Thank you for standing by, and welcome to the European Wax Center's First Quarter 2023 Earnings Results. [Operator Instructions]. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Bethany Johns, Director of Investor Relations. Please go ahead.

Thank you, and welcome to European Wax Center's first quarter fiscal 2023 earnings call. With me today are David Berg, Chief Executive Officer; David Willis, President and Chief Operating Officer; and Stacie Shirley, Chief Financial Officer. For today's call, David Berg and David Willis will provide a brief overview of our first quarter performance and discuss our priorities for fiscal 2023. Then Stacie will provide additional details regarding our first quarter financial performance and our fiscal 2023 outlook. Following the prepared remarks, David, Stacie and David 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 release issued today. These forward-looking statements involve a number of risks and uncertainties that could cause actual results to different 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, Bethany, and good morning everyone. Thank you for joining us today. We are pleased to deliver solid Q1 performance in line with our expectations as our says and dos match for the eighth consecutive quarter since we became a public company in 2021. We generated $218 million in system-wide sales, $50 million in total revenue and $16.3 million in adjusted EBITDA, representing 6%, 10% and 8% growth respectively. We delivered 4.5% same-store sales growth and opened 34 net new centers, the most centers ever opened in a single quarter since the brand was founded in 2004. We continue to drive both of our key growth vectors. Unit growth driven by our franchisees excited about the strong return on invested capital and in-center sales growth. Our focus on these vectors remains steadfast as we look ahead. And I would like to extend our sincere thanks to our associates and our franchisee partners for their commitment to our ongoing success and for living our values every day. European Wax Center created the category of professionalized out-of-home waxing and continues to be the undisputed leader in a highly fragmented space. Our model is fueled by the recurring nature of hair growth and our loyal guests who consider waxing to be a nondiscretionary part of their personal care routines. Our highly trained wax specialists deliver consistent, efficient and professional services with our unique Comfort Wax at a reasonable price in clean, hygienic centers. These qualities and our relentless focus on delighting our guests sets European Wax Center apart from others. And our scale is truly unmatched. With almost 1,000 centers nationwide offering a high quality inclusive experience, European Wax Center is uniquely positioned to provide out-of-home waxing to every body. And our tech-enabled scheduling and efficient waxing regimen allow our guests to…

Thank you, David, and good morning everyone. Turning first to our unit growth vector. As David shared earlier, we opened 34 net new centers in Q1, densifying markets in key states like California, Florida and Illinois. We have incredible momentum as we approach 1,000 centers across 45 states, demonstrating that the European Wax Center brand resonates everywhere. Franchisee demand, especially among multi-unit developers remains robust. More than 90% of our pipeline is comprised of existing franchisees who are largely focused on densifying the top 20 markets nationwide. We are also welcoming new franchisees and expanding our reach in tertiary markets. By way of example, in Q1 we signed an agreement with a small family office to develop nearly 20 centers in Southern Georgia and Alabama. The development personnel we invested in this year are helping structure multi-unit development agreements for our larger franchisees in addressing pent up demand from smaller operators who want to add 1, 2 or 3 centers to their existing portfolios. As a reminder, our centers have a relatively modest initial investment of approximately $350,000 to $400,000. We are confident that our franchisees remain well-capitalized amidst this rising interest rate environment, with sufficient funding to continue growing the European Wax Center footprint. Continued demand is also helping us reach our targeted long-term franchisee mix sooner than expected. At the IPO, we communicated a long-term expectation that 1/3 of our centers would be owned by each of 3 groups, smaller independent operators, self-funded multiunit developers and private-equity backed operators. While our current location mix is 50% independent, 30% self-funded, and 20% private-equity-backed, opening the approximately 400 centers in our existing licensed pipeline will bring that mix close to 1/3 each within the next few years. Each of these groups is tremendously valuable to the brand and continues to…

