Mister Car Wash Inc
NYSE:MCW
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Mister Car Wash Inc
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Good afternoon, and welcome to Mister Car Wash's conference call to discuss financial results for the third quarter of fiscal 2022. [Operator Instructions] Please note that this call is being recorded, and the 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, Chairperson and Chief Executive Officer; and Jed Gold, Chief Financial Officer. After John and Jed have made their formal remarks, we will open the call to questions.
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. These statements be as of today and except as may be required by law, the company does not have any obligation to update or revise such statements if circumstances change. Please review the forward-looking statements disclaimer contained in the company's second quarter 10-Q as such factors may be updated from time to time and its other filings with the SEC.
During the call today, management will also refer to certain non-GAAP financial measures. A reconciliation between the GAAP and non-GAAP financial measures can be found in the company's earnings press release issued earlier today and posted to the Investor Relations section of Mister Car Wash's website at ir.mistercarwash.com.
I will now turn the call over to Mr. John Lai. Please go ahead, sir.
Good afternoon, everyone. I'd like to begin with a quick update on our teams in Florida and the effects of Hurricane Ian. I'm happy to report that everyone is safe and our stores held up nicely. Our leadership team was amazing and went into batten down the hatches mode, securing our stores and making sure everyone had access to food, shelter and medical resources. Team Florida, I'm proud of how you came together and showed how tough you are particularly when you faced a really big one.
Moving on to our third quarter results. Overall performance was in line with expectations. And despite a tougher macro backdrop, our business continues to perform nicely and has proven over many different economic cycles to be strong and resilient. Revenue increased 12% to $218 million, adjusted EBITDA increased 6% to $66 million, and comp store sales increased 2.9%.
We opened 8 new greenfield locations and acquired 3 new car washes which brought our total store count through the end of Q3 to 420 locations. Our UWC program added 19,000 net new members and I'm happy to report that member growth and retention rates remained consistent with historical trends.
UWC has proven to be very resilient, challenging those that have expressed some concerns around a potential pullback in consumer discretionary spend. Motorists take great pride in their automobile and a clean car is not only a reflection on themselves, but it helps them feel good. To say that it's changed the way people care for their vehicles would be an understatement. And with membership starting at $19.99 per month, it offers consumers a great value.
Today, with nearly 70% of our business being subscription, we are deeply grateful to have built such a massive member base that provides a beautifully predictable and recurring revenue stream.
Moving on to the cost side of things. Similar to the past few quarters, we continue to see inflationary cost pressures across many areas of our business, which we partially offset with continued improvements in productivity, a tighter focus on our expenses and reprioritizing longer-term projects. As a seasoned management team, while we're building the business for the long term, we're also cognizant of the short-term realities of this current environment and are prudently doing what it takes right now as things get a little harder in a shifting market.
We took a modest retail price increase back in August, which is now with very little resistance. And to remind everyone, as a philosophical belief, we've always been more interested in maximizing volume versus maximizing ticket average, which is reflected in our AUVs.
But we're also not afraid to make a move when we feel it's the right time. And this recent move got us to par in each market and was long overdue, given the pressures we've been feeling on the cost side. All of our stores are executing wonderfully and putting out a good car at speed, but unemployment is still low, and the labor market is still stubbornly tight, making competition for the best talent even more challenging.
To continue to attract and retain the best, we've had to incrementally increase starting hourly rates with average nonmanagerial wages up 6% year-over-year. These wage increases are being offset by improvements to our staffing model, which we call Express 360, where everyone is cross-trained, crews are tightly knit and the team culture of all for one and one for all has resulted in improvements in cars per labor hour, reductions in labor as a percentage of revenue and reductions in our labor dollar per car.
Speaking of our teams, I'd like to highlight the continued growth of our management and training program through our OLP and Mr. Learn certified trainer network. We've spent considerable energy training the trainer and now have, in addition to our close coverage regional manager team, an additional network of trainers to help accelerate our leadership pipeline. We have a long history of promoting from within, and over 80% of our senior ops team started out as an hourly team member on the front line.
