Good morning, ladies and gentlemen and thank you for standing by. Welcome to the European Wax Center's Fourth Quarter Fiscal 2022 Earnings Call. [Operator Instructions] At this time, I'd like to turn the conference over to Bethany Johns, Director of Investor Relations. Ma'am, you may begin.

Thank you and welcome to European Wax Center's fourth quarter fiscal 2022 earnings call. With me today are David Berg, Chief Executive Officer; and David Willis, Chief Financial and Chief Operating Officer. For today's call David Berg will begin with a brief review of our fourth quarter and full year performance and discuss our priorities for fiscal 2023. Then David Willis will provide additional details regarding our fiscal 2022 financial performance and our fiscal '23 outlook. Following the prepared remarks, David Berg and David Willis 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 call and 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 our publicly released 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 is just 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, Bethany and good morning everyone. Thank you for joining the call today. We are incredibly pleased to deliver a strong Q4 performance and equally strong fiscal year. We continue to believe it's important that our sales and dues match and we delivered record top and bottom line results in line with the annual guidance we gave at the beginning of last year, despite a significant change in the consumer landscape during 2022, generating $899 million in system-wide sales and $71.6 million in adjusted EBITDA representing 13% and 12% growth respectively. The European Wax Center business model remains consistent. Our performance is anchored by the recurring nature of hair growth and our strong relationships with guests who continue to prioritize our personal care routines and our clean hygienic centers with a predictable, efficient and professional service that only our highly trained wax specialists can provide. I would like to thank our associates and our franchisee partners for driving our continued success in 2022 and for their steadfast commitment to living our values each and every day. We were recently certified by Great Places to Work, a recognition we share proudly with our team members. Thanks for their efforts, we've extended our leadership position in this highly fragmented out-of-home waxing category that European Wax Center created nearly 20 years ago. Let me give a quick recap on 2022. Throughout last year, I updated you on the progress we made against some of our 2022 priorities. First, we grew our pipeline of current and future wax specialists, planting the seeds that will support both existing centers and new center openings in the future. Second, we leveraged our scale to support our network by mitigating or offsetting much of their supply chain cost headwinds. Third, we optimized our capital structure through a…

Thanks, David and good morning, everyone. I'd also like to offer Stacie a warm welcome to the European Wax Center family. I look forward to working closely with her in the coming months and I'm confident that her experience and leadership will deliver substantial value to all of our stakeholders. 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 in 8k filed with the SEC today. Turning to our financial performance. As David mentioned, we delivered solid results ahead of our expectations, thanks in part to strong Wax Pass sales in the quarter. Q4 system-wide sales increased 11.6% to $225.4 million and total revenue increased 18.7% to $53.5 million. Top line growth was a result of unit expansion, including 33 net new centers during the quarter, coupled with a strong 6.3% same-store sales increase driven by all cohorts, including mature centers. Total revenue growth exceeded system-wide sales growth due to the medical supply arrangement with franchisees that began early in 2022 which generated approximately $12 million in total revenue for European Wax Center on an annualized basis. As we've shared before, this arrangement optimizes the procurement process for our network. And while it was approximately 220 basis points diluted to gross margin rates in 2022, it is accretive to gross margin dollars. From a profit standpoint, Q4 adjusted EBITDA increased 25.9% to $19.2 million. Fourth quarter adjusted EBITDA margins increased 210 basis points to 35.9%, primarily driven by SG&A leverage on top line growth and a favorable shift in the timing of advertising expense year-over-year. Adjusted net income grew from $8.5 million in Q4 of 2021 to $48.7 million in Q4…

[Operator Instructions] And our first question comes from Randy Konik from Jefferies.

I wanted to kind of unpack and discuss deeper the repeated commentary around the positive initial volume increases you're seeing from the, I guess, more recent cohorts. Maybe can you give us some perspective on just how much that has changed versus, I guess, years past? And kind of some of the learnings you have on what's driving that would be super helpful as we think about openings in the next few years which sound like they're going to be opening up at higher rates on year 1. So can we just unpack that a little bit?

