European Wax Center, Inc. Q4 FY2022 Earnings Call

Good morning, everyone, and thank you for being here. Welcome to the European Wax Center's Fourth Quarter Fiscal 2022 Earnings Call. I will now hand the conference over to Bethany Johns, Director of Investor Relations. Please go ahead.

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 or 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 just represent 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 an 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 provided 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 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 to 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 whole business securitization and returned approximately $220 million to shareholders through dividends and buybacks. Fourth, we implemented an enterprise data warehouse that will serve as the backbone for enhanced marketing outreach to drive incremental engagement from our guests. And finally, and most importantly, we delivered on both of our key growth vectors: unit growth and in-center sales growth. We generated over 10% new center growth and ended the year with our deepest pipeline ever. We also grew system-wide sales by 13% and same-store sales by 10.4%. Let me spend a minute talking about the health of our guests. In 2022, our guests demonstrated their commitment to their waxing routines despite a difficult year for the consumer at large. Our highly trained wax specialists performed over 22 million services last year for more than 3.5 million people. We continue to attract new guests to the brand, converting them into repeat guests and ultimately into Wax Pass guests. Our Wax Pass program engenders brand loyalty with Wax Pass sales representing commitments to the brand that generate predictable visit frequency. Wax Pass holders represent nearly 40% of total guests and generate two-thirds of our annual visits and system-wide sales dollars. Compared to 2021, these guests have increased their frequency to nearly 7.5 visits per year, more than double the frequency and annual spend of our episodic non-Wax Pass holders. Wax Pass adoption remained robust in 2022 with 16% growth in Wax Pass sales during our customary Q4 promotional period. The bottom line is that our most loyal guests are driving the majority of our network sales and have not changed their waxing routines, demonstrating that they continue to view our services as non-discretionary even in a highly inflationary environment. We believe there is a continued opportunity to drive new guests to the brand and further engage existing guests. Overall, we are pleased with how our core guests are engaging with the brand, and David Willis will cover shortly in our 2023 outlook; we expect mature center transaction trends to remain consistent with the second half of 2022. That stability and the loyalty of our Wax Pass guests have continued into 2023 and are key assumptions in our outlook for this year. Before I dive into our priorities for 2023, let me remind you where we fit into the highly fragmented hair removal landscape. European Wax Center created a category for professionalized out-of-home waxing. We are six times larger than our closest branded competitor in unit count and eleven times larger by system-wide sales. Today, we remain the only nationwide brand in this space, and we will continue to leverage our scale to extend our leadership position. We deliver a trusted service to our guests by providing a consistent, elevated experience through our highly trained wax specialists, our unparalleled hygiene protocols, and our proprietary comfort wax. These differentiators in our operating model keep guests coming back to European Wax Center on a recurring basis. As we expand, we continue to penetrate a growing $18 billion addressable market, and we feel confident we are capturing our fair share of it. Despite our dominance, we have yet to reach one-third of our unit growth potential. We have significant whitespace for our continued expansion on our expected path for more than 3,000 locations in the U.S. Our franchisees are investing their own capital to develop this whitespace. In fact, 99% of our new centers in 2022 were opened by existing franchisees. Our significant market opportunity is the foundation for our two growth vectors. First, expanding our footprint through new center growth and second, driving in-center sales, which benefits both system-wide and same-store sales growth. I'll start with our unit growth vector. At over 400 licenses, our new center pipeline is the deepest in our brand's history. We delivered more than 10% unit growth year-over-year in 2022 and expect to deliver another 10% growth rate in 2023. Nearly all of our 2023 openings will be located in existing markets, focusing on California, Texas, Florida, Illinois, and Georgia. As of today's call, two-thirds of our targeted 95 to 100 new centers are already opened or under construction. Our franchisees are well-capitalized; coupled with a modest cost to build, elevated interest rates have not impacted their appetite for expansion. Franchisee demand, especially among growth partners and multi-unit developers, remains robust. To support new centers, we will build on the momentum generated in 2022 by continuing to refine tools to help our franchisees recruit and optimize their wax specialist pipeline and enhance our already best-in-class unit economics. Our average center generates nearly $500,000 in sales in its first year of operations and nearly $800,000 in year two. It breaks even in month 14 and reaches maturity in year five, generating $1.1 million in sales with over 60% cash-on-cash returns. Make no mistake, these returns are already phenomenal, but we plan to put even more rigor around the preopening playbook for new centers to drive faster breakeven sales. Our most recent cohorts are opening at higher initial volumes than our historical average. We plan to leverage their best practices with the network to drive more momentum. We also recently launched enhanced reporting that enables better access to real-time performance analytics. Ultimately, strong