Earnings Call Transcript - MCW Q2 2025

Operator, Operator

Good afternoon, and welcome to Mister Car Wash Second Quarter 2025 Conference Call. Please note that this is being recorded, and a reproduction of this call in whole or in part is not permitted without written authorization from the company. I will now turn the call over to Eddie Plank, Vice President of Investor Relations. Please go ahead.

Edward Plank, Vice President of Investor Relations

Good afternoon, everyone, and thank you for joining us to discuss our second quarter financial results. With me on the call today are John Lai, Chairman and Chief Executive Officer; and Jed Gold, Chief Financial Officer. After John and Jed have made their formal remarks, we'll open the call to questions. During this conference call, references to non-GAAP financial measures will be made. A complete reconciliation of these measures to the most comparable GAAP measures have been included in the company's earnings press release issued earlier today and posted to the Investor Relations section of the company's website. As a reminder, comments made on today's call may include forward-looking statements, which are subject to significant risks and uncertainties that could cause the company's actual results to differ materially from management's current expectations.

John Lai, Chairman and CEO

Thanks, Eddie. Good afternoon, everyone, and thanks for joining our second quarter 2025 earnings call. The ongoing strength and durability of our UWC subscription model enabled us to deliver our ninth consecutive quarter of positive comp store sales growth. As Jed will outline in greater detail, total company revenue increased 4% to $265 million. Comparable store sales increased 1.2%, and our adjusted EBITDA came in at $87 million. While we, like the rest of the industry, experienced softer top line trends in Q2, driven by unfavorable weather and a more tepid consumer environment, we remain heartened by our UWC member base, which remains as resilient as ever and helped offset a weaker retail backdrop. Our EBITDA performance this quarter reflects a combination of softer top line results and our deliberate investments in repairs and maintenance. These investments, while temporarily elevating our cost base, were essential to reinforcing the long-term health of our stores and delivering the industry-leading quality that is synonymous with our brand. From a unit growth perspective, we added four new greenfield locations, which expanded our total unit count to 522 stores. In addition, we're encouraged by the continued growth of our UWC membership base, which increased approximately 5% compared to Q2 of last year. We also made significant progress on our base membership price increase, which will benefit revenue in a more pronounced way in the back half of this year. With the rollout almost complete, member retention levels are trending in line with our expectations, confirming the tremendous value that members are driving from the program. We've pioneered how consumers care for their vehicles through innovation and consistency. We've helped shift consumer behavior, transforming car cleaning from a relatively infrequent service into part of their weekly routine. Finally, we're seeing some early wins with our efforts to stimulate retail traffic and membership sign-ups, which I'll discuss shortly. Before I dive into the progress we're making on our strategic imperatives, I'd like to take a moment to address the changing dynamics of the car wash sector and the health of our industry. Car wash spend increased roughly 5% in Q2 according to Bank of America’s credit card consumer spend data, illustrating that demand remains strong for our industry, albeit in a more competitive environment. Recent industry developments underscore a critical point. Not all car wash platforms are created equal. One high-profile operator underwent a significant restructuring, while another platform was sold at a deep discount. These events highlight that operations matter and that customers don't see all car washes as the same. We believe we're at an inflection point in our industry's life cycle where those that grew too quickly without the operational capability to deliver a consistent customer experience are starting to fall behind the stronger operators. As the industry rationalizes, it will ultimately be a positive for our business. Our focus on operational excellence and the fundamental building blocks we've built over multiple decades have laid a robust foundation for continued growth, stronger competitive advantage, and market share expansion across the regions we serve. When layered with our industry-leading subscription member base, strong unit economics, and innovation roadmap, we believe we're positioned exceptionally well to continue growing and building our brand for years to come. As the level of competitor new builds continues to moderate, we're seeing a return to a more rational level of greenfield expansion. The new steady state of growth for our industry will benefit Mister because as the irrational behavior we've seen over the last five years lessens over time, it will enable us to further strengthen our core business while improving greenfield economics, all at a pace that best leverages our internal capabilities. Net-net, the height of the turbulent environment is behind us, and we're now in a period of healthy transition. Those who are operationally sound, customer-centric, and strategically focused will not only endure but thrive. It's important to note that as one of the premier operators in our space, our customer experience and operational expertise have become some of our biggest competitive advantages and points of differentiation. We deliver this through fast, reliable service, a robust support infrastructure, unwavering quality, and what we refer to as the moment of truth when our frontline team members interact with our customers with a wave and a smile, brightening their day while helping them keep their cars clean. With respect to all the technology, mechanization, and advanced chemistry we use, it's the human connection across our portfolio in our WOW zones that transforms what some view as an ordinary transaction into a sincere connection delivered with elevated hospitality. Now let's review the progress we've made on our four strategic pillars during the second quarter. Let me start with expanding our footprint. Each of the new locations we opened in Q2 helped to strengthen our position and provide more optionality for our UWC members, which reinforces our value proposition. As we've stated on prior calls, our opening cadence is back half weighted for 2025. We're being more judicious with site selection and, in a more robust competitive environment, adding more rigor to ensure we're good stewards of our invested capital. Long term, we're very optimistic about the future and our ability to increase our footprint while elevating our brand. Moving on to increasing our innovative solutions. A culture of innovation across product, service, and operations is in our DNA at Mister. This mindset separates us from the pack and pushes the industry forward, ultimately elevating and enhancing the customer experience. While I can't yet discuss details of what's in our pipeline for the future, I can assure you that following the tremendous success we've experienced with our Titanium launch, we are already working on our next innovation to bring to market and aiming to ramp up the cadence of new product and service introductions. In the meantime, we continue to see strong titanium penetration with 23% of our membership in that tier, a roughly 300 basis point increase from Q2 last year. On a smaller note, we recently introduced our towel program in our Express stores, and the customer response has been positive. We approach this new customer delighter with intent, ensuring our Mister-branded microfiber towel surpasses anything offered by our competitors. It's 150% larger than the standard offering and crafted from a premium 300 grams per square meter 80-20 cotton-polyester blend. In tests, our superior towel proved to be the most effective at removing residual water from hard-to-reach areas such as side mirrors and SUVs. By reinforcing our commitment to quality, our goal is to elevate customer satisfaction even further because at Mister, the car is not clean until it's dry. Next, driving traffic and growing membership. With UWC membership anchoring our business, improving the volume and consistency of our retail business is essential to accelerating overall sales and fueling membership growth. Our regional Q2 marketing test demonstrated very promising results. In the six test markets, overall comp store sales growth outpaced the non-media test control group in a meaningful way for both retail and UWC. This early success bolsters our confidence to continue to increase our investments in marketing and ad spend. We're only just beginning to amplify our brand, but these early results speak volumes. When we share our story, customers listen and engage. I look forward to more exciting moves ahead as we look to expand reach, boost traffic, and grow our membership base. Finally, building a best-in-class team. Our people and culture are one of our greatest assets at Mister. I'm delighted to announce that we've strengthened our senior leadership team with the addition of Michelle Krall as our new General Counsel. With her decades of legal, business, and retail experience at Designer Brands, Michelle is a seasoned executive with a strong background in corporate governance, M&A and transformation initiatives. I look forward to her partnership as we take the business to new heights. We still have important work ahead as we continue to invest in our best-in-class leadership development program and have prioritized our manager and trained talent pipeline as we build our next generation of high-potential future leaders to support our growth. And in the end, our greatest asset is our people, and I'm proud to say we have the best team in the industry, but we're not done building. Looking ahead, we are confident in the longer-term opportunity for our business and our position of leadership in the industry. As the industry moves towards consolidation, our scale, infrastructure, and operating efficiency place us squarely among the best positioned to capitalize on the growth opportunities it creates via strategic M&A. Before I wrap up my prepared remarks, let me say that none of our success would be possible without our amazing dedicated team and the culture we've built at Mister. I'd like to thank everyone for their hard work and dedication. I'll now turn the call over to Jed to provide more commentary on our financial results.

