EUROPEAN WAX CENTER, INC. You should read the following discussion of our historical performance, financial condition and future prospects in conjunction with the management's discussion and analysis of financial conditions and results of operations and the audited consolidated financial statements included in our annual report on Form 10-K for the fiscal year endedDecember 25, 2021 . The following discussion and analysis should also be read in conjunction with our unaudited condensed consolidated financial statements and the notes thereto included elsewhere in this quarterly report on Form 10-Q. This discussion contains forward-looking statements that are based on the views and beliefs of our management, as well as assumptions and estimates made by our management. Actual results could differ materially from such forward-looking statements as a result of various risk factors, including those that may not be in the control of management. For further information on items that could impact our future operating performance or financial condition, see Part I, "Item 1A. Risk Factors" included in our annual report on Form 10-K for the fiscal year endedDecember 25, 2021 . We conduct substantially all of our activities through our subsidiary,EWC Ventures, LLC and its subsidiaries. We operate on a fiscal calendar widely used by the retail industry that results in a given fiscal year consisting of a 52- or 53-week period ending on the Saturday closest toDecember 31 . Our fiscal quarters are composed of 13 weeks each, except for 53-week fiscal years for which the fourth quarter will be composed of 14 weeks.
Overview
We are the largest and fastest-growing franchisor and operator of out-of-home
("OOH") waxing services in the United States by number of centers and
system-wide sales. We delivered over 20 million waxing services in 2021 and over
13 million waxing services in 2020 generating $797 million and $469 million of
system-wide sales, respectively, across our highly-franchised network. We have a
leading portfolio of centers operating in 874 locations across 44 states as of
March 26, 2022 . Of these locations, 868 are franchised centers operated by
franchisees and six are corporate-owned centers.
The European Wax Center brand is trusted, efficacious and accessible. Our
culture is obsessed with our guest experience and we deliver a superior guest
experience relative to smaller chains and independent salons. We offer guests
high-quality, hygienic waxing services administered by our licensed, EWC-trained
estheticians (our "wax specialists"), at our accessible and welcoming locations
(our "centers"). Our technology-enabled guest interface simplifies and
streamlines the guest experience with automated appointment scheduling and
remote check-in capabilities, ensuring guest visits are convenient, hassle-free,
and consistent across our network of centers. Our well-known, pre-paid Wax Pass
program makes payment easy and convenient, fostering loyalty and return visits.
Guests view us as a non-discretionary part of their personal-care and beauty
regimens, providing us with a highly predictable and growing recurring revenue
model.
Our asset-light franchise platform delivers capital-efficient growth,
significant cash flow generation and resilience through economic cycles. Our
centers are 99% owned and operated by our franchisees who benefit from superior
unit-level economics, with mature centers generating annual cash-on-cash returns
in excess of 60%.
In partnership with our franchisees, we fiercely protect our points of differentiation that attract new guests, build meaningful relationships and promote lasting retention. Our net promoter score ("NPS") demonstrates our guests' devotion to our brand. We are so confident in our ability to delight that we have always offered all of our guests their first wax free.
Hair removal solutions are consistently in demand, given the recurring nature of hair growth. The OOH waxing market is the fastest-growing hair removal solution inthe United States , defined by a total addressable market of$18 billion with annualized growth that is more than double other hair removal alternatives.European Wax Center has become the category-defining brand within this rapidly growing market and became so by professionalizing a highly fragmented sector where service consistency, hygiene, and customer trust were not historically offered. We are approximately six times larger than the next largest waxing-focused competitor by center count and approximately 13 times larger by system-wide sales. Our unmatched scale enables us to drive broader brand awareness, ensures our licensed wax specialists are universally trained at the highest standards and drive consistent financial performance across each center. Under the stewardship of our CEO,David Berg , and the other management team members, we have prioritized building a culture of performance, success, and inclusivity. Additionally, we have intensified our focus on enhancing the guest experience and have invested significantly in our corporate infrastructure and marketing capabilities to continue our track record of sustainable growth. The foundation for our next chapter of growth is firmly in place.
Growth Strategy and Outlook
We plan to grow our business primarily by opening new franchised centers and
then additionally increasing our same-store sales and leveraging our corporate
infrastructure to expand our profit margins and generate robust free cash flow.
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We believe our franchisees' track record of successfully opening new centers and
consistently generating attractive unit-level economics validates our strategy
to expand our footprint and grow our capacity to serve more guests. We aspire to
grow between 7% to 10% of our center count each year. Our center count grew 7%
and 6% during fiscal year 2021 and fiscal year 2020, respectively, and has grown
each year since 2010. Our thoughtful approach to growth ensures each center is
appropriately staffed with the high-quality team and licensed, highly-trained
wax specialists that our brand has been known for since our initial opening. We
believe that none of our existing markets are fully penetrated, and that we have
a significant whitespace opportunity of more than 3,000 locations for our
standard center format across the United States . Our centers have a long track
record of sustained growth delivering ten consecutive years of positive
same-store sales growth through 2019 with resilient performance through economic
cycles.