unit economics translate to a growing licensed pipeline to support our long-term unit growth targets. Existing franchisees make up more than 90% of our pipeline. Our smaller operators, who opened almost half of our 2022 new centers, are the backbone of our brand and continue to be critical to our success. We continue to have growing interest from our institutional growth partners who represent 40% of existing centers but 70% of our future pipeline. Both of these groups continue to demonstrate their steadfast commitment to our long-term growth. Turning to our second growth vector, driving in-center sales growth which benefits both system-wide and same-store sales growth. We are excited to drive even deeper engagement with our guests this year through our three-pillared strategy: attract more, buy more, and visit more. The attract more pillar is focused on attracting new guests to European Wax Center. First, we are helping our network optimize our local marketing spend by increasing the number of regions in key states. By collaborating together in regions, centers reduce the cost of acquiring new guests by more than 20%. Second, we recently engaged a new creative agency, recognized in 2022 as the Small Ad Agency of the Year, to enhance our creative assets and campaigns that reinforce EWC as the category killer in the space. In Q2, we will launch a new campaign that celebrates inclusivity, reinforces our brand differentiators, and projects irresistible competence for everyone. Lastly, because our retention rates remain strong, we will shift more of our digital media spend to early 2023 to attract new guests sooner and retain them all year long. We are pleased with the traction that we've seen thus far from our first quarter spend. Our second pillar, buy more, focuses on increasing the average ticket in centers. We will roll out strategic service recommendations in 2023 from both online booking and our app suggesting incremental services for guests to seamlessly add to their reservations. We are also elevating our retail strategy for 2023. It's better informed by guest behavior and seasonal considerations to focus on limited-time offers that sell out and drive product attachment. As a reminder, sales of retail products are a small piece of system-wide sales but represent a larger portion of our product revenue as a franchisor. We believe both of these initiatives will work together to increase average dollars per ticket this year. Our third pillar, visit more, is designed to increase frequency among our existing guests. Our network-facing contest in 2022 successfully generated higher rebooking rates in-center, which translates to more visits per guest per year, so we will carry on that initiative in 2023. We have also invested in resources to develop an integrated multichannel customer journey later this year, enabled by our enterprise data warehouse that we established in 2022. Our data and technology enhancements will enable us to leverage our enhanced CRM capabilities to deliver the right message to the right guest at the right time via the right platform. We kicked off this effort by rolling out SMS messaging capabilities a few weeks ago. We believe our CRM efforts will be the most effective driver of incremental guest behavior, especially among more episodic guests that present the biggest opportunity. Our fragmented competitive set simply cannot make these types of investments, which gives us the opportunity to continue to take market share. Lastly, we have refined and optimized our loyalty program for 2023 to reward the desired behaviors we seek, specifically maximizing re-bookings and referrals while minimizing the financial cost to the network. While EWC Rewards is a great tool, we recognize that our Wax Pass program is our most powerful loyalty driver and the leading indicator of future visits to our centers. As we execute on our attract more, buy more, and visit more initiatives, we expect to attract new guests to the brand, convert them into repeat guests, and drive valuable Wax Pass adoption. We expect these efforts, coupled with our strong unit growth, to drive 7% to 10% top-line growth in 2023. From a long-term standpoint, our expanding network footprint drives continued revenue growth for us as a franchisor and gives us the ability to leverage our fixed cost profile, delivering margin expansion and generating significant cash flow. Over time, this translates to significant value creation for European Wax Center's franchisees and our shareholders. Before I hand it over to David Willis, our CFO and COO, I want to highlight the executive leadership changes we announced earlier this morning, reflecting our commitment to building a strong bench of leaders that will continue to execute on our growth strategy and propel European Wax Center forward. We have appointed Stacie Shirley as our next Chief Financial Officer, and she will begin her role effective March 27. Stacie will succeed David, who has been promoted to President of the company. David, Stacie, and I will work closely together over the next few months to ensure a seamless transition. We are thrilled to welcome Stacie as our next CFO. She is a proven leader with over 20 years of consumer industry and franchise expertise and brings a unique understanding of our business and the guests we serve. The Board and I have complete confidence in her, and I look forward to introducing her to many of you soon. David, on behalf of the entire European Wax Center family, we thank you for your invaluable contributions to the success of our business and the execution of our financial objectives while wearing both CFO and COO hats. You stepped back into this role last year and have done a tremendous job steering us through our first full year as a public company. We have incredible confidence in you as President to execute on our growth strategy and further expand our footprint as a category leader in out-of-home waxing, and I look forward to our continued partnership. With that, I'd like to turn the call over to you, David, to review our financial performance and our guidance details for fiscal 2023.

