our cash flows and liquidity, which reflect the Significant strength of our asset light model. Even in a tough environment, we continue to generate strong free cash flows for the benefit of both our network and our shareholders.

Speaker 3

From Q2 to Q3, our cash position increased by roughly $10,000,000 to $64,000,000 We had $395,000,000 outstanding under our senior secured notes and nothing drawn on our $40,000,000 revolver. Net leverage continued to decrease sequentially ending Q3 at 4.4 times adjusted EBITDA compared to 5.3 times in Q3 last year. Based on our outlook, we expect to further delever in the 4th quarter. Operating activities generated $17,600,000 in cash during the Q3 compared to investing outflows of approximately $150,000 We purchased approximately $5,500,000 of stock during the quarter and still have approximately $23,500,000 remaining under our current buyback authorization. Ultimately, our asset light, capital light business model enables us to determine the best way to deliver long term shareholder value as we continue to monitor our environment.

Speaker 3

Turning now to our updated outlook for 2023. With strong franchisee confidence and demand, we remain confident in delivering more than 10% unit growth for fiscal 2023. We have clear visibility and now expect to open 98 to 100 net new centers this year, which is towards the high end of our previous outlook. In terms of the top line, as David mentioned earlier, our previous guidance incorporated a solid start to the quarter and assumed that our strategic initiatives and media efforts would drive continued improvement through the back half of this year. While wax pass and routine guests Continued to show resilience and consistency, trends among our less frequent guests did not sustain the momentum we expected.

Speaker 3

As a result, we are updating our financial outlook for the balance of the year to reflect the current trends we observed in Q3 and Q4 to date. Our 2023 system wide sales expectations are now between $945,000,000 $955,000,000 with total revenue expected between $217,000,000 $219,000,000 Our full year same store sales Expectations move to a range of 1.5 percent to 2.5%. Our adjusted EBITDA outlook is 74.5 $1,000,000 reflecting the impact of a lower top line. As a reminder and consistent with our remarks last quarter, This range includes up to $1,000,000 of SG and A, primarily in the Q4 to support our laser hair removal test. Despite a challenged environment, we are committed to our promotional discipline and preserving 4 wall economics.

Speaker 3

As a result, our full year gross margin Expectations remain approximately 71%, unchanged from our previous outlook. Our 2023 interest expense outlook remains Approximately $28,000,000 slightly weighted to Q4 given a 53rd week in 2023. As a reminder, both fiscal years 202220 23 included a 53rd week that we will return to a 52 week year in fiscal 2024. We continue to expect our 2023 blended statutory tax rate to approximate 20%, which is based on known year to date exchanges from Class B to Class A shares. All in, we expect adjusted net income between $20,500,000 $21,500,000 Transaction trends have been relatively stable exiting Q3 and into Q4 to date.

Speaker 3

Our revised guidance incorporates a range of outcomes for the balance of the year, including continued stability or moderate deceleration from the current run rate. At the midpoint, our updated full year outlook translates to more than Unit growth alongside mid single digit system wide sales, total revenue and adjusted EBITDA increases. Even in an uncertain environment, we are proud to expect meaningful organic top line growth and stable adjusted EBITDA margins year over year. Most importantly, our existing franchisee network continues to reinvest in the brand and we feel confident in our long term unit growth algorithm. In conclusion, we remain the undisputed leader in our category, delighting guests in more than 1,000 centers across 45 states.

Speaker 3

Frequency and spend among our core guests are solid and consistent. However, the macro environment has been a headwind this year among our less frequent guests. We believe our best in class business model remains lucrative for franchisees who enjoy robust cash on cash returns at maturity. Those compelling unit economics in turn drive sustained reinvestment from existing franchisees. We expect our continued focus on unit growth and in center sales Growth will enable us over the long term to grow both network and corporate revenue, leverage our fixed cost profile for EBITDA margin expansion and continue generating significant free cash flow, in turn creating further value for European Wax Center, our franchisees and our shareholders.