Our straightforward, asset-light franchise platform and our proven track record
of increasing profitability will continue to drive EBITDA margin accretion and
free cash flow generation as we expand our national footprint. We have invested
in building our scalable support infrastructure, and we currently have the
capabilities and systems in place to drive revenue growth and profitability
across our existing and planned franchise centers.
Key Business Metrics
We track the following key business metrics to evaluate our performance,
identify trends, formulate financial projections, and make strategic decisions.
Accordingly, we believe that these key business metrics provide useful
information to investors and others in understanding and evaluating our results
of operations in the same manner as our management team. These key business
metrics are presented for supplemental information purposes only, should not be
considered a substitute for financial information presented in accordance with
GAAP, and may be different from similarly titled metrics or measures presented
by other companies.
Number of Centers. Number of centers reflects the number of franchised and
corporate-owned centers open at the end of the reporting period. We review the
number of new center openings, the number of closed centers and the number of
relocations of centers to assess net new center growth, and drivers of trends in
system-wide sales, royalty and franchise fee revenue and corporate-owned center
sales.
System-Wide Sales. System-wide sales represent sales from same day services,
retail sales and cash collected from wax passes for all centers in our network,
including both franchisee-owned and corporate-owned centers. While we do not
record franchised center sales as revenue, our royalty revenue is calculated
based on a percentage of franchised center sales, which are 6.0% of sales, net
of retail product sales, as defined in the franchise agreement. This measure
allows us to better assess changes in our royalty revenue, our overall center
performance, the health of our brand and the strength of our market position
relative to competitors. Our system-wide sales growth is driven by net new
center openings as well as increases in same-store sales.
Same-Store Sales. Same-store sales reflect the change in year-over-year sales
from services performed and retail sales for the same-store base. We define the
same-store base to include those centers open for at least 52 full weeks. This
measure highlights the performance of existing centers, while excluding the
impact of new center openings and closures. We review same-store sales for
corporate-owned centers as well as franchisee-owned centers. Same-store sales
growth is driven by increases in the number of transactions and average
transaction size.
New Center Openings. The number of new center openings reflects centers opened
during a particular reporting period for both franchisee-owned and
corporate-owned centers, less centers closed during the same period. Opening new
centers is an integral part of our growth strategy, and we expect the majority
of our future new centers to be franchisee-owned. Before we obtain the
certificate of occupancy or report any revenue from new corporate-owned centers,
we incur pre-opening costs, such as rent expense, labor expense and other
operating expenses. Some of our centers open with an initial start-up period of
higher-than-normal marketing and operating expenses, particularly as a
percentage of monthly revenue.
Average Unit Volume ("AUV"). AUV consists of the average annual system-wide
sales of all centers that have been open for a trailing 52-week period or
longer. This measure is calculated by dividing system-wide sales during the
applicable period for all centers being measured by the number of centers being
measured. AUV allows management to assess our franchisee-owned and
corporate-owned center economics. Our AUV growth is primarily driven by
increases in services and retail product sales as centers fill their books of
reservations, which we refer to as maturation of centers.
Wax Pass Utilization. We define Wax Pass utilization as the adoption of our Wax
Pass program by guests, measured as a percentage of total transactions conducted
using a Wax Pass . Wax Pass utilization allows management to better assess the
recurring nature of our business model because it is an indication of the
magnitude of transactions by guests who have made a longer-term commitment to
our brand by purchasing a Wax Pass .
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For the Thirteen Weeks Ended
(in thousands, except operating data and percentages) March 26, 2022 March 27, 2021 Number of system-wide centers (at period end) 874 808 System-wide sales $ 206,969 $ 156,963 Same-store sales(1) 29.0 % (6.2 )% New center openings 21 12 (1) Same-store sales increase for the 13 weeks endedMarch 27, 2021 is calculated in comparison to the 13 weeks endedMarch 30, 2019 due to the significant decline in our sales in 2020 due to COVID-19. We believe this presents a more meaningful comparison of same-store sales. As described below, we typically remove stores from our calculation of same-store sales if they are closed for more than six consecutive days. The table below presents changes in the number of system-wide centers for the periods indicated: For the Thirteen Weeks Ended March 26, 2022 March 27, 2021 System-wide Centers Beginning of Period 853 796 Openings 21 13 Closures - (1 ) End of Period 874 808 Recent Developments OnApril 6, 2022 , certain subsidiaries of the Company completed a refinancing transaction, replacing its previous senior secured credit facility with a new securitized financing facility comprised of$400.0 million principal amount of senior fixed-rate term notes and$40.0 million principal amount of variable funding notes. OnApril 11, 2022 , the Board of Directors of the Company declared a special cash dividend of$3.30 per share payable onMay 6, 2022 to its Class A common stock holders of record as of5:00 p.m. Eastern time onApril 22, 2022 . The dividend, which together with other equivalent payments (including payments of$3.30 per unit to unit-holders ofEWC Ventures, LLC other than the Company) represents an aggregate payment of approximately$209.4 million , will be funded through existing cash and proceeds from the new securitized financing facility.
