Regis Corp (RGS) 2003 Q1 法說會逐字稿

Please stand by. Your conference will begin momentarily. Please stand by. Your conference will begin momentarily.

Good morning. My name is Tom and I will be your conference facilitator. At this time I would like to welcome to the Regis Corporation first quarter fiscal year 2003 earnings conference call. All lines have been placed on mute to prevent any background noise. If anyone has not received a copy of this mornings press release please call Regis Corporation at 957 947 7798 and a copy will be faxed to you immediately.

Before management begins their formal remarks I would like to remind you that to the extent the company statements or comments this morning represent forward looking statements.

I refer you to the risk factors and other cautionary factors in today's news release as well as the company's SCC filing.

In addition this call is being recorded on behalf of Regis Corporation and is copyrighted material. It cannot be recorded or rebroadcast without the company's express permission.

And your participation implies to our taping. To access the replay ... you may do so by dialing 800 28 01 to code 265721. With us this morning are Paul Finkelstein, President and Chief Executive Officer and Randy Pearce, Chief Financial Officer and Executive Vice President.

After management has completed its review of the quarter we will open the call for questions. If you'd like to ask a question during this time please press 14 on you push button telephone.

If you wish to withdraw your question please press one followed by three.

I'd now like to turn the call over to Paul Finkelstein for his comments. Paul you may begin.

Thank you and good morning everyone and thank you for joining us.

Given the current economic environment we were quite pleased with our first quarter results. Revenues grew 14 percent to almost $400 million. System wide sales was $694 million an increase of 35 percent. sales grew one percent for the quarter.

Our September same store sales growth of 3.4 percent demonstrates the underlying strength of our business.

We are the quint essential business and our store fall on the first quarter thanks to our sales as a direct result of reduced for traffic especially in the regional malls.

Coupled with outstanding retail product promotions last year in July and August, which we're not able to be replicated this year.

Gross margins improve 90 basis points to 45.3 percent. EPS exceeded expectations growing to 44 cents a share an increase of 22 percent.

Operating cash flow increased to $35 million an increase of 22 percent. Our stock continues to perform well relative to the market.

We have effectively met our acquisition target for this fiscal year by acquiring 287 salons representing 77 million in annual revenue and approximately 5 - 6 cents of annual earnings accretions. This accretion is already facted into our earnings estimate.

We continue to meet our gross targets of new salon instruction and new franchise openings. It's been quite some times since I've given you an update on . As most of you already know about two years ago we decided to open a new mall based on the feelings of market.

At that time we understood that Regis salons was in the mall environment and constraints on growth.

We also desired to ravage the strength of our very talented Regis division supervisory team. We currently have 45 salons open and plan to construct an additional 10 stores in fiscal 2003.

The salons are operating at satisfactory levels of profit. Most importantly there has been no significant cannibalization of another Regis concepts in the malls the have .

Thus the Regis division has numerous opportunities to grow its business both inside the mall via as well as outside the mall of concepts such as the Regis brand and Jean Louis David. As I have referenced earlier this has been a very difficult economic environment in which one operates, however we feel there has been no change in our basic financial model. We do not see any significant extension of customer visitation patterns, nor is there any evidence of consumers switching to lower priced retail hair and beauty related products.

Once again the major reason for our low same store sales growth, although it still shows an increase, is a reduction of foot traffic especially in the regional malls. However, malls continue to be very good profit makers for us. We will continue to add salons in the mall environment, however, at a much slower pace than our target of expansion outside of malls.

We believe there has been a systemic change in the mall environment. The department stores are not doing what they should be doing, that is getting small tenants increased foot traffic, quite to the contrary, traffic is down, yet our common area maintenance costs are up.

We hope that both factors will change namely that department stores will do better in the quarters in the years to come and that mall developers will understand in order to keep small tenants healthy, costs will someway have to be capped, however we are not counting on this to happen, thus you will see the bulk of our expansion was acquisition and new salon construction come outside the malls where real estate costs can be better controlled.