Thanks, David, and good morning, everyone. I'm excited to be on my first earnings call as part of the European Wax Center team. 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-K filed with the SEC today. Turning to our financial performance. We delivered solid first quarter results in line with our expectations. Q1 system-wide sales increased 5.5% to $218.4 million, and total revenue increased 9.8% to $49.9 million. Top line growth was driven by our 2 growth vectors, including 11.9% unit growth. As David mentioned, our 34 net new centers were the most we've ever opened in a single quarter. Both our ramping and mature centers contributed to our 4.5% same-store sales increase, driven by price increases implemented in early 2022. From a profit standpoint, first quarter gross margin of 71% was in line with our full year guidance. Q1 adjusted EBITDA of $16.3 million increased 7.5% over last year. And adjusted EBITDA margin was 32.7%, exceeding our expectations of approximately 30%. SG&A expense timing, particularly for advertising, professional fees and payroll generated approximately $1 million in favorability for Q1. Adjusted EBITDA margin decreased 70 basis points year-over-year, primarily due to the addition of the medical supplies we now sell to franchisees, which are accretive to gross profit, but have a lower margin rate than the wax and proprietary retail products that drive the majority of our product revenue. Below the line, adjusted net income of $3.4 million differs from adjusted EBITDA of $16.3 million for the 3 primary reasons. First, interest expense was $6.9 million, an increase of $5.4 million year-over-year as a result of the whole…

Thank you, Stacy. In summary, we remain pleased with our continued top line growth, the resilience of our Wax Pass and routine guests and their enthusiasm for the brand. Their recurring predictable visits give us incredible confidence in the health of our business model over the long term. We recognize that an uncertain consumer environment has impacted a smaller segment of our guests who are more economically sensitive. We believe we're focused on the right initiatives to support our continued performance in 2023. And we look forward to updating you next quarter on our progress. In the meantime, our franchisee base is stronger than ever and continuing to invest in European Wax Centers nationwide. We remain the undisputed leader in out-of-home waxing and believe that our efforts are only widening the gap between us and competitors in this highly fragmented category. We now like to open up the call for questions. Operator?

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

I guess first question is, I just want to maybe expand a little bit upon some of the early learnings from the service bundle tests that you're going after. And then as it relates to, you talked about on the call some incentives to drive a Wax Pass focus at the center level. Can you just take us through the process there and how that incentives may have changed from prior iterations?

Randy, thanks for the questions. This is David Willis. So the service bundle is literally launched yesterday in our corporate center, so I don't think we get a fair data set, an early read, maybe perhaps ironically the very first ticket that was rung up was a pilot bundle. There was an ingrown hair service and ingrown -- Brazilian service, ingrown hair serum purchased from a customer that hasn't transacted with the brand since 2018. So something caught their eye. So we will be glad to report progress on that. In terms of the incentives, these are the same Wax Pass contests we run every promo period. The network associates really get incentivized to drive Wax Pass sales through these contests. So for perspective, these are fairly small dollars that the brand is investing, $50,000 to $75,000 that we make the top 50 to 75 performers in the Wax Pass promo some incentives available for them. So same tried-and-true tactic we've used in prior periods, and that's what we mean by incentive, Randy.

Got you. And then my last question, my follow-up is it seems like you talked about strong enthusiasm from the different groups, the independents, the self-funded and the PE entities to continue to want to buy into the system. So maybe can you just give us some perspective how those conversations have changed among those different groups over the last few months, recognizing the higher interest rates, et cetera. So just curious on understanding their level of demand going forward for units given changes in the economy and the interest rate environment.

Sure, Randy. So our network, our franchisees are very well-capitalized. In fact, the institutional players in our network have overequitized their investments and the noninstitutional players really have cash flow from existing locations to fund further development. Over 90% of our development comes from our existing franchisee base. I did say in our prepared remarks, we're pleased we've recruited a new family office investor into the network that has agreed to develop a sizable number of centers in the Southeast. And we stay in touch with our Franchise Advisory Council and our franchisees. We pulled them, what are you seeing in terms of regional lenders. And we've got about a half a dozen lenders that have a lot of activity with our network. Every one of those lenders remains active. And kind of as a reminder, we're a relatively modest upfront investment compared to some other concepts. So we're directionally $350,000 to $400,000 upfront. We're really not seeing the interest rate environment have any impact on our franchisees' desire to add more centers to their portfolios.

And our next question comes from the line of Lorraine Hutchinson from Bank of America.

I just wanted to follow up on the comments that some of your episodic customers that the trends have weakened in recent weeks. Can you talk about the magnitude of the slowdown? And what do you think the catalyst was for that slowdown?

