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 prospectus datedAugust 4, 2021 , filed with theSecurities and Exchange Commission (the "SEC") onAugust 6, 2021 pursuant to Rule 424(b)(4) of the Securities Act of 1933, as amended (referred to herein as the "Prospectus"). 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. The information provided below supplements, but does not form part of, our predecessor's financial statements. 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 the sections titled "Risk Factors" and "Forward-Looking Statements" included in our Prospectus. We conduct substantially all of our activities through our direct, wholly owned 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 21 million waxing services in 2019 and over
13 million waxing services in 2020 generating $687 million and $469 million of
system-wide sales, respectively, across our highly-franchised network. We have a
leading portfolio of centers operating in 815 locations across 44 states as of
June 26, 2021 . Of these locations, 810 are franchised centers operated by
franchisees and five 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%. The highly consistent and recurring demand for our services
and the competitive advantages provided by our scale have resulted in ten
consecutive years of same-store sales and system-wide sales growth through 2019.
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 approximately twice as high as 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 ten 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. 20 --------------------------------------------------------------------------------
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. 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 6% and 5% during fiscal year 2020 and fiscal year 2019, 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. None of our existing markets are fully penetrated, and we believe we have a significant whitespace opportunity of approximately 3,000 locations for our standard center format acrossthe 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. We intend to continue increasing our same-store sales growth by, among other things:
• driving brand awareness to accelerate guest acquisition;
• increasing our
• expanding our share of our guests' personal-care expenditures;
• increasing our transaction attachment rate, which we define as the percentage of transactions that include the purchase of a retail product to the total number of transactions; and
• driving greater guest engagement using data analytics.
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.
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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 .
(in thousands, except Thirteen Weeks Thirteen Weeks Twenty-Six Twenty-Six
operating data and Ended Ended Weeks Ended Weeks Ended
percentages) June 26, 2021 June 27, 2020 June 26, 2021 June 27, 2020Number of system-wide centers (at period end) 815 774 815 774 System-wide sales$ 218,499 $ 40,252 $ 375,462 $ 198,256 Same-store sales(1) 6.9 % (76.3 )% 1.3 % (44.3 )% New center openings 7 8 19 24 (1) Same-store sales increase for the 13 and 26 weeks endedJune 26, 2021 is calculated in comparison to the 13 and 26 weeks endedJune 29, 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. However, given the widespread and unprecedented impact of COVID-19 same-store sales for the 13 and 26 weeks endedJune 27, 2020 were calculated without removing stores that were closed for longer than six days due to COVID-19. The table below presents changes in the number of system-wide centers for the periods indicated: For the Thirteen For the Twenty-Six Weeks Ended Weeks Ended June 26, June 27, June 26, June 27, 2021 2020 2021 2020 System-wide Centers Beginning of Period 808 766 796 750 Openings 8 10 21 26 Closures (1 ) (2 ) (2 ) (2 ) End of Period 815 774 815 774 Recent Developments
As more fully described in the notes to condensed consolidated financial
statements included in this quarterly report on Form 10-Q, in
? Reorganization Transactions, which among other things, resulted inEuropean Wax Center, Inc. (the "Corporation") being appointed as the sole managing member of the Company and the Corporation entering into the Tax Receivable Agreement ? The initial public offering of the Corporation's class A common stock; and ? Entry into a new term loan and revolving credit facility which replaced our Senior Secured Credit Facility
For additional information regarding these transactions, see the notes to condensed consolidated financial statements (Note 13-Subsequent Events) included in this quarterly report on Form 10-Q.
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--------------------------------------------------------------------------------COVID-19 Impact
The Company is continuing to monitor the ongoing COVID-19 pandemic and its impact on its business. Beginning inMarch 2020 , in response to the COVID-19 pandemic, most franchisees temporarily closed their centers in order to promote the health and safety of its members, team members and their communities. InApril 2020 , the entire franchise network was temporarily closed. Beginning inMay 2020 , certain governors announced steps to restart non-essential business operations in their respective states and certain centers began to re-open. As ofJune 2021 , all of the Company's nationwide network of centers had re-opened. 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. Managing our growth effectively will require us to continually attract strong and well capitalized franchisee partners into our development pipeline and to enhance our center management system controls and information systems.
