Q2 2023 Public Car Wash Earnings Review: Zooming Out, Wider Lens Required

By: Paul Sigfusson, Head of Capital Solutions

Recently both Driven Brands (NYSE: DRVN) and Mister Car Wash (NYSE: MCW) reported Q2 2023 earnings through the June 30th reporting period. Their volatile stock reactions tell the story of investors buying and selling the shares, but the real story lives underneath and is worth double-clicking into.

Effects of Softening Retail Traffic, Competition, Weather

Driven Brands, through their company-operated car wash segment, Take 5 Car Wash, has experienced choppy waters through the first half of the year, alluding in their first-quarter earnings to the costs and time required to rebrand and integrate a 40+ brand of acquisitions under Take 5 Car Wash. Alongside their Take 5 Quick Lube brand, their objective is to streamline and cross-sell customers between their quick lube and car wash locations. The leadership team believes this can provide a meaningful lift to revenue as evidenced in test markets (10%+), but will no doubt take time to implement and see a meaningful return on the brand investment.

Over the near term, the leadership team, led by Jonathan Fitzpatrick, President and CEO of Driven Brands, mentioned a few key themes that are weighing on their first-half growth and performance: (1) softening non-member retail traffic continues to be a headwind, (2) the pace of unit expansion over the past few years across the U.S. car wash market (more than 1,500 new locations opened over the past two years) are beginning to encroach and impact their older locations, and (3) weather has been less than ideal during the first half of the year, particularly on peak throughput days, Thursday, Friday, and Saturday, where they saw increased rain during those periods. The combination of these factors has resulted in a negative 9% comparable same-store-sales comp in Q1 (adjusted for FX) and a negative 4% comparable same-store sales in Q2, across their franchise and company-operated car wash segment.

While some of these factors may be idiosyncratic to Driven Brands, there are many car wash owners that are experiencing similar trends. Driven Brands leadership continues to believe in the long-term prospects of the car wash market and remains confident in the economic resiliency, strong profitability of the unit performance, return on capital characteristics (cash-on-cash returns and cash flow generation), and a desirable customer value proposition.

MCW Narrows Guidance to Low End of Range but Maintains Stable Growth

Mister Car Wash presented a different story through its Q2 earnings period. The headline among Wall Street investors is the Company lowered its guidance for the full-year 2023 to the low end of their prior range (flat EBITDA growth y/y), which is creating pressure on the stock price, but they have continued to deliver stable growth across unit expansion (both greenfield and M&A) and comparable same-store-sales growth which has been supported by strong membership growth (over 4,500+ per location).

Mister Car Wash reported double-digit growth in their membership during the quarter, approaching 2.1 million members across their locations and accounting for 70% of their revenue, high-single-digit unit growth over the past 12 months, but continues to experience weaker retail (non-member) traffic to their locations, down ~8% in the quarter. Importantly, they did not lean on weather as a headwind which was a big part of the Q1 narrative. They operate a diverse portfolio of sites across geographies, and the weather impact was more benign during Q2, which contributed to comparable same-store-sales growth of +0.3% (+2.7% two-year comparable same-store-sales growth during the quarter).

A Broader Perspective

Both Driven Brands and Mister Car Wash noted slowing retail trends as a key factor in their revisions to management’s guidance for the year. However, this dynamic is not unique to the car wash space. In comparison to the broader retail universe, the average retail company reporting negative guidance (specialty and broadline) revised estimates for full-year 2023 sales downward by approximately (-3%), while Mister and Driven Brands revised their full-year sales guidance by (-2.4%) and (-2.1%), respectively. It is worth noting that both companies still project solid year-over-year top-line growth, despite a tapering in expectations.

Our Take: Disciplined Behavior Rewards Long-Term Operators

The persistent themes worrying long-term investors in the sector are increasing competition across geographies, slow to declining retail traffic, sale-leaseback and rent burden, and cost/access to capital. However, the drivers of long-term secular growth for the car wash industry as a whole remain well intact. Notably, consumers continue to evolve from “do-it-yourself” to “do-it-for-me” while the industry overall is still highly fragmented. In fact, we continue to see strong results from operators across the country, all of which subscribe to a common philosophy: operations matter and expand only in underserved markets with premier real estate. While we agree with these short-term headwinds, this should result in a return to more disciplined behavior in the sector, which we believe will reward long-term focused operators. At Amplify, we continue to see some of the trends that both Driven Brands and Mister Car Wash are referencing, but the platforms that are on their front foot with access to capital are continuing to lean into M&A activity and focus on the quality of their operations through investments in technology and human capital.

Amplify Advises Cruizers on Its Sale to Mister Car Wash

We’re excited to announce that we acted as the exclusive financial advisor to Cruizers Express Car Wash, a five-location chain based in Los Angeles, on its sale to Mister Car Wash. As John Lai, Chairman, CEO, and President of Mister Car Wash, shared during his Q2 earnings call, this is a great platform acquisition for them and will serve as a strategic beachhead to enter a highly desirable market. California is one of their more productive states, and this acquisition will allow further expansion through greenfield and additional M&A opportunities in the market with a lot of upside.

