Mister Car Wash, Inc. (NYSE:MCW) Q1 2024 Earnings Call Transcript

Mister Car Wash, Inc. (NYSE:MCW) Q1 2024 Earnings Call Transcript May 1, 2024

Mister Car Wash, Inc. reports earnings inline with expectations. Reported EPS is $0.08 EPS, expectations were $0.08. Mister Car Wash, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon. And welcome to Mister Car Wash’s Conference Call to Discuss Financial Results for the First Quarter ending March 31, 2024. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. Please note that this call is being recorded and a reproduction of this call in whole or in part is not permitted without written authorization from the company. Speaking from management on today’s call are John Lai, Chairman and Chief Executive Officer; and Jed Gold, Chief Financial Officer. After John and Jed have made their formal remarks, we will open the call to questions. During this conference call, references to non-GAAP financial measures will be made.

A complete reconciliation of these measures to the most comparable GAAP measures have been included in the company’s earnings press release issued earlier today and posted to the investor relations section of the company’s website at mistercarwash.com. As a reminder, comments made on today’s call may include forward-looking statements which are subject to significant risks and uncertainties that could cause the company’s actual results to differ materially from management’s current expectations. Please be advised that the statements made today are current only as of this call and are based on the company’s present understanding of the market and industry conditions. While the company may choose to update these statements in the future, they are under no obligation to do so unless required by applicable law or regulations.

Please review the forward-looking statements disclaimer contained in the company’s latest annual 10-K and 10-Q reports, as such factors may be updated from time to time in other filings with the Securities and Exchange Commission. I will now turn the call over to Mr. John Lai. Please go ahead.

John Lai: Good afternoon and thank you for joining our first quarter earnings call. Our overall performance in the first quarter was in line with our expectations and the trends were a continuation of what we saw in the previous quarter. In the first quarter, sales increased 6% to $239 million. Adjusted EBITDA increased 6% to $75 million. Comp store sales increased 1% and we opened six new greenfield stores and ended the quarter with 482 locations. We added 35,000 UWC members and ended the quarter with over 2.1 million members. Our subscription business, which accounted for about 74% of sales in the first quarter, remains incredibly resilient. But this has been offset by a softer retail environment, which has been driven by a combination of increased competition, intentional greenfield growth, cannibalization and a lower-income customer cohort that’s been under more pressure.

The reason why we enjoy industry-leading AUVs is because we offer tremendous value, execute with efficiency and get you in and out fast. Our value proposition begins with delivering a clean, dry, shiny car and the cherry on top is the elevated customer service delivered from our amazing team members. The headline for Mister Car Wash is the ongoing progression and momentum we’re experiencing after the rollout of Titanium and the incredible response that we’re seeing from our customers. Penetration levels are continuing to grow and I’m happy to report that we’re above the 20% level at the end of the first quarter. As promotions are now rolling off, we’re beginning to see a healthy lift to revenue per member and expect that to continue throughout the remainder of the year.

After testing various Titanium price points, we’ve settled in on $39.99 and are in the process of standardizing this across all regions in a deliberate and measured way so that we don’t unnecessarily rattle our customers. With the launch of Titanium, we have taken a step back and looked at our service and price offerings. We know that there is a large and growing market for premium products and our Titanium and Platinum wash packages offer a level of shine and protection that are superior to anything in the market today. As a result, we believe we have some room to migrate our Platinum program to $32.99 from $29.99 in most markets. Raising Platinum pricing to $32.99 not only reinforces the premium nature of our Platinum package, but it simultaneously decreases the gap between the two programs, which will help incent customers to trade up to Titanium.

When we tested the elasticity of $32.99, even after a slight uptick in churn, we found it to be highly accretive. When you factor in our Platinum and Titanium mix, our premium penetration is now north of 60%, with about 5% of our lift coming from base members. Our Unlimited Wash Club program continues to perform nicely, with capture rates at historic highs, relatively flat core churn and wash frequency of existing members remaining consistent. As previously noted, we have elected to prioritize upgrading existing members over focusing on growing our member base, which will result in more modest net member growth this year, but the lifetime value improvements we’re seeing in revenue per member has got us super excited. Zooming out, we still believe the market for subscription plans is underpenetrated and our opportunity to grow our member base is strong.

From a unit growth standpoint, we’re on a good path and a healthy cadence with six new greenfields in Q1, which is a record for any Q1. We remain confident that we can open approximately 40 this year. Our stores are opening with strength and helping us to densify existing markets, and with each new store we open, we continue to create a network effect and offer more options for our members, strengthening our value proposition and extending our competitive moat while simultaneously growing our market share. On the people front, I’m thrilled to announce the appointment of our new Vice President of Marketing, Matt Marakovitz, who fills a critical seat for Mister as we look to advance our efforts across customer acquisition, engagement, loyalty and subscription.