For additional information regarding these transactions, see Note 15-Subsequent Events in the condensed consolidated financial statements included in this quarterly report on Form 10-Q.
COVID-19 Impact
There is a significant amount of uncertainty about the duration and severity of the consequences caused by the COVID-19 pandemic. While governmental and non-governmental organizations are engaging in efforts to combat the spread and severity of the COVID-19 pandemic and related public health issues, the full extent to which outbreaks of COVID-19 could impact our business, results of operations and financial condition is still unknown and will depend on future developments, including new variants of the virus and spikes in cases in the areas where we operate, which are highly uncertain and cannot be predicted. However, such effects may be material. Our financial statements reflect judgments and estimates that could change in the future as a result of the COVID-19 pandemic.
Significant Factors Impacting Our Financial Results
We believe there are several important factors that have impacted, and that we expect will continue to impact, our business and results of operations. These factors include: New Center Openings. We expect that new centers will be a key driver of growth in our future revenue and operating profit results. Opening new centers is an important part of our growth strategy, and we expect the majority of our future new centers will be franchisee-owned. Our results of operations have been and will continue to be materially affected by the timing and number of new center openings each period. As centers mature, center revenue and profitability increase significantly. The performance of new centers may vary depending on various factors such as the effective management and cooperation of our franchisee partners, whether the franchise is part of a multi-unit development agreement, the center opening date, the time of year of a particular opening, the number of licensed wax specialists recruited, and the location of the new center, including whether it is located in a new or existing market. Our planned center expansion will place increased demands on our operational, managerial, administrative, financial, and other resources.
Same-Store Sales Growth. Same-store sales growth is a key driver of our business. Various factors affect same-store sales, including:
• consumer preferences and overall economic trends;
• the recurring, non-discretionary nature of personal-care services and purchases;
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--------------------------------------------------------------------------------• our ability to identify and respond effectively to guest preferences and trends;
• our ability to provide a variety of service offerings that generate new and repeat visits to our centers;
• the guest experience we provide in our centers;
• the availability of experienced wax specialists;
• our ability to source and deliver products accurately and timely;
• changes in service or product pricing, including promotional activities;
• the number of services or items purchased per center visit;
• center closures in response to state or local regulations due to the COVID-19 pandemic or other health concerns; and
• the number of centers that have been in operation for more than 52 full weeks.
A new center is included in the same-store sales calculation beginning 52 full weeks after the center's opening. If a center is closed for greater than six consecutive days, the center is deemed a closed center and is excluded from the calculation of same-store sales until it has been reopened for a continuous 52 full weeks. Overall Economic Trends. Macroeconomic factors that may affect guest spending patterns, and thereby our results of operations, include employment rates, business conditions, changes in the housing market, the availability of credit, interest rates, tax rates and fuel and energy costs. However, we believe that our guests see our services as non-discretionary in nature. Therefore, we believe that overall economic trends and related changes in consumer behavior have less of an impact on our business than they may have for other industries subject to fluctuations in discretionary consumer spending Guest Preferences and Demands. Our ability to maintain our appeal to existing guests and attract new guests depends on our ability to develop and offer a compelling assortment of services responsive to guest preferences and trends. We estimate that more than two-thirds of OOH waxing consumers start waxing by age 29 or earlier. We also believe that OOH waxing is a recurring need that brings guests back for services on a highly recurring basis which is reflected in the predictability of our financial performance over time. Our guests' routine personal-care need for OOH waxing is further demonstrated by the top 20% of guests who visit us, on average, approximately every four weeks. Our Ability to Source and Distribute Products Effectively. Our revenue and operating income are affected by our ability to purchase our products and supplies in sufficient quantities at competitive prices. While we believe our vendors have adequate capacity to meet our current and anticipated demand, our level of revenue could be adversely affected in the event we face constraints in our supply chain, including the inability of our vendors to produce sufficient quantities of some products or supplies in a manner that matches market demand from our guests, leading to lost revenue. We depend on two key suppliers to source ourComfort Wax and one key supplier to source our branded retail products and we are thus exposed to concentration of supplier risk. Our Ability toRecruit and Retain Qualified Licensed Wax Specialists for our Centers. Our ability to operate our centers is largely dependent upon our ability to attract and retain qualified, licensed wax specialists. Our unmatched scale enables us to ensure that we universally train our wax specialists at the highest standards, ensuring that our guests experience consistent level of quality, regardless of the specific center they visit. The combination of consistent service delivery, across our trained base of wax specialists, along with the payment ease and convenience of our well-known, pre-paidWax Pass program fosters loyalty and return visits across our guest base. Over time, our ability to build and maintain a strong pipeline of licensed wax specialists is important to preserving our current brand position. Seasonality. Our results are subject to seasonality fluctuations in that services are typically in higher demand in periods leading up to holidays and the summer season. The resulting demand trend yields higher system-wide sales in the second and fourth quarter of our fiscal year. In addition, our quarterly results may fluctuate significantly, because of several factors, including the timing of center openings, price increases and promotions, and general economic conditions.
