10-K: European Wax Center Reports Steady Growth in 2023, Expands Footprint

European Wax Center's 2023 annual report highlights continued growth in revenue, center count, and system-wide sales, solidifying its position as a leader in the out-of-home waxing market.

Summary

• European Wax Center (EWC) is the largest and fastest-growing franchisor and operator of out-of-home waxing services in the United States.
• In 2023, EWC delivered over 23 million waxing services, generating $955 million in system-wide sales.
• The company operates 1,044 locations across 45 states as of January 6, 2024, with 1,038 franchised and 6 corporate-owned centers.
• EWC's asset-light franchise model allows for capital-efficient growth and strong cash flow generation.
• Mature centers generate annual cash-on-cash returns in excess of 50% for franchisees.
• The company estimates its total addressable domestic market to be over $18 billion, with approximately 69 million U.S. adults interested in waxing.
• EWC is approximately six times larger than its closest waxing-focused competitor by center count and approximately 11 times larger by system-wide sales.
• The out-of-home waxing market grew at an estimated compound annual growth rate (CAGR) of 8% between 2015 and 2019.
• EWC's system-wide sales increased from $899 million in fiscal year 2022 to $955 million in fiscal year 2023.
• The company's total revenue increased from $207 million in fiscal year 2022 to $221 million in fiscal year 2023.
• Consolidated net income declined from $14 million in fiscal year 2022 to $12 million in fiscal year 2023.
• Adjusted EBITDA increased from $72 million in fiscal year 2022 to $76 million in fiscal year 2023.

Sentiment

Score: 7

Explanation: The document presents a generally positive outlook with strong growth metrics, but the decrease in net income and various risk factors temper the overall sentiment. The company's dominant market position and growth strategies are encouraging, but the challenges and risks are also significant.

Positives

• EWC's franchise model provides attractive returns for franchisees, with mature centers generating over 50% cash-on-cash returns.
• The company has a strong franchisee base, with existing franchisees accounting for 100% of new center openings in 2023.
• EWC's focus on wax-based hair removal and consistent service delivery drives repeat visits and revenue predictability.
• The company's asset-light franchise platform allows for capital-efficient growth and strong free cash flow generation.
• EWC has a well-known, pre-paid Wax Pass program that fosters loyalty and return visits.
• The company has a strong management team with experience in retail and franchising.
• EWC has a scalable support infrastructure to drive revenue growth and profitability.
• The company has a strong brand reputation and high guest satisfaction.

Negatives

• Consolidated net income declined from $14 million in fiscal year 2022 to $12 million in fiscal year 2023.
• The company faces competition from numerous independent waxing operators and beauty salons.
• EWC is dependent on a limited number of key suppliers for its products.
• The company's business is subject to seasonality, with higher demand during summer and holiday periods.
• The company is subject to various risks related to data security and privacy.
• The company is subject to various risks related to its franchisees, including their financial health and compliance with standards.

Risks

• The company's business is affected by the financial results of its franchisees.
• Franchisees could take actions that could harm the brand.
• The company and its franchisees may be unable to attract and retain guests.
• Increased use of social media may adversely impact the company's reputation.
• The company faces a high level of competition.
• The company's ability to improve financial performance depends on its ability to anticipate and respond to market trends.
• The company's planned growth could place strains on its management, employees, information systems, and internal controls.
• The company's financial performance could be materially adversely affected if it fails to retain key executives.
• The company and its franchisees are heavily dependent on computer systems and information technology.
• The occurrence of cyber-incidents could negatively impact the company's business.
• The company is subject to a number of risks related to ACH, credit card, debit card, and digital payment options.
• The company depends on a limited number of key suppliers, including international suppliers.
• Changes in supply costs could adversely affect the company's results of operations.
• The company's success depends on the adequate protection of its intellectual property.
• The company is a holding company and is dependent upon distributions from EWC Ventures.
• The company's stock price may be volatile.
• The company is an emerging growth company and cannot be certain if the reduced disclosure requirements will make its stock less attractive to investors.

Future Outlook

The company intends to deliver sustainable growth in revenue and profitability by expanding its national footprint, increasing brand awareness, driving system-wide sales growth, and expanding profit margins.

Management Comments

• We are so confident in our ability to delight that we have always offered all of our guests their first wax free.
• Our team has encouraged investment in systems and corporate infrastructure to support the anticipated continued growth of our network.
• We believe our franchisees track record of successfully opening new centers and consistently generating attractive unit-level economics validates our strategy to expand our footprint and grow our capacity to serve more guests.
• We believe that none of our existing markets are fully penetrated and a significant portion of our whitespace opportunity is in markets where we already have a presence today, which provides us with a high degree of confidence for the likely receptivity and success of new openings.

Industry Context

The document highlights EWC's position in the rapidly growing out-of-home waxing market, which is outpacing the overall hair removal market. The company's scale and focus on waxing services differentiate it from smaller competitors and beauty salons that offer waxing as a secondary service.

Comparison to Industry Standards

• EWC is approximately six times larger than its closest waxing-focused competitor by center count and approximately 11 times larger by system-wide sales, indicating a dominant market position.
• The out-of-home waxing market grew at an estimated CAGR of 8% between 2015 and 2019, compared to an estimated CAGR of 3% for the total hair removal market, demonstrating EWC's participation in a high-growth segment.
• EWC's mature centers generate annual cash-on-cash returns in excess of 50%, which is a strong indicator of unit-level economics compared to other franchise models.
• The document notes that the market is highly fragmented with more than 10,000 independent waxing-focused operators and almost 100,000 beauty salons that only provide waxing as a small part of their broader service offering, highlighting the opportunity for EWC to continue to consolidate the market.

Legal Proceedings

• The company may be the defendant from time to time in litigation arising during the ordinary course of business, including, without limitation, employment-related claims, claims based on theories of joint employer liability, data privacy claims, claims involving anti-poaching allegations and claims made by former or existing franchisees or the government.
• In the ordinary course of business, the company is also subject to regulatory and governmental examinations, information requests and subpoenas, inquiries, investigations, and threatened legal actions and proceedings.

Related Party Transactions

• The Company paid fees to certain members for consulting services provided to the Company. Related party consulting fees of $ 117 for the year ended December 25, 2021 are included in selling, general, and administrative expenses in the Consolidated Statements of Operations. The term of the consulting services agreement ended in August 2021. For the years ended December 31, 2022 and January 6, 2024 there were no consulting fees paid to related parties.

Stakeholder Impact

• Shareholders: The company's performance and growth strategies are aimed at increasing shareholder value, but the stock price may be volatile.
• Employees: The company provides opportunities for growth and rewards based on results, and has refined its in-center atmosphere to allow for contactless check-in and elevated hygiene standards.
• Franchisees: The company's franchise model provides attractive returns, and the company provides support services to help franchisees succeed.
• Customers: The company aims to provide a superior guest experience with high-quality, hygienic waxing services and convenient technology-enabled interfaces.
• Suppliers: The company maintains strong relationships with its suppliers to ensure market competitiveness and reliability in its supply chain.

Next Steps

• The company plans to grow its national footprint across new and existing markets.
• EWC intends to continue to grow brand awareness and accelerate guest acquisition.
• The company will employ strategies to continue driving system-wide sales growth.
• EWC plans to expand its profit margins and generate robust free cash flow.

Key Dates

Keywords

waxing, franchise, hair removal, out-of-home, beauty, system-wide sales, EBITDA, revenue, franchisees, Wax Pass