If you were to ask others what makes Mister Car Wash who they are, they probably answer they're good operators, particularly at scale. This hasn't happened by accident. We have a culture of operational excellence and it's something we're deeply proud of.
Investing in human capital and our high-potential future leaders is one of the smartest things the company can do. We've built a laser-focused system, developed a national infrastructure and are now turning out the next-gen leaders that can be plugged into new stores or markets and hit the ground running in a high throughput environment.
Before I turn it over to Jed, I'd like to take a moment to thank our teams that delivered these results. We are the largest carwash operator in the United States with a footprint that stretches from coast to coast from California to Pennsylvania and north and south from Minnesota to Texas. We may be geographically spread out, but we act and move as one, delivering a consistent customer experience no matter which mystery you visit. It's taken us 25 years to build the best team in the industry, and I couldn't be proud of everyone who's contributed to our success.
Jed, I'll now turn it over to you.
Thank you, John, and good afternoon, everyone.
Overall, we had a good third quarter, and our results were in line with our expectations. Similar to trends in the previous quarter, demand remained relatively consistent, and we continue to partially offset inflationary pressures with productivity improvements as well as retail price, the retail price increase that we took in mid-August.
Our greenfield stores continue to perform very well and are exceeding our expectations. We are experiencing first year average unit volumes in the area of $1.4 million and four-wall EBITDA margins in the range of 30% to 35%. These stores continue to ramp nicely beyond year 1. For comparison, our average mature express average unit volumes are $2.1 million with four-wall EBITDA margins of 45% to 50%. The significant opportunity to expand our store footprint, coupled with these solid returns and our world-class operations capability have emboldened us to continue investing behind our greenfield expansion capabilities.
In addition to new build expansion, we see opportunity to invest in a number of strategic initiatives while also taking steps to manage our near-term expenses and cost structure.
During late September and early October, we experienced a disruption to our business in Florida as a result of Hurricane Ian. We have 72 locations in Florida and all but 3 stores temporarily closed for an average of 3.5 days. Benefit to the majority of revenue being subscription-based is the reoccurring revenue helps insulate us from the financial impact of weather-related events such as the hurricane.
Having said that, the hurricane has resulted in some construction delays in Florida that we are working through.
During the third quarter, comparable store sales increased 2.9% and net revenue increased 12% to $218 million. Comparable store sales growth was positive in all 3 months of the quarter, with growth in September outpacing the growth in July and August. The EWC subscription side of our business remains steady and represented 69% of total wash sales in the third quarter. In line with our expectations, we added 19,000 net UWC members during the quarter and 204,000 net UWC members during the first 9 months of the year. On a year-over-year basis, the number of UWC members increased by 19%.
Similar to last quarter, we did not see a meaningful change from our historical churn rates, and we did not see club members trading down from the premium package to the base package in any meaningful way. During the quarter, we also experienced some stabilization on the retail side of our business with third quarter retail sales in line with our expectations and second quarter levels. Similar to my commentary on comparable store sales, retail volumes were better in September than July and August.
Turning to expenses. These were also in line with our expectations but continue to be impacted by inflationary pressure. Excluding stock-based compensation and as a percentage of revenue, labor and chemicals decreased 90 basis points to 30.3%. Other store operating expenses increased 190 basis points to 31.2% and G&A expense increased 70 basis points to 8.1%.
Labor and chemicals continue to benefit from some labor efficiencies. Other store operating expenses increased primarily from a combination of higher utility rates and increased maintenance service costs. And the increase in G&A is primarily from public company costs and growth-related investments. As we have previously discussed, the biggest expense increases impacting adjusted EBITDA are coming from growth initiatives as we continue to build out internal capability and vertically integrate in areas where it makes the most sense.