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;
• 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, given the rebound in
performance in the second half of fiscal year 2020 despite the COVID-19
pandemic. Therefore, we believe that overall economic trends and related
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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, nearly 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 our proprietary wax and one key supplier to source our branded retail
products and we are thus exposed to concentration of supplier risk.
Our Ability to Recruit 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-paid Wax 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 sales is recognized upon transfer of control. Our product sales revenue comprised 55.4% and 63.3% of our total revenue for the 13 weeks endedJune 26, 2021 andJune 27, 2020 , respectively, and 55.7% and 57.7% of our total revenue for the 26 weeks endedJune 26, 2021 andJune 27, 2020 , respectively. 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 19.4% of our total revenue for the 13 weeks endedJune 26, 2021 andJune 27, 2020 , respectively, and 24.7% and 25.2% of our total revenue for the 26 weeks endedJune 26, 2021 andJune 27, 2020 , 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 13.8% and 11.3% of our total revenue for the 13 weeks endedJune 26, 2021 andJune 27, 2020 , respectively, and 13.7% and 11.0% of our total revenue for the 26 weeks endedJune 26, 2021 andJune 27, 2020 , 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 5.7% and 6.0% of our total revenue for the 13 weeks endedJune 26, 2021 andJune 27, 2020 , respectively, and 5.9% and 6.1% of our total revenue for the 26 weeks endedJune 26, 2021 andJune 27, 2020 , 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 ten years beginning on the date the center is opened, which is an average of two years from the date the franchise agreement is signed. Therefore, the franchise fees are typically amortized over a 12-year period. Deferred franchise fees expected to be recognized in periods greater than 12 months from the 24 -------------------------------------------------------------------------------- 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, as well as the amortization of deferred financing costs.
Post-Offering Non-Controlling Interest and Expenses
In connection with the Reorganization Transactions and our initial public offering described under "Recent Developments" and in the notes to the condensed consolidated financial statements included in this quarterly report on Form 10-Q, we were appointed as 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 will consolidate the financial results ofEWC Ventures , and a portion of our net income (loss) will be allocated to the non-controlling interest to reflect the entitlement of the EWC Ventures Post-IPO Members to a portion ofEWC Ventures' net income (loss). Following the consummation of this offering, we became subject toU.S. federal, state and local income taxes with respect to our allocable share of any taxable income ofEWC Ventures and will be taxed at the prevailing corporate tax rates. In addition to tax expenses, we also will incur new expenses related to our operations as a public company, plus payments under the Tax Receivable Agreement. See "Unaudited Pro Forma Consolidated Financial Information" in the Prospectus for more information regarding the post- offering non-controlling interest and expenses. 25
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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
June 26, June 27, $ %
2021 2020 Change Change
Revenue:
Product sales $ 26,524 $ 6,838 $ 19,686 287.9 %
Royalty fees 12,030 2,101 9,929 472.6 %