Components of Results of Operations
Revenue
Product Sales: Product sales consist of revenue earned from sales of proprietary wax, other products consumed in administering our wax services and retail merchandise to franchisees, as well as retail merchandise sold in corporate-owned centers. Revenue on product
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sales is recognized upon transfer of control. Our product sales revenue
comprised 54.5% and 56.2% of our total revenue for the 13 weeks ended
Royalty Fees: Royalty fees are earned based on a percentage of the franchisees' gross sales, net of retail product sales, as defined in the applicable franchise agreement, and recognized in the period the franchisees' sales occur. The royalty fee is 6.0% of the franchisees' gross sales for such period and is paid weekly. Our royalty fees revenue comprised 25.1% and 24.1% of our total revenue for the 13 weeks endedMarch 26, 2022 andMarch 27, 2021 , respectively. Marketing Fees: Marketing fees are earned based on 3.0% of the franchisees' gross sales, net of retail product sales, as defined in the applicable franchise agreement, and recognized in the period the franchisees' sales occur. Additionally, the Company charges a fixed monthly fee to franchisees for search engine optimization and search engine marketing services, which is due on a monthly basis and recognized in the period when services are provided. Our marketing fees revenue comprised 14.2% and 13.5% of our total revenue for the 13 weeks endedMarch 26, 2022 andMarch 27, 2021 , respectively. Other Revenue: Other revenue primarily consists of service revenues from our corporate-owned centers and franchise fees, as well as technology fees, annual brand conference revenues and training, which together represent 6.2% and 6.2% of our total revenue for the 13 weeks endedMarch 26, 2022 andMarch 27, 2021 , respectively. Service revenues from our corporate-owned centers are recognized at the time services are provided. Amounts collected in advance of the period in which service is rendered are recorded as deferred revenue. Franchise fees are paid upon commencement of the franchise agreement and are deferred and recognized on a straight-line basis commencing at contract inception through the end of the franchise license term. Franchise agreements generally have terms of 10 years beginning on the date the center is opened and the initial franchise fees are amortized over a period approximating the term of the agreement. Deferred franchise fees expected to be recognized in periods greater than 12 months from the reporting date are classified as long-term on the condensed consolidated balance sheets. Technology fees, annual brand conference revenues and training are recognized as the related services are delivered and are not material to the overall business.
Costs and Expenses
Cost of Revenue: Cost of revenue primarily consists of the direct costs associated with wholesale product and retail merchandise sold, including distribution and outbound freight costs and inventory obsolescence charges, as well as the cost of materials and labor for services rendered in our corporate-owned centers.
Selling, General and Administrative Expenses: Selling, general and administrative expenses primarily consist of wages, benefits and other compensation-related costs, rent, software, and other administrative expenses incurred to support our existing franchise and corporate-owned centers, as well as expenses attributable to growth and development activities. Also included in selling, general and administrative expenses are accounting, legal, marketing operations, and other professional fees.
Advertising Expenses: Advertising expenses consist of advertising, public
relations, and administrative expenses incurred to increase sales and further
enhance the public reputation of the
Depreciation and Amortization: Depreciation and amortization includes depreciation of property and equipment and capitalized leasehold improvements, as well as amortization of intangible assets, including franchisee relationships and reacquired area representative rights. Area representative rights represent an agreement with area representatives to sell franchise licenses and provide support to franchisees in a geographic region. From time to time, the Company enters into agreements to reacquire certain area representative rights. Interest Expense: Interest expense consists of interest on our long-term debt, including amounts outstanding under our revolving credit facility, amortization of debt discount and deferred financing costs and gain and losses on debt extinguishment.
Other Expense: Other expense consists of non-cash gains and losses related to the remeasurement of our tax receivable agreement liability.
