European Wax Center Inc (EWCZ) has established itself as the undisputed leader in the rapidly growing out-of-home waxing services market in the United States. With over 1,000 locations across 45 states, the company has built a powerful brand and a loyal customer base through its commitment to delivering a consistent, high-quality guest experience.

Business Overview:

European Wax Center, Inc. was formed as a Delaware corporation on April 1, 2021, for the purpose of completing a public offering and related transactions to carry on the business of EWC Ventures, LLC and its subsidiaries. The company's operations involve selling franchises of European Wax Center, distributing unique facial and body waxing products to franchisees for use in waxing services, and providing branded facial and body waxing products directly to consumers at various locations throughout the United States.

The company's journey began in 2004 when it was founded, with the first European Wax Center location opening in 2005. Over the next several years, European Wax Center experienced rapid expansion through its franchise model, growing to over 900 locations by 2019. The company faced significant challenges in 2020 due to the COVID-19 pandemic, which resulted in temporary center closures and reduced foot traffic. However, European Wax Center demonstrated resilience by implementing safety protocols and supporting its franchisees through this difficult period.

A major milestone in the company's history was its initial public offering in 2021, which raised over $200 million in proceeds. This influx of capital allowed European Wax Center to further invest in its corporate infrastructure and marketing capabilities to support its expanding franchise network. By the end of 2021, the company had grown to over 940 locations across 44 states.

Throughout its history, European Wax Center has successfully navigated various operational and competitive challenges. The company has had to adapt to fluctuations in the macroeconomic environment, manage supply chain disruptions, and respond to evolving consumer preferences. Additionally, European Wax Center has faced competition from smaller, independent waxing salons as well as larger beauty and personal care chains that have expanded into waxing services.

The out-of-home waxing industry is estimated to have a total addressable market of over $18 billion in the US, growing at a CAGR faster than other hair removal alternatives. European Wax Center is the category-defining brand and largest player, approximately 6 times larger than the next largest competitor by center count.

Financial Performance:

In its most recent fiscal year, which ended on December 31, 2023, European Wax Center reported total revenue of $221.02 million, representing a 6.5% increase from the prior year. The company's net income for the year was $8.93 million, or $0.18 per diluted share. European Wax Center's strong financial performance is a testament to the resilience of its business model, which is largely driven by recurring revenue from a loyal customer base.

One of the key financial metrics that highlights the strength of European Wax Center's model is its operating cash flow, which totaled $55.60 million in fiscal 2023. Free cash flow for the same period was $54.82 million. This robust cash flow generation, combined with the company's asset-light franchise structure, has enabled it to invest in growth while maintaining a healthy balance sheet.

For the most recent quarter ended July 6, 2024, European Wax Center reported revenue of $55.43 million, a decrease of 0.5% year-over-year. This decline was primarily attributed to guests pulling back on retail purchases in the challenged macroeconomic environment. Net income for the quarter was $6.00 million, representing a 50.7% decrease from the same period last year. Operating cash flow for the quarter was $14.80 million, with free cash flow of $14.22 million.

European Wax Center's business is structured around four main revenue streams:

1. Product Sales: This segment includes revenue from sales of Comfort Wax, other products used in waxing services, and retail merchandise sold to franchisees and in corporate-owned centers. Product sales accounted for 56.8% of total revenue for the 26 weeks ended July 6, 2024.

2. Royalty Fees: The company earns a 6% royalty fee based on franchisees' gross sales, paid weekly. Royalty fees represented 24.1% of total revenue for the 26 weeks ended July 6, 2024.

3. Marketing Fees: These fees are based on 3% of franchisees' gross sales, plus a fixed monthly fee for search engine optimization and marketing services. Marketing fees accounted for 13.6% of total revenue for the 26 weeks ended July 6, 2024.

4. Other Revenue: This includes service revenues from corporate-owned centers, franchise fees, technology fees, and training. Other revenue represented 5.5% of total revenue for the 26 weeks ended July 6, 2024.

Liquidity:

As of July 6, 2024, European Wax Center had $48.00 million in cash and cash equivalents. The company's debt-to-equity ratio stood at 5.54 as of December 31, 2022. European Wax Center also has access to a $40 million revolving credit facility, which was undrawn as of July 6, 2024.

The company's current ratio as of July 6, 2024, was 2.53, indicating a strong ability to meet short-term obligations. The quick ratio for the same period was 2.09, further underlining the company's solid liquidity position.

Growth and Expansion:

European Wax Center's growth strategy is focused on expanding its footprint of franchised centers across the United States. In fiscal 2023, the company opened 59 net new centers, bringing its total to 1,044 centers across 45 states. The company believes it has the potential to grow its network to more than 3,000 locations in the U.S., representing a significant runway for future expansion.

For fiscal 2024, European Wax Center expects to open 43 gross new centers, with 35 already opened. However, due to an expected 5 to 10 additional center closures by the end of the year, they anticipate 17 to 22 net new center openings. Looking ahead to fiscal 2025, the company has indicated that closures could potentially exceed gross openings, resulting in a net negative number of new openings. More specific guidance on this will be provided when Q4 results are reported in March.

To support its growth, European Wax Center has invested in building a scalable infrastructure, including a robust training program for its wax specialists and a centralized marketing and operations support system for its franchisees. The company's franchise model, which requires a relatively low capital investment from franchisees, has also proven to be an effective way to drive growth while maintaining an asset-light business structure.

Looking ahead, European Wax Center remains focused on driving new guest acquisition, increasing ticket sizes, and improving the productivity of its existing centers. The company has recently partnered with Dolabra Digital, a marketing and technology firm, to enhance its digital capabilities and better target both new and existing customers.

Financial Outlook:

For fiscal 2024, European Wax Center has reiterated its previous financial guidance:

• System-wide sales of $930 million to $950 million

• Revenue of $216 million to $221 million
• Same-store sales between -1.5% and +0.5%
• Gross margin improvement to approximately 73%
• Adjusted EBITDA of $70 million to $74 million
• Adjusted net income of $19 million to $22 million

This outlook reflects the company's expectation of continued growth despite the challenging macroeconomic environment.

Risks and Challenges:

Despite its strong market position and proven business model, European Wax Center faces a number of risks and challenges that investors should be aware of. These include:

1. Macroeconomic Conditions: The company's business is susceptible to changes in consumer spending patterns, which can be influenced by factors such as employment levels, inflation, and overall economic uncertainty. This is evident in the recent pullback on retail purchases by guests.

2. Competition: While European Wax Center is the market leader, it faces competition from smaller, independent waxing salons as well as larger personal care chains that offer waxing services.

3. Regulatory Environment: The waxing industry is subject to various health and safety regulations, which can vary by state and local jurisdiction. Failure to comply with these regulations could result in fines, penalties, or even the closure of centers.

4. Reliance on Franchisees: As a franchisor, European Wax Center's success is dependent on the performance and financial health of its franchisees. Challenges faced by franchisees could have a direct impact on the company's overall financial results.

5. Talent Acquisition and Retention: Attracting and retaining qualified wax specialists is critical to the company's ability to deliver a consistent guest experience. Failure to do so could hinder growth and customer satisfaction.

6. Center Closures: The company is facing challenges with center closures, which could potentially outpace new openings in the near future. This could impact overall growth and revenue.

Despite these risks, European Wax Center remains well-positioned to capitalize on the growing demand for out-of-home waxing services. With its strong brand, scalable business model, and focus on operational excellence, the company is poised to continue its trajectory of sustained growth and profitability in the long term, while navigating short-term macroeconomic headwinds.