However, we have started to take a more balanced approach to managing our near-term cost structure with long-term growth objectives and are tightening our belts where we can around labor, hiring, systems and becoming even more efficient at aligning our investments behind our strategic priorities.
During the third quarter, interest expense increased to $10.1 million from $5.7 million last year due to the higher interest rates on the unhedged portion of our debt and additional debt added as part of our Clean Streak acquisition. As a reminder, our favorable interest rate hedge expired in mid-October, and we are now paying LIBOR plus 300 basis points on our outstanding debt.
Our GAAP reported effective tax rate for the third quarter was 26.9% compared with 19% for the third quarter of 2021. The increase was primarily due to the exercise of employee stock options and the favorable tax treatment in the year ago period. The benefit to our GAAP tax rate related to the exercise of stock awards exercise was negligible in the third quarter compared with $2.6 million in the third 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 $30 million and $0.09, respectively, in the quarter. Third quarter adjusted EBITDA was $66.1 million, up 5.9% from the third quarter last year.
Moving on to some balance sheet and cash flow highlights. At quarter end, cash and cash equivalents were approximately $75 million and outstanding long-term debt was $895 million. For the first 9 months of the year, net cash provided by operating activities was $185 million and gross capital expenditures were $132 million.
Lastly, let me make a few comments around guidance. Given the in-line trends of the third quarter and modest acceleration in trends across the months of September and October, we remain comfortable with our previously provided outlook for the year and are simply tightening the ranges.
Our updated full year 2022 guidance now calls for comparable store sales growth of 4% to 5%; net revenues of $865 million to $880 million; adjusted net income of $123 million to $128 million and adjusted EBITDA of $273 million to $278 million. As a reminder, when we forecast interest expense, we use the LIBOR forward curve in the market, and this makes for a bit of a moving target. With the shifts in the forward curve over the past 90 days, our 2022 interest expense assumption is now $43 million instead of the $42 million that we mentioned last quarter.
Interest expense continues to be a meaningful headwind to the model as the Fed increases interest rates. We continue to look at strategies to reduce interest expense going forward, but do not expect any material benefits in the short term.
With Hurricane Ian causing some construction delays in the state of Florida and some of the supply chain delays earlier in the year, there are a few greenfield openings that could get pushed into early 2023 and our guidance for new greenfield locations is now a minimum of 25 this year. With the number of stores slated to open right at the end of the year, we do not expect the modest to land timing to have a material impact on revenue or expenses in the fourth quarter of the full year.
As stated earlier, we will remain opportunistic when it comes to sale leasebacks. Our model now assumes total proceeds of between $90 million to $95 million in 2022 versus the $140 million to $150 million previously forecasted. While we could end up doing more should the terms be favorable, we currently do not plan to do more deals unless terms are consistent with our recent closings.
Our capital expenditure outlook for the full year 2022 is now $200 million to $240 million versus a previous range of $235 million to $285 million. This is largely a function of conservatism built into the original guide, along with some CapEx projects that we have chosen to combine with next year's work around the new service offering. Given the magnitude of the work related to the new service rollout, it is simply more efficient to defer certain projects and complete these next year instead of this year.
In closing, I would like to add my thanks and appreciation to all our hard-working team members and associates who are executing the business every day and helping us fulfill our mission of being America's premier car wash. With that, I'll turn it over to the operator to begin the Q&A session. Operator?
[Operator Instructions] Our first question is from Elizabeth Suzuki of Bank of America. .
So I'm just curious what you're seeing in the market currently in terms of acquisition multiples and whether they've gotten more attractive since the beginning of the year? I mean, you added the 3 stores this quarter. Just curious if anything more chunky is becoming available at a more reasonable price.
Yes. Liz, this is John. Great question. So we have seen multiples recede a bit here in recent times. I think that's a combination of a couple of factors. One, private equity firms. Typically, we'll lean in on their first platform acquisition to gain entry into the space, and then we see rationality kick in on their second and third and fourth acquisitions after that. Obviously, borrowing costs are going up, which is going to have a little bit of an impact on the economics of a deal.