Lorraine, good morning. Let me just double-click a little bit on transaction trends kind of across the cohorts that we talked about. So that Wax Pass and routine guests, their frequency has continued to be strong and consistent, view us as nondiscretionary. And as we mentioned, drive over 75% of our network sales. That episodic guest, through our guest survey work has shown that they are a bit more no more sensitive to the economic pressure that we're under, particularly as we exited Q1 and into the early days of Q2. So what we've done is deployed some additional levers to drive transactions and ticket size. And what's really important, I think, for everybody to recall is that we're focused on things that we know how to do, that we've done before to drive behavior, and we've got some proof points. So let me go through kind of the guest initiatives and what we're doing. And because your question went to episodic guests, Lorraine, I'll start there. We've really enhanced our CRM capability with our new data warehouse that we've spoken about over the last couple of quarters, gives us confidence that we can specifically identify those guests that may have fallen off or softened their behavior a little bit in the past recently. So we're doing a couple of things, using targeted CRM via text and e-mails we identified a portion of the 2021 cohort where we incentivize them with very small offers that we've seen drive transaction lift versus the control group early on in our test thus far. The other thing we've done with that episodic guest, and this is -- if you think about the episodic guests, it's really a subset of the episodic guests that we've seen the change in behavior on. And we looked…

And our next question comes from the line Dana Telsey from Telsey Advisory Group.

Just as you think about the change in cadence, what are you seeing by region? Is California different than any other regions of the country? And how would you frame it? And then just coming out of the quarter, was there a difference in cadence going into the quarter and ending the quarter? And then you've always talked about higher-tier aestheticians to drive greater productivity. Where are we on that journey of aestheticians through their greater level of productivity?

Dan, let me start with the aestheticians in terms of our wax specialist pipeline. So we're really continuing to build on the momentum we generated last year with regard to the wax specialist pipeline. The beauty school partnership program has expanded now to 25 schools in 5 states. We've had several hundred attendees, a 97% approval rating that I think we addressed in our prepared remarks. And our careers page has generated more than double the wax specialist applications in the first quarter. So I think from a staffing level, we feel pretty good, very similar to our last call. I think if you were to pull our average franchisee, they would say, I've got enough waxers, I'm still focused on leveling up waxers to get more red and orange levels as they are our most proficient waxers. And I'd say, overall, our franchisees are making solid progress with respect to that. In terms of the change in cadence, your question as to geography, I don't think we saw it isolated to one state or one region. This episodic guest, for context, what we're seeing in terms of the recent ticket trends, it's about 1 in 10 episodic guests is where we're seeing the opportunity. David had touched on the incentives that we are using to get that 1 in 10 episodic guests back into our centers on a more regular basis, but not really seeing it isolated to one part of the country or another Dana.

And then just on the store openings this year. Obviously you opened a lot in the first quarter. Any cadence through the balance of the year that we should be mindful of?

Well, we did. We opened a few more earlier in Q1 than we had anticipated. But we are expecting with 80% of our full year guidance, now either open or under construction, we're expecting slightly more than half will actually open in the first half of 2023, if that's helpful.

And our next question comes from the line of Scot Ciccarelli from Truist Securities.

So I guess I have another follow-up on your comments about the episodic customers. I know you guys cited some weakness with this customer cohort last year as well. So what is it you're seeing today in terms of the incremental change? Is it some customers just kind of like dropping off totally, less frequency? Is it buying less, all of the above? Any kind of color there would be helpful.

Yes, Scott, maybe trying to get this appropriate context. We have talked about the episodic guests. That informed our guide that we provided in March. What we're seeing, this 1 in 10 episodic guest translates to less than 5% of system-wide sales on an annualized basis. So I just want to make sure we're clear. We want to absolutely be transparent to address any questions. But in the context of what we're talking about, we see the opportunity here is less than 5% of total system-wide sales specific to this guest. The programs that we have deployed recently to target this guest, we're pleased with the initial feedback and response rate from these guests. So we are confident in reiterating our full year guide for the year.

And Scot, to your point, we talked about that last year, and that's why as we went to the toolbox, we saw something that drove incremental spend by that guest that was more economically pinched. And that's why we brought back the 3-plus-1 offer for that guest. Unlike last year where we offered that across the board with our more enhanced day warehouse and better CRM, we've targeted specifically those guests, that episodic guest that has softened in the behavior. And to David's point, this is a very small subset of that episodic guest and have offered that specifically to that guest rather than across the board. And we expect to see the same sort of lift and take up a rate that we saw when we offered that last summer.

Got it. And then one quick follow-up. Can you talk to aesthetician retention rates at the franchisee level? I just know that they're -- we're still hearing from a lot of other retailers, there's ongoing pressures on wages, et cetera. And I'm wondering if there's any kind of issue in terms of retention or let's call it, wage pressures that the franchise needs are under.