Marketing fees 6,632 1,225 5,407 441.4 %
Other revenue 2,716 649 2,067 318.5 %
Total revenue 47,902 10,813 37,089 343.0 %
Operating expenses:
Cost of revenue 11,540 3,717 7,823 210.5 %
Selling, general and administrative 12,212 6,340 5,872 92.6 %
Advertising 6,515 2,603 3,912 150.3 %
Depreciation and amortization 5,271 5,040 231 4.6 %
Total operating expenses 35,538 17,700 17,838 100.8 %
Income (loss) from operations 12,364 (6,887 ) 19,251 279.5 %
Interest expense 4,635 4,485 150 3.3 %
Net income (loss) $ 7,729 $ (11,372 ) $ 19,101 168.0 %
For the Twenty-Six Weeks Ended
June 26, June 27, $ %
2021 2020 Change Change
Revenue:
Product sales $ 47,141 $ 25,183 $ 21,958 87.2 %
Royalty fees 20,880 11,002 9,878 89.8 %
Marketing fees 11,566 4,784 6,782 141.8 %
Other revenue 4,972 2,667 2,305 86.4 %
Total revenue 84,559 43,636 40,923 93.8 %
Operating expenses:
Cost of revenue 21,471 12,395 9,076 73.2 %
Selling, general and administrative 23,278 16,718 6,560 39.2 %
Advertising 11,399 6,291 5,108 81.2 %
Depreciation and amortization 10,409 9,938 471 4.7 %
Total operating expenses 66,557 45,342 21,215 46.8 %
Income (loss) from operations 18,002 (1,706 ) 19,708 1,155.2 %
Interest expense 9,171 8,707 464 5.3 %
Net income (loss) $ 8,831 $ (10,413 ) $ 19,244 184.8 %
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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 For the Twenty-Six Weeks Ended
June 26, June 27, June 26, June 27,
2021 2020 2021 2020
Revenue:
Product sales 55.4 % 63.3 % 55.7 % 57.7 %
Royalty fees 25.1 % 19.4 % 24.7 % 25.2 %
Marketing fees 13.8 % 11.3 % 13.7 % 11.0 %
Other revenue 5.7 % 6.0 % 5.9 % 6.1 %
Total revenue 100.0 % 100.0 % 100.0 % 100.0 %
Costs and expenses:
Cost of revenue 24.1 % 34.4 % 25.4 % 28.4 %
Selling, general and administrative 25.5 % 58.6 % 27.5 % 38.3 %
Advertising 13.6 % 24.1 % 13.5 % 14.4 %
Depreciation and amortization 11.0 % 46.6 % 12.3 % 22.8 %
Total operating expenses 74.2 % 163.7 % 78.7 % 103.9 %
Income (loss) from operations 25.8 % (63.7 )% 21.3 % (3.9 )%
Interest expense 9.7 % 41.5 % 10.9 % 20.0 %
Net income (loss) 16.1 % (105.2 )% 10.4 % (23.9 )%
Comparison of the Thirteen Weeks Ended
Revenue
Total revenue increased$37.1 million , or 343.0%, to$47.9 million during the 13 weeks endedJune 26, 2021 , compared to$10.8 million for the 13 weeks endedJune 27, 2020 . The increase in total revenue was largely due to our results for the 13 weeks endedJune 27, 2020 being severely impacted by center closures stemming from the COVID-19 pandemic. In addition, we had 41 new center openings which became operational during the period fromJune 27, 2020 toJune 26, 2021 .
Product Sales
Product sales increased$19.7 million , or 287.9%, to$26.5 million during the 13 weeks endedJune 26, 2021 , compared to$6.8 million for the 13 weeks endedJune 26, 2020 . The increase in product sales during the 13 weeks endedJune 26, 2021 was primarily due to the negative impact of center closures resulting from the COVID-19 pandemic on product sales during the 13 weeks endedJune 27, 2020 . In addition, the increase in product sales was also partially attributable to new center openings which became operational during the period fromJune 27, 2020 toJune 26, 2021 . Royalty Fees Royalty fees increased$9.9 million , or 472.6%, to$12.0 million during the 13 weeks endedJune 26, 2021 , compared to$2.1 million for the 13 weeks endedJune 26, 2020 . The increase in royalty fees during the 13 weeks endedJune 26, 2021 was the result of the negative impact of the COVID-19 pandemic on network revenues during the 13 weeks endedJune 27, 2020 . In addition, the increase in royalty fees was also partially attributable to new center openings which became operational during the period fromJune 27, 2020 toJune 26, 2021 .