On the international front the UK continues to perform extremely well and we are focusing on cost Tec synergies relating to our and John Louis David acquisitions.

These synergies should be in place no later than the March quarter plus the major focus of fiscal 2003 on the European Continent is to streamline our operation. For fiscal 2004 the main focus will be on franchise growth.

I would like to now discuss expectations for the second quarter. We do expect revenue growth of 14 percent to over $410 million and same stores sales growth of approximately two percent. Historically this has been a very difficult quarter to forecast in that we have the shortest possible Christmas selling season this year contrasted with a very long shopping season last year.

We feel that we have conservatively projected and are comfortable with EPS estimates of 46 cents an increase of 18 percent, which is the current consensus. We continue to be very comfortable with fiscal 2003 objectives. We expect system low sales of nearly three billion dollars an increase of 30 percent and total revenue growth of between 12 and 14 percent.

In stores sales growth should exceed two percent and we expect EPS to grow to between $1.82 and $1.85 or 14 or 16 percent increase.

Align acquisitions and capital expenditures are planned at the present time to be between 140 and $155 million, although if something very good comes along, we'll jump at the opportunity since our debt to CAPP ration is quite low by historical standards.

We continue to be solidly investment grade and we have significant access to capital at inexpensive rates. We expect the fiscal year ends salon of approximately 9,500 an increase of nearly 1,000 locations, of course all of these assumptions are based on no additional significant economic downturn, despite the current retail environment we remain very bullish about our business and our ability to achieve our fiscal 2003 growth objectives.

One brief comment before passing the baton onto Randy, and that is to share with you a message that your management is here for the benefit of our shareholders, not the shareholders money is here for the benefit of management. There are no skeletons in our closet and I am very thankful for the governance and guidance that our board of directors have given us.

As Randy has pointed out times in past discussions. This is basically a cash business and our accounting is quite simple to understand. Our banks understand this and to them we are credit. Randy I would like to continue an .

That's fine. Thanks Paul. And good morning everyone. We're very pleased today to report record performance both in terms of first quarter revenues as well as earnings. Our revenues increase just over 14 percent during the quarter and our earnings of 44 cents per share were up 22 percent from the 36 cents per share we reported in the same period a year ago. Our first quarter of 44 cents per share exceeded our expectations as well as the consensus street estimate by a penny per share.

The tough economy continues to impact our business however we were able to post record results despite a difficult economic environment which has been very tough on most retailers. As you know we like to emphasize the fact that this is exactly our point of distinction. We're not like most our retailers. We're a service retailer that's in a replenishment type business. Our customers replenish their haircuts, their hair color and their hair care hair products on a regular basis. So even in difficult times such as these Regis will be impacted but certainly not to the same extent as a typical retailer as demonstrated by our long history of same stores sales growth.

Let me know - jump in and I'll give you a bit more detail behind our first quarter results and I'll start first by discussing revenues. Our consolidated revenues increased 14.2 percent in the first quarter of fiscal 2003 to a record $399,223,000. Each of our operating divisions enjoyed overall sales increases during the quarter. In addition our franchised revenues grew to $26 million in the quarter an increase of 67 percent due to our recent acquisitions of the two franchise companies. You'll find a table in our press release that breaks out our first quarter revenues for each salon division. Service sales were up 12.6 percent and our higher margin product sales grew nearly 10 percent.

In addition our product sales mix for the quarter represented 29.5 percent of total company owned sales compared to 30.1 percent in the same period last year. The slight decline in our product sales mix was essentially due to the number of strip center salons we have acquired over the last year. As you know strip center salons typically have a lower level of product sales and generally have a product sales mix in the range of 12 to 15 percent which is lower than our overall corporate average. When you add in sales from our franchise salon our system wide sales in the first quarter increased 35 percent to $693,984,000. We expect to report system wide sales of nearly $3 billion for our entire 2003 fiscal year.