Randy, David Willis. Thanks for the question. In terms of order of magnitude, the last couple of year cohorts are opening at about 10% to 15% higher than what our historical maturation curve would suggest. As we really diagnose that, we see some common themes overall. One, some consistent upfront marketing spend to really drive the new guest files. So when the center opens, they've got an existing book of guests they can market to. The other thing that we've seen is our franchisees are hiring more waxers earlier in the cycle to support additional walk-in traffic and candidly just more transaction volume. Those are the 2 common threads. What we had referred to in terms of our focus this year is candidly further unpacking that and publishing to our network best practices. We plan to elevate those franchisees that are driving this level of the momentum with the NCOs, put them on the spotlight and tell the rest of the network, what they have found to work in their respective centers. So that at least gives you kind of a satellite view of what we're seeing with the NCI, Randy.

Super helpful. My last question is there's a lot of opportunity it seems around -- you talked about average dollar sales or services per transaction could drive that higher. If I recall in the last couple of years with COVID, there had been some probably some hesitation around let's say, base services. So maybe give us some perspective of where we are in state services as a proportion of where they usually have stood in the past? And then just some of the strategies you're working on to drive additional services per visit per customer going forward?

Randy, thanks. It's David. See, I've got couple of things on that front. One of the things that we ran very successfully was a rebooking contest in center, where we incented our wax specialists and our guest service associates to ensure that before the guests left the center that they rebooked their next service. And we saw a nice lift in terms of rebooking which gives us that confidence that when you rebook in center, you're highly likely to come back at your scheduled date going forward. So we've seen that be effective and we're going to continue to run that program in 2023 to drive that frequency of guests. Your specific question around face, we really haven't seen a significant difference in terms of our body face mix, there is a bulk of our guests continue to skew towards body services. We have expanded -- we have a test going on in 250 centers around brows. Now we've done a couple of things. One is that a real focused retraining on our brow waxing capability to make sure that that's best-in-class, particularly coming out of COVID when there wasn't as much space being done. And then second, we've introduced in these -- we're testing brow tinting in 250 centers. We're going to run that test for about another 30 days. We feel really good about the initial results that we have. So I think, Randy, we're going to -- we're cautiously optimistic that we can continue to see face percentages go up in 2023 as we add additional services.

And our next question comes from Jonathan Komp with Baird.

Maybe a broader question. Just as you look back over the last few quarters and your ability to read and react to the lower frequency of some of your guests. Just any current thoughts on the economic sensitivity of your guests and coming into 2023, would you say you're better prepared to react to anything that may come up just given all the initiatives you've outlined today?

Yes, listen, I think the good news is that we feel and have seen over the past few quarters, really sort of stable transactions in terms of across all of our guest profile. We always talk about sort of that Wax Pass holder. And the great news there is that Wax Pass holder continues to come 7.5x a year very regular, the top quintile coming 9.5x a year. So -- and generating 2/3 of our revenue. So we always ring-fence kind of that real solid Wax Pass holder. We talked certainly at the end of last year about that episodic guest. You may recall, John, we talked about -- we introduced a limited time offer of the 3 plus 1 Wax Pass to help that guest that might have had a little bit more of an economic pinch in the back half of 2022. We retargeted a percentage of those guests that bought the 3 plus 1 Wax Pass at the end of last year and saw a very nice mix. We offer them the opportunity to come on to the 9 plus 3 with a little bit of an incentive to do that and saw a nice lift in terms of folks that migrated up from 3 plus 1 to 9 plus 3%. So as we continue to talk about us getting folks on a 9 plus 3 Wax Pass is really our best loyalty program and then sending folks to do that. So I think we've got better opportunities as we've got a better visibility to CRM and brought new capabilities in to help drive that, where we can take a look at those guests that might have not come as often as they had been in 2021 and 2022 and really retarget them with very specific personalized targeted messaging to drive them back into the center. So we feel good about our opportunity with that guest and obviously continue to drive that loyal guests to stay on the regular routine that they've demonstrated over the years.