Marketing Fees
Marketing fees increased$5.4 million , or 441.4%, to$6.6 million during the 13 weeks endedJune 26, 2021 , compared to$1.2 million for the 13 weeks endedJune 27, 2020 . Marketing fees increased primarily due to the negative impact of the COVID-19 pandemic on network revenues during the 13 weeks endedJune 27, 2020 . 27 --------------------------------------------------------------------------------
Other Revenue
Other revenue increased$2.1 million or 318.5%, to$2.7 million during the 13 weeks endedJune 26, 2021 , compared to$0.6 million for the 13 weeks endedJune 27, 2020 . The increase in other revenue during the 13 weeks endedJune 26, 2021 was primarily due to the negative impact of corporate-owned center closures resulting from the COVID-19 pandemic on other revenue during the 13 weeks endedJune 27, 2020 . In addition, we waived technology fees for closed centers in 2020 to provide relief to our franchisees from the adverse impact of the COVID-19 pandemic. Costs and Expenses Cost of Revenue Cost of revenue increased$7.8 million , or 210.5%, to$11.5 million during the 13 weeks endedJune 26, 2021 , compared to$3.7 million for the 13 weeks endedJune 27, 2020 . The increase in cost of revenue was largely the result of higher revenues in the current year period as compared to our revenues for the 13 weeks endedJune 27, 2020 , which were severely impacted by center closures stemming from the COVID-19 pandemic.
Selling, General and Administrative
Selling, general and administrative expenses increased$5.9 million , or 92.6%, to$12.2 million during the 13 weeks endedJune 26, 2021 , compared to$6.3 million for the 13 weeks endedJune 27, 2020 . The increase in selling, general and administrative expenses was primarily due to increased payroll and benefits expense resulting from our reduction and temporary furlough of certain corporate employees in the prior year and increased professional fees in the current year arising from preparations for our initial public offering.
Advertising
Advertising expenses increased
Depreciation and Amortization
Depreciation and amortization increased$0.2 million , or 4.6%, to$5.3 million during the 13 weeks endedJune 26, 2021 , compared to$5.0 million for the 13 weeks endedJune 27, 2020 . The increase in depreciation and amortization expense was primarily driven by an increase in amortization expense for the additional reacquired rights from area representatives completed during fiscal years 2020 and 2021. Interest Expense Interest expense increased$0.2 million , or 3.3%, to$4.6 million during the 13 weeks endedJune 26, 2021 , compared to$4.5 million for the 13 weeks endedJune 27, 2020 . The increase in interest expense was primarily due to the additional$10.0 million borrowed under our revolving credit facility inMay 2020 , which was outstanding during the entire period in the current year.
Comparison of the Twenty-Six Weeks Ended
Revenue
Total revenue increased$40.9 million , or 93.8%, to$84.6 million during the 26 weeks endedJune 26, 2021 , compared to$43.6 million for the 26 weeks endedJune 27, 2020 . The increase in total revenue was largely due to our results for the 26 weeks endedJune 27, 2020 being severely impacted by center closures stemming from the COVID-19 pandemic. In addition, we had 41 new center openings which became operational during the period fromJune 27, 2020 toJune 26, 2021 .
Product Sales
Product sales increased$22.0 million , or 87.2%, to$47.1 million during the 26 weeks endedJune 26, 2021 , compared to$25.2 million for the 26 weeks endedJune 26, 2020 . The increase in product sales during the 26 weeks endedJune 26, 2021 was primarily due to the negative impact of center closures resulting from the COVID-19 pandemic on product sales during the 26 weeks endedJune 27, 2020 . In addition, the increase in product sales was also partially attributable to shipments of a new product line to franchisees in the current year and new center openings which became operational during the period fromJune 27, 2020 toJune 26, 2021 . 28
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Royalty Fees
Royalty fees increased$9.9 million , or 89.8%, to$20.9 million during the 26 weeks endedJune 26, 2021 , compared to$11.0 million for the 26 weeks endedJune 26, 2020 . The increase in royalty fees during the 26 weeks endedJune 26, 2021 was the result of the negative impact of the COVID-19 pandemic on network revenues during the 26 weeks endedJune 27, 2020 . In addition, the increase in royalty fees was also partially attributable to new center openings which became operational during the period fromJune 27, 2020 toJune 26, 2021 .
