Changing Beauty Norms And Franchise Challenges Will Lower Valuations

Key Takeaways

• Shifting beauty standards and alternative hair removal methods threaten long-term demand, risking a shrinking customer base and market share.
  
• Persistent labor cost pressures, slower expansion, and franchise-related risks challenge profitability and revenue growth.
  
• Improved sales trends, stronger franchisee support, and enhanced marketing are positioning the company for sustained growth and more reliable, recurring revenues.

Catalysts

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

• Changing attitudes toward natural beauty, body positivity, and growing acceptance of body hair may reduce the long-term demand for recurring waxing services, causing a structural decline in European Wax Center's addressable market and driving lower organic revenue growth over time.
  
• Persistent labor cost inflation, particularly in urban markets and states like California-which management cited as facing operational headwinds-will continue to erode center-level profitability and compress EBITDA margins despite efforts to improve operational efficiency across franchisees.
  
• Slower-than-expected pace of new center openings, compounded by ongoing center closures (with up to 50 net closures expected in 2025) and signs of market saturation, limit the company's ability to drive sustainable top-line revenue growth from network expansion.
  
• The franchise model's dependence on hundreds of third-party operators exposes the brand to heightened risk of uneven service quality and brand dilution, threatening customer retention and undermining same-store sales growth even as core guests remain stable for now.
  
• Increasing innovation and adoption of at-home or alternative body hair removal solutions, such as home lasers and depilatories, will divert a significant segment of current and prospective customers away from specialist providers, leading to sustained traffic declines and weaker comparables, ultimately pressuring both revenue and net income through loss of market share.

European Wax Center Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on European Wax Center compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming European Wax Center's revenue will decrease by 0.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 4.2% today to 10.2% in 3 years time.
• The bearish analysts expect earnings to reach $22.1 million (and earnings per share of $0.42) by about August 2028, up from $8.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 10.6x on those 2028 earnings, down from 21.7x today. This future PE is lower than the current PE for the US Consumer Services industry at 19.9x.
• 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 10.01%, as per the Simply Wall St company report.

European Wax Center Future Earnings Per Share Growth

Risks

• The company is showing early but tangible improvement in same-store sales and transaction growth, with recent same-store sales up 1.7% in June and visit frequency increasing among existing guests, which could support a rebound in revenue and stabilize long-term earnings.
  
• Enhanced data analytics and targeted marketing initiatives have led to a 40% improvement in cost per acquisition and higher guest reactivation rates, which are likely to drive better customer retention and increased recurring revenues over time.
  
• Significant investments in leadership and operational excellence, including a revamped franchise support structure and the addition of experienced executives, are improving four-wall profitability and franchisee confidence, which could result in higher EBITDA margins and better unit economics.
  
• The company is laying the groundwork for a return to net unit growth by the end of 2026 and has a pipeline of openings that are ramping above pre-pandemic levels, suggesting long-term topline growth potential and expansion of the addressable market.
  
• The franchise network remains engaged and optimistic, with most new unit growth expected to come from experienced, existing franchisees, indicating a path toward sustainable expansion and a reduction in the risk of earnings volatility due to store closures.

Valuation

• The assumed bearish price target for European Wax Center is $4.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of European Wax Center's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• 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 bearish analysts, you'd need to believe that by 2028, revenues will be $216.9 million, earnings will come to $22.1 million, and it would be trading on a PE ratio of 10.6x, assuming you use a discount rate of 10.0%.
• Given the current share price of $4.48, the bearish analyst price target of $4.0 is 12.0% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.