Speaker 3

With that, I'd like to turn the call back to David to wrap up our prepared remarks and open it up for Q and A. David?

Speaker 2

Thank you, Stacy. As I laid out at the top of the call, we're focused on driving reservations and top line growth amid the near term challenges presented by this macro environment, while also maintaining our promotional discipline and margin profile. Despite these challenges, we remain confident in our long term growth potential. We believe we have a resilient service offering with loyal core guests and continued opportunities to expand our brand and the model. As the dominant player in a highly fragmented category, we are well positioned to leverage our scale and take market share in a period of disruption.

Speaker 2

At only 1 third of our long term unit target of 3,000 centers, our white space is significant and we benefit from continued reinvestments from submitted franchisees to support our growth trajectory. With so much potential yet to be realized, We remain as excited as ever about our future and the growth opportunities ahead for all of our stakeholders. We'd now like to open up the call for questions. Operator?

Operator

Thank Our first question comes from Randall Konik with Jefferies. Your line is

Speaker 4

open. Hey, thanks and good morning everybody. I guess maybe David, give us maybe a little bit more color On the pattern differential from the episodic guests, maybe changes That you're seeing frequency and spend, maybe a little more flavor there would be very helpful. And how that's potentially how much that has changed versus, Let's see the Q2, 90 days ago or 90 days ago. Just want to just get a little more color, that would be very helpful.

Speaker 4

Thank you.

Speaker 2

You bet, Randy. So our transaction trends exiting our 2nd quarter and entering the 3rd quarter were solid, Randy, and that is what gave us confidence in reiterating our full year guide on our last earnings call. There's really two things that happened in the quarter. The less frequent guests began to pull back in late August and into September. We saw no disruption or change in frequency or spend with our could be impacting this cohort, we increased our digital ad spend to try to drive additional reservations from all guest cohorts.

Speaker 2

So as we kind of saw movement through the quarter, Randy, it was really back half of August and through September. So what are we doing about it is probably more important. Well, we continue to leverage data to more effectively acquire and retain our most valuable guests. And we're driving reservations through new channels with more value oriented messaging. We're trying to target our guests with the messaging that resonates with them, those elements of our brands that are most valuable to them.

Speaker 2

And as I touched on just briefly in our prepared remarks, We also recently launched online wax passes and gift cards within the last couple of weeks to allow our guests to transact with the brand where they want. So So hopefully, Randy, that gives you a bit more color in terms of the movement through the quarter in terms of what we saw.

Speaker 4

Yes, it does. And then I guess, one final question for me would be early impressions or early learnings, I know it's very early On some of the laser tests that you've done so far, anything stand out that you can share with us?

Speaker 2

Sure. So our hypothesis as we discussed in the last call, we had kind of 3 things we wanted to understand. Could we capture an incremental customer to the brand, an incremental demographic to EWC by offering laser? Could we expand the share of wallet from our existing wax guests with laser? And overall, could we enhance what we think are already very robust 4 Wall Economics.

Speaker 2

4 weeks into the test, as mentioned, Randy, we're in 6 centers in the New York City The early reads on all of those fronts are encouraging. We plan to share kind of more Details of this pilot results in 2024, but at least initial reads would Just our hypothesis, we're encouraged by the reads on all three hypothesis. Understood. Thanks guys.

Speaker 3

Thank you.

Operator

Thank you. Our next question comes from Lorraine Hutchinson with Bank of America. Your line is open.

Speaker 3

Thank you. Good morning. It seems like the episodic guest has been really choppy quarter by quarter. I wanted to just zoom out and ask if you're seeing anything that would cause you to change your new store ramp expectations, your sales at maturity or anything that you think would change the franchise model?

Speaker 2

Lorraine, thanks for the question. You're exactly right. It has been choppy. This is now kind of the 6th quarter that I think that macros had an impact on that part of our guest file. We remain very bullish on our new unit development, not just in terms of NCOs delivered, but the pipeline of forthcoming NCOs, our management team is really supporting our franchisees every way that we can because Opening a center is certainly helpful to the brand, but if that center doesn't drive tickets and is not Ramping properly and ultimately profitable, we're not going to see those reinvestment rates.

