European Wax Center, Inc. Q1 FY2025 Earnings Call

Good morning ladies and gentlemen and thank you for standing by. Welcome to European Wax Center's First Quarter Fiscal 2025 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. In order to facilitate as many participants as possible, we ask that you please limit yourself to one question and one follow-up during the Q&A session. If you have additional questions, you may re-join the queue. On the call today are Chris Morris, Chairman and Chief Executive Officer; and Tom Kim, Chief Financial Officer. I would now like to turn the conference over to Bethany Johns, Director of Investor Relations. Ma'am, you may begin.

Good morning, everyone. Thank you and welcome to European Wax Center's first quarter fiscal year 2025 earnings call. On today's call, Chris Morris will provide an update on its first full quarter with the company and discuss additional details regarding progress made on our priorities. Then, Tom will discuss our first quarter performance and fiscal 2025 outlook. Following the prepared remarks, the team 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 differ materially. Please refer to our SEC filings, as well as our earnings release issued today for a more detailed description of the risk factors that may affect our results. Please also note that these forward-looking statements reflect our opinions only as of the date of this call and we take no obligation to revise or publicly release the results of any revision to our forward-looking statements in light of new information or future events. Also during this call, we will discuss non-GAAP financial measures which adjust our GAAP results to eliminate the impact of certain items. You will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP to GAAP measures in our earnings release. A live broadcast of this call is also available on the Investor Relations section of our website at investors.waxcenter.com. I will now turn the call over to Chris Morris. Chris?

