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This report was generated using published research from our Retail team led by Sector Head Brian McGough.
EWCZ has grown to a recognizable brand in the US, but we think there are near term issues regarding their overall unit growth story that will pressure the stock price. Our key bearish viewpoints include negative comparable store sales (comps), an uncertain pricing strategy, high franchise costs, and an increasingly leveraged financial structure.
A Brief History on the Waxing Industry and EWCZ’s Role
European Wax Center (EWCZ) was founded in 2004 by siblings David Coba, Joshua Coba, and Jessica Coba. The journey began in Aventura, Florida, where the first location opened. The growth of EWC can be attributed to its franchising model, initiated in 2006. This approach allowed rapid expansion, and by 2011, EWCZ had over 200 locations across the United States.
The company's Initial Public Offering (IPO) took place on August 5, 2021, set at a price of 17 per share. The funds raised through the IPO were earmarked for various strategic initiatives, including expanding the number of centers, investing in marketing and brand awareness, and further enhancing the customer experience.
Short Thesis
Negative Outlook on Comps: EWCZ projects a slight revenue beat in Q4 2023. However, the outlook for 1H24, particularly January through March, is not promising. Brian McGough, Hedgeye’s Retail analyst, anticipates that EWCZ may report negative comps, potentially down by 3-5%. This decline is noteworthy as it deviates from the previous trend where comps were marginally better than expectations. A negative comp, coupled with any indication of slowing unit growth, could lead to a dramatic drop in EWCZ’s stock value, potentially halving it.
Pricing Strategy and Economic Tailwinds: A crucial element of EWCZ’s growth in the past few years has been its pricing strategy. Consistently increasingly pricing has been a significant tailwind, essentially driving the comp growth in system-wide sales. However, management’s recent uncertainty about the continuation of this tailwind is concerning. With costs, four-wall economics, transaction trends, and price elasticity under evaluation, EWCZ’s ability to sustain its growth through pricing is questionable. This uncertainty is a red flag for investors, signaling potential risks in the company’s future revenue streams.
High Costs and Leverage: The cost to open a franchise for European Wax Center stands at 356,000. This entry barrier could deter new franchisees, especially in a market facing economic uncertainties and higher interest rates. Moreover, the company is significantly levered at 3.6x. This high leverage ratio is a concern, particularly if the company faces a downturn in business, as it might impact its ability to service debt and invest in growth.
Broken IPO and Stock Valuation: Retail analyst Brian McGough has labeled EWCZ as a ‘broken IPO,’ which is currently trading at around 15. Its post IPO performance has dipped below its initial valuation, eroding investor confidence, and placing further downward pressure on the stock price.
Outlook & Predictions
Based on our analysis, EWCZ presents a compelling short opportunity. The combination of potential negative comps, uncertainty in pricing strategy, high franchise costs, a heavily levered financial structure, and the risk of decelerating unit growth forms a confluence of factors that could significantly impact the company's stock price. Investors should be cautious and consider the possibility of a substantial decline in EWCZ’s stock, particularly in the first half of 2024. Hedgeye's call is short European Wax Center (EWCZ), reflecting our analysis and the outlined risks that could adversely affect the company’s financial performance and stock valuation.
Appendix: Definitions of Key Financial Terms
- Comparable Store Sales (Comps): This refers to the revenue generated by a retail chain's existing outlets over a certain period, compared to an identical period in the past. Positive comps indicate increased sales, while negative comps suggest a decline.
- Tailwind: In finance, a tailwind refers to a situation or condition that will move growth, revenues, or profits higher.
- Leveraged: This term refers to the amount of debt used to finance a company's assets. A company with significantly more debt than equity is considered to be highly leveraged.
- IPO (Initial Public Offering): This is the process by which a private company can go public by selling its stock to the public.