Jedidiah Marc Gold, Chief Financial Officer

Thanks, John, and good afternoon, everybody. As John indicated, in the second quarter, strong performance in our UWC subscription business enabled us to drive total comparable sales growth of 1.2%, generate $87 million in adjusted EBITDA, and deliver $0.11 in adjusted EPS, effectively offsetting pressure on our non-subscription business. At approximately 75% of sales, the health and resiliency of our subscription business provides a reliable, large base of recurring revenue from quarter to quarter. In addition, strong adoption of our base price increases led to higher Express revenue per member in Q2 and offset the pressure we anticipated as we lapped last year's rollout of Titanium. As we evaluate the competitive landscape, our estimates indicate that the pace of competitor new builds continues to decelerate versus prior years, which is a positive for us and the broader industry. Furthermore, comparable Mister stores that initially experienced a decline following new competitor market entrants continue to demonstrate a pattern of recovery over 18 to 24 months, eventually exceeding the chain-wide average. This reinforces the notion that our customers, even if swayed to try something new, recognize our superior operations and come back to Mister. Now let me provide some details on the second quarter numbers. For simplicity, I'll be referring to adjusted numbers only, which exclude items such as stock-based compensation and gain or loss from the disposition of assets. The reconciliation of adjusted figures can be found in our filings and earnings press release. Net revenues increased 4%, driven by a combination of 1.2% comparable store sales growth and the contribution of incremental revenue from new store openings over the past 12 months. UWC comps increased mid-single digits, partially offset by softer-than-expected retail comps, which decreased low double digits. As we shared on our last two earnings calls, retail performance in Q4 2024 and Q1 2025 was enhanced by favorable weather patterns that supported elevated consumer demand. In Q2, the absence of similar tailwinds, coupled with signs of tightening discretionary spending contributed to a moderation in growth. Despite the traffic challenges, we were pleased to grow UWC membership by 5% over last year with our churn levels remaining in line with historical levels and our expectations. Sales were fairly consistent throughout the quarter with May being the relatively stronger month. Recall that the Easter holiday created a slight headwind to our Q2 comp in April. UWC sales represented 76% of total wash sales, and we ended the quarter with more than 2.2 million UWC members. At the end of the quarter, the membership split among base, platinum, and titanium was approximately 42%, 35%, and 23%, respectively. Since the end of Q2, we've seen an uptick in titanium sign-ups and capture rates driven by a strong consumer response to a targeted trial promotion, which we believe can drive titanium penetration modestly higher even when factoring in our expectations for churn. Finally, best Express revenue per member in Q2 increased approximately 4% to $29.23, driven primarily by the successful rollout of price increases to our base membership tier. While we typically don't provide a lot of intra-quarter commentary, July comp store sales have shown an encouraging improvement. Retail is trending less negatively, and UWC is outperforming its Q2 run rate. It's important to note that July was expected to be a stronger month given that it represents the most favorable year-over-year comparison for the third quarter. Total operating expenses were $178 million in the quarter. As a percentage of revenue, total operating expenses increased 200 basis points to 67.2%, primarily due to sales deleverage given our low variable cost structure. That said, our team remains focused and disciplined, continually exploring new ways to optimize costs and maximize operational leverage. Labor and chemicals increased 20 basis points to 27.6% as we lapped the efficiencies we realized from our optimized labor model and savings in chemical costs and absorbed higher labor rates. Other store operating expenses increased 160 basis points to 32.6%, primarily driven by higher cash rent expense related to our new store growth and sale leasebacks as well as higher utilities, particularly electricity, where rates have been increasing. In addition, our investment into equipment and facilities maintenance to maintain our industry-leading wash infrastructure is also being impacted by higher materials costs. G&A expense increased 10 basis points to 6.9%, driven primarily by the shift of roughly $1.6 million of planned marketing spend from Q1 into Q2, which we discussed on our last call. To add to John's earlier comments, we are very encouraged by our media tests, which drove a meaningful comp lift in the six markets compared to the control group. These positive results exceeded our expectations and arm us with the conviction to broaden the scope of our testing and ramp up our marketing investments over time. EBITDA decreased 2% to $87 million and EBITDA margin decreased 200 basis points to 32.8%. Although we remain focused on controlling expenses, our EBITDA margin faced headwinds this quarter due to sales deleverage and a challenging year-over-year comparison. Second quarter interest expense decreased 