Okay. Thank you, Bethany, and good morning everyone. Thank you for joining us to discuss European Wax Center's first quarter 2025 financial performance. I'm pleased to share that we delivered solid first quarter results of $225.9 million of system-wide sales, 70 basis points of positive same-store sales growth and $18.8 million in adjusted EBITDA. These results demonstrate that our guests value our unparalleled waxing services and our business is on the right track, enabling us to reiterate our outlook today. At the same time, we recognize the consumer backdrop and supply chain environment remain uncertain. I want to emphasize that the fundamentals of our model remain strong and we are actively managing these dynamics which Tom will speak to in the second half of today's call. But first, I'd like to take a moment to share a few reflections from my first 100 days with EWC. Over the past few months, I spent a lot of time visiting centers across some of our largest markets, coast-to-coast from New York and New Jersey to Florida and California and several states in between. I've been interfacing heavily with our franchise partners, associates, guests, and stakeholders with the goal of understanding our competitive advantages and setting the priorities for sustainable growth. As a result, my belief in EWC's potential has never been stronger. I'm invigorated by the passion we all share for this iconic brand and the incredible work our talented franchisees and associates do each day to deliver the unparalleled guest experience unique to European Wax Center. My first 100 days haven't just been a period of listening and learning; they've also been a time of action. As I mentioned last quarter, it's evident that we have a lot of opportunities to solidify the foundation of this business. We've already taken a lot of steps designed to improve execution, strengthen operations, and build momentum. I believe 2025 is a reset year but let me be clear; what we need to do to reignite our growth isn't complex. The core of our concept remains strong. We need to focus on the basics, bring energy back to the brand, and ensure we have the tools needed to execute flawlessly. This includes modernizing the marketing engine, making sure franchisees are set up for success, and being disciplined and strategic in our approach to new center expansion. Together with my new executive team, we are sharpening our vision for the future. We continue to ground our actions in driving sales, improving four-wall profitability, and reigniting unit growth which I believe are critical to delivering near-term results and best positioning us to revitalize our long-term growth story. I'm incredibly proud of the progress we've made on each of these priorities over the past two months and I'm excited to walk you through our accomplishments and our action plans for Q2 and beyond. First, driving sales through traffic growth. Our core guests continue to love European Wax Center and remain stable. But to increase four-wall sales and profitability, we need to drive more new guests and get non-core guests to visit us more often. To do that well, we are building a data-rich digital-first marketing engine underpinned by a clear and relevant brand identity. Our marketing team is acting with conviction to deliver near-term wins while laying the groundwork to fuel sustainable long-term sales growth. We are methodically approaching this effort from a few angles. We began in Q4 by building the measurement foundations to truly understand our advertising effectiveness and support a modern approach to marketing. We introduced that technology in Q1, and as a result, we are leveraging our data with our digital and social media partners better than ever before, enabling our media dollars to be more efficient and lowering our cost per acquisition. Most importantly, we're seeing early signs of traction with new guests. On a two-year basis, 2025 new guest trends have improved each month, giving us confidence that we're headed in the right direction. In terms of non-core guests, we're significantly increasing our ability to engage with them through email and SMS which should enable us to unlock additional visits. This is a great example of the kind of basic sharpen-the-edges opportunities we have uncovered which we anticipate will result in better guest engagement. We're still not where we need to be, but we're pleased with the progress we've made so far. To drive new guest acquisition for the long term, we are redefining our target guest profile and reinvigorating our brand identity. We performed extensive research and testing in Q1 that has given us three valuable insights. First, out-of-home waxing still represents a large and stable addressable market. Second, we can cast a wider net with new guests by leaning into those who offer a higher lifetime value, are more profitable, and are more likely to be retained. And third, we can deliver a clear message that better resonates with the high-value guests I just described. Armed with this new information, we are taking immediate actions to improve marketing content this quarter. The initial phase of refining our message and creative assets is already underway with a new champion ad expected to be live for the peak summer waxing season. We plan to launch bigger, more holistic brand strategy work later this year. Together with improvements we've made leveraging data and lowering our cost of acquisition, we expect to refine our marketing mix and more effectively drive traffic in the second half of 2025. As a reminder, this is a key assumption in the high end of our outlook. Our second area of focus is cultivating a more effective corporate infrastructure to support franchisees, facilitating higher four-wall profitability through operational excellence. We realize franchisees are the primary customers we serve and their success drives our success. Our immediate priority is to narrow the gap between underperforming centers and the broader network. We've increased the capacity of our franchisee support team, and we're spending more time working hand-in-hand with operators. We recently deployed new tools that offer enhanced tracking, accountability, and transparency, making it easier than ever for both us and our franchise partners to see opportunities and action plans. Our operations team is also driving 50% more engagement with our learning management system. Combined, these actions have started to generate KPI improvement in underperforming centers. Regarding our long-term goal of operational excellence, we've made progress on our search for a strong Chief Operating Officer to evolve our structure and processes. We also look forward to engaging with our partners next week at our annual franchisee event where we will reinforce our aligned focus on reigniting sustainable, profitable growth, both at the individual center level and across the network as a whole. Moving to my third focus area, implementing a more sophisticated development approach focused on thoughtful, profitable expansion. We continue to partner closely with franchisees to evaluate near-term growth plans while prioritizing long-term network health. To prepare for 2026 new center openings, we've identified underpenetrated trade areas with strong existing demand for out-of-home hair removal which we believe will pave the way for franchisees to resume unit growth while best positioning their centers for success. Longer term, we plan to utilize a more strategic development approach. We've upgraded our market planning tool to a purpose-built solution with enhanced analytics and forecasting capabilities. This leap in sophistication should enable us to more accurately model new site potential moving forward. We've also implemented a rigorous site approval process for new centers. We believe that both of these actions should enable better new center performance and support more sustainable growth over time. Ultimately, we remain confident that our efforts to drive sales and improve four-wall profitability will best position the network to return to net unit growth by the end of 2026. And last but not least, we've made substantial progress in assembling a team of seasoned leaders who will help execute these priorities for 2025 and beyond. Our Chief Commercial Officer, Katie Mullen; and Chief Information and Digital Officer, Chris Andrews, officially joined at the end of Q1 and are off to a running start and they've done a tremendous amount of work in the short time they've been with us. And finally, I'm excited to introduce Tom Kim, our new Chief Financial Officer, for the first time today. Tom joined us last month and is a strategic CFO with franchise experience and a history of driving profitable growth. He will be a valuable and impactful partner in executing our strategic priorities and reigniting growth for European Wax Center and I look forward to all of you getting to know him better in the coming weeks and months. So with that, I'll pass things over to Tom to review our Q1 financial results and our outlook for 2025.