But yes, we have seen actually a number of broken deals here in the most recent period, which we actually view as healthy because things were getting a little too frothy. So multiples have come back down, still not where we want them to be. And throughout this entire process, as we've shared with you in the past, we're going to remain very disciplined, very selective in our approach to M&A and really look at things through a very strategic lens. We have never been in this thing to just get big and scale up from a sheer number standpoint. It's more about the quality of the asset and how that fits within our overall portfolio.
Great. And then just one quick one on Hurricane Ian and whether -- or how much do you think that impacted total sales in the quarter just given the number of stores you have in the market? And just in general, when there are weather events like that, is it correct to assume that those sales just get lost because people wait another week to get their cars washed?
No, I think, Liz, one of the great things about this model is that with a subscription element, it's just really the retail sales that are impacted during a weather event such as this. So we estimate the impact to be about $0.5 million in lost revenue over the 3.5 days that we were closed. But once again, this is where the beauty of the model helps insulate us from these short-term economic downturns or regional downturns and then some of these weather patterns that come through.
The next question is from Simeon Siegel of BMO Capital Markets.
Can you let us know or any help on what you're expecting for new UWC members in Q4 into next year? And then can you speak to retail trends, whether you're -- if there's any other than Florida, any regional or maybe income discrepancy as you might be seeing?
Yes, I'll kick it off and Jed, you can chime in here. When we look at our historical growth rate quarter-over-quarter, typically, Q1 and Q2 is when we see the bulk of our registration sign-ups. So we have modest expectations for Q4 as we did in Q3. And we're really gearing up towards having a strong first half of next year. That said, we expect to grow as we have in each of the quarters that we've been in this program.
From a retail standpoint, again, we characterize retail stabilizing in Q3. We're feeling optimistic that the worst is behind us and that as retail gets healthier, that will -- from a pipeline standpoint, lead to more [indiscernible] for us to be able to continue to grow our membership program.
Yes. Simeon, the one thing I would add there as you look at the sequential trend of those retail volumes during the quarter, right, and seeing the slight improvement quarter -- month over month during the quarter, to John's point, gives us some optimism, but we're staying on soft ground here, knowing that there's a lot of uncertainty with the macro backdrop. And then as you look at Q4, it does tend to be a higher beta quarter for us, and it tends to be -- there's just with the weather and the number of retail customers that come through, you tend to see a little bit more volatility in Q4, relatively more volatility during Q4.
The next question is from Michael Lasser of UBS.
Can you give us a sense for how much the like-for-like price increase contributed to the overall same-store sales growth in the quarter? And I believe one of the reasons why you look to raise prices, was it provided a bit more cushion to be promotional when you needed to? Have you already begun to be more promotional? And have you seen others in the marketplace increase their promotional intensity as well?
Michael, this is John. I'll kick it off, and then I'll turn it over to Jed to talk specifically about what the price increase meant from a contribution standpoint. But let me just kind of kick it off by saying we generally don't like to talk publicly about our pricing strategy for obvious reasons. But as we noted, the most recent price move got us to par in almost all of the markets that we're in, and it was met with very little resistance.
So as Jed reported, we didn't see any material trading down to any lower-priced packages, which is always a good sign. And from a just big picture standpoint, we do believe that we still have some pricing power, but we don't think now is the right time for us to make any moves. And if we were, we probably won't be sharing that with you guys on this call anyway. The second part of your question, what was the...
On promotional intensity
Promotional intensity. Yes, yes. So we are in the early stages of testing various promotional campaigns right now through multiple channels, omnichannel approach, both digitally and through some direct. And we're collecting the data and assessing the promotional effectiveness of those campaigns. And we're not at a point right now to say whether or not they're having a desired effect and moving the needle.
