After the stock market wipeout in 2022, investors are sifting through the wreckage for quality investments trading at discounts from their previous highs. Is European Wax Center (EWCZ -1.61%) one such example? Let's discuss whether the company's efforts to consolidate the fragmented hair-removal industry should earn it a spot in your portfolio.
What is European Wax Center?
Founded in 2004 and hitting public markets in 2021, European Wax Center is a small-cap personal-hygiene company that focuses on hair removal. The company disrupts this relatively mature industry by supplanting the traditional independent salon with its franchise business model. And while it isn't America's only hair-removal chain, it is the largest -- its employees performed more than 20 million waxing services in 2021.
The U.S. hair-removal industry isn't known for its lightning-fast growth. According to management, the opportunity (which includes razors and in-home hair-removal solutions) expanded at a compound annual growth rate (CAGR) of just 3% between 2015 and 2019 (out-of-home waxing services grew by 8%). European Wax Centers' growth strategy will depend on differentiating its service from mom-and-pop waxing salons and more expensive options such as laser hair removal.
How is the business performing?
European Wax Center has several competitive advantages that can help it capture market share from its rivals.
First off, starting at $12 per session, waxing is significantly cheaper than more invasive techniques like laser hair removal, which boasts an average cost of $389, according to the American Society of Plastic Surgeons. European Wax Center differentiates itself from other waxing options through its scale, which leads to brand recognition and possible cost efficiencies.
Image source: Getty Images.
European Wax Center is also investing in proprietary technologies, such as its Comfort Wax, which is designed to reduce the discomfort involved in the hair-removal process. Such products could not only help with customer retention but also assist in branding the company and setting it apart in an industry with low barriers to entry and differentiation.
Third-quarter revenue increased by 12.3% year over year to $55 million as European Wax Center scaled up its business by opening 18 new locations to bring its total to 911 centers. The company is also profitable, with adjusted EBITDA growing by 12.6% to $18.6 billion.
That said, its balance sheet is highly leveraged, with $370.7 million in long-term debt compared to just $41.6 million in cash and equivalents. At $6.8 million, the company's interest expense is a substantial portion of EBITDA.
An eye on the valuation
With a forward price-to-earnings (P/E) multiple of 37, European Wax Center is significantly more expensive than the S&P 500's average of 21. And while the company operates in what looks like a stable industry, its growth rate isn't high enough to justify such a premium.
The company's high debt load is also cause for concern as we move into a higher-interest-rate environment and possible recession. European Wax Center is a hold for now. Investors might want to wait for a lower price before buying the stock.