Thank you, Chris. I'm excited to be on my first earnings call as part of the European Wax Center team. With my background leading finance for consumer and franchise businesses, it was easy to see that EWC's category leadership position, meaningful white space, and strong free cash flow profile offer a compelling and attractive opportunity. I look forward to partnering with the team and our franchisees to capitalize on our opportunities as we solidify our foundation and reinvigorate our unit growth. Before I begin my remarks, I'd like to remind everyone that our discussion of growth rates on this call will refer to the first quarter of fiscal 2025 compared to the first quarter of fiscal 2024. For comparability purposes, please note that our centers are closed on Easter Sunday which fell in Q1 fiscal 2024 but shifted to Q2 fiscal 2025. Now, to our results. We ended Q1 with 1,062 centers, representing 1% growth year-over-year. We had 5 gross openings during the quarter and 10 closures, resulting in 5 net center closures. We were expecting 6 to 7 net closures but benefited from an opening that shifted forward into Q1. System-wide sales increased 2.1% to $225.9 million from $221.4 million, with year-over-year growth driven by the shift in the Easter holiday and payment timing. Same-store sales grew 70 basis points. Adjusting for the Easter shift, we estimate it would have been approximately flat. While transaction growth remains pressured, as Chris mentioned, we're starting to see some improvement in new guest trends. We are still in the early stages of enhancing our marketing and operational capabilities under the leadership of our new executive team and we're excited about the work we're doing to drive top line momentum. Total revenue of $51.4 million decreased approximately $400,000 or 90 basis points, primarily due to lower retail and wholesale product revenue. Additionally, this is the final quarter we are lapping a COVID-related surcharge with product revenue that we eliminated early last year. Q1 revenue exceeded our internal expectations due to franchisee order patterns and a successful retail promotion, both of which we believe pulled forward some demand. As expected, gross margin increased modestly to 74.2%, primarily due to a higher mix of royalty and marketing fees. SG&A expenses increased $1.9 million to $15.3 million, primarily driven by higher stock-based compensation and executive severance costs that we exclude from adjusted EBITDA. Advertising expense decreased $1.4 million due to the timing of spend within the fiscal year. Adjusted EBITDA of $18.8 million increased 7.2% from $17.5 million in the prior year period. Adjusted EBITDA margin increased to 36.5% from 33.7% and was higher than our full-year expectations of approximately 33% due to the revenue, advertising and SG&A expense timing that benefited Q1. Net interest expense increased slightly to $6.6 million and income tax expense increased to $1.4 million from $1.2 million last year. Adjusted net income increased 10.3% to $9.5 million from $8.6 million last year. We have updated our definition of adjusted net income to better align the metric with management's review of our core ongoing operations by excluding noncash amortization of intangible assets. Please refer to the earnings release for further details and a reconciliation to adjusted net income as reported in prior periods. Lastly, as a housekeeping item, as of May 9, 2025, there are 43.3 million Class A common shares outstanding and 22.1 million potentially dilutive shares related to Class B shares and outstanding equity awards. Now, turning to the balance sheet. Our $40 million revolver remains fully undrawn and we ended the quarter with $58.3 million in cash and $389 million outstanding under our senior secured notes. Our net leverage ratio at quarter end was 4.3x and would have been approximately 3.8x, excluding the $41.2 million in stock buybacks we executed during the trailing 12 months. As of quarter end, we had $8.8 million remaining under our $50 million share repurchase authorization. In terms of our capital allocation priorities, our attractive asset-light and capital-light franchise model continued to generate healthy free cash flow that we believe will enable us to remain opportunistic. Q1 was yet another strong quarter as net cash provided by operating activities was $12.7 million compared to $700,000 