25% to $15 million, primarily due to lower average interest rates year-over-year and lower borrowings compared to last year. Of note, we executed a float-to-fixed interest rate swap in April for $250 million, which effectively fixes approximately 30% of our floating interest rate exposure at 3.369%, plus 250 basis points as compared to SOFR plus 250 basis points, bringing even more predictability to our cash flows over the next couple of years. Finally, second quarter net income and net income per diluted share were $37 million and $0.11, respectively. Moving on to some balance sheet and cash flow highlights. At the end of the quarter, cash and cash equivalents were $26 million, and outstanding long-term debt was $853 million, a $72 million year-over-year decrease and a modest decrease from Q1. As a result, we continue to expect our net leverage ratio to improve to under 2.5x adjusted EBITDA by the end of the year. Our balance sheet remains healthy and flexible, and we continue to self-fund our growth and expansion while opportunistically reducing debt when feasible. On that note, while our greenfield program currently remains the highest and best allocation of capital, it is equally important to underscore the consistent and strong cash-generating capacity of this business, which reinforces our financial resilience and enhances our long-term value creation for shareholders. We held off on executing sale leasebacks in Q2 as we awaited clarity on the One Big Beautiful Bill Act. As we suspected, following its passage and the restoration of 100% bonus depreciation incentives to buyers versus 40% prior, we've seen a marked increase in demand for our assets. We are now entering into deals on significantly improved terms compared to last year. Given the strength of our sites, operational excellence, strong credit profile, and positive market conditions, we believe we'll be able to execute deals on advantageous terms. Now I'll provide an update to our full year outlook. I'll start by saying we remain highly confident in the long-term strength of our business and our position as the category leader in the car wash industry. Our fundamentals are solid. Our strategy is sound, and our growth opportunities remain compelling. That said, we continue to monitor evolving consumer dynamics, particularly as near-term macroeconomic headwinds and sentiment shifts could create greater volatility in discretionary services spending. In Q2, these pressures were most apparent within our non-subscription segment. Given this backdrop, we are modestly revising the upper end of our full year guidance for comp revenue, adjusted EBITDA, and adjusted EPS to reflect both our Q2 performance and a more cautious outlook on retail consumer behavior for the remainder of the year. The low end of our guidance range is unchanged. Regarding the tariff environment, as we've previously noted, our direct exposure remains limited. However, we continue to take a measured view of overall impact given the potential for indirect exposure and downstream economic effects on consumer behavior. Taking that all into consideration, let me provide additional context and color to assist you for modeling purposes. As the low end of our guidance remains the same, my comments will refer only to the high end of the range. First, within comparable store sales, we assume retail trends in the back half of the year will remain consistent with the negative low double-digit performance we observed in Q2. Breaking that down further, we anticipate total comparable store sales growth to be stronger in Q3 relative to Q4, given the more difficult year-over-year comparison we faced in the fourth quarter. Second, as we've now lapped the titanium rollout from last year, we anticipate the implementation of pricing adjustments on our base membership will continue to support revenue per member. This reflects our broader strategy for enhancing membership value while optimizing price to benefit alignment across our offerings. Third, we have slightly moderated new store openings for 2025 to reflect the disciplined approach to capital deployment prioritizing high-performing markets and optimizing return on investment as we scale with intention. This, coupled with the timing of certain deals, implies that we now expect to land around the low end of our planned new store openings for 2025, with non-comparable store sales expected to come in modestly below prior expectations. Our revised CapEx plan for this year reflects the adjustments in store openings and provides us with increased flexibility to deploy cash, including the option to reduce debt. For even more details, the full list of our outlook ranges for 2025 can be found in the table in today's earnings release. In summary, as we navigate the ongoing shifts in the industry and look ahead to future trends, our solid foundation gives us confidence in our long-term prospects even amid challenging macroeconomic conditions. We continue to lead the space with unmatched operational execution and an experienced management team whose capabilities set us apart. Backed by a powerful brand, a passionate team, and a market-leading subscription model, we are exceptionally positioned to benefit from the changing tides within the car wash sector and deliver lasting value to our shareholders. Operator, that concludes our prepared remarks, and we will now open the call for questions.