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 the 8-K 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 expenses year-over-year. Adjusted net income grew from $8.5 million in Q4 of 2021 to $48.7 million in Q4 2022. Fourth quarter GAAP net income of $2.3 million includes a $55.9 million expense related to the remeasurement of our tax receivable agreement liability and a $53.3 million income tax benefit triggered from the release of a valuation allowance on our related deferred tax assets. For the full year, we opened 91 net new centers, representing 10.7% unit growth, once again exceeding our long-term high-single-digit growth target. System-wide sales increased 12.8% to $898.6 million, and total revenue increased 16% to $207.4 million. Same-store sales increased 10.4%, driven by both the price increases our franchisees implemented in Q1 of 2022 and transaction growth across all center cohorts. Adjusted EBITDA was $71.6 million, up 11.7% from $64.1 million in fiscal 2021. Adjusted EBITDA margins decreased 140 basis points year-over-year to 34.5%, primarily due to public company costs in the new medical supply arrangement, partially offset by operating expense leverage from top-line growth. Full-year interest expense increased to $23.6 million from $20.3 million in 2021 as a result of our whole business securitization that closed in April of last year, which locks in a fixed 5.5% rate on all of our long-term debt. Lastly, adjusted net income grew to $71.5 million in 2022 from $29.7 million in 2021, while GAAP net income increased to $13.6 million from $4 million the prior year. In terms of the balance sheet, we ended the quarter with $44.2 million in cash and $398 million outstanding under our senior secured notes. Our $40 million revolver remains fully undrawn. Net leverage at the end of fiscal 2022 was 4.9 times adjusted EBITDA, and we expect to deleverage nearly an additional full turn in 2023 to approximately four times based on our fiscal guidance that I'll cover shortly. Net cash provided by operating activities was $44.4 million in fiscal '22 compared to only $0.25 million in investing outflows, a signature of our asset-light, capital-light model. We repurchased approximately $10 million of our Class A common stock during the fourth quarter, with $30 million remaining under our current authorization. Our industry-leading free cash flow profile gives us continued optionality to deploy cash to the benefit of our model, our network, and our shareholders. Now turning to our outlook for fiscal 2023. As David mentioned earlier, we plan to deliver more than 10% unit growth once again based on 95 to 100 net new center openings this year, with 45 to 50 expected openings in each half of the year. Our license pipeline is the deepest it's ever been, with over 400 centers to be developed, representing unprecedented interest and firm commitments from existing franchisees and growth partners. We feel incredibly confident in our long-term goal of 3,000 European Wax Centers nationwide. From a top-line standpoint, we expect system-wide sales between $965 million and $990 million and total revenue between $222 million and $229 million, which implies a 7% to 10% growth for both metrics in 2023. We also expect mid-single-digit same-store sales growth. New centers continue to generate a strong maturity curve, and their sales ramp in years two through five will drive our overall comp performance in 2023. In fact, as David mentioned, our recent cohorts are opening at higher average unit volumes than our historical averages. As we shared with you on our last call, mature center transaction volumes have remained stable for the past two quarters and continue to remain stable through the first two months of 2023. While stable, these trends are slightly below our long-term growth algorithm. Our top-line outlook assumes continued transaction stability supported by the unwavering loyalty of our recurring Wax Pass guests. It is important to note that our outlook does not assume any service price increases for 2023. We recommended modest price increases to our network in both 2021 and 2022, and we'll continue to analyze and evaluate consumer trends and behavior as we move throughout the year. Our gross margin outlook is approximately 71%, which reflects the wraparound impact of our medical supply arrangement that was implemented in late Q1 of last year. Underlying gross margins are largely stable from 2022. As a reminder, while outbound freight rates continue to remain elevated from historical levels, as a franchisor with scale, we have leveraged with both our suppliers and franchisees to mitigate cost increases and protect gross profit. We expect to deliver $77 million to $80 million of adjusted EBITDA, translating to modest margin expansion year-over-year. Our model naturally generates meaningful SG&A expense leverage, and we are reinvesting a portion of this in 2023 to support our continued growth and evolution as a public company. First, we have the wraparound impact from associates hired in 2022 to support public company operations and compliance. Second, we are making key strategic hires in development, field operations, and finance to support our growing license pipeline and drive four-wall profitability over time. Lastly, we are investing in our associates through larger merit increases given the inflationary macro environment. We believe rewarding our associates for their commitment to the brand is the right thing to do and in line with our corporate values. We are pleased that these investments should strengthen our leadership position over time, and we expect to return to meaningful EBITDA margin expansion in fiscal 2024. We expect approximately $28 million of interest expense this year, slightly weighted to Q4 given the 53rd week in 2023. And with the valuation allowance on our deferred tax assets now fully released, we currently believe our 2023 effective tax rate will increase to approximately 18% before discrete items. Given our capital structure, we expect our effective tax rate to increase to the 25% statutory rate over time as pre-IPO shareholders exchanged their Class B shares for Class A shares. Incorporating these interest and tax estimates, we expect adjusted net income between $22 million and $24.5 million. Before I open the call for Q&A, I'd like to provide some insights on the seasonality of our full-year outlook. We expect same-store sales growth to be fairly consistent throughout the year. At a high level, the first half of the year will benefit from last year's service price increase, while the back half of the year will benefit from lapping the modest transaction headwinds we began seeing midway through 2022. From a system-wide sales perspective, we believe that 2023 sales will be slightly more weighted to Q2 and Q4 compared to the prior year, with the continued strength of Wax Pass sales generated in those quarters during our regular semiannual promotional periods. In terms of SG&A, we expect the payroll deleverage from the investments I mentioned earlier to be more concentrated in the back half of the year as associates are hired. Additionally, we plan to shift our marketing spend within the year. Our marketing fund approximates 3% of system-wide sales, which means that as we grow our network and top line, our marketing budget expands as well. In 2023, our annual budget is increasing by approximately $2 million. As David alluded to in his opening comments, we plan to spend the vast majority of those incremental dollars in Q1 to attract more new guests to the brand earlier in the year. Therefore, we expect Q1 adjusted EBITDA margins near 30%, increasing to the mid-30% margin rates for the remainder of the year. In summary, we are as confident as ever in the underlying strength of our business model and the predictable, recurring visits from our Wax Pass holders. Transaction trends remain solid and franchisees are expanding their portfolios with us, driving continued momentum in unit growth. We are leaning into our marketing and CRM enhancements to attract more new guests to the brand and then drive them to visit more frequently and spend more money with us. We are making investments in the right areas to extend our leadership position as a category killer and creator, and as we continue taking share in this growing yet highly fragmented category. We'd now like to open up the call for questions.