in investing cash outflows. We remain comfortable meeting our debt service obligations under our flexible whole business securitization and we value the optionality to invest in reigniting our core business while maintaining a strong balance sheet to position us well through a variety of macroeconomic conditions. Turning now to our outlook for 2025 which we are reiterating today. Let me start with our underlying assumptions which are based on a stable consumer environment in 2025. As a reminder, in March, we shared that the high end of our outlook assumed that our marketing efforts would begin to drive more traffic in the back half of 2025, with trends improving through the second half. The lower end of our outlook assumes that while we make progress against our priorities, the modest transaction decline we continue to see in mature centers persists throughout this year. While we normally do not comment on quarter-to-date trends, we recognize that the macro environment has been incredibly dynamic over the past few weeks. Normalizing for Easter holiday shift, mature center transaction trends have been stable year-to-date and our outlook assumptions for the full year remain intact. Importantly, our unit expectations for the year remain unchanged. We expect 10 to 12 gross openings and 40 to 60 center closures or 28 to 50 net center closures. In Q2, franchisees have opened 1 and closed 2 centers so far and we expect 7 to 8 net closures for the quarter. We continue to expect system-wide sales between $940 million and $960 million, representing approximately flat year-over-year growth at the midpoint. Same-store sales is expected to be flat to positive 2% which assumes some sales recapture for comp store closures during the year. We expect that Q2 same-store sales could be flat to down slightly due to the Easter shift, implying expected improvement in the two-year stack from Q1 to Q2. Consistent with last quarter, our outlook for full-year revenue remains between $210 million and $214 million and approximately 22.3% of system-wide sales. As I mentioned earlier, we expect that franchisees shifted product purchases into Q1 due to April's tariff announcement and a successful retail promotion which will likely impact revenue recognized in Q2. On this topic, let me take a minute to discuss the potential impact of increased tariffs on our business in fiscal 2025. Approximately half of our product cost is currently subject to the 10% global tariff. While the majority of our retail products are sourced domestically, a portion of our medical supplies and retail product components are sourced from China and our proprietary wax is sourced from Europe. That said, our cross-functional team is doing an excellent job acting quickly with our suppliers to mitigate the risk of cost increases and identifying alternatives where it makes sense. We recognize that this is a highly fluid environment and we are still working through several options. But based on what we know today, we feel confident in our ability to manage the estimated tariff impact within our current outlook. We continue to plan advertising expense slightly higher than 3% of system-wide sales in fiscal 2025 to support the traffic-driving initiatives Chris described earlier. Compared to 2024, our current plans are to spread advertising expense more evenly throughout the year. Our adjusted EBITDA outlook remains at $69 million to $71 million and reflects our expectation of SG&A growth primarily driven by personnel to help us achieve our strategic goals and normalize incentive compensation. Finally, we expect adjusted net income between $31 million and $33 million which is consistent with our previous guidance of $16 million to $18 million plus approximately $15 million of intangible asset amortization expense, net of an approximately 23% effective tax rate before discrete items. As we look to the back half of the year, European Wax Center is certainly not unique in navigating an uncertain macro environment. We are acting thoughtfully and swiftly to drive sales, improve four-wall profitability and reignite unit growth. Our pursuit of these priorities is within our control, even if the environment is not. While it's still early days, we believe we are putting the right people and actions in place to drive near-term results and long-term growth for European Wax Center, its franchisees, and its shareholders.