We look forward to a continuing dialogue with many owners and operators in the car wash market. Please don’t hesitate to reach out to our team with any questions.

Amplify Capital Advisors
[email protected]
480-581-1000

 

By the Numbers

 

Take 5 Car Wash (Company-Operated Segment) – By the Numbers

Jet Brite Car Wash

With decades of hands-on experience as operators, when it came time to sell our car wash business who we sold to was important to Sam and me. Chris [Jenks] and the team at Amplify listened to us throughout the entire process. They found the right buyer in ZIPS who would be a good steward of the brand and helped find the best path forward for us where we can continue pursuing our passion for manufacturing high-quality car wash equipment.  

Jet Brite Car Wash  
Dave Delesandro  | Founder

Quick N’ Clean

My relationship with Commercial Plus over the past 20 years has been a very professional and trustworthy relationship. The feel of trust is very important in this business, and Jeff Pavone and his staff have exhibited a level of trust that makes me continue to feel that they have my best interest front of mind. I deal with many brokers across the nation, and my best experiences and results have been achieved with Commercial Plus representation.

Quick N’ Clean
Richard Karle | Owner

Zips

It’s been a great experience working with Amplify Car Wash Advisors to bring these sites into the ZIPS portfolio. We look forward to serving Dallas area customers with an enhanced car wash experience unique to ZIPS, with the added benefit of our extensive network of stores. This year we have continued our aggressive growth track with the goal to truly shine in our efforts to be the best express car wash provider in the industry and it’s acquisitions like this that help us reach our goals.

Zips
Gene Dinkens | CEO

ModWash

It was truly a pleasure to work with the Amplify team on our most recent acquisition of three additional operating locations in our home state of Tennessee. Their team provided great support and ensured a timely and seamless closing process, and we are excited for the additional growth opportunities this relationship will produce in our near future. We know this is the first of many transactions we will successfully complete with the Amplify team as we grow from our current operating store count of 23 to well over 200 locations across 14 states in the next two years.

ModWash
Brian Thornton | COO

Busy Bee Car Wash

For years I’ve talked to a lot of brokers with the same goal; sell your car wash chain as quickly as possible. But I chose to work with Amplify because they were interested and invested in the emotional side of selling my business and truly value long-term relationships. They weren’t forcing me to take a deal just to take a deal. They listened to my concerns and goals then educated me on all my options. And that’s how I decided on the right partner for my chain specifically. I went to bed at night after I signed the papers knowing I got the best deal possible versus just having any deal put in front of me that is only about money.

Busy Bee Car Wash
Jim Mulholland | Owner

Q Car Wash

We really appreciate Jeff and his entire team at Amplify. Their expertise and deep industry knowledge helped us navigate our options and best showcase our strengths to maximize our value. Caliber is a good fit for Q Car Wash as they look to expand in North Texas.

Q Car Wash
Viran Nana | COO

Cobblestone Auto Spa

I have known both Jeff and Bill for over thirty years combined, and respect them both as experts in our professional car washing industry. Their unique and individual strengths bring very strong talent and advice to operators, sellers, and buyers with sharp knowledge, client’s best interest in mind, and an actual personal touch. They hold the expertise and performance track record to hold a very high level of respect within this rapidly-changing car wash industry.

Cobblestone Auto Spa
Tuck Bettin | CEO

Oasis Car Wash

Turning over a business you started from one shovel of dirt 25 years ago and grew to several locations is a difficult and even uncomfortable process. So, when it came time for Larry and me to sell, we chose Amplify Car Wash Advisors to guide us through the process because of their strong reputation and thought leadership in the industry. Their team was professional and did a great job walking us through each step.

Oasis Car Wash
Dallas Hawkins | Partner

Busy Bee Car Wash

Selling our business after 52 years is big deal and certainly not a decision I took lightly, turning over our family legacy was an emotional process and I appreciated that the team at Amplify respected that. They helped me understand my options and found the best deal for me.

Busy Bee Car Wash
Jim Mulholland | Owner

Ducky’s Express

I have been a multi-site developer and operator in the car wash industry for over 30 years. Four years ago, a partner’s health concern forced me to sell a portion of my portfolio, and during that process, I was introduced to Jeff Pavone of Commercial Plus. I was immediately impressed with Jeff’s knowledge of my industry and his volume of successful deal closings. In a very short period of time, Jeff found the right buyer at a very fair price, and the transaction closed shortly thereafter. I was looking for a team with honesty, integrity, and a proven track record of success, and I found all of that in Jeff.

Ducky’s Express
Richard Miller

Trademark Car Wash

These are some of the most exciting times for car wash owners. As we grew 350% in revenue in just one year, we recognized the time to partner up with a top-tier team that has mastered growth in retail and specifically the automotive industry. Amplify Car Wash Advisors had helped us acquire, raise capital, and was the perfect partner to help us reach this next chapter of the Trademark story.

Trademark Car Wash
Andrew Goldberger