Ladies and gentlemen, thank you for standing by, and welcome to the European Wax Center Second Quarter Fiscal Year 2021 Earnings Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to introduce your first speaker for today, Amir Yeganehjoo, Vice President of Financial Planning and Investor Relations. You may begin.

Thank you, and welcome to European Wax Center's Second Quarter Fiscal Year 2021 Earnings Call. With me today are David Berg, Chief Executive Officer; David Willis, Chief Operating Officer; and Jennifer Vanderveldt, Chief Financial Officer. For today's call, David Berg will begin with a review of our mission, positioning and strategy, followed by highlights of our second quarter performance. Then Jennifer will provide additional details regarding our financial performance and introduce our guidance. After prepared comments, David Berg, David Willis, Jennifer Vanderveldt and I will be available to take questions you have for us today. 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 security law, 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 will now turn the call over to David Berg.

Thank you, Amir, and good afternoon, everyone. I am thrilled to speak with you all on our first call as a public company. As the leader in the out-of-home waxing category, European Wax Center's purpose is to make our guests feel great about themselves. Since 2004, we've delivered a trusted, efficacious and accessible service to our guests by providing a consistent and unparalleled experience through our extensively trained wax specialists, our stringent hygiene protocols and our proprietary Comfort Wax. These differentiators in our operating model keep our guests coming back on a recurring basis. For EWC, the sustainability of our business model has produced a compelling growth algorithm, giving us confidence that we can deliver low double-digit revenue growth and low to mid-teen adjusted EBITDA growth in the future. Becoming a public company represents a significant milestone for us as it further empowers us to expand our leadership position for the benefit of all of our stakeholders. We are excited to share our company's history to discuss the category we operate in and to explain why we believe we are poised for sustainable, profitable growth in the future. I want to thank the entire European Wax organization. our franchisees, our wax specialists and all of our associates for their dedication and passion for driving our business and their relentless focus on delighting our guests. Their combined efforts have allowed us to deliver a track record of consistent growth and succeed even in the face of a pandemic while providing us with a unique and powerful platform to continue our success in both the near and long term. And to our guests, I also say thank you for trusting us to be your out-of-home hair removal brand of choice. As you saw in our earnings release, we delivered strong second quarter…

Thanks, David, and good afternoon, everyone. I am delighted to speak with you on our first earnings conference call as a public company. I'll begin my discussion with an overview of our business, followed by a review of our second quarter results. While discussing our financial performance, I will compare our second quarter fiscal 2021 results to both fiscal year 2020, which was significantly impacted by temporary pandemic-related center closures as well as fiscal 2019, which represented a more normalized year of operations for us. I will then introduce our fiscal 2021 outlook. As David mentioned, European Wax Center is the leader in out-of-home waxing services, a growing and attractive category. Our asset-light operating model delivered a consistent guest experience and predictable unit economics for our franchise partners. Our strong track record of growth is driven by these dynamics. At a corporate level, we are able to achieve our growth objectives with modest investment and working capital requirements, resulting in meaningful free cash flow growth. And as part of our overall capital allocation framework, we will evaluate opportunistic uses of our cash in partnership with our Board. I would now like to turn to a review of our second quarter and first half results. My remarks will focus on our adjusted results, which excludes onetime costs related to our initial public offering and assumes our initial public offering occurred at the start of the year. You can find reconciliation tables in our press release and 8-K filed with the SEC today. Ahead of my review, I would like to provide a brief definition of the terms we use when describing the performance of our business. First, system-wide sales, which represents revenue from the sale of services and products across our network. System-wide sales also include collections on Wax Pass cash…

[Operator Instructions] Our first question comes from the line of Randy Konik with Jefferies.

Just wanted to really first talk a little bit more about the implementation of technology. Dave, you touched on it a little bit in your remarks. So I guess what would be really helpful is to give us some perspective on how the business was run before your text back was basically augmented. And then talk to us about how technology helps the franchisees run their business better. How has technology helped the customer's experience improve? And then talk to us about how technology has really changed data analytics at the corporate office.

