On Friday, Morgan Stanley (NYSE:MS) downgraded European Wax Center (NASDAQ:EWCZ) stock from Equalweight to Underweight, setting a price target of $5.00.
The firm cited several fundamental issues that overshadow the attractiveness of the company's low valuation. European Wax Center's third-quarter results for 2024 revealed that the company's strategies are not yielding the expected turnaround, prompting the downgrade.
The company's rapid expansion, which saw its store base grow by approximately 40% since 2019, has seemingly diluted its value proposition. Morgan Stanley pointed out European Wax Center's inconsistent comparable sales track record, with sales per average center growth declining year-over-year in 2023 and 2024 estimates, compared to an increase in 2019. This trend suggests potential overexpansion.
European Wax Center is expected to close more stores in 2025, which Morgan Stanley agrees is the right move. However, the analyst indicated that additional reinvestment might be necessary in marketing, service levels, and possibly pricing to enhance sales productivity.
Despite these challenges, Morgan Stanley is still modeling a modest improvement in comparable sales and adjusted EBITDA growth for 2025 and 2026.
The firm's analysis reflects a bearish outlook with a downside risk of approximately 85% compared to an upside potential of around 45%. This assessment is based on a constant multiple of approximately 7 times forward-year two enterprise value to EBITDA against an adjusted EBITDA projection of about $77 million for 2026.
The company's solid EBIT margins and healthy free cash flow were acknowledged but are not sufficient to mitigate the concerns raised by the analyst.
In other recent news, European Wax Center (EWC) has been maintaining growth despite closures, as discussed in its Q3 Earnings Call for fiscal 2024. The company reported a slight decrease in revenue to $55.4 million, with same-store sales also experiencing a minor dip.
However, EWC maintains a positive outlook, with system-wide sales remaining steady at $240.2 million and a gross margin improvement to 72.9%.
The company's financial outlook for fiscal 2024 projects system-wide sales between $930 million and $950 million, and adjusted EBITDA of $70 million to $74 million.
EWC plans to open 43 new centers, with 35 already operational, and expects net openings of 17 to 22 after closures. Despite potential closures outpacing unit growth in 2025, the company remains committed to long-term growth and franchisee profitability. EWC is partnering with Dolabra Digital to improve marketing efficiencies and guest acquisition strategies.
It's worth noting that the company has paused the expansion of its laser hair removal pilot and there has been no purchase of corporate units from franchisees.
Further guidance on financial performance and projections for 2025 will be provided in the Q4 earnings call. These are the recent developments in EWC's business strategy and financial performance.
InvestingPro Insights
The recent downgrade by Morgan Stanley aligns with several key metrics and insights from InvestingPro. European Wax Center's stock has indeed taken a significant hit, with InvestingPro data showing a 22.38% decline in the past week and a substantial 55.01% drop over the last year. This steep decline has brought the stock's price to just 38.33% of its 52-week high, reflecting the market's growing concerns about the company's performance.
Despite these challenges, InvestingPro Tips highlight that management has been aggressively buying back shares, which could signal confidence in the company's long-term prospects. Additionally, the stock is trading at a low P/E ratio relative to near-term earnings growth, with a PEG ratio of 0.48, suggesting potential undervaluation.
It's worth noting that while Morgan Stanley's price target is set at $5.00, the InvestingPro Fair Value estimate stands at $9.58, indicating a possible upside. Investors seeking a more comprehensive analysis can access 10 additional InvestingPro Tips for European Wax Center, providing a broader perspective on the company's financial health and market position.
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