And our first question comes from Randy Konik from Jefferies.

I wanted to unpack and discuss deeper the repeated commentary around the positive initial volume increases you're seeing from, I guess, more recent cohorts. Maybe can you give us some perspective on how much that has changed versus, I guess, years past? And 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 in year one. 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 two 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 momentum with the new center openings, put them in 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 new center openings, Randy.

My final question is about the opportunities related to average dollar sales or services per transaction, which could lead to improvement. I'm recalling that during the last couple of years with COVID, there was likely some reluctance regarding base services. Could you provide some insight into the current state of services as a proportion of their historical levels? Additionally, what strategies are you implementing to increase the number of services per visit for each customer in the future?

Randy, thanks. It's David. I want to share a couple of updates. We ran a successful rebooking contest at the center, encouraging our wax specialists and guest service associates to ensure guests scheduled their next visit before leaving. This initiative led to an increase in rebookings, reinforcing our confidence that when guests rebook, they are likely to return on the scheduled date. We plan to continue this program in 2023 to enhance guest frequency. Regarding face services, we haven't seen a significant change in the mix between body and face services, as most guests still prefer body services. We are currently testing brow services in 250 centers. This includes focused retraining on our brow waxing techniques to ensure they're top-notch, especially after COVID when fewer services were being performed. Additionally, we're testing brow tinting in these locations and will continue this test for about another 30 days. Initial results have been promising, so we're cautiously optimistic about increasing face service percentages in 2023 as we introduce more options.

