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