Income Tax Expense: We are subject toU.S. federal, state and local income taxes with respect to our allocable share of any taxable income ofEWC Ventures and are taxed at the prevailing corporate tax rates. Income tax expense includes both current and deferred income tax expense. Noncontrolling Interest: We are the sole managing member ofEWC Ventures . Because we manage and operate the business and control the strategic decisions and day-to-day operations ofEWC Ventures and also have a substantial financial interest inEWC Ventures , we consolidate the financial results ofEWC Ventures , and a portion of our net income (loss) is allocated to the non-controlling interest to 21 -------------------------------------------------------------------------------- reflect the entitlement of the members ofEWC Ventures after our initial public offering (the "EWC Ventures Post-IPO Members") to a portion ofEWC Ventures' net income (loss). Results of Operations The following tables presents our condensed consolidated statements of operations for each of the periods indicated (amounts in thousands, except percentages): For the Thirteen Weeks Ended $ % March 26, 2022 March 27, 2021 Change Change Revenue: Product sales$ 24,778 $ 20,617 $ 4,161 20.2 % Royalty fees 11,385 8,850 2,535 28.6 % Marketing fees 6,450 4,934 1,516 30.7 % Other revenue 2,813 2,256 557 24.7 % Total revenue 45,426 36,657 8,769 23.9 % Operating expenses: Cost of revenue 11,991 9,931 2,060 20.7 % Selling, general and administrative 15,474 11,066 4,408 39.8 % Advertising 6,556 4,884 1,672 34.2 % Depreciation and amortization 5,060 5,138 (78 ) (1.5 )% Total operating expenses 39,081 31,019 8,062 26.0 % Income from operations 6,345 5,638 707 12.5 % Interest expense 1,507 4,536 (3,029 ) (66.8 )% Other Expense 785 - 785 - Income before income taxes 4,053 1,102 2,951 267.8 % Income tax expense 27 - 27 - Net income $ 4,026 $ 1,102$ 2,924 265.3 % Less: net income attributable toEWC Ventures, LLC prior to the Reorganization Transactions - 1,102 (1,102 ) (100.0 )% Less: net income attributable to noncontrolling interests 2,141 - 2,141 - Net income attributable to European Wax Center, Inc. $ 1,885 $ -$ 1,885 $ - 22
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The following table presents the components of our condensed consolidated
statements of operations for each of the periods indicated, as a percentage of
revenue:
For the Thirteen Weeks Ended
March 26, 2022 March 27, 2021
Revenue:
Product sales 54.5 % 56.2 %
Royalty fees 25.1 % 24.1 %
Marketing fees 14.2 % 13.5 %
Other revenue 6.2 % 6.2 %
Total revenue 100.0 % 100.0 %
Costs and expenses:
Cost of revenue 26.4 % 27.1 %
Selling, general and administrative 34.1 % 30.2 %
Advertising 14.5 % 13.3 %
Depreciation and amortization 11.1 % 14.0 %
Total operating expenses 86.1 % 84.6 %
Income from operations 13.9 % 15.4 %
Interest expense 3.3 % 12.4 %
Other expense 1.7 % -
Income before income taxes 8.9 % 3.0 %
Income tax expense 0.1 % -
Net income 8.8 % 3.0 %
Less: net income attributable to EWC Ventures,
LLC prior to the Reorganization Transactions - 3.0 %
Less: net income attributable to noncontrolling
interests 4.7 % -
Net income attributable to European Wax Center,
Inc. 4.1 % -
Comparison of the Thirteen Weeks Ended
Revenue
Total revenue increased$8.8 million , or 23.9%, to$45.4 million during the 13 weeks endedMarch 26, 2022 , compared to$36.7 million for the 13 weeks endedMarch 27, 2021 . The increase in total revenue was largely due to 66 new center openings which became operational during the period fromMarch 28, 2021 throughMarch 26, 2022 . In addition, same-store sales increased 29% in the 13 weeks endedMarch 26, 2022 compared to the 13 weeks endedMarch 27, 2021 largely due to total revenue for the first 13 weeks of 2021 being negatively impacted by lingering COVID-19 restrictions affecting many of our centers.
Product Sales
Product sales increased$4.2 million , or 20.2%, to$24.8 million during the 13 weeks endedMarch 26, 2022 , compared to$20.6 million for the 13 weeks endedMarch 27, 2021 . The increase in product sales was primarily due to new center openings which became operational during the period fromMarch 28, 2021 toMarch 26, 2022 as well as the increase in same-store sales in the first 13 weeks of 2022 compared to the same period in 2021.
Royalty Fees
Royalty fees increased$2.5 million , or 28.6%, to$11.4 million during the 13 weeks endedMarch 26, 2022 , compared to$8.9 million for the 13 weeks endedMarch 27, 2021 . The increase in royalty fees during the 13 weeks endedMarch 26, 2022 was the result of the increase in system-wide sales driven by new center openings which became operational during the period fromMarch 28, 2021 toMarch 26, 2022 as well as the increase in same-store sales in the first 13 weeks of 2022 compared to the same period in 2021.