Yes. Great. That's really helpful. Maybe one other question then just on the unit growth outlook. With you projecting another year above your high single-digit long-term growth target for new unit growth, should this be sort of a new run rate that we think about going forward given the pipeline that you have? And then just any updates you could share on a few of the more institutional franchise owners that you have in the system?

Yes, John, I don't think we're prepared to say this is the new long-term growth algorithm. While we're incredibly pleased to deliver this level of unit growth in back-to-back years and as David touched on, we feel incredibly confident about future development, I don't think we're there yet to say, let's assume 10-plus percent is the new baseline. We are -- our growth partners that we've talked about the prior quarters, while they represent 40% of existing centers in the system, they do represent 70% of that license pipeline yet to be developed. So we feel incredibly confident about their ability to keep growing their respective footprints in their respective markets. Having said that, we had a very nice balance of NCOs from franchisees of all sizes. In 2022, we had a very healthy percentage of our NCOs that were delivered from our smaller franchise group. So while we're excited about kind of the headline grabbing numbers that the larger institutional players have committed to, we're equally happy that we have smaller franchisees still willing to commit to opening another 1 or 2 centers within EWC.

We have a question from Dana Telsey from Telsey Group.

As you think about the product sales and new product introductions and what you've developed in 2022, what is the outlook for 2023? And how do you think of the margin opportunity there? And the other thing, David, that you mentioned is that reporting for real-time analytics has been enhanced. What are you learning and what adjustments or enhancements are you gaining from that process that impact '23?

Dana, let me address the retail question and then I'll let David talk about some of the analytics that were -- and kind of 2 pieces of that, Dana, that will impact. One is what are we utilizing here from field support or what we call our franchise business consultants, whether they have visibility to and how do they help drive profitability but also what we're working on to allow the franchisees to have better visibility from a BI perspective at in-center. Retail product, we're pretty consistent in terms of what we think margin expectations are going to be in 2023 as they've been historically. I think one of the things that we really have learned is that limited time offers are really a great driver for us. That newness of product for our guests is critically important and build it such that we run out of supply so that there is a real high demand for the product. It gets excitement within the center and gets excitement within our guest profile to get new products. We just launched a new spring bag that's out in the centers. It's early days. The sales are going very, very well on that become accustomed to sort of the quarterly limited time offerings. What's really important to us is that our Wax specialists and our GSAs educate the guests on why the aftercare products that we sell are so critical to the overall service. And that attachment rate is really what we look at, so that the guest gets the absolute the best service that they can pre-during and post wax. So that attachment effort continues to be focused on by our marketing and product teams as well as delivering that training out in the field by our operations team. Hey Dana [ph], you want to maybe just double click on the analytics.

Yes. So on the reporting day now first, talk about a new report we made available to our internal folks called the ops dashboard. And it gives, as David touched on, our field business consultants, real-time access to KPIs and profitability that they can in turn have those commercial conversations with our franchisees where KPIs may be lagging either benchmark averages or top quartile arms them to have a healthier commercial conversation with franchisees and where they can drive improvements within their centers. Specifically, one of the most popular tools that we use with our franchisees is what we call a sales opportunity tool and it's a very simple tool that shows our franchisees, if you sold one more Wax Pass for a week, here's what that drives for your center. If you converted one more guest will increase SPT by 10%. Here's what that means to your business on an annualized basis. In the second quarter, we will be launching to our network, better reporting to our center level associates have real-time access to their own KPIs. You may recall, a number of our franchisees provide incentive compensation as part of the waxers and the GSA's compensation package. This reporting will allow in-center level associates to receive real time how they are tracking on SPT Wax Pass sales, all those different KPIs that ultimately drive their respective bonuses based on whatever compensation structure that franchisees have in place within their centers. So all and we're excited about what we've already delivered but we've got more cool stuff that we think can help not only our support for our field business consultants but center-level associates drive better KPIs within the services.

Got it. And then just one other thing. How was California during the quarter and what are you seeing there? And just lastly, the Wax Pass promotion, last year, there was some date or timing shifts. How are you thinking about the Wax Pass promotion cadence this year?

