Mister Car Wash, Inc. (NYSE:MCW) Q4 2023 Earnings Call Transcript February 21, 2024
Mister Car Wash, Inc. reports earnings inline with expectations. Reported EPS is $0.07 EPS, expectations were $0.07.
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 Fourth Quarter and Fiscal Year ending December 31, 2023. 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 for questions. During the conference 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 and other filings with the Securities and Exchange Commission. I would now like to turn the call over to Mr. John Lai. Please go ahead, sir.
John Lai: Good afternoon and thank you for joining our Q4 earnings call. This past year, we delivered solid results, driven by our focus on continuously improving our services, our physical plants and our teams, which resulted in a better overall experience for our customers. Our obsession around delighting our customers begins with delivering a consistently clean, dry and shiny car with exceptional customer service in a super speedy way, all of which takes a team of highly trained and motivated operators who love what they do. During the fourth quarter, our results were in-line with our expectations. Sales grew 7% to $230 million. Adjusted EBITDA increased 5% to $69.5 million. Comp store sales increased 0.7% and we opened 14 new greenfield stores and ended the year with 476 locations.
Reflecting on the year, it was one of the more challenging years, but it was also a year where we demonstrated our metal by working through some macro forces, such as increased competition, high inflation, high interest rates and an abnormally tight labor market. Despite these pressures, we were able to grow sales by 6%, adjusted EBITDA by 1.5%, same-store sales by 0.3% and we opened a record 35 new greenfield locations and acquired six locations, all while adding 194,000 new UWC members. What we're most excited about is the introduction of Titanium, our new super-premium service, which will act as a nice tailwind to revenues over the next several years as we trade people up to our new premium membership plan. I'm extremely pleased to report that we were able to compress our rollout timeline and convert our entire portfolio ahead of schedule and now have 100% of our stores with Titanium.
We're just now beginning to see the fruits of our labor as introductory promotional offers roll off in select markets. Early stage adoption rates are exceeding our expectations from a percentage of members in the program standpoint. Jed will share more details in a second about what we're seeing. As we think about our Unlimited Wash Club and how that's changed every aspect of our business, it's important to note that for many years our primary focus has been on net member growth and converting retail customers into members. Over the last six months and into 2024, we're going to prioritize trading up existing members into Titanium versus converting retail customers into UWC members. Given our multiple lanes format, we're now positioning our guest services specialist in the membership lane to accomplish this task.
As a result of this shift in focus, we're expecting a period of more modest net member growth offset by the tailwind of accelerated growth in revenue per member. Retail volume has been a headwind for us and appears to be weaker across this sector, driven by a more difficult overall economic environment for consumers and an increase in competitive activity. The good thing is that 2023 was the year when the number of new units coming into the market began to moderate. After years of explosive growth, the market is resetting, which is a good thing, and we believe that things will begin to abate in 2024 and dial down in 2025. While others are pressing pause, we're pushing full steam ahead. The next several years will be a period of opportunity for Mister Car Wash, opportunities for us to advance our position in the market, but do it in a disciplined and opportunistic way.
With a strong balance sheet, access to capital, and a long history of being best-in-class operator, we're in a great position to play offense while others are playing defense. Looking ahead into 2024 and moving at a pace that feels right to us, we plan to open approximately 40 new Express locations and from an M&A standpoint, continue to evaluate good opportunities that help us densify and fortify our leadership position across the country. And finally, we're on a multiyear path to accelerate our leadership development program, which is our pipeline for future store managers. We're very proud of the fact that 90% of our store managers started their careers as hourly employees, and building an organization from the ground up, one leader at a time, has created an amazing team that knows how to process cars efficiently and maximize throughput during peak demand.
When asked about our competitive advantage, I don't even blink when I say it's our operations team and the support infrastructure we have developed that's allowed us to elevate our standards and scale our business to heights no one thought was ever imaginable. In the end, it's all about people, and we're very proud that throughout our journey, we've never lost sight of our guiding principle, which is to take care of our people, who take care of our customers, who in turn will allow us to generate extraordinary shareholder value over the long run. I will now turn the call over to Jed to provide more commentary around our financial results.
Jedidiah Gold: Thank you, John and good afternoon. Overall, we had a solid fourth quarter. From a top line perspective, sales were within our guidance range. Comp trends were strong in the first half of the quarter and moderated as the quarter progressed, primarily on the retail side. From a bottom line perspective, the team exercised strong financial discipline and adjusted EBITDA and adjusted net income came in ahead of our guidance range. We managed expenses well in the quarter and are finding opportunities to operate more efficiently. As John indicated, we completed the rollout of Titanium ahead of schedule and we are now focused on driving trial and adoption across all our locations nationwide. As noted on our previous earnings call, our initial penetration target for UWC was at least 10% of UWC subscription mix within a year of implementation.
