DRVN - Mister Car Wash: Stepping Towards The Sideline For The Short-Term

Summary

• MCW posted strong Q4 results with adj. EBITDA of $66.2 million, beating expectations, and comparable store sales rising by 4%, while UWC membership increased by 14% over the previous year.
• Softer retail demand remains a challenge for the car wash industry, including MCW, with lower-income markets being slightly negative during Q4.
• MCW's guidance for FY23 is risky if retail demand is weaker than anticipated.

Summary

Mister Car Wash, Inc. ( MCW ) posted better-than-anticipated top-line and margin results for the fourth quarter, which were strong and ahead of expectations due to greater sales and margin. Members of the Unlimited Wash Club [UWC] grew 14% over last year and now represents 71% of all washes. I still think that MCW's long-term development potential is appealing, and I anticipate that the firm will gain market share in the highly fragmented car wash sector. Yet, the short- to medium-term economic slowdown is a challenge for MCW. First off, retail demand is still under pressure, with some lower-income cities reporting negative comparables this quarter. Second, despite MCW's commitment to increasing retail traffic through better marketing, the lower retail traffic is anticipated to have a negative impact on UWC membership growth in the near future. Given the mixed outlook for FY23, which includes an EBITDA guide that is 6.5% below consensus and a still tense macroeconomic environment for the car wash industry, I recommend to size down any existing position to a more comfortable risk level.

Results

MCW reported adj. EBITDA for 4Q22 of $66.2 million, exceeding the average estimate of $60.4 million. Comparable store sales rose 4% year over year, while MCW's adj. EBITDA margin of 30.9% beat expectations of 28.2%. UWC membership at the end of the quarter was 1.88 million, increased by 13.8% over last year. The company also added 13 new greenfield locations and 3 locations (in California) in the fourth quarter, bringing the total number of locations to 436.

Retail demand

Softer retail demand continues to be a challenge for the car wash sector. As MCW's lower-income (household income $40k) markets were slightly negative during 4Q, the macroenvironment appears to be the primary driver of the weaker retail demand. Management also stated that the weaker demand did not appear to be influenced by weather or competition. Driven Brands ( DRVN ), a competitor of MCW, also noted comparable difficulties when announcing its fourth quarter results. More importantly, DRVN anticipates that retail demand will continue to be a challenge at least through 1H23, and any further weakness in the retail sector is likely to have an impact on MCW's financial performance as well. This is a very complex macro environment, and I believe it will contribute to near-term headwinds for both the business and the share price.

UWC memberships

The number of UWC members increased to 1.88 million, up 14% over the previous year, and they accounted for 71% of all washes, compared to 67% last year. Retail frequency levels are still under pressure, but it is clear that MCW has transformed into a subscription-heavy business, and customer conversion to UWC is driving a significant advantage. Although management is taking action by concentrating on implementing more targeted, effective marketing to boost retail demand and, as a result, UWC memberships, I anticipate that UWC growth will remain subdued in the foreseeable future as retail demand is anticipated to remain under pressure.

Guidance

MCW provided guidance for FY23, including net revenue of $925 million to 960 million, comparable store sales of flat to 3.0%, adj. EBITDA of $277 million to $297 million, and adj. EPS of $0.30 to $0.35. I want to draw attention to the fact that comparable sales growth in the first half of the year is expected to be lower than in the second, with trends strengthening in the second half of the year to the higher end of the range. In my opinion, this could pose a danger to 1H23's bottom line if retail demand is weaker than anticipated and given the difficult comparison, and a threat to 2H23's if there is no rebound.

Conclusion

MCW is the market's largest operator (by number of sites) and provides a full range of services to assist all facets of vehicle repair. In my opinion, MCW competitive positioning in the sizable, expanding, and highly fragmented US car wash sector will likely be further bolstered by MCW's strong brand, growing store network, and innovative membership program. However, I will wait for a further pullback for an opportunity, since a continuing retail slump and a weaker-than-anticipated outlook might continue to hurt performance in the near-term.

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