Our first question comes from Dana Telsey with Telsey Advisory Group.

Chris, as you think about the game plan going forward in Wax Pass customers, can you talk a little bit about what changed this quarter, the outlook for the second quarter in the frequency of the Wax Pass customers, what's happening with your promotional rates? And then just expanding on the potential tariff impact, is there other places to source from? And what are you seeing from franchisees in ordering patterns? And then I just have a quick follow-up.

Okay, we had some audio issues, but I believe I understood your two questions. Firstly, I'm happy to report that we've made significant progress in a short time since our team's formation. We have a clear understanding of our opportunities and priorities, and I'm confident in our progress. Regarding our Q2 outlook, we're on track with our initial expectations for the year, which is why we're comfortable reaffirming our annual guidance. Our strategies are expected to yield benefits primarily in the second half of the year, and while there's still much work ahead, our team is finding its footing and focusing effectively. Concerning promotional activity, there hasn't been any substantial change recently, and we don't anticipate any moving forward. Our main focus is using our marketing dollars more effectively, targeting our paid media approach, and emphasizing new guest acquisition, rather than entering a heavy promotional period. Regarding Wax Pass sales, we're pleased to see steady improvements in comparable store sales and new guest acquisitions over the past two years, along with strong Wax Pass sales in Q4. Currently, we view the business as stabilizing, and we're seeing early positive results from our strategies. On the topic of tariffs, our team is diligently managing tariff exposure, similar to other companies in the U.S. Tom outlined our exposure during the call, and we believe we can navigate this year while still meeting our guidance. We're exploring all options, including alternative sources for some medical equipment, though we won't be changing our Comfort Wax formula, as it's critical to our brand, and finding a different supplier would be more challenging. We're actively considering all possibilities in other areas of the business.

What feedback are you receiving from franchisees regarding the center closures? How should we approach the expected return to unit growth by the end of fiscal '26? What insights are you gaining from this?

Certainly. First, I want to emphasize how grateful we are to have such high-quality franchise partners who genuinely care about our brand. Their passion for our mission is evident, and they all want to see us succeed. That's a solid foundation for us. However, the last few years have presented challenges. We've struggled to achieve consistent month-to-month transaction growth. Declining transactions have pressured our bottom line. Additionally, we previously entered a high-growth phase, which was necessary, but in hindsight, we may have expanded too rapidly. This combination has contributed to unit closures. Our franchisees are working hard to navigate through these challenges. The closures we've identified, ranging from 40 to 60, involve underperforming units that have not yet succeeded in driving their top line. This situation underscores our commitment to fostering strong partnerships with our franchisees and focusing on tools that will enhance profitability. We aim to provide the necessary support to our franchisees while building a more effective marketing strategy for guest acquisition. We believe that managing our business in this manner will better position us to support our franchisees and reduce closures. Overall, our situation remains largely unchanged since our last discussion, but I want to reiterate the strength of our partnership with franchisees as we work to improve our business.

Our next question comes from Jonathan Komp with Baird.

One question I want to ask, just looking at the latest financial disclosure documents, it looks like the high end of the cost to build disclosed in those documents increased pretty substantially compared to recent years. Could you just give a current view of sort of key investments, anything driving inflation? And then over time here, the return to net unit growth, would you say it's more based on optimizing the cost and the operations or more about the top line initiatives?

Yes, absolutely. Let me address your question by going in reverse order. As we aim to return to net unit growth, we have two main guiding principles. First, in the short term, we are concentrating on markets where we believe there is sufficient density to support the volumes necessary for our franchisees to achieve effective returns. This involves identifying opportunities for expansion without affecting our core business, ensuring no risk of cannibalization. Fortunately, there are still many markets available for growth. The second principle involves closely collaborating with our franchisees to ensure they can attain a compelling return on investment that encourages them to invest. We are thoroughly examining the unit economics to identify areas for improvement, making sure our franchisees are positioned for success in terms of top-line revenue, profitability, and overall capital investment. The increase in our capital investment is not due to any fundamental changes in our model but rather the inflationary pressures that everyone is experiencing.