I think it's important to note that we've been I guess, promotionally averse as a company. We're definitely not into discounting. We're definitely not positioned as the price player in the industry. And so as a result, when we see others getting more aggressive with promotions, sometimes that could be a signal that things are not always as healthy as they need to be.
That said, there's nothing that's off the table for us. We have been growing beautifully through what is that old school word of mouth, people telling their friends and family and our advertising budget has been virtually nil up until recently, but that doesn't suggest that we shouldn't experiment and try new strategies to acquire new customers, trade them up to more profitable packages, get them into our program.
And we are seeing some very clever strategies around accelerating membership through different initial introductory offers. And again, we're going to be experimenting with those as well. So the jury is still out, Michael. Hopefully, we'll have more to report in our subsequent calls with you guys. But for now, we're very much in test mode.
And then, Michael, to the first part of your question about the price increase, just as a reminder, when we take pricing, little bit different than what you would see in a typical retailer where you take pricing, you'll see a little bit of an impact to that retail volume. But because of the delta between the retail price and UWC, it helps increase that value proposition and actually helps that a little bit trade up into UWC. Net-net, we believe that the August price increase have performed as expected, and it's benefiting the third quarter comp by about 300 basis points.
Okay. Jed, if I could ask one other question. It looks like your interest expense next year will go up by about $15 million, $20 million depending on where interest rates shake out. So A, is that correct? And B, given where your debt position stands, the rise in interest rates, does that have any influence over the timing or your willingness to do additional bolt-on deals right now?
So I'll take the first part, right? So depending on where -- the way that we forecast our interest expense is we take the forward curve for the next year, and then we're paying LIBOR plus 300. So your math is about correct with where -- when we look at the quarterly run rate on our interest expense right now without the hedge, it's about $16 million to $19 million per quarter, incremental interest expense.
And then to the second piece to your question around the cost of debt and impacting potential acquisitions, it does. I mean there's a -- we believe the free cash flow model -- the free cash flow generated from the model is more than adequate to fund the growth and the greenfield expansion. And that's, as we've talked about previously, that's the priority at the highest and best use of capital and where we want to allocate it.
But as different M&A opportunities come available, we'll look at them, and we'll see whether the economics work or not. It's really going to be on a case-by-case basis. It's a tough one to answer and say definitively, it really depends on the multiple that we're going to pay and ultimately what the borrowing cost is going to be at the time that we would make the acquisition.
The next question is from Peter Keith of Piper Sandler.
I wanted to just kick off with more of a shorter-term question around the improvement in retail car wash with September. Is that something that's continued here with October? And then there's been some theories that maybe lower gas prices would have helped retail car wash. It didn't seem to really kick in over the summer, but maybe it's kicking in now. Do you have any thoughts on what's driving this recent improvement?
Yes. Well, we can't speak to the last month's performance, obviously, but we are optimistic that retail will improve. We had hypothesized that there was -- relationship between gas prices and retail demand. But to your point, we didn't see that play out as gas prices dropped specifically in the July, August time frame. So so much for our hypothesis, right? But you would think that with more money in people's pockets, they would then have the ability to do more stuff.
So yes, I mean the other, I think, metric that we think is important is miles driven, and there is a direct link between miles driven and how dirty vehicle will get. And that number has remained fairly consistent, which is a good sign that even though gas prices fluctuate either up or down, people still are getting from point A to point B and their cars are still getting dirty and they'll still need to get cleaned. And the beauty of our business is that people love a clean car.
And the one thing I would add there is, I mean, there still is, right, there's still a lot of uncertainty out there in the broader macroeconomic environment. But this is really where UWC helps insulate us from a lot of these macro pressures. And that subscription element really helps differentiate us from other retailers and other companies that you may be following.
Okay. Helpful. And then maybe to pivot to a longer-term question. Just on the greenfield unit growth opportunity. I think you've said partial acquisition, but a lot from greenfield, you thought you'd get to 1,000 units over time. I'm hearing just out there that a lot of operators have pivoted to greenfield growth because of the acquisition multiples, hearing as many as 850 to 900 new greenfield stores this year industry-wide. So is that a number that you would agree with? And does that change the outlook or the pace of trying to get to 1,000 stores over the coming years? .