Randy, thank you. Thanks very much for the question. Appreciate that. We understand that we might have had some breakup on part of Jen's remarks, so apologies for that. I assure you, Randy, that in-suite technology is ahead of our conference call technology. So we'll make sure that, that discussion on the topic [ was right ]. I think it was depreciation and amortization primarily. We'll get that in the transcript. So apologies for that for the folks on the call. And thanks for your question, Randy. Let me just maybe start with kind of what we've done and really have been allowed to do given kind of our scale and candidly, our competitor set can't do. And I'll start in-suite, and I'll try to address your questions on both franchisees, customers and kind of [ how corporate is ] helping us run, Randy, to make sure we're thorough in the answer. First from an in-center standpoint and a particularly in-suite standpoint, so within the wax suite, there's an iPad that we put into every wax suite. So the wax specialist has the ability to look at the history of a guest, see what services they've had in the past, allows them the opportunity to add on services, to suggest new services as well as attach retail products to them. So having kind of that diagnosis prior to the guests coming into the wax suite, we think is an excellent opportunity for us to continue to increase the average ticket. We launched a mobile app here over the past few months. Today, it allows for virtual check-in for our guests. It allows our guests to rebook on the app, and it give -- provides us the opportunity to give a notification via text to the guests of their reservation and…

Super helpful. I just had one little follow-up. Any learnings on new service initiatives such as men's or new services in general such as like, I think, the wax facial was in pilots? Just any color on that would be super helpful.

Yes, Randy. Listen, I think as franchisor, it's our obligation to continue to innovate. So we -- if the analog here is to the restaurant menu, we've got to make sure that we continue to provide offerings that make sense for our guests, where the brand gives us permission or where a guest gives permission. As you know, in a franchise model, we want to make sure that this is executable across all of our 800-plus centers. So we're very, very focused on staying close to our expertise in wax. We have a great pilot program put in place on new services. We're very encouraged by what we're seeing in terms of the male service opportunity that we really launched with some gusto here in the past few months. I think the Wax-Powered Fast Facial, we talked about in Jen's comments about some of the mix shift that we've seen to more full body services. I think there's been a bit of reticence in terms of services under mask. So we continue to be mindful in studying our Wax-Powered Fast Facial but again, we think differentiates us from other waxing competitive set. And Randy, we'll just continue to innovate in those areas but ensure that it's something that is very executable across all of our locations and ensure that we have that same amazing guest experience in whatever service we're providing.

Our next question comes from the line of Lorraine Hutchinson with Bank of America.

I wanted to focus my questions around new center growth. Can you just talk a little bit about how confident you are in executing on the 52 centers this year? And then what line of sight do you have in hitting that high single-digit growth in 2022 and beyond?

Lorraine, thanks for the question. I'm going to ask David Willis, our Chief Operating Officer to address that, please.

Sure. We feel very confident about the full year, 52 new center openings. Our development pipeline is really robust. As at the end of the second quarter, we had 226 licenses in the pipeline, and we continue to make progress on executing the multiunit development agreements we talked about on the road show. We're probably most excited that we're seeing growth commitments from franchisees of all sizes. So the small, medium and large franchisees are all committing to further develop. These multiunit development agreements, Lorraine, you may recall, go out about 3 or 4 years. So we're feeling quite confident about delivering 52 centers this year and equally confident going forward that we can hit our 7% to 10% unit growth per year growth metric.

Our next question comes from the line of Simeon Gutman with Morgan Stanley.

This is actually Hannah on for Simeon. I wanted to ask a question around market share. So in terms of the total out of hair -- out-of-home hair removal, you are a little over 10%. Is there a way to think about the range from your highest AUV centers to your lowest, what local market share looks like for that range? And is that how we should think about market share potential over time?

Yes. Hannah, thanks for the question. Just to be clear, the 10% share is the out-of-home waxing category. Overall hair removal is around 4%, just for clarity there. We don't drive down to our local markets today in terms of our market share. But I think the important point here is that this is such a highly fragmented market. 99-plus percent of the business is mom and pops. I think we shared earlier that we commissioned a very well-known international research group at the beginning of the year to evaluate our market opportunities. They came up with this kind of -- the TAM that we've addressed. And additionally, they find that 5% to 10% of those smaller mom-and-pop shops were not going to survive COVID. We're seeing that in some of our new guest count acquisition where 1 in 5 of our new guests in the quarter are coming from our competitive set. So we do believe we're taking market share, and we'll continue to watch those numbers to make sure that we know where those guests are coming from.

And maybe a quick follow-up if you have the time. Out-of-home waxing currently sitting about 1/3 of the total hair removal market, obviously, its growth is outpacing the larger market, so that penetration just kind of tick up. Do you have a sense for where out-of-home waxing penetration of overall hair removal kind of mixes out in the long term?