Okay, great. That's really helpful. And just one follow-up. I know you talked about the annual franchisee convention coming up here. Could you just maybe share, Chris, more when you think about the key themes you hope to get across during that event, anything you're willing to share?

Yes, certainly. It's happening next week. I know many franchise partners are listening to this call today, so I'll give them a preview of what to expect. First, we will conduct a thorough situation assessment to ensure everyone understands where we stand as a brand and network. We'll discuss potential opportunities ahead of us, outline our plan to succeed, and focus on enhancing our partnership with the franchise network to maximize our potential. Our aim is for everyone to leave the meeting feeling informed, supported, and aware of a clear strategy for 2025, 2026, and beyond. We have a shared vision and commitment to drive this business in a smart, profitable manner. I'm looking forward to spending time with our partners next week, sharing our message and hearing their thoughts.

Our next question comes from John Heinbockel with Guggenheim.

Chris, once you've addressed the centers that are not performing well, how much of the remaining base do you believe would still be considered underperforming? Is that just an issue related to average unit volume? If that's the case, how do you see marketing playing a role in this issue, which has been a challenge for improving average unit volume more quickly? What are one or two key actions you think could help with that?

Yes, great questions. The main issue is related to average unit volume. The challenge we face is with the centers we've identified as at risk of closure; it fundamentally comes down to AUV. There's always potential for improved profitability, but it's important to note that the top line is what has primarily led these units to be on the closure list. In a multi-unit business, especially one with high labor costs, boosting the top line is crucial because greater top-line growth allows for better leverage on labor investments. Our primary focus is on collaborating directly with our franchisees to develop effective strategies to attract new guests. This is the central work our new Chief Commercial Officer is spearheading. We've invested in building a digital platform and a data analytics system to make better decisions regarding our marketing spending, and we're pleased with the results we've seen so far. Period over period, we've observed improvements in our comparable store sales and steady growth in new guest acquisitions, but there is still a significant distance to cover to reach our goals. Therefore, our initial priority is to continue enhancing new guest acquisition efforts. We see opportunities not only in improving our digital and performance marketing but also in refining our brand identity. Over the past few weeks, we have engaged in extensive research to better understand how our brand is perceived by various target audiences. Through this segmentation analysis, we believe we've found opportunities to both retain our current guests and attract new ones. We are confident in our understanding of the messaging that will resonate with these guests, along with the service model needed to fulfill our brand promise. Looking ahead, we see our opportunities as twofold: sharpening our performance marketing skills and combining this with a refined brand identity that we believe will be more effective in the market. We are excited to pursue this and to continue working with our operators to enhance profitability by identifying areas for efficiency at the unit level. As we progress through this round of closures, we expect to gain insights throughout the year. We believe we are focused on the right priorities, and as we execute our strategies to gain momentum on the top line, improve profitability, and return to growth without compromising our core values, we will end up with a robust portfolio of centers that is well-positioned for sustained growth moving forward.

And one quick one follow-up. You mentioned high-value guests. I'm curious, some of this may be intuitive but the characteristics of a high-value guest and are there high-value guests' potential that you weren't targeting before, right, that you now will?

Yes, the answer is yes. We have identified and are currently testing a specific group of high-value customers that we believe we can successfully target. It's important to note that our management team is focused on conducting thorough research to gather insights, followed by a rigorous testing and learning process. With the insights we've gained, we're excited about the potential opportunities that lie ahead. We believe we can enhance our existing offerings without substituting them, thus creating a healthy portfolio that supports our ongoing growth.

Our next question comes from Korinne Wolfmeyer with Piper Sandler.

I want to touch a little bit on what you're seeing just in the general market conditions with your consumers. Obviously, a very dynamic macro backdrop right now. And I want to understand what kind of trends maybe changed or stayed stable throughout the quarter? And then how are you thinking about the market as it relates to the high end and the low end of the guidance range?