Yes. No, I think that number is a pretty good industry guesstimate right now. It's hard for us all to get really accurate data, but that number feels right. But when you just zoom out and look at the size of this U.S. car park and what we estimate to be total number of [indiscernible] car washes in the U.S., we still believe that the market is underserved and that there is strong demand that needs to be met.
So we think that there's a lot of runway for growth with a lot of white space out there. There are certain markets like Phoenix, like Lubbock, Texas that have become very saturated and highly competitive. And so there are pockets of the country that have gotten really, really intense. But when we look at our geographic footprint, we believe that we can double our footprint in our own backyard while continuing to look for new markets to move into either adjacencies or brand new geographic areas. So we're still very, very bullish on our upside unit level growth opportunity. And our vision has not changed whatsoever.
[Operator Instructions] The next question is from Simeon Gutman of Morgan Stanley.
This is Michael Kessler on for Simeon. I wanted to start with the comments you made in the prepared remarks about -- it sounds like a little bit of a total shift on labor efficiencies and some of the cost savings in the near term. And so I just wanted to ask a little bit further on that, what you guys are doing, if there's anything different or new or how you're responding to the demand backdrop?
Yes. I think it's less about the demand backdrop, and it's more about just kind of how we're reassessing what we're focused on. So coming out of the pandemic, we took on a lot of initiatives, added a bunch of folks at a very accelerated rate. But since this economy has shifted somewhat, we're reevaluating and reprioritizing and identifying what are the most important initiatives that we need to focus on.
So for us, innovating from an R&D perspective, the de novo greenfield development will always be priorities, leadership pipeline development that those are super important to us. But in terms of buckling down and becoming even more efficient, there are always opportunities in any organization, particularly organizations that are growing as fast as we have to get leaner and get tougher.
And in one particular area, where we have, as we've shared previously, an elevated staffing model at store level, inside that staffing model, there was an opportunity for us to tighten that up a bit without impacting the customer experience, quality and/or speed and/or customer service. So we're able to improve our total labor hours used per store. But then also look at some longer-term projects that had longer-term payoffs and choose to perhaps put those on the back burner.
And to give you some examples, if we were looking to reimage a store that has a few years on its odometer. Maybe we hold off on that temporarily while we focus on the items that I just mentioned. So for us, we think that we can be in investment mode and cost reduction mode simultaneously. It's not an either or. And so we're going to continue to invest for the long term to continue to grow this thing.
But at the same time, we're going to be prudent, and we're going to be smart. And this management team, we got a bunch of tough cookies here that have managed through a bunch of different economic cycles. And for us, this is just another cycle that we're managing through. And the fact that our margins are so strong already, it gives us room to get even tighter.
Great. And maybe one follow-up on just on Clean Streak, how that's going, the integration, the rebannering. I don't know if it was at all delayed because of the hurricane, the integration process, but an update there would be great.
Yes. Listen, we're on track. This one was going to -- we reported from day 1, this is going to take us a little bit longer than the average integration. And as we've shared in the past, the post acquisition integration, definitely not for the faint of heart, but what we do really well is we buy good businesses and make them better. And to do that, we implement a number of initiatives starting with improving the physical plant, the processes and programs and transitioning all those in an elegant way.
And then the hardest part, but arguably the most important part is getting the team all synced up, getting the culture right and making sure that they're highly engaged and happy and that takes time. So we are taking this on a kind of a rolling regional basis. We are a little over 1/3 of the way through the transition. We are in the midst of the second 1/3 of that, and we hope to by, I think, the end of Q1 of next year, be completely finished, it's taken us a little bit longer than what we had anticipated, which is just pushing back that project a little bit. But again, we're not going to cut corners or short change anything.
The next question is from Chris O'Cull of Stifel.