Hannah, so I beg your pardon. I lost you at sort of the $6 billion of the $18 billion is out of home and then growing faster. Then we've lost you, I'm sorry.

I just was wondering if you have a sense for where home waxing penetrations land in the long term as a percentage of all hair removal.

Well, we certainly see it -- I mean, we're excited, obviously, that it's the fastest growing modality hair removal. Is it going to be half of the hair removal model? That's part of our job, is to try to get it there. We're just excited that it's growing faster. We're the leader in that category. And I think it's -- again, we just keep focused on making sure that we're driving our market share across all of the DMAs where we operate. But I don't -- we have not sort of done an analysis to say, of that $18 billion, could that third of that market in out-of-home waxing grow to a significant high or not. We believe there's great opportunity within the space that we're operating right now.

Our next question comes from the line of John Heinbockel with Guggenheim.

Let me focus on the opportunity, right, to accelerate maturation of centers. So maybe you can talk to that a little bit, whether it's network effect, marketing cross-sell, and the degree to which you think you can get to 1 million quicker than year 5.

John, thanks for the question. I'm going to ask David Willis to follow up on that, please.

John, this is -- good to talk to you. The accelerating -- the maturation of the centers is really front and center. David has put this squarely on the operations team, so we are identifying those KPI levers that we can execute against that are going to drive faster breakeven in 25% plus EBITDA. You may recall from the road show, the average center profitability and maturation is about 20% EBITDA. But our top performers are 25%. We're trying to institutionalize those things that those folks are doing well across the rest of the network. We've seen some early -- very encouraging signs in terms of new center openings in the pace upon which their revenues are ramping, both in 2020 and in 2021 in terms of new center openings. So a variety of initiatives that our teams are focused on working with franchisees, but in simple terms, we're simply trying to institutionalize what our best operators are doing across the rest of the network.

And maybe, John, to add a little bit to that, too. As we track the performance of our cohort by the fifth year, we're seeing some great outperformance in the businesses for 2020 and 2021. If we think about 2021, obviously, the first year, really performing [ about ] 60% to 70% higher versus our overall trend in 2020. If you think about that, that's about 10% to 20% higher. So again, these are onetime stats that we are wanting to provide for just some clarity. We know we're a newly public issuer. But I do think some of the things that we're pushing on the operations side [ as long as ] we believe are going to continue to work.

And just real quick, you guys have talked about the, I guess, the labor shortage at least in California. Maybe just quick in terms of supply/demand for wax specialists, right, and you should be an employer of choice. So is that just sort of a timing issue just in California when you think about the availability of specialists?

John, this is David Willis. Primarily in California, you're right. That's where we're seeing the short -- the most shortage, and we think that's really because California is lagging the rest of the country and coming back online. We continue to provide our network an arsenal of tools that enable them to recruit wax specialists, most from beauty schools and other avenues. And we're candidly seeing momentum. We're seeing more hires by our franchisees of the wax specialists month-over-month, so we're encouraged. But certainly, to your point, we're seeing the labor shortages more in California than we are rest of the country.

Our next question comes from the line of Jonathan Komp with Baird.

David or Jen, I'm wondering, as you look forward to the balance of 2021 and into '22, could you maybe rank order the biggest drivers of your same-store sales that you see? And then more near term, can you share any commentary on the behavior of your guests? Just over the last few months, I know we're past the typical peak, but given the Delta in COVID, I'm curious what you're seeing behaviorally from your guests.

Yes. Jon, I'll start with kind of what we're seeing from guest behavior, and then I'll ask Jen to speak to the same-store sales comps as we look forward. I think we continue to be really pleased with the consumer response certainly following the lifted COVID restrictions. So the overall demand side of the business, we're encouraged about. I think this just continues to demonstrate the trust that our guests have with our brand, and the nondiscretionary and recurring nature of our services. So that -- we saw that when centers opened back up, and that's continued along. So the demand side is very robust. As we kind of think about our outlook, we continue to see sequential improvement in same-store sales in the back half of this year with comp sales up in low double digits in Q3 and Q4, so that consumer response is strong. As David alluded to and we talked about in the prepared remarks, California is lagging that. But we hope that, certainly, as California catches up, that's going to be upside for us as we move forward. So from a consumer trend standpoint, we're encouraged by what we've seen. We're obviously very mindful of any kind of variant that might come on or additional government mandates. But right now, we continue to be very optimistic about the consumers coming back in the business. Jen, do you want to talk a bit about sort drivers for same-store next year?