Speaker 2

So our teams are hyper focused on making sure Not only do we deliver additional new centers into the system, but we're supporting franchisees to ensure that those are ramping properly and profitably. So Nothing right now, Lorraine, would suggest that we're seeing a slowdown in demand. Our franchisees, By and large are well capitalized. We have a very supportive lender group that's familiar with our model that continues to support our franchisees further development. But we're not taking this macro environment lightly.

Speaker 2

We touched on I think on our last call that were some NCO disciplines that we're putting in place to ensure that those pre opening marketing efforts are effective, so our franchisees can build Adequate number of guests in their file to market to the day they open. We also want to ensure that those centers are properly staffed To support the reservations and tickets, both of those things are very, very important to ensure that new centers Get off the ground efficiently.

Speaker 3

I would add one last thing. Making sure that we're balanced as it relates to or most importantly, we're trying to drive more reservations and in And so making sure we're balanced from a standpoint of how we're doing that and not just overly discounting on a broad based

Operator

Thank you. Our next question comes from Dana Telsey with Telsey Advisory Group. Your line is open.

Speaker 5

Hi, good morning, everyone. As you think about the cadence of sales and what you're seeing, Are you seeing it in all regions around the country? Is there anything different from one region to another? And then as you speak with the franchisees,

Speaker 1

How are

Speaker 5

they managing the expense structure or the aestheticians? How are you looking to continue To grow aestheticians or grow that frequency, are there any survey work that you've done in terms of Determining if it is if there's adjustments in pricing or wax pass events, do you need to do more of or less of in terms of managing the business as we go forward in this macro environment? Thank you.

Speaker 3

Thanks, Dana. I appreciate the question. From a geography standpoint, not really seeing much there. There's obviously going to be spots here and there and some of that's going to be generated based NCOs and where that's occurring, but nothing really to call out. As far as the wax specialists, I'll say a couple of things.

Speaker 3

I'm sure David might have some comments as well, but We continue to deepen that pipeline. We've talked about the relationships that we have with beauty schools and that's a really important piece. And we've been, I'd say successful. We're meeting our goals as it relates to not only the number of our wax specialists, but also the level Kind of a third red or orange and looking at that on a center by center basis.

Speaker 2

Yes. I would say, Dana, just to add to that, Stacy is spot on. We feel comfortable that the average center has the requisite targeted number of wax specialists. We continue to work with our franchisees On level what we call leveling up and retention, we would we've got a solid mix in terms of our most experienced waxers for the average centers. We're not exactly where we want to be in terms of the optimal mix, but we're working our way towards that.

Speaker 2

And kind of back to your question on the elevated labor rates, You may recall, we did not do or recommend an across the board price increase in fiscal 2023 for our network. We certainly have franchisees operating in certain markets with elevated labor costs. And in many cases, those franchisees have taken pricing At the local level to protect their 4 wall profitability, but we didn't do an across the board peanut butter spread price increase this year.

Speaker 6

Thank you.

Operator

Thank you. Our next question comes from Scot Ciccarelli with Truist Securities. Your line is open.

Speaker 7

Hey, guys. This is Joe on for Scott. Thanks for taking Question. I know you mentioned that you stayed away from broader on natural promotional activity in the quarter. Do you have any insight into whether nearby peers are maybe getting more aggressive Then drawing away those episodic guests that you might typically get?

Speaker 2

Joe, good question. The survey that we have completed would suggest this episodic guest, we're not losing her to a competitor. She's not waxing now. In many cases, she is an event driven waxer. So she waxes before she takes A given vacation before she makes a trip, she's not taking that trip, so she's not doing the other things leading up to that trip.

Speaker 2

The best intelligence we have from our guests would suggest we haven't lost her to a competitor. She still values European Wax Center. Unlike the wax pass guests and the routine guests that view us as non discretionary, Some of our episodic guests view us as more of a luxury and she's simply pulling back given the macro environment.

