On Thursday, Baird maintained a Neutral rating on European Wax Center (NASDAQ:EWCZ) but lowered the price target to $7.00 from the previous $13.00. The adjustment comes after the company reported a second-quarter adjusted EBITDA that exceeded expectations by 6%, primarily due to lower-than-anticipated SG&A expenses, despite a revenue shortfall.
European Wax Center also reduced its second-half guidance, citing slower comparable store sales and a deceleration in unit growth due to macroeconomic pressures.
The firm expressed optimism about CEO David Berg's ability to improve performance through a heightened focus on the business. However, there is concern about the need for a more significant revision to the 2025 estimates, given the low visibility on a turnaround in comparable store sales, which is believed to be necessary to drive unit growth.
Despite the current valuation of European Wax Center appearing attractive at less than 9 times the next twelve months' EV/EBITDA, Baird suggests that the company needs to bolster confidence in its financial projections. The revised price target reflects a more cautious outlook for the company's financial performance in the near term.
In other recent news, the European Wax Center (EWC) reported a 2.3% increase in system-wide sales, reaching $260.2 million in their second quarter fiscal 2024 earnings call. Despite a challenging macroeconomic environment, the company saw same-store sales grow by 1.6% and a gross margin improvement to 73.2%. However, adjusted EBITDA fell by 2.6% due to higher advertising expenses, leading EWC to revise its financial guidance for 2024.
In response to these developments, Citi downgraded EWC from a Buy to a Neutral rating, adjusting the price target significantly to $5.50 from the previous $16.00.
The company has also announced the reinstatement of former CEO David Berg. EWC plans to expand its successful laser hair removal pilot to additional states and focus on driving new guests, reactivating lapsed guests, and enhancing the guest experience. The company expects to open 27 to 32 net new centers and achieve system-wide sales of $930 million to $950 million.
InvestingPro Insights
InvestingPro data provides a glimpse into the financial health and market sentiment surrounding European Wax Center (NASDAQ:EWCZ). With a market cap of $303.23 million and a recent trading price of $5.06, the company's stock is trading near its 52-week low, which could indicate a potential entry point for investors. The adjusted P/E ratio for the last twelve months as of Q1 2024 stands at 20.03, which, when combined with a PEG ratio of 0.13, suggests that the stock may be undervalued relative to its earnings growth potential.
Furthermore, the company boasts an impressive gross profit margin of 72.33% for the same period, highlighting its ability to maintain profitability despite broader market challenges. Two InvestingPro Tips that stand out for European Wax Center are the aggressive share buyback strategy pursued by management and the high shareholder yield, both of which could be seen as positive signals of confidence in the company's value proposition. Additionally, with 8 analysts having revised their earnings downwards for the upcoming period, investors may want to keep a close eye on future earnings reports for signs of stabilization or improvement. For those interested in a deeper analysis, InvestingPro offers additional tips to help navigate the investment landscape surrounding European Wax Center.
InvestingPro's fair value estimate of $7.21 aligns closely with Baird's revised price target of $7.00, which may provide further validation for cautious optimism. As European Wax Center navigates the challenges ahead, investors would be wise to monitor these metrics and InvestingPro Tips closely.
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