Marketing Fees
Marketing fees increased$1.5 million , or 30.7%, to$6.5 million during the 13 weeks endedMarch 26, 2022 , compared to$4.9 million for the 13 weeks endedMarch 27, 2021 . Marketing fees increased as a result of the increase in system-wide sales driven by new center openings which became operational during the period fromMarch 28, 2021 toMarch 26, 2022 as well as the increase in same-store sales in the first 13 weeks of 2022 compared to the same period in 2021. 23 --------------------------------------------------------------------------------
Other Revenue
Other revenue increased$0.6 million or 24.7%, to$2.8 million during the 13 weeks endedMarch 26, 2022 , compared to$2.3 million for the 13 weeks endedMarch 27, 2021 . The increase in other revenue during the 13 weeks endedMarch 26, 2022 was primarily due to increases in franchise fee revenues driven by new center openings which became operational during the period fromMarch 28, 2021 toMarch 26, 2022 as well as an increase in corporate center revenues.
Costs and Expenses
Cost of Revenue
Cost of revenue increased$2.1 million , or 20.7%, to$12.0 million during the 13 weeks endedMarch 26, 2022 , compared to$9.9 million for the 13 weeks endedMarch 27, 2021 . The increase in cost of revenue was primarily due to higher product sales in the current year period driven by new center openings which became operational during the period fromMarch 28, 2021 toMarch 26, 2022 as well as the increase in same-store sales in the first 13 weeks of 2022 compared to the same period in 2021.
Selling, General and Administrative
Selling, general and administrative expenses increased$4.4 million , or 39.8%, to$15.5 million during the 13 weeks endedMarch 26, 2022 , compared to$11.1 million for the 13 weeks endedMarch 27, 2021 . The increase in selling, general and administrative expenses was primarily due to increased payroll and benefits and insurance expenses. The increase in payroll and benefits expense resulted from increased equity based compensation due to the modification of certain pre-IPO equity awards and the issuance of new equity awards, and increased headcount at our corporate office due to the increased requirements of being a public company. The increase in insurance expense was primarily attributable to the purchase of additional lines of coverage due to becoming a public company. These increases were partially offset by a decline in professional fees in the first 13 weeks of 2022. In the first 13 weeks of 2021 we incurred professional fees related to preparations for our initial public offering which were not incurred in the current year.
Advertising
Advertising expenses increased$1.7 million , or 34.2%, to$6.6 million during the 13 weeks endedMarch 26, 2022 , compared to$4.9 million for the 13 weeks endedMarch 27, 2021 . The increase in advertising expense was commensurate with our increase in marketing fee revenues driven by new center openings and an increase in same store sales..
Depreciation and Amortization
Depreciation and amortization for the 13 weeks endedMarch 26, 2022 was largely consistent with the 13 weeks endedMarch 27, 2021 , decreasing$0.1 million , or 1.5%, to$ 5.0 million for the 13 weeks endedMarch 26, 2022 , compared to$5.1 million for the 13 weeks endedMarch 27, 2021 .
Interest Expense
Interest expense decreased$3.0 million , or 66.8%, to$1.5 million during the 13 weeks endedMarch 26, 2022 , compared to$4.5 million for the 13 weeks endedMarch 27, 2021 . The decrease in interest expense was primarily due to lower interest expense on the 2026 Term Loan due to the reduced principal balance and interest rate from our previous credit facility, which was repaid in connection with our initial public offering inAugust 2021 .
Other expense
Other expense for the 13 weeks ended
Income Tax Expense
We recorded$27 thousand in income tax expense for the 13 weeks endedMarch 26, 2022 primarily due to state income taxes. This differs from the federal statutory income tax rate primarily as a result of the impact of the Company's full valuation allowance against its net federal and state deferred taxes. Other drivers of the effective tax rate include non-taxable income attributable to non-controlling interest, and the tax effects of stock compensation.EWC Ventures , our financial reporting predecessor, was a pass-through entity and not subject to income tax. As such, there was no income tax expense for the 13 weeks endedMarch 27, 2021 . We estimate that in future annual periods, our blended statutory tax rate, prior to valuation allowance consideration, will be approximately 15% ofEWC Ventures income or loss before income taxes. This estimated blended statutory tax rate is based on the current capital structure, excludes discrete or other rate impacting adjustments 24 -------------------------------------------------------------------------------- which may impact the company's income tax provision in the future and is based on our blended federal and state statutory tax rates reduced to exclude our non-taxable noncontrolling interest percentage. We expect this estimated blended statutory tax rate to increase as EWC Ventures Units and the corresponding shares of Class B common stock are exchanged for shares of Class A common stock because our nontaxable noncontrolling interest earnings will decrease. Non-GAAP Financial Measures In addition to our GAAP financial results, we believe the non-GAAP financial measures EBITDA and Adjusted EBITDA are useful in evaluating our performance. Our non-GAAP financial measures should not be considered in isolation from, or as substitutes for, financial information prepared in accordance with GAAP. These non-GAAP financial measures are presented for supplemental information purposes only and may be different from similarly titled metrics or measures presented by other companies. A reconciliation of the