Matt’s background at General Mills, Walgreens and Target brings a wealth of experience and knowledge around digital strategy, customer insights and omni-channel program development. As we look to double and then triple our footprint, we’ll need to double and triple our field leadership team, which will create a number of amazing career opportunities for so many of our talented team members who are hungry for more. We’re proud of the fact that every general manager of each of our stores receives equity in the form of restricted stock units, which strengthens our ownership like mentality and entrepreneurial spirit, while allowing them to participate in the financial success of the company. We continue to change lives for the better and because of that, I’m extremely proud of what we have built and extremely excited about our future ahead.

I’d also like to take this opportunity to give a big high five to all the men and women who are representing us so well and working so hard as we fulfill our mission of becoming the preeminent car wash operator in the world. With that, I’ll now turn the call over to Jed to provide more commentary around our financial results.

Jed Gold: Thank you, John, and good afternoon, everybody. As John indicated our results in the first quarter way in line with expectations and the trends were relatively consistent with what we saw in the previous quarter. Let me touch on a few highlights before we run through the numbers. Our subscription business remains strong and core churn levels remained within our historic range. We are very pleased with the performance of our new Titanium package. Customers traded into Titanium faster than we expected in the first quarter and we are confident in meeting or exceeding our penetration target of 15% going forward. The Titanium promotions that we ran in the first quarter are rolling off in April and May, and we expect to see be largely promotion free by the end of the second quarter.

Similar to prior periods, we continued to see pressure on the retail side of the business and the pressure was slightly more pronounced in stores that are in lower income areas where consumers may be more constrained. Our 2024 greenfield pipeline is solid and we are encouraged by the results. We are experiencing in our ability to open approximately 40 locations during the year. Each of our greenfield locations ramps a little differently depending on the market, but we continue to see solid year two cash-on-cash returns of about 50% and seeing paybacks of under three years. Greenfield development, densifying and expansion into adjoining markets continues to be the highest and best use of our capital. Finally, we tightly managed our expenses during the quarter, which allowed us to lever SG&A and drive strong cash flow and adjusted EBITDA levels.

With that said, let me run you through the first quarter numbers. During the first quarter, net revenues increased 6% and comparable store sales increased 1% compared to last year. UWC sales represented nearly 74% of total wash sales and we added 35,000 net new UWC members in the first quarter. On a year-over-year basis, the number of UWC members increased by 106,000 members or 5%. Adjusted net income and adjusted net income per diluted share, which add back stock-based compensation and certain non-core operating expenses were $27 million and $0.08, respectively, in the quarter. Adjusted EBITDA was $75 million, up 6% from the first quarter of last year. Adjusted EBITDA margin remained flat at 31.4%. On the expense side of the business, we remain focused on finding efficiencies and optimizing investments we are making to support the long-term growth and development of the business.

Total costs and expenses were $197 million in the quarter and included $7 million in stock-based compensation and related taxes and $5 million of one-time professional fees. Excluding these items, total operating expenses as a percentage of revenue was flat at 77.4%. The main drivers were labor and chemicals increased 20 basis points to 28.9%, other store operating expense increased 90 basis points to 40.5% and G&A expense decreased 50 basis points to 8.7%. Commenting on each of these a little further, the increase in labor and chemicals was primarily driven by the increase in stores we operate and higher average hourly wages, which was partially offset by efficiencies and sourcing of our proprietary chemical program. The increase in other store operating expenses was primarily from an increase in rent expense related to our store growth and sell leasebacks.

We entered the first quarter with 47 more car wash leases compared to the same time last year and cash rent expense increased 12% to $26.5 million. The decrease in G&A expense was driven by our increased focus on doing more with less, tightly managing expenses and optimizing the G&A structure of the business. In the first quarter, interest expense increased to $20 million from $18 million last year due to higher interest rates. Moving on to some of the balance sheet and cash flow highlights. At the end of the quarter, cash and cash equivalents were $11 million and outstanding long-term debt was $920 million. Our balance sheet remains healthy and we continue to self-fund our growth and expansion. Late during the first quarter, we completed the refinance of our credit agreement, which consisted of upsizing, amending and extending the maturity of our first-lien term loan and revolving commitment to $925 million due in 2031 and $300 million due in 2029, respectively.

Both amendments removed a 10-basis-point credit adjustment spread. Under the newly refinanced credit agreement and at our current leverage levels, our $925 million term loan will be priced at SOFR+ 300 basis points and our revolving credit facility will be priced at SOFR+ 250 basis points. The transactions extend Mister’s debt maturities and increased liquidity in line with company growth. We do not expect any increase in interest expense as a result of the refinance. We completed one sell-leaseback transaction involving one car wash location in the first quarter for an aggregate consideration of $5 million. We continue to see healthy demand at favorable rates in the sell-leaseback market. In conclusion, we are reiterating the full year guidance ranges previously provided for fiscal 2024, which is included in today’s earnings press release.

We are optimistic about the business’s long-term outlook. We have the best operations and management team in the industry with more collective experience operating car washes than anybody else. The combination of our great brand, our great team, subscription business model and strong unit economics will enable us to deliver growth and shareholder value creation for years to come. With that, Operator, we’re ready to take any questions.

See also

Goldman Sachs’ Top 15 Stock Picks for 2024 and

11 Best Home Appliance Stocks to Invest In.

To continue reading the Q&A session, please click here.