This is Patrick on for Chris. Jed, it seems like your guidance implies 4Q comps in the flat to up 4% range, which is pretty wide. So is that right, first of all? And if it is, is it safe to assume that you're running within that range currently? And then what are the key factors that would lead you to land in the low or the high end of that range?
Yes. So your math is right, Patrick, flat to 4% in Q4. In order to get to the midpoint of the guide, it would imply a Q4 comp of 2%. As you look at the quarter, we did 2.9%. But as we -- you look at particularly November and December, historically, there is a higher beta on performance in those months, plus still a lot of uncertainty in the macro backdrop. So we still believe it's prudent to model the weight -- the wider range of outcomes that you're seeing there.
Okay. Got it. That's helpful. And then I mean how many sites do you guys currently have under construction now? And then can you give us a sense of how many leases you've got signed for next year as well?
Give me a second here as I look.
Yes, Patrick, and I'll jump as he see [indiscernible] And so we typically don't disclose how many projects we actually have under construction today. But I mean, as we had said in the prepared remarks and in the revised guidance, we're trending to a minimum of 25 this year. You can look at the historic pace of newbuilds that -- and the rate that we've been adding them. We've also got the long-term growth algorithm of high single-digit unit growth to use as guardrails as you're thinking ahead to future years and quarters.
Am I allowed to say, Jed, that we have a fat pipeline? Can I use that word? But listen, under construction is one piece, being signed under contract, currently being negotiated on, being researched. The definition of the pipeline, there's a lot of liberties that people take to define their pipeline. But you were very precise in saying how many are under contract. So we can circle back and provide more detail if we're allowed to. But needless to say, we're really, really optimistic about our greenfield development initiative, and we hope to get to this cadence where by this time next year, we're on pace to open up a store week.
The next question is from Justin Kleber of Baird.
Jed, I wanted to first ask just a follow-up on your comments on sale leasebacks. You mentioned less favorable terms, given the backup in cap rates. As we think about next year and the bonus depreciation starting to step down, do you think these transactions get harder to execute? And does that, I guess, in any way, impact your thoughts on store growth or CapEx going forward?
Yes. Just one clarification. It's -- so cap rates, we have not seen, at least in the recent closing, less favorable cap rates on the deals that we've actually closed on. As we look ahead, we're going to be very opportunistic and disciplined in making sure that we keep those cap rates relatively consistent with those recent closings. But listen, I mean, these are -- our leases are structured to be 20-year leases.
It's a -- so signing into something just for today to try and generate some capital, it doesn't make a whole lot of sense. We're looking at this over the long term. We believe with the cash that's generated from operations that we can fund our expected growth and we're not going to have to pull back. But we're going to continue to market these deals and see what we can get using a combination of both the national REIT partners that we have great long-standing relationships with, along with the 1031 market that we're very active in as well.
Got it. Okay. That's helpful. And then just a follow-up to the promotional question Michael asked. I noticed you were offering a membership discount with at least one new build in Florida. Obviously, many of your peers use that approach. So was that -- I just kind of want to confirm, John, was that one of these tactics you were referencing that you're testing? And then I guess, just any initial feedback on what sign-ups look like when you implement that maybe compared to a legacy new build.
Yes. No, you're exactly right, and I compliment you on your on-the-ground field due diligence, actually getting out of the office and going and kicking the tires. So you get extra credit on the analyst ratings from our perspective. But no, what you saw was exactly one of the strategies that we're testing and evaluating right now. And again, there could be lots of different iterations. We want to make sure that we're -- from a control standpoint and then an A/B testing standpoint, that we're not just discounting just to discount and that the discounts that -- or the promotions that we do elect to deploy actually move the needle at a rate where it makes sense.
So we -- early on in our life cycle, this industry was riddled with a whole lot of inefficient promotional tactics. And as a result, I call it scar tissue, but we have learned a lot along the way. And when you pause and say, what is your objective? Is it to drive customer acquisition or trade people up to more profitable packages or convert them into membership?