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?

I think the positive aspect is that we have noticed stable transaction activity across all our guest profiles over the past few quarters. Our Wax Pass holders are still visiting regularly, averaging 7.5 times a year, with the top tier visiting 9.5 times a year, contributing two-thirds of our revenue. We continue to focus on these valuable Wax Pass holders. At the end of last year, we introduced a promotional 3 plus 1 Wax Pass aimed at guests who may have faced financial challenges in the latter part of 2022. We successfully retargeted some of those guests who purchased the 3 plus 1 Wax Pass, offering them an opportunity to upgrade to the 9 plus 3 plan with an incentive, and we saw a positive response with an increase in those migrating to the higher pass. We are committed to promoting the 9 plus 3 Wax Pass, our premier loyalty program, and enhancing our outreach efforts. With improved visibility into our customer relationship management and new capabilities, we can effectively target guests who have not visited as frequently as they did in 2021 and 2022, using personalized messaging to encourage their return. We are optimistic about engaging these guests while maintaining loyalty among our regular visitors.

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. Our growth partners that we've talked about in 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 new center openings from franchisees of all sizes. In 2022, we had a very healthy percentage of our new center openings 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 one or two 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 before David discusses the analytics. There are two key aspects that will influence us. One is how we are leveraging our franchise business consultants for visibility and profitability support, and the other is our efforts to provide franchisees with improved business intelligence at their centers. Our expectations for retail product margins in 2023 remain consistent with historical figures. We've learned that limited-time offers are effective drivers, creating excitement and high demand by ensuring product shortages. We've recently introduced a new spring bag that’s performing very well. Customers are becoming accustomed to our quarterly limited-time offerings. It's crucial for our Wax specialists and guest service associates to educate customers about the importance of our aftercare products for overall service quality. We're focused on improving the attachment rate so that guests receive the best possible service before, during, and after their wax. Our marketing and product teams, along with our operations team, are dedicated to this effort. Dana, would you like to elaborate 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, it will increase sales per transaction 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 to 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 guest service associates' compensation package. This reporting will allow in-center level associates to receive real-time updates on how they are tracking on sales per transaction, Wax Pass sales, and 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 in all, 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 were some date or timing shifts. How are you thinking about the Wax Pass promotion cadence this year?

I'll start with California. Overall, we're optimistic about California. In previous calls, we mentioned that they were catching up to the rest of the network since they reopened their centers in early 2021. Our California franchisees generally feel positive, and the average franchisee believes they have sufficient staffing. We're focused on optimizing the efficiency of our waxers, and everyone is feeling confident. We're also witnessing significant development for new center openings in California, which likely has the most substantial pipeline compared to our other top states.

Dana, regarding the Wax Pass promotions, typically you pay for 9 and receive 11, which we refer to as 9 plus 2. Since the brand's inception, we have held a semiannual promotion in May and June where customers can buy 9 and get 12, and in November and December, they can buy 9 and get 12 or what we call 9 plus 3. The only change we implemented in 2022 was moving the November-December promotion forward to mid-October. This was influenced by the macroeconomic environment, as Black Friday announcements began as early as August, and we thought it wise to start our promotion a couple of weeks early. We will assess the need for changes, but we do not anticipate any additional promotional offers for the Wax Pass beyond our usual May, June, and November-December events as we plan for 2023.

Our next question comes from John Heinbockel with Guggenheim Partners.

This is William Markus 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, we frequently discuss our wax specialist pipeline activities, and we are quite pleased with the progress we've made. We've previously mentioned some pilot programs we conducted with 21 beauty schools throughout 2022 and the success we've achieved in engaging prospective waxers for our network. We now intend to expand this initiative to a wider audience. Approximately 750 students were involved in the pilot programs, and we saw strong engagement and conversion rates. We've also improved our careers page, leading to increased engagement, click-through rates, and application submissions. Overall, from a waxer pipeline perspective, we feel positive about the efforts made over the past several quarters, which are beginning to yield results for our franchisees. Our gauge, Julio, is the level of discussion within the network about needing more waxers, and we’re not hearing that as much as we did a few quarters ago. Many of our operations teams are now focused on retention strategies to ensure we keep the waxers we've recruited and, most importantly, to help them reach the highest level of efficiency to maximize revenue per wax.