Operator, Operator

We will now begin the question-and-answer session. The first question comes from Andre Heinbockel from Guggenheim.

Unidentified Analyst, Analyst

Regarding marketing, having analyzed the six markets, what are your thoughts on the effectiveness of promotions compared to brand awareness? Where do you believe the greater potential lies? Additionally, considering your capacity to increase marketing expenditures, how do you approach the balance between that and the current economic conditions? If you decide to increase spending now, do you feel it might be ineffective given the macroeconomic environment, leading you to pause on such decisions?

John Lai, Chairman and CEO

Yes. John, good to hear from you. So to answer your first part of your question, I think our approach has been initially focusing on awareness to generate trial and then ultimately have to adopt our service as part of the regular purchasing pattern, transitioning them ultimately into membership, which is our primary goal. But when we look at the blend from a campaign standpoint, and I want to emphasize the word blend, it really was a mix of awareness and also highlighting some of our virtues without getting overly promotional. That said, we did tinker with some percentage off and dollar-off offers, and we had some interesting results across all of those different campaigns. So again, it's a little bit more nuanced than that. There are multiple channels that we tested. And in the different channels, we saw some encouraging results. So in short, this is probably the most significant data that we've seen that is emboldening us to say, hey, there's something here. It's starting to move the needle. We want to turn up the knob, but we want to do it in a responsible way. And so to the second part of your question, which is when are we going to start increasing our ad spend, we're going to expand our testing and move into some new markets. But we're still tinkering and we're still iterating around how to fine-tune both messages and offers because we don't have the magic bullet, but what we're seeing is extremely encouraging.

Unidentified Analyst, Analyst

And then a quick follow-up, right? Some of your competitors had been more aggressive with regard to membership pricing. Have you seen that now begin to kind of move more toward where you're priced? Is there more rationality from those competitors?

John Lai, Chairman and CEO

Absolutely. I think at the end of the day, we believe that discounts can actually destroy value over time and dilute your brand equity. And those that are overly promotional from a discount standpoint can ultimately end up biting them. And so that's why we've been so cautious throughout this entire process and speaking to, again, the virtues of our value proposition versus leaning too heavily on price. So short answer to your question is there is some rationality setting in, and we're seeing just less activity.

Operator, Operator

The next question comes from the line of Justin Kleber from Baird.

Justin E. Kleber, Analyst

First, just you mentioned an increase in titanium sign-ups during July based on some of these promotional offers. I assume it's too early to tell, but just how are you thinking about those members opting to sign up for titanium and then ultimately sticking with the plan once the promotional offer expires?

Jedidiah Marc Gold, Chief Financial Officer

Yes, Justin, it's Jed here. And yes, we have seen and we're encouraged with the trend that we've seen post Q2, where we've put a concerted effort and some messaging behind titanium just to help drive some improvement in that titanium mix. We believe that the overall capture is going to prove sticky and that while we do expect a little bit of fallout consistent with what we've seen in the past when we run promotions like this, we believe that we've adequately captured that. And so we're sitting at the mid-20% range today. We believe we can drive that just a little bit higher. But listen, it's going to be over time. And we've captured, obviously, the low-hanging fruit with the initial rollout, but we still see some potential there for titanium.