Sure. So in terms of -- I'll focus really on the wax specialist. You may recall, Scott, that historically we've seen the greatest amount of turnover in that position in the first 90 days. And I think that's really driven from 2 things, either the Wax specialist decides this is not the career for her or if center managers can't get them leveled up to a certain level within 90 days it's going to be very difficult for them to ultimately get to orange and red level status. We're actually seeing turnover in that first 90 days decrease a bit over the last 90 days. So we're encouraged by that. Our operations teams have been focused now for 2 or 3 quarters on leveling up strategies and retention strategies. So we like to think that we're seeing a positive impact with turnover slightly declining in the first 90 days. So we're going to keep after it up, Scott.

And our next question comes from the line of Jonathan Komp from Baird.

This is Alex Conway on for John this morning. I just wanted to ask if you have any details around the comp guidance for the full year, kind of what are the ins and outs there with Q2 being a little lower? And then also if there's any pricing impact you expect for the rest of the year.

Sure. This is Stacie Shirley. So as we think about the comp for the remainder of the year, one, we've reiterated our guidance. And so as you think of the cadence, Q2, because of the impact of this episodic guests that we've been talking about and pulling back, we've guided to a low single digit. But as we think about the balance of the year, we expect to be in the mid-single digits, and that's going to be really driven by, again, the success and continued consistency of our Wax Pass guests as well as these particular targeted events and promotions towards that episodic guests. It's going to take a little time for those to kind of take root. And so that gives us confidence that we will achieve the mid-single-digit guidance that we had given previously. The other part of your question, we, at this time, don't anticipate any pricing increases for this year, but we'll continue to monitor that.

Yes. And then following up, with the more targeted marketing spend that you talked about shifting less from brand awareness, kind of why was now the right time to do that? And is it something that you've done in the past? Or is this really the first time you've taken more away from brand awareness to more targeted marketing.

Alex, we always take a look at kind of how we allocate the funds and the marketing funds that we get from franchisees. A lot of that is driven to help build brand awareness and to make sure that we're driving reservations into our franchisee centers. We had a nice lift in terms of our growth and awareness levels in the past couple of quarters. And we just thought it made sense given sort of a call to action and really getting folks inm incentivizing folks to come into the centers that it made sense to make that shift a little bit more deliberately in this quarter. And it's something we look at on a quarter-to-quarter basis as we allocate those dollars.

And our next question comes from the line of John Heinbockel from Guggenheim Partners.

Curious about the routine guest opportunity, right? Because it's probably a mid-single-digit percent of your customers. You would think a very substantial percentage could be converted to Wax Pass. Do you think that's the case? And then when I think about bringing on new guests, what percent right would come on as Wax Pass guests as opposed to routine or episodic? Is it a very significant percentage?

John, so on the routine, you're spot on in terms of the percentage of the guest file, it is mid-single digits in terms of that particular cohort. It's about 11% of our ticket volume and system-wide sales. They are coming with the same frequency, candidly about half a visit more frequently than our Wax Pass guest on average. There may be an opportunity to convert them on Wax Pass. Candidly, they're giving the brand a bit more money by not being on a Wax Pass. And their behavior has not changed a bit over the last several quarters. So it's clearly a very valuable guest cohort to the brand. In terms of percent that ultimately find their way into Wax Pass, it's about 20%. So if I just say if we recruit a new guest into the brand, follow the guest journey, directionally 20% of those new guests will find their way into our most valuable fully grailed Wax Pass guest.

Okay. And then I know the journey to 1/3, 1/3, 1/3 of ownership, if you look at the centers that will open this year, right, the 95 to 100, how would that break down, right? And maybe if you think about your pipeline out to 24, do you think private equity is as much as 40% or 50% of that or not that high?

Yes. So when I look at our license pipeline, specifically our growth partners, they today represent to center 40% of total units in the system, but almost 70% of that license pipeline. I think we had talked, John, in the last few years, we've kind of over-indexed on NCOs with our smaller operators. We're now, as we brought institutional capital players into the brand now they kind of found entry points through acquisition. We've worked through agreements with them. And so now they are starting to find their stride in terms of NCOs. So I think we had said in our prepared remarks, today's existing asset base from our smaller operators is about 50% of open units. But if I fast forward 2, 3 years out, we're getting to that 1/3, 1/3, 1/3 because of the development that's coming over the next few years is by volume largely driven from the self-funded multiunit developers in the private equity-backed operators.