Absolutely. So Jon, let me handle the second part of your question. We have seen over the course, we think, sequential quarter-over-quarter growth. We expect that to continue. You just heard that from David. And we are pleased with how the customer has rebounded and continues to rebound in terms of transactions. But in the quarter, mix really drove that same-store build in Q2, and we continue to see that kind of differential in terms of the body services versus the face. We expect that to continue through balance of the year; but against that, transactions continue to improve. You've heard some really good news from us today in terms of how happy we are with our new guest trend on a sequential basis. I would tell you that when we talk about California in terms of a demand versus supply, we actually see the new growth in California of new customers over indexing that plus 58%, gets us really comfortable that we've got the demand on a go-forward basis. And then as we think about 2022, I don't want to provide that outlook yet, but we continue to feel comfortable and confident in our long-range growth algorithm that we've always stated is going to be driven more by transactions in the long run. So I think it's a bit of an end when you think about the mix shift we've seen during COVID lapping that in time and really the end of the transactions still coming into our system and potential upside as those customers that may still be sidelined -- side blinded continue to reactivate around the facial service and as we see kind of COVID restrictions abate.

And Jon, we're going to stay hyperfocused on our 2 growth initiatives to drive unit count in the -- throughout the U.S.; and then second, to drive sustained same-store sales comps. And that's really broken down in those 3 buckets that we talked with you all about. That's to attract more guests. How do we continue to drive new guests to our centers? Second, how do we get them to buy more? And third, how do we get them to stay loyal longer? We're launching our new loyalty program at the end of this month that we're incredibly excited about. That's going to allow us to reward our best guests right at a perfect time, we think, as we go into November and December, sort of high-spend months, to really get our guests excited about the new loyalty program that'll enhance the stickiness that we've got with our guests longer term.

Yes, that's great. And then just one other follow-up. The point that Wax Pass sales are exceeding their redemptions. Could you maybe just clarify what's driving that and then maybe the broader financial implications longer term as you grow the Wax Pass penetration?

Sure, Jon. I think we really want to talk about the drivers in terms of this pipeline of future services that we see. I tend to look at this relationship as a really important one. There will be periods, I will say, where the differential that we're seeing in this period in terms of Wax Pass purchases less redemptions being a positive may turn to the other direction. And that just means that all of the CRM efforts you've heard David Berg talked about are working. We're driving that engagement. Historically, we see extremely low breakage rates around this. This is the hair that grows back every period. And so we feel really confident that when we talk about a differential in terms of this number on a go-forward basis that, that is really building that very robust pipeline of future service business. And as we look at things today, we've got all of that just kind of waiting to come on into our centers to get serviced. And I feel really comfortable that this business is different from many others you may see and that such a high proportion of total service dollars coming in off that Wax Pass program. And I think what we're reporting today, which is that up 36% is just evidence of that.

Our next question comes from the line of Dana Telsey with Telsey Advisory Group.

As you talked about the labor component, what are you seeing in the labor component country -- in the U.S.? How do you see those costs and the impact of SG&A? And then when we had talked previously, freight was a topic. And just wondering, any updates on freight, getting goods in and how that's being passed on to the franchisees or what you're seeing in terms of pricing or any changes there?

Thanks, Dana. David?

Yes. Dana, it's David. So on the labor component, you may recall from our prior conversations that, by and large, the wax specialists are making more than state or federal minimum wage. They have a base rate, and then most of our franchisees deploy payroll programs that have a significant amount of compensation tied to incentives, so a percentage of the service revenues. So in terms of the inflation on wages, we haven't seen that directly impact our franchisees because we were kind of already paying higher-than-normal minimum wages. As it relates to freight, we're seeing higher ocean freight, as I think everyone is, but we've been able to manage that. We don't envision that will impact the margins on our P&L.

Got it. And then, Jennifer, just one follow-up. On the cadence of the third and the fourth quarter and what you talked about with sales, any difference in how we should break down third and fourth quarter or how you think about it?