So I'll start with California. All in, we feel good about California. We've spoken on several of these calls that they were playing a bit of catch-up to the rest of the network, given when they started reopening their centers in the first quarter of 2021. All in, I think our California franchisees feel very good. I think the average franchisee would say they got adequate staff on hand. We continue to focus on leveling up to the most efficient level of waxers. But all of them were feeling really good and we continue to see significant development for NCOs in the state of California, Dana. It probably represents -- if I look at our license pipeline, that's probably the deepest pipeline is concentrated in California amongst our other top states.

Dana, on the Wax Pass promotions, where typically, the Wax Pass is you pay for 9 and get 11, so what we call 9 plus 2. We have, really, since the inception of the brand had a semiannual promotion on that in the months of May and June where you buy 9 and get 12 and then similarly in November and December buy 9, get 12 or 9 plus 3 as we call that. The only change we made in 2022 was that November-December time frame, we pulled that forward and started offering that in mid-October. We'll kind of see and that was really sort of what was going on from a macroeconomic standpoint. Folks were Black Fridays were getting announced in August and we just felt it was prudent for us to offer that a couple of weeks early. We'll see if we need to do that or not but we don't anticipate any other promotional aspects of the Wax Pass except for the typical ones that we've done May, June and November and December as we look at 2023.

Our next question comes from John Heinbockel with Guggenheim Partners.

This is William Markus [ph] on for John Heinbockel. Just a quick question on the needed ability to source retail wax specialists and any efforts to further improve the productivity of existing ones? And a quick follow-up right after.

Yes, Julio [ph], we talk a lot about our wax specialist pipeline activities. And I would say that overall, we feel quite pleased with the progress that we've made. We had touched on, I think, on prior calls, some of the pilot programs that we ran in -- with 21 different beauty schools throughout 2022, the success that we've had with those in terms of engagement with prospects -- prospective waxers to our network. We now plan to roll that out to a broader network. I think we touched 750 students through the pilot programs. We had great engagement and conversion. We've made some enhancements to our careers page. We're starting to see better engagement and click-through and candidly submission rates for applications there. So all in, from a waxer pipeline perspective, I think we're feeling really good about some of the efforts we've undertaken over the last several quarters are starting to bear fruit for our franchisees. Kind of our barometer, Julio, is if there's a fair amount of chatter in the network, I need more waxers, we're not hearing that like we heard a couple of quarters ago. A lot of our operations teams are now really focused on retention strategies. So now that we've recruited adequate head count within centers, how do you retain those waxers? And most importantly, how do you level them up so you can get them to the most -- the highest level of efficiency and maximize revenue per wax [indiscernible].

Awesome. And the next was just thoughts on further promotional programs around maybe moving some of those casual guests and transitioning the cash or average cash up closer to the upper quartile type of consumer?

Yes, Julio, thanks for the question. We don't -- we are not a discount promotional brand. What we are going to do is lean into our enterprise data warehouse to really talk about what we call lapsed guests. So guests that may have visited us but haven't been there in the past 6 months and send out to them some targeted messaging to drive them back into the center. If there's an opportunity to give them some incentive to do that, we'll do that. But we've got a couple of tools where we can do that via either reward points or some sort of incentive to come in for multiple services. But this is not a -- as you know, this is not a discounting brand. We don't plan to be overly promotional, don't need to be but it is our opportunity really as we get smarter and better muscle around understanding who those guests are to drive them back in and ensuring that we retain the guests that are most loyal to us to ensure that they stay on their same frequency of visit. So that's our game plan under that attract more, buy more, visit more strategy that 3-pillar strategy around how do we continue to drive sales and same-store sales comps.

Our next question comes from Kelly Crago from Citi.

I think at ICR, you were kind of thinking that the comp progression through the year would be a bit different than what you're seeing today. I believe you were pointing to more of a 3% to 4% growth rate in the first half as you were continuing to cycle through the weakness that you've been seeing in non-Wax Pass customer. And then maybe that was going to get back up to your long-term algo in the back half of highest singles. But I think now you're saying it's going to be more consistent. So I'm just curious what's changed. And then also, I believe you talked about some strong growth in January but that might have been Omicron-related. So just curious if the momentum you're seeing in January has continued so far quarter to date?