Speaker 7

Got it. That makes sense. And then just one quick follow-up. Can you talk about how Wax Pass sales are trending for the quarter maybe versus your expectations?

Speaker 2

Yes, Joe, good question. So we are in our semiannual promotional period. We launched a couple of weeks ago. We feel good about where wax pass sales are trending. In fact, The current transaction trends and the wax pass conversion rates, all of those are factored into our revised guide for the year.

Speaker 7

Got it. Thanks so much.

Speaker 2

Of course.

Operator

Thank you. Our next question And comes from Simeon Gutman with Morgan Stanley. Your line is open.

Speaker 1

Hey, guys. This is Jackie Sussman on for Simeon. Thanks so much for taking our question. Just in terms of the Q4 implied guide, could you talk about the assumptions within that on the transactions versus Ticket side, I know you guys called out lower quarter to date transactions, but just any more color there in light of the environment you're seeing? Thanks so much.

Speaker 3

Yes. So we didn't break that out kind of between transactions and pricing, if that's what you're speaking to. But what I can tell you is First two quarters, we certainly had that tailwind of the pricing increase that David mentioned just a minute ago and that we took in Q1 of 22 and still a little bit of that in Q3. So our comp has been heavily driven by pricing this year. So we'd expect that there will still be some of that going on in Q4 as it relates to sort of the additional pricing that Our centers or franchisees took on their

Speaker 1

own. Great. Thank you so much.

Speaker 3

Yes. Thank you.

Operator

Thank you. Our next question comes from Corrine Wolfmeyer with Piper Sandler. Your line is open. If you're still having issues, please dial back in with the call me feature. Okay.

Operator

Our next question comes from John Heinbockel with Guggenheim Partners. Your line is open.

Speaker 8

So David, I'm curious, is the idea now maybe lean more into the loyal the more loyal Consumer as opposed to episodic. And I'm curious within that, how is the bundling test going? Is that showing an ability to move the needle?

Speaker 2

Yes, John, great question. We candidly want to do both. And Apologies if I wasn't clear in my prepared remarks. We are wanting to drive tickets in general. Part of that is Reengaging episodic guests, attracting new guests to the brand, but absolutely increasing share of wallet with our existing guests is a primary focus Of our commercial marketing teams.

Speaker 2

In terms of the bundling test, we talked on this a couple of calls ago. We did kind of Started with the 6 center pilot to work through the operational kinks, expanded that to 100 center pilot. And now we've got a couple of months of data to get a solid read And we're encouraged by our ability to drive greater ticket. The longer term goal with bundles, Near term benefit would be to increase the average ticket. The longer term benefit would be to influence guest behavior.

Speaker 2

So I guess it might have only purchased one service from us per visit would commit to purchasing 2 or more services from us per visit. We have extended that extended the number of centers that now have the service bundles to over 200. We're going to continue to monitor and measure, but we're encouraged enough that I anticipate we will further rollout bundles throughout the network.

Speaker 6

And one thing I'd add, John,

Speaker 3

as your question as far as leaning more into episodic, it's really more leaning into just attracting more guests To the center. And a lot of that is going to come with we talked about the change to our media agency and we feel very good about the strategies that they're putting in place. But it's more broad based, I'd say.

Speaker 8

And then maybe as a follow-up, right? So if we go through a period here, right, where AUMB is down because of the macro. Obviously, to run these centers well, you have to invest In specialists, right. I mean, I'm curious the levers you have to take some pressure off the 1st year to 18 months of P and L, Right, for the franchisees. I mean, you're not going to touch the royalty.

Speaker 8

Could you take less on less margin on wax? How do you think about those levers?

Speaker 2

Yes, John. So we've got, as you said, a number of levers. If We saw AUVs not trending in a direction that was driving the reinvestment rates that we're seeing. Of course, we would look at Opportunities to support our franchisees and if we had to use our P and L, we would evaluate those. Our focus has been on operational recruitment and marketing support to ensure that these centers can ramp Productively in years 12 and profitably through maturity.

