In an industry where most businesses are independent, franchised competitors stand out. European Wax Center (EWCZ -1.70%) has successfully expanded to become the largest and fastest-growing franchisor and operator of out-of-home waxing services as measured by locations and systemwide sales, with over 850 salons. Here's why the company looks poised to thrive in the big but fragmented personal care market.
Regardless of your personal opinions on the aesthetics of body hair, half of the population faces a ton of social pressure to have less of it. Body hair removal is one of the most popular sectors of the personal care industry (which also includes services such as hair treatments, manicures, tanning, and laser), with high margins and low overheads, and different franchise providers tout the service as resistant to recessions.
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Making the most of a piecemeal market of small players
Founded in 2004, European Wax Center provides a full suite of body waxing services, such as eyebrow and nose hair waxing. There's no shortage of waxing salons in the U.S., but the industry is highly fragmented. Along with the rest of the personal care industry, it's been dominated by small businesses that operate out of just one physical location or city. On its franchisee website, European Wax Center boasts of growing faster within the market than the rate at which the overall market is growing.
Since European Wax Centers are mostly franchised, the company's risk-averse business model makes franchisees most responsible for the costs of failure while insulating the brand owner from financial losses. Other national retail brands have benefited from this approach -- for example, over 90% of McDonald's (MCD -0.05%) locations are franchises.The franchise model allows the European Wax Center brand name to expand across the U.S. with significantly less investment than would be needed to open an equal number of company-owned stores.
Entrepreneur magazine ranks the company 48th out of its top 500 franchise opportunities, and No. 1 in its category this year for "outstanding performance in areas including unit growth, financial strength and stability, and brand power." This is an improvement from its 2021 (No. 49) and 2020 (No. 56) rankings. The company also took home the top spot in its category this year for its performance in unit growth, financial strength, and brand power.
In addition, 80% of visitors are repeat customers, and 50% have been visiting for three years or more, indicating success within the business model of the personal care industry, where customers regularly and repeatedly make purchases.
When European Wax Center filed for its IPO in July 2021, it had 808 locations. Currently, there are more than 850, growth of at least 5%.
Last month, European Wax Center recently came off a record Q4 2021, with revenue up 53.8% from Q4 2020 and up 35% from Q4 2019. This month, the company announced a special dividend of of $3.30 (the stock price for that day, April 11, was $29.8). For FY 2021, systemwide sales grew 69.9% from fiscal 2020, revenue grew 72.8% in the same period, and same-store sales saw sequential acceleration each quarter.
Why European Wax Center has room to grow
European Wax Center has a presence in 46 states but isn't established everywhere in the country, indicating room for more franchises in the market. As almost all of European Wax Center's revenue comes from franchises (there are just a handful of directly owned locations ), the company needs to keep market saturation in mind when expanding to make sure franchises don't cannibalize business from each other by competing in too small a local market. The company will also need to stay competitive with local independent non-franchisee operators.
However, the continued success of this large chain in a fragmented market could present a good opportunity for investment. Although the stock is volatile and down round 20% from its 52-week high, in the long term (thanks to having the power of a corporation behind them) franchisees may be able to beat independent competitors in advertising and name recognition, while saving money on supplies via bulk orders. 62 institutional investors have purchased stock over the last 12 months, nearly 9 times the number of institutional sellers, which comes in at 7. Lastly, European Wax Center has no direct competitors that can match its scale in its beauty segment, as there are no other publicly traded hair removal salon stocks in the U.S.
In addition to the lack of publicly traded waxing salon stocks, there are almost no salon stocks for other services (such as tanning and nails), outside of the hair salon stock Regis Corporation (RGS 1.83%). The general absence of publicly traded companies for the beauty salon services industry shines another spotlight on the uniqueness of European Wax Center's type of success, while also further emphasizing the fragmentation of the industry. However, as European Wax Center has only been trading for less than a year, investors interested in personal care stocks may want to follow it for a longer time to see whether new trends develop.