Justin E. Kleber, Analyst

Okay. That's good to hear. And then just a shorter-term question since you mentioned it, Jed, in your remarks, you talked about July and some encouraging trends. I don't know if you're willing to put a finer point on how July trended relative to 2Q's comp and maybe how that retail business is trending relative to the down low double digits for 2Q?

Jedidiah Marc Gold, Chief Financial Officer

Yes. Looking at the quarter, Q2 was steady overall. We noticed some slight momentum in July. While we're seeing some positive indicators, we need to stay realistic since we will have a weaker comparison in July 2024. We're optimistic about this trend, and we anticipate July to be one of our stronger months this year. When we analyze retail for the quarter, it remained relatively stable. In Q1, we saw mid-single digit growth, but in Q2, retail experienced a decline in the low double digits. Fortunately, retail showed improvement in July, though we still face a softer comparison from the previous year.

Operator, Operator

The next question is from the line of Chris O'Cull from Stifel.

Christopher Thomas O'Cull, Analyst

Jed, my question is on the new unit performance. I was just hoping maybe you could provide an update on the performance of new washes, including the performance relative to your underwriting targets? And any changes in the speed at which they ramp up?

Jedidiah Marc Gold, Chief Financial Officer

Yes, Chris. Overall, we are pleased with the performance of the new builds. In some cases, the stores are taking a bit longer to ramp up compared to our earlier locations. There are four main reasons for this. First, competition is slightly stronger in those areas. Second, we strategically opened stores ahead of the main trade area based on development trends. Third, there's some self-cannibalization as we intentionally densify our existing market. Lastly, a few locations are on less-than-ideal sites or layouts. We are learning from these experiences to avoid similar issues in the future. While some stores may be slower to ramp up, we believe they will eventually meet our expectations. Furthermore, on our last call, we discussed becoming more strategic and precise in our site selection process by incorporating additional data and tools.

Christopher Thomas O'Cull, Analyst

Okay. Fair enough. John, is M&A becoming a more compelling opportunity? It sounds like with valuations possibly starting to rationalize, I'm curious how you perceive the potential size of acquisitions the company would consider from both a capital and an integration standpoint?

John Lai, Chairman and CEO

Yes. Chris, we definitely see M&A as a key part of our growth opportunity over the next several years. Trying to predict when and who will be available could be a fool's errand because oftentimes, it's dependent upon the seller and their intent. So we remain opportunistic and we remain open, and we are evaluating and looking at a lot of things that are coming across our desk. I think it's important to note that we have really prioritized quality assets, and we look for businesses where we see a clear strategic reason with upside potential where it could be accretive for us even if we have to lean in a little bit from a multiple standpoint. But as we've shared on previous calls, we've seen a contraction in multiples year-over-year. The height of the craziness was, I think, 2022, 2023 timeframe. But since then, multiples have come down to more palatable levels. And when we see something that makes sense, I think we're in a great position to strike when the iron is hot. Again, I want to overstate that buying a business is one thing, improving what you bought is another. And that's really where we excel. So the post-acquisition integration and the things that we do to improve, standardize and lift that customer experience takes some time. Oftentimes, it could be up to a year before we get the business to where it needs to be. So it's definitely a long game, and that requires patience. But we've proven over the 100 businesses that we've acquired over time that we have this really strong track record of M&A. So that's, in short, kind of our view. And over the next two to five years, as we look at our growth trajectory and what our potential could be, it's going to be this blend of greenfields, which we're very focused on right now, and M&A, which has always been a strong muscle for us. And the fact that we have both options available to us, I think, is going to put us in a great position.

Christopher Thomas O'Cull, Analyst

Any comments on the potential sizing or limitations with your capabilities in terms of what you could potentially look at?

John Lai, Chairman and CEO

No. I think the days of the whole kit and caboodle and all-or-nothing may be over, given just some of the eclectic portfolios that have been assembled with little sense around densification and how you support those far-flung locations. So we look at everything through a regional lens and through markets that we're currently in. Our primary goal is to densify and infill fortresses and strengthen while we also look for adjacencies. That said, if there's a new market that is opening up through M&A, it does offer us an opportunity to act as a beachhead to move into that new market.

Operator, Operator

The next question comes from the line of Robert Ohmes from Bank of America.

Yanjun Liu, Analyst

This is Vicky Liu on for Robbie Ohmes. And also thank you for using our car spending data in your prepared remarks. First question, can you give us more color on your investments in repairs and maintenance? And what's the average lift you expect to see after these remodels?

