Innovative Strategies And Analyst Optimism Propel Future Revenue And Earnings Growth

Key Takeaways

• Enhanced data analytics and new service offerings like laser hair removal pilot aim to boost customer retention, loyalty, and attract new customers.
  
• Strategic investments in franchisee resources, app and website improvements, and marketing partnerships are focused on operational cost stabilization and market share expansion.
  
• Heightened economic challenges and operational costs are slowing expansion and could dampen revenue, profitability, and long-term growth expectations.

Catalysts

Operates as the franchisor and operator of out-of-home waxing services in the United States.

• Enhanced data analytics capabilities for targeting and reactivating lapsed guests could increase customer retention and loyalty, potentially boosting recurring revenue and improving same-store sales.
  
• Focused initiatives on inviting new guests and optimizing marketing spend using media efforts are aimed to drive incremental reservations, which should expand the customer base and contribute positively to revenue growth.
  
• Efforts to provide franchisees with more capacity and resources by reevaluating near-term development plans and lowering unit growth outlook for 2024 may stabilize operational costs and improve net margins by addressing macroeconomic challenges effectively.
  
• Investing in new capabilities, such as laser hair removal pilot, and evaluating partnerships in marketing and technology including AI, are likely to enhance service offerings, attract new customers, and improve transaction counts, positively impacting revenue and earnings.
  
• Ongoing investments in app and website improvements to ease guest booking experiences, coupled with strategic brand partnerships, are designed to expand market share and increase brand awareness, further driving long-term revenue growth.

Assumptions

• Analysts are assuming European Wax Center's revenue will grow by 4.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.6% today to 11.8% in 3 years time.
• Analysts expect earnings to reach $30.6 million (and earnings per share of $0.6) by about September 2027, up from $12.6 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.2x on those 2027 earnings, down from 27.9x today. This future PE is lower than the current PE for the US Consumer Services industry at 20.1x.
• Analysts expect the number of shares outstanding to decline by 4.33% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.59%, as per the Simply Wall St company report.

Risks

• The ongoing difficult macroeconomic environment is affecting consumer spending across many categories, which could suppress revenue growth and impact the company's ability to drive new guest growth and increase transactions, impacting overall revenue and profitability.
  
• Reduction in the outlook for new center openings in 2024 indicates potential challenges in achieving previously anticipated growth targets, which may affect revenue expansion and earnings projections.
  
• Increased rent and labor costs in certain geographies pose a risk of potential closures or the need for operational adjustments, which could affect revenue and net margins by increasing operating costs and potentially decreasing the number of operating locations.
  
• The company's need to reevaluate near-term development plans and extend the timeline for new center openings suggests a possible slowdown in growth momentum, potentially impacting long-term revenue and earnings growth prospects.
  
• The reduction in the company's financial guidance for the remainder of 2024, attributed to lower-than-expected transaction volumes and the impact of a softer macro-environment, indicates potential risks to achieving projected revenue, net margins, and earnings.

Valuation

• The analysts have a consensus price target of $8.56 for European Wax Center based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $18.0, and the most bearish reporting a price target of just $5.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $258.6 million, earnings will come to $30.6 million, and it would be trading on a PE ratio of 18.2x, assuming you use a discount rate of 7.6%.
  
• Given the current share price of $7.38, the analyst's price target of $8.56 is 13.8% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.