Yes, Kelly, I think we're 60 days past ICR. We continue to monitor transaction trends. And as we touched on in our prepared remarks, we've seen a lot of stability now for the last 8 months really. When I think about kind of how we exited fiscal 2022, comp actually accelerated throughout the fourth quarter. We had a very strong January. Keep in mind, our first quarter is typically probably our lightest top line from a system-wide sales perspective for the whole year. But all in, I don't know that a lot has really changed other than we just have better visibility in terms of ticket trends that we've seen now for 8 months. And as we kind of run those through our budgets and forecast, that's kind of netting out to a fairly consistent comp expectations throughout all 4 quarters of 2023.

And just on the January momentum that you were seeing in when we last continue. I know you were kind of talking about it perhaps being Omicron-related but just curious if...

Yes. Kelly, I think -- so if I remember right, ICR was the 9th or 10th of January. I think that was really -- those comments were related more to sort of the past few weeks of fiscal year 2022, where in calendar year December of 2021, we saw the Omicron impact and we saw a nice lift in the -- as we exited the year.

Got it. And then just lastly for me. You said the transactions are running below where you would typically like to see them. Could you just break down exactly what the sort of the transactions versus ticket growth look like in the fourth quarter? And then just remind us, I guess when you think about through the year, it seems like maybe first half is more ticket-driven, second half more transactions-driven. I'm just curious if that's how we should be thinking about it. And also what will be driving the transaction growth in the back half of the year?

Yes. So for Q4, transactions were basically flat. All of the comp in Q4 was really from a price perspective. As we look to 2023, given we don't plan in within our guidance to have taken service level pricing at Center, I would expect about 3/4 of our comp in 2023 to come from volume, both from ramping -- primarily from ramping centers and about 1/4 of comp to come from price. Recall when we take price, it takes about a full year to get the full benefit of that because we have such a high proportion of our service dollars that are on wax that are being redeemed on Wax Passes. So it typically takes a full year to get the full economic benefit of the service price increase. So we still will get a modest lift in comp from price but most of that we expect to come from volumes, specifically the ramping centers.

We have a question from Simeon Gutman from Morgan Stanley.

Hi Dan, this is actually Hannah Pittock on for Simeon. You've kind of been talking all year about that dip in frequency from the low-frequency kind of non-habitual waxer customer. I'm wondering kind of how that trended through Q4 where it's sitting now. And then thinking about your comp cadence in '23, are you embedding some sequential improvement there in the health of the consumer, knowing obviously it's a relatively small percentage of your revenue?

Hannah, this is David. So we are not assuming there is sequential improvement in that guests. We didn't see any change in behavior in Q4. As I mentioned earlier, we've really seen stability in our transaction trends specifically from those guests. Now notwithstanding, we have kind of better data. We can peel the onion a bit more with our data warehouse. So we understand that's really a subset of guests most recently acquired in 2021, not so much related to guests acquired prior to 2021. So with that data, we can now arm our marketing team with who the guest segment is specifically that might have slowed down their visit frequency just a bit and that's exactly what we plan to do with our CRM strategy.

Make sense. Maybe one quick follow-up. You mentioned you expect to be back to kind of margin expansion in '24. Would you just walk us through kind of the structure of the investments that you're making, the extent to which they're onetime versus permanent parts of the base but lever very quickly just due to the size.

Yes. So that's really associated with the OpEx investments that we've decided to make. In 2023, we touched on kind of the wraparound impact from our fiscal 2022 new hires to support us as a public company. We're making discrete investments in our development and operations teams that if you think about our -- as we continue to grow our network, we don't have to add a new development person or a new field business consultant every 10 or 20 centers but every 80 to 100 centers, you're making fairly modest discrete investments to continue supporting that growth. We are making those investments in 2023. So I think when you factor in some additions we're making in finance that I think will continue to help drive our business as well. I would expect us to return to our better leverage at the adjusted EBITDA margin in 2024 and beyond. Thanks, Hannah.