What I find compelling about our brand is the resilience of our core guests, which is a significant strength and quite rare in multi-unit consumer businesses. This stability and resilience of our core guests have persisted despite a challenging consumer environment. We haven't observed any negative changes in our core guests. I’m pleased to report that we are seeing sequential improvement in both comparable store sales and new guest acquisition on a two-year basis. This indicates an overall improvement across all guest profiles, including both our core and episodic guests. While these improvements are minor, it's important to temper expectations; however, we are seeing stability and a positive trend. This has us feeling encouraged, especially considering the current backdrop in the consumer environment.

And then on the guidance for the high end, just to reiterate the things that Chris mentioned that we're diving deeper into research and learning and implementing on the marketing side with new guests and other marketing initiatives, the high end of the guidance assumes that some of these green shoots that are taking place really build out in the latter half of this year and that starts to take us to the higher end of the revenue range versus if these marketing initiatives take more of a foothold in the beginning of 2026, well, then subsequently, that puts us at the lower end of the range. Nevertheless, we have taken into account where we're headed based on both of those ranges and we are very confident in managing to the guidance which is why we've reiterated it today.

Very helpful. And then I want to touch a little bit on the advertising spend in the quarter. It did come in a little bit lighter and it seemed like maybe there was some timing shift. Can you just give us a little bit more color on what exactly was going on there and how we should be thinking about the cadence of ad spend for the remainder of the year?

Yes, good question. It is worth a call out that as we've looked at this year's budgeting and the efforts, and also with Katie joining us and thinking through efficiencies of marketing spend, what we've budgeted for this year is much more of a leveling of marketing spend in comparison to prior quarters and prior years. And so, it is worth to call out that as we think about a quarter-over-quarter spend, you are going to see a little bit more of a matching to the revenue system-wide nature of the business versus I think there was some lumpiness in prior quarters and spending in those quarters.

Our next question comes from Kelly Crago with Citi.

I would like to follow up on an earlier question. Can you provide more details on how underperforming stores compare to healthy stores in order to understand their impact on total comparable sales? Additionally, with stores closing, can you quantify or explain what happens to the customers when a store shuts down in a market? Are these customers moving to other locations? Any further details would be appreciated. I have one more follow-up as well.

Thank you, Kelly. First, regarding sales transfer, it varies by location. While it's unlikely to see a complete transfer of sales, there are instances where some sales do shift to our existing locations. This largely depends on the specific location and market conditions. One advantage we have is our Wax Pass program. When a center closes, Wax Pass holders tend to seek out nearby centers to redeem their passes. It's a case-by-case situation. As for your initial question, I prefer not to delve into specific details about underperforming centers right now. I can assure you that we have considered all mentioned factors in our annual guidance. We are aware of how underperforming centers are doing compared to our core operations. These centers have lower Average Unit Volumes, which is why we are monitoring them closely. However, I prefer not to discuss the specific impacts on the overall system, but rest assured that this has been incorporated into our guidance.

Got it. Could you provide us an update on what percentage of your sales are coming from core Wax Pass guests compared to non-Wax Pass customers? Also, what is your long-term goal for that?

Sure. We're currently seeing about 75% of our sales coming from Wax Pass holders, which plays a significant role in our business model. We're comfortable with this ratio and don't anticipate making any major changes. As we enhance our commercial office and intelligently allocate our marketing budget, there is a possibility we may explore new ways to generate revenue that could influence this ratio. However, at this moment, we have no immediate plans to alter it, and I expect that the 75% figure will remain steady for the rest of this year.

Our next question comes from Simeon Gutman with Morgan Stanley.

Chris, so we spent some time on this call talking about the marketing funnel and some targeting. And then we talked about franchisee execution. I wanted to take your temperature on both of those and put a couple more up on the board, the waxer consistency and then the value that the business is conveying to the consumer. So if you take all four of those, I wanted to see where the priority sits. It sounds like there's more focus on the marketing and the franchisee execution, less so on those other two but just wanted to see if there's an opportunity with them as well.

