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Key Takeaways
- Strategic resource allocation towards core operations and guest engagement aims to drive revenue growth and improve net margins.
- Potential acquisitions using strong cash flow could enhance operational control and long-term financial performance.
- Economic challenges and high costs threaten revenue growth, profitability, and expansion, while reliance on key franchises poses risks to consistent performance.
Catalysts
About European Wax Center- Operates as the franchisor and operator of out-of-home waxing services in the United States.
- European Wax Center is focusing on enhancing its guest acquisition and engagement strategies through a partnership with Dolabra Digital, expected to drive more new guests and improve ticket size, thereby potentially increasing revenue.
- The company is reallocating resources to its core out-of-home waxing business, pausing the expansion of its laser hair removal pilot, which should refine its operational focus and improve net margins.
- The introduction of a dedicated cross-functional team to support underperforming centers aims to improve center productivity and unit economics, which could positively impact earnings.
- The company is restructuring its commercial and operations departments to better align with key priorities, focusing on guest retention and reactivation to drive recurring revenue growth.
- European Wax Center is exploring the possibility of utilizing its strong free cash flow for strategic acquisitions of franchise units, which could increase control over operations and improve long-term financial performance.
European Wax Center Future Earnings and Revenue Growth
Assumptions
How have these above catalysts been quantified?- Analysts are assuming European Wax Center's revenue will grow by 3.7% annually over the next 3 years.
- Analysts assume that profit margins will increase from 5.0% today to 11.0% in 3 years time.
- Analysts expect earnings to reach $27.5 million (and earnings per share of $0.52) by about December 2027, up from $11.1 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 20.6x on those 2027 earnings, down from 23.3x today. This future PE is greater than the current PE for the US Consumer Services industry at 19.7x.
- Analysts expect the number of shares outstanding to decline by 2.54% per year for the next 3 years.
- To value all of this in today's terms, we will use a discount rate of 8.33%, as per the Simply Wall St company report.
European Wax Center Future Earnings Per Share Growth
Risks
What could happen that would invalidate this narrative?- The company is facing potential closures and a challenging macroeconomic environment, which could negatively impact new guest acquisition and top-line performance, leading to lower overall revenue growth.
- Higher-than-expected cost pressures, including elevated rents and wages, particularly in regions like California, could compress net margins and affect the profitability of both the parent company and its franchisees.
- There is a risk of net negative unit growth in 2025 due to closures potentially exceeding openings, which could impact revenue scalability and long-term growth prospects.
- The company has incurred nonroutine expenses related to executive transitions and reorganization efforts, which could temporarily affect earnings and shareholder perception.
- A reliance on a small number of significant franchises for growth, and the difficulty in rapidly attracting new franchisees, could present risks in achieving consistent net unit growth and maintaining current revenue levels.
Valuation
How have all the factors above been brought together to estimate a fair value?- 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 $248.9 million, earnings will come to $27.5 million, and it would be trading on a PE ratio of 20.6x, assuming you use a discount rate of 8.3%.
- Given the current share price of $5.8, the analyst's price target of $8.56 is 32.3% 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.
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Disclaimer
Warren A.I. is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by Warren A.I. are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that Warren A.I.'s analysis may not factor in the latest price-sensitive company announcements or qualitative material.
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