Regis is by far the salon industry leader yet we only have a two- percent worldwide market share and a four- percent domestic share, which means we have plenty of opportunity for future growth. As we reported in our press release in October 7th same store sales for our domestic company owned salon came in at exactly one percent in the first quarter which included growth service comps of 70 basis points and growth and retail product comps of 1.7 percent. As we've previously stated in our monthly same store sales press releases. Our first quarter comps of one percent was a bit low compared to what we had planned primarily due to the strength of last years product promotions in July and August.

As Paul stated we were pleased to see our same store sales bounce back in September to 3.4 percent. I will now talk about our first quarter gross margins. I think you're going to see that although our seems to our sales growth was below plan for the quarter the impact on our earnings was more than offset by improvement in our gross margin.

Our first quarter overall combined gross margin came in at 45.3 percent of total company wholesales which happened to be 90 basis points better than the same period a year ago.

As I'll now address both the service and the product portion of our business contributed to the increase in our combined gross margin rates. Let's first talk about service margins.

This year during our first quarter our service margin rate improved to 43.9 percent or 70 basis points better than the same period a year ago. We had expected our service margins to improve but by only 20 basis points or so due to a mixed play. In other words this budget improvement was due to the fact that our fastest growing salon concepts would continue to be the ones with our highest service margins.

Well our first quarter service margins did improve but by 70 basis points rather then 20. This incremental improvement was largely due to lower pay roll cost primarily in our Regis salon division.

Looking ahead we expect our service margins for all of our 2003 fiscal year to be slightly better than the 43.4 percent rate we posted in fiscal 2002 better then perhaps 20 basis points or so.

Let me now discuss our retail product margins. As you may recall last quarter we mentioned to you that we expected our product margins to continue to improve this fiscal year for around 48 percent due to improved purchasing power.

To put this into prospective we estimate Regis has a 10 percent share of the entire professional product market here in the United States. This year we will likely sell nearly $460 million product in our corporate salons alone. Plus we sell products to our franchisees in addition to that.

As a result the pricing on our product purchases is better than ever before and as we expected our product margins did improve.

During the first quarter our retail product margins grew to 48.6 percent compared to a rate of 47 percent in the first quarter a year ago. The 48.6 percent rate was a bit better than we initially budgeted. Largely due to the fact that we paid out significantly less in bonus commissions during the quarter as a result of our lower retail product .

At this point in time we believe our product margins for the remainder of our current fiscal year should be at least in the low 48 percent range. Results from our semi annual fiscal inventory count will provide us a much better indication as to our annual product margin rate and we will provide you an update on this next quarter.

I'll now switch gears and discuss rent expense. Our consolidated rent expense in the first quarter of our current year came in at 14.4 percent of company owned revenue, which was up 30 basis points over the same period a year ago.

We had budgeted that our rent rate would likely increase in the quarter due to several factors. The first related to our recent acquisition of Jean Louis David. The JLD chain has very few company owned salons but the ones they do have are located primarily in the New York City area and pay higher base minimum rents.

The second factor related to a slight increase in commonary and maintenance costs that we were budgeting for primarily in regional malls. We include commonary and maintenance costs in our rent expense category.

As we discussed with you in the past landlords are experiencing higher insurance, higher utilities and higher maintenance costs which they are passing on to their tenants.

Smaller mall tenants such as Regis are frequently forced to absorb a much higher share of these costs.

Our third factor that impacted our first quarter ramp rate was lower than expected comps which had the effect of increasing certain fixed cost categories as a percentage of sales such as . As we stated during our previous conference call we continue to expect our ramp expanse for all of our current 2003 fiscal year should be at or perhaps just slightly higher than the 14.3 percent rate we reported all of last fiscal year. Let me now address the direct salon expense category, which includes costs directly impaired by the salon such as salon advertising, insurance, telephone, utilities and janitorial costs.