Jedidiah Marc Gold, Chief Financial Officer

Yes, Vicky. Regarding the repairs and maintenance we've discussed, these efforts are part of our commitment to maintaining a top-tier facility. We will keep making these investments over time. The items that affect the repairs and maintenance line are those below the capital expenditure threshold that we do not capitalize but consider essential for the daily upkeep. This ensures that the uptime of our wash remains best-in-class and that the quality of our assets continues to meet high standards.

John Lai, Chairman and CEO

And Jed, if I can just add, too, we're so proud of the fact that our businesses are running like a top. This is a well-oiled machine, and we have never neglected the business, and we continue to reinvest. When we're running high-volume car washes, there's a lot of wear and tear, and our businesses are in that top quartile from a volume perspective. So we're ahead of the curve to make sure that nothing is deferred, nothing has kicked down the road. And when you compare that to some of the businesses out there that have, quite frankly, run out of cash to support their core infrastructure, all those things catch up to you from a customer experience standpoint, and we are determined never to let that happen at Mister Car Wash.

Yanjun Liu, Analyst

That's helpful. And as you look across the U.S., can you talk about your white space opportunities? And what is the biggest challenge you think when you expand into a new market?

John Lai, Chairman and CEO

The U.S. car park is large. The car wash industry is vast, but we think that there's an ample runway for growth ahead of us. We still believe that we can double our footprint over time, and that will be probably a combination of greenfield and M&A. And again, we're agnostic to both. And we're on this march. And so as we continue to grow, it's been kind of an elusive difficult task to try to get your arms around exactly what is the specific number of car washes in the United States. I mean that's oddly one of the more debated topics. But in our own estimates, we think that we can continue to grow from 520 stores today to potentially 1,000. And when we get there, we will have to reset the target and recalibrate.

Operator, Operator

The next question comes from Michael Lasser from UBS.

Michael Lasser, Analyst

John, you noted that you believe the industry grew 5%, Mister was up 4%. So just mathematically, you grew a little slower than the industry in the most recent quarter. So, a, why do you think that was? And b, if there was some share leakage, who do you think there was share leakage to? And how do you respond?

John Lai, Chairman and CEO

You're referring to the Bank of America credit card data? I think you were. Maybe you don't want to reference another bank, but the data that we sourced that I think was widely available is the aggregate data for the industry. And so if there are new stores coming into the space, they're looking at total spend across the entire car wash industry. From a same-store sales standpoint, we don't have nor do you a benchmark to say what are our competitors doing today to say that we're either underperforming or overperforming. So that's how I'd respond.

Michael Lasser, Analyst

Got you. In response to the slower retail trends, do you think you're seeing any evidence that the consumer is taking a pause because of some of the pricing that's passed through? And does that motivate you to want to shift any of the pricing that you have pushed through?

Jedidiah Marc Gold, Chief Financial Officer

Yes, Michael, the short answer is no. The pricing is performing right in line with what we expected from tests. The slowdown that we're seeing, it's on the retail side. As a reminder, the price increase that we took was the UWC base price increase. And so that consumer behaves very differently. And like I said, it's performing in line with tests. The retail softness that we're seeing, I think it's a couple of things. When you look at Q1, we had some nice weather tailwinds, and the lap was really soft. We expected some slowdown from mid-single digits to what we saw in Q2 but it was just a little bit more pronounced than we expected. One hypothesis we've heard is that some consumers, with all the news of tariffs, have shifted their spending more toward goods in anticipation of tariff impact versus services. Like we said, we are encouraged to see a little bit of improvement in July.

John Lai, Chairman and CEO

When we look at our $10 price point on average for retail, it's a tremendous value, and it's a very accessible price point to almost every motorist out there. But we are thinking about is there perhaps in this current period, people that are more discerning, maybe being a little more judicious with their spend. And a fun story I want to share with you, I was talking to my daughter-in-law who occasionally would go get her nails done. She said, 'I want to save some money, so I did my nails myself at home.' And after she was done, she said, 'I'll never do it again; I'm going to go back to the nail salon.' And if you talk to anyone that's washed their car at home, after 1.5 hours of washing your car, you're sweating, you're hot, the car doesn't look that great. And you do the math and say, 'Hey, I'm going to go to an Express Car Wash in 10 minutes. I'm in and out for $10; my time is worth a whole lot more.' So again, everything about the Express Exterior car wash speaks to speed, convenience, tremendous value. And we think over time, this is all cyclic, and the consumer will come back, retail consumer. By the way, if my nail salon analogy didn't land, forgive me, but it resonated with me.

Operator, Operator

The next question is from the line of Peter Keith from Piper Sandler.

Peter Jacob Keith, Analyst

John, the nails line referenced to landed with me for what it's worth. Maybe a first question for Jed. Do you have any sense or could you quantify what you think the weather impact was during Q2? And was it a more significant weather impact quarter than maybe what we've seen over the last year or two?