Marketing Fees
Marketing fees increased$6.8 million , or 141.8%, to$11.6 million during the 26 weeks endedJune 26, 2021 , compared to$4.8 million for the 26 weeks endedJune 27, 2020 . Marketing fees increased primarily due to the negative impact of the COVID-19 pandemic on network revenues during the 26 weeks endedJune 27, 2020 .
Other Revenue
Other revenue increased$2.3 million or 86.4%, to$5.0 million during the 26 weeks endedJune 26, 2021 , compared to$2.7 million for the 26 weeks endedJune 27, 2020 . The increase in other revenue during the 26 weeks endedJune 26, 2021 was primarily due to the negative impact of corporate-owned center closures resulting from the COVID-19 pandemic on other revenue during the 26 weeks endedJune 27, 2020 . In addition, we waived technology fees for closed centers in 2020 to provide relief to our franchisees from the adverse impact of the COVID-19 pandemic. Costs and Expenses Cost of Revenue Cost of revenue increased$9.1 million , or 73.2%, to$21.5 million during the 26 weeks endedJune 26, 2021 , compared to$12.4 million for the 26 weeks endedJune 27, 2020 . The increase in cost of revenue was largely the result of higher revenues in the current year period as compared to our revenues for the 26 weeks endedJune 27, 2020 , which were severely impacted by center closures stemming from the COVID-19 pandemic
Selling, General and Administrative
Selling, general and administrative expenses increased$6.6 million , or 39.2%, to$23.3 million during the 26 weeks endedJune 26, 2021 , compared to$16.7 million for the 26 weeks endedJune 27, 2020 . The increase in selling, general and administrative expenses was primarily due to increased payroll and benefits expense resulting from our reduction and temporary furlough of certain corporate employees in the prior year and increased professional fees and corporate reorganization costs in the current year arising from preparations for our initial public offering. These increases were partially offset by a decrease in commissions resulting from the reacquisition of rights from certain area representatives and a decrease in relocation costs in the first 26 weeks of 2021 compared to the first 26 weeks of 2020.
Advertising
Advertising expenses increased
Depreciation and Amortization
Depreciation and amortization increased$0.5 million , or 4.7%, to$10.4 million during the 26 weeks endedJune 26, 2021 , compared to$9.9 million for the 26 weeks endedJune 27, 2020 . The increase in depreciation and amortization expense was primarily driven by an increase in amortization expense for the additional reacquired rights from area representatives completed during fiscal years 2020 and 2021. Interest expense Interest expense increased$0.5 million , or 5.3%, to$9.2 million during the 26 weeks endedJune 26, 2021 , compared to$8.7 million for the 26 weeks endedJune 27, 2020 . The increase in interest expense was primarily due to the additional$10.0 million borrowed under our revolving credit facility inMay 2020 , which was outstanding during the entire period in the current year. 29 --------------------------------------------------------------------------------
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, 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 (loss) to EBITDA and Adjusted EBITDA is set forth below for the periods indicated:
Thirteen Weeks Ended Twenty-Six Weeks Ended
June 26, June 27, June 26, June 27,
2021 2020 2021 2020
(in thousands)
Net income (loss) $ 7,729 $ (11,372 ) $ 8,831 $ (10,413 )
Interest expense 4,635 4,485 9,171 8,707
Provision for income taxes - - - -
Depreciation 413 400 841 771
Amortization 4,858 4,640 9,568 9,167
EBITDA $ 17,635 $ (1,847 ) $ 28,411 $ 8,232
Exit costs - lease abandonment(1) - - - 159
Corporate headquarter relocation(2) - 63 - 546
Share-based compensation(3) 259 419 557 1,246
IPO-related costs(4) 1,859 100 2,982 100
Other compensation-related costs(5) 43 186 380 350
Adjusted EBITDA $ 19,796 $ (1,079 ) $ 32,330 $ 10,633
(1)
Represents exit costs related to abandoned leases resulting from our corporate
headquarters relocation.
(2)
Represents costs related to employee relocation, severance and moving fees
resulting from our corporate headquarter relocation.
