Marketing And Service Initiatives Will Strengthen Future Guest Retention

Key Takeaways

• Strategic marketing and enhanced engagement efforts are planned to increase revenue and profitability, showing results from late 2025.
  
• Improved franchisee support and operational strategies aim to boost retention and optimize center utilization, enhancing revenue and margins.
  
• Declining transactions and profitability, along with center closures, could hinder revenue growth amid macroeconomic challenges and inflationary pressures affecting franchisees.

Catalysts

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

• European Wax Center is focused on developing a robust marketing engine to drive traffic to centers, aiming to increase revenue and improve 4-wall profitability by acquiring new guests and enhancing engagement strategies. This effort is expected to begin showing results in the back half of 2025.
  
• The company is cultivating a more effective service-based infrastructure to support franchisees, aiming to improve operational excellence and guest retention, which should enhance revenue and potentially net margins by achieving higher utilization rates in centers.
  
• Implementing a sophisticated development approach for thoughtful and profitable expansion is expected to support long-term network health and unit growth, impacting future revenue growth as new centers open in optimal locations.
  
• European Wax Center is assembling a world-class management team to execute strategic priorities, which could lead to improved operational efficiencies, ultimately benefiting both net margins and earnings.
  
• With significant investment in marketing and technology slated for 2025, the company aims to engage guests more effectively and drive traffic, potentially resulting in increased revenue through enhanced customer acquisition and retention efforts.

European Wax Center Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming European Wax Center's revenue will decrease by 0.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.8% today to 9.8% in 3 years time.
• Analysts expect earnings to reach $21.9 million (and earnings per share of $0.38) by about March 2028, up from $10.5 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 17.3x on those 2028 earnings, down from 17.4x today. This future PE is lower than the current PE for the US Consumer Services industry at 18.5x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.86%, as per the Simply Wall St company report.

European Wax Center Future Earnings Per Share Growth

Risks

• Franchisees are experiencing declining transactions and profitability, leading to paused growth plans and center closures, which could negatively impact revenue and earnings.
  
• There is a slower than anticipated evolution of marketing and operational infrastructure, not keeping pace with unit growth, potentially affecting future revenue growth and market penetration.
  
• Pressured consumer spending in a challenging macro environment has led to softness in average unit economics, impacting both revenues and profit margins.
  
• A substantial number of center closures anticipated, (40 to 60 centers), could result in a decrease in total revenue and sales network expansion over the short term.
  
• Franchisees face increased inflationary pressures, especially in markets like California, which could further erode net margins and operational profit if not effectively managed.

Valuation

• The analysts have a consensus price target of $6.5 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 $15.0, and the most bearish reporting a price target of just $4.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $222.6 million, earnings will come to $21.9 million, and it would be trading on a PE ratio of 17.3x, assuming you use a discount rate of 9.9%.
  
• Given the current share price of $4.21, the analyst price target of $6.5 is 35.2% 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.