We have already surpassed that goal and Titanium penetration levels are running over 15%. With that said, let me run you through the fourth quarter numbers. In the fourth quarter, total net revenue increased 7.4% and comparable store sales increased 0.7% versus last year. UWC sales represented nearly 74% of total wash sales and we added 6000 net members in the fourth quarter. On a year-over-year basis, the number of UWC members increased 10.3%. The performance of our subscription business remained very stable in the quarter. Core churn rates outside of the Titanium promotional offering remained in-line with the historic ranges. On the development side, we opened 14 new greenfield locations in the fourth quarter, which was a quarterly record.
Greenfield returns remain very strong and continue to be the highest and best use of our capital. On the expense side of the business, we remain focused on managing expenses and optimizing the investments we are making to support the long-term growth and development of the business. We are also identifying areas where we can leverage our scale to drive efficiencies and do even more with less. Excluding stock-based compensation and as a percentage of revenue, total operating expenses increased 170 basis points to 81.2% year-over-year. The main drivers were labor and chemicals decreased 53 basis points to 28.9%, other store operating expense increased 175 basis points to 40.6%, G&A expense was flat at 10.1%, and (gain) loss on sale of assets increased 45 basis points to 1.6%.
Breaking this down a little further, the labor and chemicals benefited from better staffing models focused on maximizing throughput and delivering a great customer experience. Our team works with a sense of purpose and it's one of our strengths. This was partially offset by an increase in average hourly wages. Other store operating expenses increased primarily from an increase in rent expense and from the fact that we have 45 more car wash leases compared to the same time last year as a result of the additional sell leasebacks done over the twelve-month period. In the quarter, cash rent expense increased 13% to $26 million. G&A expenses, excluding stock-based compensation expense as a percentage of revenue were flat year-over-year and we are starting to leverage the growth investments made over the past few years.
In the fourth quarter, interest expense increased to $20 million from $14.9 million last year due to higher interest rates and the expiration of our interest rate hedge in October of 2022. Our GAAP reported effective tax rate for the fourth quarter was 26.8% compared with 25.1% for the fourth quarter last year. Adjusted net income and adjusted net income per diluted share which add back stock-based compensation and certain noncore operating expenses were $24 million and $0.07 respectively in the quarter. Fourth quarter adjusted EBITDA was $69.5 million, up 5% from the fourth quarter of last year. Adjusted EBITDA margin was 30.2% versus 30.9% in last year's fourth quarter. Moving on to some balance sheet and cash flow highlights. At the end of the year, cash and cash equivalents were $19 million and outstanding long-term debt was $897 million.
Our balance sheet remains healthy and we continue to self-fund our growth and expansion. We completed five sale-leaseback transactions involving five car wash locations in the fourth quarter for an aggregate consideration of $23.8 million. We continue to see healthy demand at favorable rates in the sale-leaseback market. Lastly, let me make a few comments around guidance and some of the factors that helped shape our initial outlook for 2024. First, we expect to open approximately 40 new greenfields this year. The majority of these will be in existing markets where we have opportunities to densify, fortify and grow our market share. The timing of these openings will be back half weighted with an estimated 30% of the first half and approximately 70% of the second half.
Second, we will continue to promote Titanium across various markets to drive trial and adoption, particularly across our base of approximately 2.1 million Unlimited Wash Club members. Once customers experience the speed and convenience of being a member of our Unlimited Wash Club or the shine and efficacy of Titanium, the majority of them recognize the value and continue with the program beyond the promotional pricing period. We tested this to varying degrees last year and will be re-launching introductory pricing promotions in certain markets this year to help drive trial and adoption even further. This will drive Titanium penetration rates, but will also put some short-term limits around revenue lift and flow through from Titanium this year, particularly in the first half.
Third, last year we grew UWC by just over 10% with 35 new greenfield openings and six acquisitions. This year we are targeting approximately 40 new greenfield openings and focused on driving Titanium conversion and revenue per member. Fourth, we expect G&A growth to slow a little and we should be in a position to leverage certain expenses this year due to various productivity initiatives and an even greater focus on doing more with less. Lastly, we are not anticipating any changes in the macro environment. Many consumers remain challenged and we have not seen a meaningful consolidation across the industry yet, which we think warrants a certain level of cautiousness in building our initial outlook for this year. Full list of our initial outlook ranges for 2024 can be found in the table in today's earnings press release.
In closing, I would like to thank the entire Mister team for their work and dedication. We are a team that cares for one another and our customers. 2023 was another important year in our longstanding history. We came together as a team and delivered strong execution and solid results and it's a testament to the culture and type of people at Mister. With that, we are happy to open the call to questions.