Jedidiah Marc Gold, Chief Financial Officer

Yes. Looking at Q2, we are thankful for our subscription business, which makes up 75% of our revenue. We receive these subscription fees consistently, regardless of weather conditions, providing us with some protection against market trends. The remaining 25% of our revenue comes from retail, which is more affected by weather. For Q2, we experienced a lack of favorable weather conditions, although the impact wasn't pronounced. I wish we could measure the effects of weather perfectly, as we've tried various approaches to analyze it. There was a beneficial weather effect in Q2 that we didn't have in Q1, and we've noted that consumer activity appeared somewhat sluggish in Q2, pointing more to consumer behavior than to weather conditions. We've taken this into account for our future projections, and for the second half of the year, we expect to see the same trends as those observed in Q2.

Peter Jacob Keith, Analyst

And maybe I'll ask a follow-up on that to John. So the marketing does sound encouraging with the six markets. Maybe are you cracking the whip a little bit harder? Do you want the team to try to move faster on the testing and the marketing? You've got something that seems to work in a tepid environment. Can you pick up that pace and get that marketing rolled out to more markets faster?

John Lai, Chairman and CEO

Short answer, yes. But we want to be intentional and deliberate and in a very measured way, expand while we tinker and iterate upon what's working as well as the things that didn't work. So this has been very much a launch and learn and then refine and continue to build upon the things that are actually moving the needle. So our goal today is to expand the test into some additional markets. We're not going to go hog wild and just throw a whole bunch of money against the wall. But as we've discussed on previous calls, our ad spend as a percentage of revenue is very minuscule. And when compared to other operators that are spending a much larger percentage, we hold ourselves to the highest standard from a return on ad spend perspective and really want to measure how promotionally effective each campaign is.

Jedidiah Marc Gold, Chief Financial Officer

Peter, just to put a little finer point on what we think the goals of what it is we're testing is we want to see comp growth net of control. And so to John's point, there are a lot of different messages that you can test, and then there's a lot of different channels to communicate those messages to consumers. And that's the piece that we're continuing, making sure we're learning and then institutionalizing these learnings and doing that as quickly as we can.

Operator, Operator

The next question is from the line of Simeon Gutman from Morgan Stanley.

Unidentified Analyst, Analyst

With respect to the 2025 guidance, can you provide a little more context for what you're assuming is driving the negative low double-digit decline in retail comps in the back half? Is there anything to call out from income cohorts or just weather year-over-year compares, anything to help us understand that dynamic?

Jedidiah Marc Gold, Chief Financial Officer

Yes, Zach. We began by analyzing the trends from Q2 and projecting them into Q3 and Q4. We noticed some softness among consumers in the lower income bracket. There are specific areas where we are seeing some weather impacts. It's worth mentioning that our 63 interior clean sites did not meet our expectations and usually contribute more significantly to retail. However, the Express sites performed slightly better on the retail side. Looking ahead to Q3 and Q4, I want to highlight that we have a strong comparison in October 2024 that we've taken into account in our guidance.

Unidentified Analyst, Analyst

That's helpful. And then if I could just follow up on the essentially the sensitivity of your customers to the base price increase now that most of them have been rolled out. You mentioned it was in line with your expectations. Is there any more color you can give on the progression of how the response might initially compare to the way it normalizes, whether two to three months after an initial downturn?

Jedidiah Marc Gold, Chief Financial Officer

Yes. To date, the rollout has gone as planned with strong member and new customer adoption. Like we said, the rollout and the results are in line with our expectations and what we've observed. We did a few different test markets late 2024, and then it's been a phased rollout throughout 2025. And while we see a slight uptick in the churn four to six weeks, those churn levels are back down in line with our historic average. As we've said, that price increase is just on the base membership. We do have a handful of markets that we still need to take the base price increase on that will see a little bit more impact in the second half of the year. But largely, we've taken it in all the markets. One thing to note when taking a price increase in subscription like this, it is about a 45-day lag for your existing subscription customers before they recharge, 45 days on average before they recharge at that new higher price. So there is just a little bit of a lag when we take a price increase like this. So performing in line with what we expected. We have got the question, do we see people trade up into that platinum package as a result of the base price increase? We are not seeing any of that. It has not been factored into the guidance, but the outlook factors in our the price increase as we saw in tests, and that's what we're seeing here now today.

Operator, Operator

The next question comes from the line of Phillip Blee from William Blair.

Phillip Blee, Analyst

Can you share what percentage of your stores were negatively impacted by competitive intrusion during the quarter? And then, Jed, you briefly touched on this during your remarks, but can you share a bit more about how comps look for those stores based on how long ago the competitive intrusion occurred? So if a competitor opened during the past year, what are those stores comping at versus if a store had competitive intrusion in one year or two years or even no competitive intrusion? Just trying to gauge how quickly that recovery ramps up.