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 are not a discount promotional brand. Our plan is to utilize our enterprise data warehouse to focus on what we refer to as lapsed guests, those who have visited us but haven't come back in the last six months. We intend to send them targeted messaging to encourage their return. If there's a chance to provide them with an incentive, we will do so, utilizing tools such as reward points or incentives for multiple services. However, we are not aiming to be overly promotional or discounting. Our goal is to better understand these guests to bring them back and retain our most loyal customers, ensuring they continue to visit us regularly. This strategy falls under our approach to attract more customers, encourage them to buy more, and increase their visit frequency, which is a three-pillar strategy aimed at boosting sales and same-store sales comparisons.

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 customers. 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 eight months really. When I think about how we exited fiscal 2022, the same-store sales 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 eight months. And as we run those through our budgets and forecasts, that's kind of netting out to a fairly consistent same-store sales expectations throughout all four quarters of 2023.

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

Yes, Kelly, if I remember correctly, ICR was around the 9th or 10th of January. Those comments were mostly about the last few weeks of fiscal year 2022, where in December 2021, we experienced the impact of Omicron and saw a nice boost as we moved into the new 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 the first half is more ticket-driven, second half more transaction-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?

For Q4, transactions remained largely unchanged, with same-store sales growth primarily driven by pricing increases. Looking ahead to 2023, since we do not anticipate implementing service level pricing at our centers, I expect that approximately 75% of our comparable sales will come from increased volume, mainly from ramping centers, while around 25% will be based on price increases. It's important to note that when we raise prices, it usually takes about a year to realize the full benefit due to the high percentage of our service revenue tied to Wax Passes. As a result, the modest increase in same-store sales from price adjustments will be overshadowed by volume growth, particularly from 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 been talking all year about that dip in frequency from the low-frequency kind of non-habitual waxer customer. I'm wondering 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 the structure of the investments that you're making, the extent to which they're one-time versus permanent parts of the base that lever very quickly just due to the size?

Yes, our current situation is linked to the operational expenses we've chosen to invest in. In 2023, we mentioned the impact of our new hires from fiscal 2022, which is crucial for supporting our role as a public company. We are strategically investing in our development and operations teams. As our network expands, we don’t need to hire a new development person or field business consultant for every 10 or 20 centers; instead, we are making modest investments for every 80 to 100 centers to facilitate that growth. These investments are ongoing in 2023. Additionally, we are adding roles in finance that will further drive our business forward. I anticipate that we will see improved leverage in our adjusted EBITDA margin starting in 2024 and thereafter. Thank you, Hannah.

Our next question comes from Scot Ciccarelli from Truist.

This is Josh 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?

Our staffing levels have continued to improve quarter-over-quarter within the center. From a turnover perspective, we haven't seen any significant changes, whether positive or negative, in waxer-level turnover. When we bring new waxers into the system, there's typically a notable amount of turnover in the first 90 days. If our franchisees cannot help the waxers reach a certain level of proficiency during those initial three months, we generally experience higher turnover. However, we haven't noticed any dramatic changes in recent quarters compared to historical data. Once our waxers stay with us for a year, they tend to remain loyal to the brand, so overall, turnover has remained stable.

And Josh, as David talked about in his earlier comments, 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 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 ear 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 markets? 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, thank you for the question. Last year, we opened centers in 32 different states, with most of those openings concentrated in areas where we already have a strong presence, as our franchisees aimed to protect and grow their markets. States like California, Texas, Florida, New York, New Jersey, and Illinois experienced significant new center activity last year. Our franchisees are focused on developing centers in response to guest demand. About 70% to 75% of our untapped opportunities are located in markets where we already operate, indicating ample room for expansion in these areas. While we are open to exploring new markets if there is franchisee and guest demand, the majority of demand currently exists in states where we already have a footprint. I hope that clarifies things.

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 the 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 our fiscal calendar with retail calendars. In terms of a slightly stronger Q2 and Q4, we've seen that over 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 relates to how 2023 compares to 2022, I would say the second quarter and fourth quarter could be 50 to 100 basis points heavier in both of those quarters relative to 2022. But that overall profile is not dramatically different than what the brand has experienced over the last several years. Well, thank you everybody for your time today on the call. 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.