And our next question comes from the line of Kelly Crago from Citi.

Just curious on ticket versus transaction in the quarter and then how that looks quarter-to-date and how we should expect that to trend in the back half of the year, just given -- I do believe you begin to lap some of these -- some of the slowdown from that to product guests last year.

Yes. This is Stacie again. So as we look at Q1, right, both of our ramping and mature centers did comp, but that was really driven by the annualization of a price increase that we did last year. So I think as we've said that we -- in the first half, we would have a tailwind of a price increase. And in the second half, as we're kind of again circling back around some of the challenges that we had in the back half of last year, that will be a tailwind in the second half. Anything to add? I think I had it.

Got it. And then just secondly, just a follow-up on the specific episodic guests that you're speaking to. Just curious what's unique about that guest in terms of income, age, just any sort of color you could provide and whether this is kind of indication of more like a broadening of the weakening macro environment of the consumer. Just anything you're hearing from your franchisees would be great.

Yes. Kelly, we're probably best informed by the guest survey work that we do. And again, just as David Willis mentioned, a very small subset of that episodic guest. And it's probably not surprisingly. It's that guest that has a little bit lower income that is feeling the pinch from inflationary pressures. And as David sort of quantified, that's less than sort of a 5% impact on our top line annual system-wide sales. So we think the incentives that we have offered to that episodic guest are the right ones that give them an economical bundle to get them back into the brand in a way that they can afford. But it's really largely driven by the macroeconomic situation that we find ourselves in right now.

[Operator Instructions]. And our next question comes from the line of Simeon Gutman from Morgan Stanley.

And this is Hannah Pittock on for Simeon Gutman. I wanted to ask on retail products. I know there's been some newness there. I'm wondering how attachment rate is trending. Or if there's any kind of change in the services versus retail mix of system-wide sales, specifically product sales as a percent of system-wide sales. Look like they stepped down sequentially. So I'm wondering if mix was a part of that.

Hannah, good morning. Retail products, as you know, are really a small portion of our system-wide sales as we utilize retail products really to help convey that authority position that we have to our guests. You're right. In fact in the fiscal year 2021, we redesigned and relaunched our entire product lineup. Attachment rates have held fairly consistently in the kind of mid-teens range. We've seen that consistent over the past few years. I think what we're excited about is that we're going to utilize limited-time offers, and we've done this successfully in the history of the brand to generate excitement, to purposely make sure that we run out of product so that our guests are invited into a new product line. We just launched a product that has gone incredibly well in the first week, so we started to sell that. We are not in the discounting world, generally speaking, in retail. We always see that there's an opportunity to continue to drive attachment. One of the things that David alluded to in answering one of the questions is a bundling opportunity where we will bundle services together but also a product, a retail product with a service because just as a reminder, our products really are there to enhance the efficacy of the service, make it last longer, make it more comfortable. So getting our guests' understanding that it's an integral part of their overall waxing experience is something we think there's opportunity to do in terms of our bundling as we go forward.

Makes sense. That's very helpful. And maybe as a follow-up. You mentioned that the newer cohorts of store openings are tending to ramp a little bit faster than historical cohorts have. Does that change the way we should think about the comp algorithm if kind of growth is being pulled into year 1 versus year 2 and it's factored into the comp? Or at this point, is it such a small part of the mix that it doesn't really move the needle?

Hannah, I would say today it's a fairly small part of the mix. We had talked I think on prior calls, we're very pleased that the last couple of years cohorts are ramping faster out of the gate in year 1. And for those that are 2 years and older, have maintained that momentum through their second year of operation. We do want to monitor this candidly through maturity before I think we're ready to say, a, is it consistent across the board; b, can we replicate it? We had touched on, at least in the prepared remarks, the NCO playbook that we're focused on this year. We're candidly just trying to leverage best practices that these great operators have executed against across the board. So for now, I wouldn't change the comp as a result of kind of the early success we've seen from these recent cohorts. We just want to monitor these through maturity.

This does conclude the question-and-answer session of today's program. I'd like to hand the program back to David Berg for any further remarks.

Thank you, Jonathan. Thanks, everybody, for joining our call this morning, and we will look forward to speaking with you and chatting in August about Q2. I appreciate everybody taking the time this morning. Have a great day.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.