non-GAAP financial measures to the most directly comparable financial measure stated in accordance with GAAP and a further discussion of how we use non-GAAP financial measures is provided below. EBITDA and Adjusted EBITDA. We define EBITDA as net income (loss) before interest, taxes, depreciation and amortization. We believe that EBITDA, which eliminates the impact of certain expenses that we do not believe reflect our underlying business performance, provides useful information to investors to assess the performance of our business. We define Adjusted EBITDA as net income (loss) before interest, taxes, depreciation and amortization, adjusted for the impact of certain additional non-cash and other items that we do not consider in our evaluation of ongoing performance of our core operations. These items include exit costs related to leases of abandoned space, IPO-related costs, non-cash equity-based compensation expense, corporate headquarters office relocation, non-cash gains and losses on remeasurement of our tax receivable agreement liability and other one-time expenses. We believe that Adjusted EBITDA is an appropriate measure of operating performance in addition to EBITDA because it eliminates the impact of other items that we believe reduce the comparability of our underlying core business performance from period to period and is therefore useful to our investors in comparing the core performance of our business from period to period. EBITDA and Adjusted EBITDA may not be comparable to other similarly titled captions of other companies due to differences in methods of calculation. A reconciliation of net income to EBITDA and Adjusted EBITDA is set forth below for the periods indicated: Thirteen Weeks Ended March 26, 2022 March 27, 2021 (in thousands) Net income $ 4,026 $ 1,102 Interest expense 1,507 4,536 Income tax expense 27 - Depreciation and amortization 5,060 5,138 EBITDA $ 10,620$ 10,776 Share-based compensation(1) 3,335 298 IPO-related costs(2) - 1,123 Other compensation-related costs(3) - 337 Remeasurement of tax receivable agreement liability (4) 785 - Other (5) 417 - Adjusted EBITDA $ 15,157$ 12,534 (1)
Represents non-cash equity-based compensation expense.
(2)
Represents legal, accounting and other costs incurred in preparation for initial public offering in fiscal year 2021.
(3)
Represents costs related to reorganization driven by COVID-19 and buildup of executive leadership team in fiscal year 2021.
(4)
Represents non-cash expense related to the remeasurement of our tax receivable agreement liability.
(5)
Represents non-core operating expenses identified by management. For fiscal year 2022 these costs relate to executive severance.
Liquidity and Capital Resources
We measure liquidity in terms of our ability to fund the cash requirements of our business operations, including working capital needs, capital expenditures, contractual obligations and debt service with cash flows from operations and other sources of funding. Our primary sources of liquidity and capital resources are cash provided from operating activities, cash and cash equivalents on hand, proceeds from our secured term loan and revolving credit facility and proceeds from the issuance of equity to our members. We had cash and cash equivalents of$44.2 million as ofMarch 26, 2022 . 25 -------------------------------------------------------------------------------- Future payments under the TRA with respect to the purchase of EWC Ventures Units which occurred as part of the IPO and throughMarch 26, 2022 are currently expected to be$115.8 million . Such amounts will be paid when such deferred tax assets are realized as a reduction to income taxes due or payable. That is, payments under the TRA are only expected to be made in periods following the filing of a tax return in which we are able to utilize certain tax benefits to reduce our cash taxes paid to a taxing authority. The impact of any changes in the projected obligations under the TRA as a result of changes in the geographic mix of the Company's earnings, changes in tax legislation and tax rates or other factors that may impact the Company's tax savings will be reflected in income (loss) before income taxes on the Consolidated Statements of Operations in the period in which the change occurs. We recorded a liability of$60.3 million based on current projections of future taxable income taking into consideration the Company's full valuation allowance against its net deferred tax asset. During the 13 weeks endedMarch 26, 2022 there were no other material changes in our contractual obligations from those described in our annual report on Form 10-K for the fiscal year endedDecember 25, 2021 . We believe that our sources of liquidity and capital will be sufficient to finance our continued operations and growth strategy for at least the next twelve months. Our primary requirements for liquidity and capital are working capital, capital expenditures to grow our network of centers, debt servicing costs, and general corporate needs. We have in the past, and may in the future, refinance our existing indebtedness with new debt arrangements and utilize a portion of borrowings to return capital to our stockholders. Our assessment of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties. Our actual results and our future capital requirements could vary because of many factors, including our growth rate, the timing and extent of spending to acquire new centers and expand into new markets, and the expansion of sales and marketing activities. We may, in the future, enter into arrangements to acquire or invest in complementary businesses, services and technologies. We have based this estimate on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, or if we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, results of operations and financial condition would be adversely affected.