You need to be very mindful of not diluting existing customer revenue or trading people down unnecessarily because there's a whole lot of folks that you apply a discount to that don't necessarily need it. I just got to ask, did you -- when you visited the store in Florida, did you actually sign up for our Unlimited Wash Club program.
Actually just came across in a press release, so I can't take credit for [indiscernible].
You know what, the gold star gets taken away. I thought you actually got out of the office. Nice desktop diligence then. How is that?
All right, guys. Well, thanks for all the color. Appreciate it.
The next question is from David Bellinger of MKM Partners.
Good to be back on the call here. So the first one, on the more recent stabilization in retail volumes, given the notion that member growth is very dependent on the retail single-wash customers as a lead generator for conversion. What does lower retail over the past few quarters mean for the business into 2023? And could we see some kind of air pocket and member growth as we get into next year? Are you expecting that? And is there any way to potentially size that impact?
David, John here. So I think bottom line is we've done such a good job of converting so many customers into our membership program. To your point, we now need to spend more energy on driving retail, which has bubbled up to the top of our priority list. So the recent campaigns that we have described in select markets and we're being somewhat vague intentionally, we're really intended to drive retail traffic ultimately then lead to a boost in membership growth.
The term air pocket, that's a clever term on your part. I hope that we don't experience that air pocket that we continue to see a healthy and steady growth quarter-over-quarter. But yes, as I mentioned earlier, we're still in the early stages of assessing which promotional strategy is going to truly move the needle. And we hope to continue our upward trajectory in terms of member growth.
And David, just one other point. You heard in my prepared remarks that we added 204,000 members during the first 3 quarters of the year, up 19%. So this is where focus on member retention and making sure that we keep those rates within the historic range. But history and what we've seen here recently, despite the macro headwinds as the team has done a good job of being able to retain those members. And so we're optimistic as to what that means going forward.
Got it. And then maybe just a follow-up for you, Jed. What's implied in the updated guidance seems to be a very similar year-on-year decline in EBITDA margins for Q4? I think that will be your fifth quarter in a row of EBITDA margin contraction and fully understanding that lapping these higher volumes plays into that. But should we continue to expect margin pressures to linger over the next few quarters? Are you seeing any evidence that some of these cost pressures are starting to level off or begin to abate a bit?
Yes. So as we've said, the inflationary pressures, we're continuing to experience those in the business. We're continuing to see that pressure, and we don't expect that to subside anytime soon other than through some of the various cost saving initiatives that we're taking to help offset that. We obviously have the August price increase that's helping offset some of that as well. As we think about it in the longer term and zooming out just a little bit, we still believe that the fundamentals of the business are strong. And that 30% to 35% margins that you've heard us talk about before is achievable.
Yes. Jed, I would just add, so we have amazingly strong four-wall EBITDA margins and the health of what we're generating in store level is tremendous. We've built this and invested in this infrastructure to accelerate our growth. And Dave, we certainly could -- if we chose to pull back on the throttle and boost the margin profile, but at what expense? And so prior to going public, margin expansion was never a priority for us. It grew naturally just by focusing on top line growth.
We want to kind of remain in top line growth, to be quite honest with you. So for us, we think it's more important to drive member growth, to drive unit sales and retail traffic. We have, as we've mentioned, kind of shifted our focus a little bit to get smarter on the cost side to, if anything, stabilize the margins and then hopefully improve them. But it's never been a priority to maximize our margins at least today. There will be some point in our curve when start to mature and perhaps slow down, then we can certainly deliver margin expansion, but it's not the top priority for us right now.
This concludes our question-and-answer session. I would like to turn the conference back over to John Lai for closing remarks.
Yes. I just want to thank everyone for joining us on the call today. We look forward to with all the knock on woods, a solid fourth quarter and circling back with you guys and sharing the results once the quarter concludes. Thank you very much.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.