(3)
Represents non-cash equity-based compensation expense.
(4)
Represents legal, accounting and other costs incurred in preparation for initial
public offering.
(5)
Represents costs related to reorganization driven by COVID-19 and buildup of
executive leadership team.
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$35.2 million as ofJune 26, 2021 . 30 -------------------------------------------------------------------------------- InAugust 2021 , concurrent with our initial public offering, we entered into a new credit agreement providing for a new$180.0 million term loan and a$40.0 million revolving credit facility. The proceeds from the new term loan were used together with proceeds from our initial public offering to fully repay and terminate the Senior Secured Credit Facility. See the notes to the condensed consolidated financial statements (Note 13-Subsequent Events) contained elsewhere in this quarterly report on Form 10-Q for more information. 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. We anticipate additional cash obligations as a result of the Tax Receivable Agreements described in the notes to condensed consolidated financial statements included in Item 1 of this quarterly report on Form 10-Q. During the 26 weeks endedJune 26, 2021 there were no material changes in our contractual obligations from those described in the Prospectus. 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.
Senior Secured Credit Facility
Our Senior Secured Credit Facility consists of a$245.0 million term loan and a revolving credit facility. Borrowings under the term loan bear interest at an index rate as defined in the credit agreement plus an applicable margin of 5.5% (6.5% atJune 26, 2021 ), payable quarterly throughDecember 28, 2019 and monthly thereafter. The term loan requires principal payments equal to approximately$2.4 million per fiscal year, payable in quarterly installments with the final scheduled principal payment on the outstanding term loan borrowings due onSeptember 25, 2024 . Beginning in fiscal year 2020, additional principal payments could become due in May of each year, which are based upon a calculation of Excess Cash Flow, as defined by the credit agreement. No such additional principal payments were required inMay 2021 or 2020. InMay 2020 , we amended the Senior Secured Credit Facility to increase the borrowing capacity under the revolving credit facility by$10.0 million , to an aggregate amount of up to$30.0 million . Borrowings under the revolving credit facility bear interest at an index rate defined in the credit agreement plus an applicable margin of 3.5% (4.25% atJune 26, 2021 ), payable monthly. The revolving credit facility was fully drawn as ofJune 26, 2021 and expires onSeptember 25, 2024 . In consideration of the increased capacity on the revolving credit facility, the applicable margin on the term loan increased by 1.0%, to 5.5%. Additionally, beginning with the month endedJune 27, 2020 and for the 12 months thereafter, we are required to maintain$6.0 million of minimum liquidity, as defined by the credit agreement. During such period, the financial covenant requiring us to maintain a maximum net leverage ratio (as described below) is not in effect. The credit agreement governing our Senior Secured Credit Facility requires us to comply with a number of affirmative and negative covenants, including certain restrictions on additional indebtedness, liens against our assets, sales of our assets and other restrictions on payments. The credit agreement also contains a quarterly maintenance covenant that requires us to maintain a net leverage ratio (as defined in the credit agreement) that does not exceed 8.75 to 1.00. As described above and in accordance with the terms of theMay 2020 amendment to the credit agreement, this maintenance covenant is not in effect beginning with the month endedJune 27, 2020 and for the 12 months thereafter. The requirement to be in compliance with the maintenance covenant will resume beginning with the fiscal period beginningJune 27, 2021 . Failure to comply with our covenants would result in an event of default under our Senior Secured Credit Facility unless waived by our Senior Secured Credit Facility lenders. An event of default under our Senior Secured Credit Facility can result in the acceleration of our indebtedness under the facility. As ofJune 26 2021 , the minimum net leverage ratio covenant was not in effect as a result of the amendment to the credit agreement described above. For additional information regarding our long-term debt activity, see the notes to the condensed consolidated financial statements (Note 7-Long-term debt, net) contained elsewhere in this quarterly report on Form 10-Q. 31
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Derivative Instruments and Hedging Activities