Our next question comes from Scot Ciccarelli from Truist.

This is Josh [ph] on for Scott. I just wanted to ask around the overall staffing levels for the Wax specialists. Just curious how that's trending, given the wage pressures out there in the market, I wanted to see if you're seeing any significant changes in turnover rates or anything else to note there?

Josh, I would say our staffing levels have continued to improve kind of quarter-over-quarter within center. From a turnover perspective, I don't think we've seen dramatic shifts, positive or negative in terms of waxer-level turnover. You may recall, as we bring new waxers into the system, there's a decent amount of turnover in that first 90 days. If we can't -- if our franchisees can't -- the waxers can get to a certain level of proficiency within the first 3 months, so we tend to see a fair amount of turnover in those first 3 months. We've seen no dramatic changes in the most recent quarters versus history there. Once our waxers are with us for a year, they tend to be pretty sticky to the brand. So I don't think we've seen any dramatic shifts in terms of turnover.

And Josh, as David talked about in his earlier comments that we've had a hyper focus in working with our franchisees about attracting waxers into the pipeline and making sure that they come to work in EWC. And that focus is still ongoing but also our operations team really working with our franchisees to say, how do you develop a great culture in your center to retain those wax specialists that have come back and work with us. So I think, candidly, the strongest testament to the supply of waxers being adequate or back to normal is that our franchisees continue to sort of bode with their checkbooks and grow with us. So they are not seeing any kind of an impediment to their continued growth, north of 10% year-over-year growth last year and guiding to the same thing this year. So we keep a close year with our Franchise Advisory Council and all of our franchisees. And I think the fact that they continue to grow with us and not see that as any kind of turn to their growth is a great testament to the ability to get an adequate supply of wax specialists.

We have a question from Korinne Wolfmeyer with Piper Sandler.

Congrats on a great quarter. Just to touch on some of the commentary on where the new centers are being built out. I believe you said they're more so going to be in existing markets. What is the path maybe longer term to moving more into those untapped market? Is it really just we need to get those franchise relationships? Is it about finding the right market and making sure they're ready to bring in a waxing center? Just what is the path to moving into more of those other markets?

Yes, Korinne, thanks for the question. So last year, we opened centers in 32 different states. We saw the heaviest concentration of those NCOs coming in the states where we have already as the most significant presence is our franchisees really wanted to protect and expand their respective markets. So those states are California, Texas, Florida, New York, New Jersey, Illinois saw a fair amount of NCO activity last year. So our franchisees are really developing centers where there's demand from guests. And so as we say, 70%, 75% of our whitespace resides in markets where we already have a presence. We've got just a lot of opportunity to continue expanding our footprint in the states where we have a presence. It's not to say that we won't go to new markets if there's both franchisee and guest demand there but most of this -- most of the demand resides in states where we already have a presence. Hopefully, that helps.

Yes, that's very helpful. And then can you just clarify quickly that 53rd week that's going to fall in Q4. And then I believe you touched briefly on kind of cadence of the top line, maybe a little bit heavier in Q2 and Q4. But can you just elaborate a little bit more on the cadence we should expect in '23?

Yes. So the 53rd week in 2023, you may recall we had a 53rd week in 2022. So we're just aligning kind of our fiscal calendar with retail calendars. In terms of a slightly stronger Q2 and Q4, we've seen that over the last couple of years -- actually, the last several years, you may recall, we run our traditional semiannual Wax Pass promotions in the second quarter and in the fourth quarter. As it relate -- how does 2023 compare to 2022, I would say the second quarter and fourth quarter could be 50 to a 100 basis points heavier in both of those quarters relative to 2022. But that overall profile is not dramatically different than what the brands experienced over the last several years.

Thank you. And there are no other questions in the queue. I'd like to turn the call back to Mr. David Berg for closing remarks.

Well, thank you, everybody, for your time today on the call today. We certainly look forward to chatting with you over the next few days and weeks and continuing to deliver on our long-term growth objectives. But thank you for joining us on the call this morning.

This concludes today's conference call. Thank you for participating. You may now disconnect.