2026 Credit Agreement
Our 2026 Credit Agreement consists of the 2026 Term Loan and the 2026 Revolving Credit Facility. Borrowings under the 2026 Term Loan bear interest at an index rate as defined in the credit agreement plus an applicable margin of 3.0% (3.2% atMarch 26, 2022 ). The 2026 Term Loan requires principal payments payable in quarterly installments with the final scheduled principal payment on the outstanding 2026 Term Loan borrowings due onAugust 9, 2026 . There were no outstanding borrowings under the 2026 Revolving Credit Facility as ofMarch 26, 2022 . The 2026 Credit Agreement contains certain customary events of default, including in the event of a change of control, and certain covenants and restrictions that limit the Borrower's and its subsidiaries' ability to, among other things, incur additional debt; create liens on certain assets; pay dividends on or make distributions in respect of their capital stock or make other restricted payments; consolidate, merge, sell, or otherwise dispose of all or substantially all of their assets; and enter into certain transactions with their affiliates. The Company is also subject to certain financial maintenance covenants under the 2026 Credit Agreement, which require the Company and its subsidiaries to (i) not exceed certain specified total net leverage ratios and (ii) not fall below a certain fixed charge coverage ratio, in each case, at the end of each fiscal quarter. If the Company fails to perform its obligations under these and other covenants, or should any event of default occur, the term loan and revolving credit facility commitments under the 2026 Credit Agreement may be terminated and any outstanding borrowings, together with accrued interest, under the 2026 Credit Agreement could be declared immediately due and payable. For additional information regarding our long-term debt activity, see the notes to the condensed consolidated financial statements (Note 6-Long-term debt) contained elsewhere in this quarterly report on Form 10-Q.
Tax Receivable Agreement
Generally, we are required under the TRA, which is described more fully in Part 1 "Item 1A. Risk Factors" in our annual report on Form 10-K for the fiscal year endedDecember 25, 2021 in the section entitled "Risks Related to Our Organization and Structure-We are required to pay theEWC Ventures' pre-IPO members for certain tax benefits we may claim, and the amounts we may pay could be significant" to make payments to theEWC Ventures pre-IPO members that are generally equal to 85% of the applicable cash tax savings, if any, that we actually realize (or are deemed to realize, calculated using certain assumptions) as a result of (i) increases in our allocable share of certain existing tax basis of the tangible and intangible assets of the Company and adjustments to the tax basis of the tangible and intangible assets of the Company, in each case as a result of (a) the purchases of EWC Ventures Units (along with the corresponding shares of our Class B common stock) from certain of the EWC Ventures Post-IPO Members using a portion of the net proceeds from 26
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the initial and secondary public offerings or in any future offering or (b) Share Exchanges and Cash Exchanges by theEWC Ventures pre-IPO members (or their transferees or other assignees) in connection with or after the initial public offering, (ii) our utilization of certain tax attributes of the Blocker Companies (including the Blocker Companies' allocable share of certain existing tax basis ofEWC Ventures' assets) and (iii) certain other tax benefits related to entering into the TRA, including tax benefits attributable to payments under the TRA. Subject to the discussion in the following paragraph below, payments under the TRA will occur only after we have filed ourU.S. federal and state income tax returns and realized the cash tax savings from the favorable tax attributes. The first payment would be due after the filing of our tax return for the year endedDecember 25, 2021 , which is dueOctober 15, 2022 . Future payments under the TRA in respect of future purchases of EWC Ventures Units, Share Exchanges and Cash Exchanges would be in addition to these amounts. Payments under the TRA are computed by reference to realized tax benefits from attributes subject to the TRA and are expected to be funded by tax distributions made to us by our subsidiaries similar to how cash taxes would be funded to the extent these attributes did not exist. To the extent we are unable to make payments under the TRA for any reason (including because our credit agreement restricts the ability of our subsidiaries to make distributions to us), under the terms of the TRA such payments will be deferred and accrue interest until paid. If we are unable to make payments due to insufficient funds, such payments may be deferred indefinitely while accruing interest until paid, which could negatively impact our results of operations and could also affect our liquidity in future periods in which such deferred payments are made. Under the TRA, as a result of certain types of transactions and other factors, including a transaction resulting in a change of control, we may also be required to make payments to theEWC Ventures pre-IPO members in amounts equal to the present value of future payments we are obligated to make under the TRA. If the payments under the TRA are accelerated, we may be required to raise additional debt or equity to fund such payments. To the extent that we are unable to make payments under the TRA for any reason (including because our credit agreement restricts the ability of our subsidiaries to make distributions to us), under the terms of the TRA Agreement such payments will be deferred and will accrue interest until paid. If we are unable to make payments due to insufficient funds to make such payments, such payments may be deferred indefinitely while accruing interest until paid, which could negatively impact our results of operations and could also affect our liquidity in future periods in which such deferred payments are made.
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