InDecember 2018 , we entered an interest rate cap derivative instrument which was designated as a cash flow hedge at inception. Our objective is to mitigate the impact of interest expense fluctuations on our profitability resulting from interest rate changes by capping the LIBOR component of the interest rate at 4.5% on$175.0 million of our long-term debt, as the interest rate cap provides for payments from the counterparty when LIBOR rises above 4.5%. The interest rate cap has a$175.0 million notional amount and is effectiveDecember 31, 2018 , for the monthly periods from and includingJanuary 31, 2019 throughSeptember 25, 2024 . The interest rate cap has a deferred premium; accordingly, the Company will pay a monthly premium for the interest rate cap over the term of the agreement. The annual premium is equal to 0.11486% on the notional amount. Changes in the cash flows of interest rate cap derivatives designated as hedges are expected to be highly effective in offsetting the changes in interest payments on a principal balance equal to the designated derivative's notional amount, attributable to the hedged risk. We recognize as assets or liabilities at fair value the estimated amounts we would receive or pay upon a termination of the interest rate cap prior to the scheduled maturity date. As ofJune 26, 2021 , the fair value of the interest rate cap derivative instrument was estimated to be a liability of$0.3 million , with$0.2 million classified within Other current liabilities and$0.1 million within Other long-term liabilities on the condensed consolidated balance sheet. The fair value is based on information that is model-driven and whose inputs were observable. Tax Receivable Agreement Generally, we are required under the Tax Receivable Agreement, which is described more fully in "Risk Factors-Risks Related to Our Organization and Structure-We will be required to pay the Company's pre-IPO members for certain tax benefits we may claim, and the amounts we may pay could be significant" and "Certain Relationships and Related Party Transactions-Tax Receivable Agreement" in the Prospectus to make payments to the Company's 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 Company's assets resulting from the Corporation's acquisition of EWC Ventures Units in the IPO and future Share Exchanges and Cash Exchanges (ii) our utilization of certain tax attributes of the Blocker Companies (including the Blocker Companies' allocable share of certain existing tax basis of the Company's assets) and (iii) certain other tax benefits related to entering into the Tax Receivable Agreement, including tax benefits attributable to payments under the Tax Receivable Agreement. Assuming no material changes in the relevant tax law and that we earn sufficient taxable income to realize in full the potential tax benefit described above, we estimate that payments under the Tax Receivable Agreement would aggregate to approximately$234.8 million over 18 years from the date of the completion of our IPO, based on the initial public offering price of$17.00 per share of Class A common stock and assuming all future Share Exchanges and Cash Exchanges occurred on the date of our IPO. The actual amounts we will be required to pay may materially differ from these hypothetical amounts, because potential future tax savings that we will be deemed to realize, and the Tax Receivable Agreement payments made by us, will be calculated based in part on the market value of our Class A common stock at the time of each Share Exchange or Cash Exchange and the prevailing applicable federal tax rate (plus the assumed combined state and local tax rate) applicable to us over the life of the Tax Receivable Agreement and will depend on our generating sufficient taxable income to realize the tax benefits that are subject to the Tax Receivable Agreement. Subject to the discussion in the following paragraph below, payments under the Tax Receivable Agreement 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 dueMarch 15, 2022 , but the due date can be extended untilSeptember 15, 2022 . Future payments under the Tax Receivable Agreement in respect of future Share Exchanges and Cash Exchanges would be in addition to these amounts. We currently expect to fund these payments from cash flow from operations generated by our subsidiaries as well as from excess tax distributions that we receive from our subsidiaries. To the extent we are unable to make payments under the Tax Receivable Agreement for any reason (including because our credit agreement restricts the ability of our subsidiaries to make distributions to us), under the terms of the Tax Receivable Agreement 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. 32
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Under the Tax Receivable Agreement, 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 the Company's pre-IPO members in amounts equal to the present value of future payments we are obligated to make under the Tax Receivable Agreement. If the payments under the Tax Receivable Agreement 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 Tax Receivable Agreement for any reason (including because our credit agreement restricts the ability of our subsidiaries to make distributions to us), under the terms of the Tax Receivable 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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