Yes, you provided valuable insight into the business, and I agree with your assessment of our priorities. The top priority is on the marketing funnel, followed closely by collaborating with our operators on execution, which are interconnected. In terms of execution, we are focusing on two key areas: enhancing profitability with our partners and ensuring an excellent guest experience to drive revenue growth. The next priority is maintaining consistency among our wax specialists, followed by delivering value to the consumer. Our research indicates that we do not have a value issue, which is positive. While there is always room for improvement in waxer consistency, our primary focus must be on marketing and execution. Following those, we aim to work closely with our franchise partners to create a world-class environment for our wax specialists, which will boost retention and execution.

Okay. And then a follow-up on the underperforming franchises or franchisees. Can you talk about what you've uncovered? And is it a situation in which franchise businesses are generating cash and there isn't that spark to get better? Or is it more location and not enough staff at these sites? Like what are you finding is the diagnosis?

It's a combination of factors. Different units face varying circumstances. When the top line isn't performing, the instinct to manage the business differently can sometimes lead to poor decisions as we enter survival mode. There are numerous reasons for this. For example, some units were opened too quickly or in less than ideal locations, sometimes too close to each other. Additionally, some franchisees were stretched too thin without adequate infrastructure. There were also cases where we failed to follow the right strategies to set up a center for success, such as not investing enough in local marketing or training team members. This all stems from moving too quickly. However, we see opportunities to improve in a few areas. Recently, our team launched a new center playbook that outlines specific initiatives, including proper local store marketing investments and ensuring the right staffing before opening. We've noticed that units following this playbook are ramping up more quickly than those that didn’t. We're also focused on being strategic about where we open new units, managing those openings effectively, and strengthening our partnerships with franchisees to boost support. I believe these changes will make a significant difference.

Our next question comes from Scot Ciccarelli with Truist.

Can you provide some specific examples of the changes you've made or are making on the marketing front to drive new customer acquisition? I mean, the goal certainly sounds logical but maybe a few examples might help the group here. And then secondly, a follow-up on tariffs. You said tariffs are included in your guide but what is the strategy for dealing with higher input prices? Like let's just assume that you do have higher prices? Like is it to pass on higher prices to the customer? Are you going to eat it? Is the franchise going to eat it? Just kind of high level there.

Yes, we are considering all available options regarding tariffs. We're not ready to specify exactly which actions we will take. However, we are examining everything you've mentioned. Our guiding principles around tariffs are to make the right decisions for our brand, our franchise partners, and all of our stakeholders. We are evaluating different possibilities, but I can assure you that we are confident in our ability to manage the situation and meet our annual guidance. We are still developing the plan, so I can't share the specifics yet. Can you remind me what your first question was?

Yes. Just some specific examples on the changes you're making to the marketing front for new customer acquisition.

We are in the early stages of developing our marketing engine. Much of what I'm sharing is foundational work, but we are confident in our efforts. We discussed implementing this technology in the fourth quarter, which we have successfully leveraged in the first quarter. This allows us to establish a link between when a guest receives a marketing impression and their behavior. Many consumer brands already utilize this insight, but we have not, and it provides us with significant understanding of how to best allocate our paid media budget. This also positions us well to engage in a testing and learning process to improve our paid media strategies, ultimately driving efficiency and positively impacting our cost per acquisition. Additionally, we are experimenting with various creative messages and components, looking at how guests respond to different images and messages. We are getting closer to finding the right mix that will maximize our incremental results. Overall, it's still early days, but we have conducted extensive research during this time that is shaping our future direction.

That concludes today's question-and-answer session. I'd like to turn the call back to Chris Morris for closing remarks.

Okay. Thank you, everybody. We really appreciate the interest. We look forward to continuing to share our results as we move forward. Have a great day. Thank you.

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