Speaker 2

So I think you raised an interesting point. There's a number of levers we could We have been fortunate that the center level performance writ large has performed in such a way we haven't had to Discount royalties or pullback marketing fund, but we absolutely want to make sure our franchisees

Speaker 8

Okay. Thank you.

Speaker 4

Sure. Thank you.

Operator

Thank you. Our next question comes from Karen Wolf Meyer with Piper Sandler, your line is open.

Speaker 7

Hey, good morning. Thanks for

Speaker 6

taking the question. The first one is to press on the episodic guest Trends a little bit more. And I think you've previously talked about 5% to 10% of gas being affected by macro pressures. Is that still the case? And then is the added pressure you're seeing just a stronger magnitude for those guests?

Speaker 6

Or has that 5% to 10

Speaker 2

Yes. Quint, thanks for the question. If I think about this episodic bucket, Let me first start with our wax fast and routine guests. That part of our guest file comprises over 75% of system wide sales. So if I kind of lump everyone Into this episodic bucket, it's about 25% of our network sales.

Speaker 2

What you've got in this bucket is pretty widespread. You've got Folks that are event driven waxers are going to come 2 or 3 times a year that are only going to come in for their waxing before that special event. And you have some folks that this group appears to be more impacted. They view us not as a nondiscretionary Part of their service like our wax pass and routine guests. So it's this part of our guest file that is we feel more pinched From the macroeconomic environment, we feel there's a part best demographic data we have available, which suggests more of this Part of our guest file is a lower income guest on average than our wax pass and our routine guests.

Speaker 2

So we speculate the macro is having a more Bigger impact on this part of our guest file.

Speaker 6

Got it. Very helpful. Thank you. And then Briefly on some of the marketing and ad spend you talked about, I believe you said you maybe increased some spend this quarter, but it proved not as Effective, but then you also said some ad spend got pushed into Q4 from Q3. So can you just touch on what exactly is going on there and what we should expect for spending into Q4 and maybe even the early parts of 2024?

Speaker 6

Thank you.

Speaker 2

Yes. Maybe let me touch on the first part of your question and Stacy can address As I had said earlier, we kind of had 2 things happen in the quarter. 1 is this less frequent guest began to pull back late August and into September, so we did increase digital ad spend to try to drive reservations from all of our guest cohorts. The second thing that happened is we had an execution in this Intermedia portfolio. This was impacted by an isolated technical error that generated fewer reservations than what we had planned for.

Speaker 2

I'll follow-up on that. So what are we doing about it? Well, we've engaged a new agency that was onboarded the last couple of weeks And we anticipate really positive impact on transactions over time, but I do want to highlight our guidance for this year does not assume A change from our current transaction trends. Stacy, if you want to touch on kind of timing of the spend, that would be great.

Speaker 3

Yes. So two things, right, the million or the 100 basis Point that we called out in SG and A that was marketing, that's what David just spoke to. The timing is the advertising, which is Basically what the what we call our end fund where our centers are paying into us, it's just a timing difference between Q3 and Q4. So it's not that we're Changing what we're doing or anything like that, other than obviously we've changed media agencies and optimizing continuing to optimize that spend. But it's really just a timing Peace on that.

Speaker 3

But there are 2 different buckets, if that makes sense.

Speaker 6

Very helpful. Thank you.

Operator

Thank you. Our next question comes from Jonathan Komp with Baird. Your line is open. Jonathan, if your telephone is muted, please unmute. There are no further questions at this time.

Operator

I'd like to turn the call back over to David Willis for any further remarks.

Speaker 2

Hey, thanks, Michelle. Well, we really appreciate the questions and your participation on today's call. We really appreciate your time. We look forward to speaking with you in the days and the weeks to come. Thanks so much for joining us.

Operator

Thank you for your participation. This does conclude the program and you may now disconnect.

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Earnings Conference Call
European Wax Center Q3 2023
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