Sure. Dana, this is Jen. I think what we tried to do, as we said in the spoken remarks, just talk about, for the balance of the year, we think about our outlook being in the lower end of that high single-digit range. I think as you kind of roll forward to full year, that does really imply that low double digit in terms of same-store sales. But we've certainly been talking about the great robust demand that we're seeing in this quarter and that sequential improvement we see over time. So that builds itself into system-wide sales, which when you think about the link of that as a non-GAAP metric for health of the total network and how that then translates into an outperformance for EWC, that's going to be probably more directly, and we continue to feel very comfortable there.

Our next question comes from the line of Kelly Crago with Citi.

I'm just curious, what just specifically is driving the acceleration in same-store sales in the back half of '21? Is it California catching up to the rest of the chain? Is it a sequential improvement in traffic and transactions? And since we're so far into 3Q, just hoping you could help us understand what's driving that acceleration and why it's sustainable into the fourth quarter?

Sure. Kelly, this is Jen. I'll take that one. I think what we're very comfortable about in terms of what's driving the sequential growth is exactly what you're alluding to when you think about the mix between transaction versus price. I think what you're hearing us say is that we believe that the mix shift in terms of that price component and dollars for service on body services, that will continue through the balance of the year, is reflected in kind of our outlook that we have provided. But we continue to see guests recover in terms of transaction counts, and that's what's kind of driving that. I will say, in terms of if we are looking at [ that ] on a stacked basis for Q4, the comparative just gets a little higher there. That's more of a function of what was in Q4 of '19. 1 month back in that period, we did have a malware incidence that the company has kind of taken meaningful strides to invest in cybersecurity on go forward basis. But I think that that's where you see a bit more of an increase there. I will say, again, to reemphasize the component for the full year outlook in terms of the lower end of our high single-digit range imply that sequential growth over time. But I just will say it's the lower end of that range given the great guest demand we're seeing but just a little bit of a pinch in terms of some of the supply that we are actively partnering with our franchisees to address.

And just following up on the labor side, it's great to hear that you're not really seeing the inflationary headwinds yet or your franchisees aren't seeing them. But I'm just curious if we get to a point where the labor market is so tight that your franchisees start to see some of these inflationary pressures. What tools do you have available to sort of help them absorb those costs? Or would anything happen on the pricing side to help these franchisees offset those headwinds? Just anything else you could talk to that could help us understand that?

Kelly, ultimately, there's price to our guests, right? If we see in select markets where labor rates are incredibly high, we can ultimately look great priced to the guests. You may recall, we had multiple price tiers and probably no surprise, the higher labor cost markets have higher service prices for our guests. So that's probably the biggest lever that our franchisees can enable.

Our final question comes from the line of Bill Chappell with Truist.

Just following back up on California. You may have given this. But what percentage of the sales is the state of California? And then did you see any change intra-quarter? I mean did it improve throughout the quarter? And as we moved into this quarter, is it pretty much the same level throughout?

Yes. Bill, we don't have sort of that sales growth and [ all like that ]. I will tell you that California, given their center count, accounts for about 15% of our network. So it does -- there is an impact on our overall financial metrics when California sneezes a bit. And we certainly saw in the quarter month-over-month improvement as we went through the quarter.

And just to follow up, so...

Yes. I would just add one thing. Bill, I would just say one thing. I know we've spoken a lot about California. Our franchisees, I think a positive trend there is about 25% of our new centers opened year-to-date and 25% of centers opened over the last 4 quarters are actually in California. So notwithstanding they are navigating some challenges, they're a little slower to come back online versus the rest of the country, there are some encouraging signs our franchisees are committed to further developing there, too.

Got you. And then a follow-up and you may have covered this. But you mentioned that there were some licensing, I guess, delays that were affecting labor probably more than finding labor. So is that cleared up? Or is that still something that impacts the next few months?

Yes. So Bill, what we shared was the cosmetology schools actually shut down, right? And then they were not issuing licenses for estheticians when they reopen. We understand, we're catching up on that. We have an industry relations team that's very close with our franchisees, and we're staying in touch with the cosmetology and beauty schools out there. I'm sure that the faster we get those licenses out to new estheticians, the better it's going to be for us. So they are catching up on that.

So that's 3Q, 4Q, we should be back to normal?

That -- we're -- with respect to what the California government's going to do, I'm not going to opine on that. I certainly hope so. We hope that they can get caught up for us.

I would now like to turn the call back over to Mr. David Berg for closing remarks.

Well, we thank you all very much for joining our inaugural Q2 earnings call as a public company. We appreciate everybody's interest, and we look forward to speaking with you about Q3 in November. Thank you all very much.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.