Jedidiah Marc Gold, Chief Financial Officer

When we look at the number of our existing stores that had a competitor open within a 3-mile radius, it's roughly 13 of the stores. We tend to track this with a couple of different data sources. Some of it's crowd-sourced through our field team, but then we also have a system where we look at this. So it's significantly less than where we were two years ago. If you recall, two years ago, there were, on average, 30 stores per quarter that were being opened. So we are definitely seeing a slowdown of new competitors coming in. And then when we look at the breakdown of stores that have a competitor within a 3-mile radius and then start to age those competitors, those stores where the competition was less than 1 year old, they were a negative low single-digit total comp compared to the all-in system average of plus 1.2%. And then when we go to the other side of the spectrum, those sites without any competition, they comped at a positive mid-single digit. And then everything else follows in a nice curve, very consistent pattern in what we've seen quarter after quarter after quarter. And this gives us confidence in the long term and is a testament to the great operations of Mister and the consumer finds their way back over time.

Phillip Blee, Analyst

Okay. Great. Very helpful. And then car wash has been an industry that some politicians have recently highlighted as one that has faced incremental headwinds from some amped-up immigration enforcement efforts. Just curious if you've seen any of this impact to your business at all or whether or not this could be a hindrance to some of your peers and in turn, be a benefit to you?

John Lai, Chairman and CEO

No, absolutely not. We participated in the E-Verify program back when it was a pilot program over 20 years ago. And so we play by the rules, and we are highly confident that our workforce is documented to work in the United States. So we don't see any immigration enforcement issues as any impediment to our ability to operate. So short answer is no.

Operator, Operator

The next question comes from Bobby Griffin from Raymond James.

Robert Kenneth Griffin, Analyst

Just curious, based on kind of your early learnings from the pricing initiatives, how does it change how you guys view price as one of the tools that you can use to drive comps going forward? And does the success of this initial pricing increase create an opportunity for more of a pricing optimization type of work throughout the tiers of your membership?

John Lai, Chairman and CEO

Good question. Our pricing cadence has been somewhat episodic and definitely is lagging inflation for sure. And we're kind of happy with this conservative approach, to be honest with you. You might argue that we're leaving money on the table. But our thought process is that we want to appeal to a broad array of consumers, both high end and glass because everyone loves a car wash. And so to that end, we wanted to continue to offer extreme value for those that perhaps had less discretionary income but then also have premium services for those that are less price sensitive. And across that array, we think that we're highly competitive. So we think that there are definitely opportunities going forward. Our conservative approach could be perhaps optimized over time. We are definitely looking inside all areas of our business to see how we can create more value and drive revenue. And pricing certainly is one of those levers. But I'll say this, it's one of the easiest levers to press. And for us, what we want to do is earn a price increase by creating more value for our customers, which is why we focus more on the R&D innovation side so that we can deliver something new and exciting and better when we do launch a new price increase.

Operator, Operator

The next question is from the line of Christian Carlino from JPMorgan.

Christian Justin Carlino, Analyst

Now that you have the full rate of the base price increase flowing through in the back half and you're annualizing the titanium rollout and the platinum changes from last year, how are you thinking about member counts versus revenue per member in the updated guide? And does the guide assume any change in the membership outlook? Or was it all the retail business that drove the revision?

Jedidiah Marc Gold, Chief Financial Officer

The biggest driver there, Christian, is that retail. As we think about membership and the price increase we've implemented, revenue per member is the main factor. However, the guidance revision is influenced by the retail softness we experienced during the quarter.

Christian Justin Carlino, Analyst

Got it. That's helpful. And on the margin front, it looks like you're implying pretty solid margin expansion in the back half despite softer comps. So could you talk about what's driving this? Was there any expenses pulled forward into 2Q or just generally tightening the belt? Anything there?

Jedidiah Marc Gold, Chief Financial Officer

Yes. Our largest expense, which we discussed during our Q1 call, was the pull-forward of marketing spending from the Q2 marketing test that occurred in Q2. We anticipate some margin expansion in Q3 and Q4 compared to last year. We had such a strong Q2 that we expected the Q2 margin to be slightly lower than in 2024. However, the impact was a bit more pronounced due to sales deleverage. With a low variable cost model like ours, increased sales significantly contribute to driving margin as we approach Q3 and Q4. We are continually exploring small initiatives and opportunities to optimize our cost structure. We are actively working on different contracts through RFP processes to secure the best pricing and to optimize our supplier base, leveraging the scale of Mister Car Wash for more favorable pricing. These small efforts can accumulate and support margin expansion.

John Lai, Chairman and CEO

Sorry, go ahead, operator.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back to John Lai for closing remarks.

John Lai, Chairman and CEO

Thank you, operator, and thank you, everyone, for joining the call today. As we look at our business over the long term, we've never been more optimistic. With competitive dynamics shifting in our favor, competition moderating, we believe we're super positioned to capitalize on all the opportunities in front of us, and the best is yet to come. So thanks, everybody.

Operator, Operator

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.