The direct salon expense category came in on plan at 9.5 percent of company owned revenue and that was up 20 basis points from the first quarter rate a year ago. Once again we had expected this type of increase primarily due to increase in workers compensation costs in our salons. We've talked with you about this before and we've also addressed with you the aggressive safety and return to work programs we implemented last year which we believe that over time will cost escalation. Looking ahead to the rest of our current 2003 fiscal year we're budgeting that the direct salon expense category should be about 30 basis points higher than the nine percent rate we reported for all of last year.

This increase primarily relates to increased workers compensation costs in the current year. I'm now addressed the line item titled franchised direct cost. As we discussed with you last quarter you will no longer find an expense line item called other in our operating expense category rather we've now labeled this franchise direct cost. This new line item includes cost of product that we sell to our franchises as well as direct cost we incur here at our home office and in other countries to support our franchising activities.

These expenses in our first quarter before any allocation of indirect corporate overhead costs represented 53.3 percent of franchised revenues compared to 40.7 percent in the first quarter last year. The acquisitions we've made during fiscal 2002 of the two franchise companies have caused this expense category to increase as a percentage of franchise revenues over the prior year. As all direct costs incurred by our French franchise companies to support franchising activities are now included.

Growth in the sale of retail product to our franchises here in the United States has also contributed to the quarter over quarter increase in this percentage. Looking forward we're budgeting that our franchise direct cost should be in the range of about 54 percent which is comparable to the rate that we reported in the first quarter of our current year.

I'll now address our corporate overhead expense which is labeled on the as corporate and franchise support costs as we discussed with you last quarter this line item is what we used to call . All direct costs we incurred to support our franchise activities have been removed from this line item and have been reclassified in the expense line we just talked about called franchise direct cost. Therefore all of the remaining expenses within this corporate and franchise support cost category relate to costs associated with our field supervision, our salon training and promotions, our corporate office and our two distribution centers.

This expense category for the first quarter of our current quarter represented exactly 10 percent of total revenues down slightly from the 10.1 percent we reported in the same period a year ago. We had expected our current year first quarter rate to bellowed than last year as our prior year results included higher costs associated with closing our Minneapolis distribution center. In addition our first quarter rate of 10 percent have been a bit lower yet had our safe store sales net plan in the quarter.

Looking ahead we continue to expect that our corporate and franchise support costs for the entire 2003 fiscal year should be lower than the 9.6 percent rate we reported last year in fiscal 2002, lower perhaps by 20 basis points or so.

As we've discussed before this decrease in rate primarily relates to the fact that our fiscal 2002 results last year included six months of duplicative costs in operating three distribution centers prior to the time we closed our Minneapolis facility.

Let me now switch to our two depreciation and amortization expense categories and quite frankly there's not a lot to talk about here as both categories came in essentially on planned for the quarter and as a percentage of sales first quarter rates were identical for the same period a year ago.

During the first quarter of our current year the salon portion of this expense was 3.4 percent of company own sales, identical to the rate we reported last year in the first quarter. In addition the corporate portion of our D&A represented 70 basis points of first quarter sales which was also identical to the first quarter rate last year.

The combined effect of all of our revenue and expense items that I've discussed caused our fourth low rate before corporate overheads to improve 40 basis points to exactly 18 percent of first quarter company owned sales. This rate reflects the health and profitability of our companies salon operations and quite frankly in this retail environment we're very pleased with our salon performance.

After factoring in head corporate overhead our overall operating income increased in the first quarter to over $36 million or 9.1 percent of sales, this was up 50 basis points from the 8.6 percent rate we recorded in the same period a year ago.

I've now dropped down to interest expense, which came in on plan at $5.1 million or 1.3 percent up first quarter sales. That was an improvement of 10 basis points on the first quarter last year.

Our total debt at September 30 also came in generally where we expected it to be - standing at $311 million, which was up $12 million on our prior June 30 fiscal year end. This increase in debt was primarily due to our first quarter acquisition activity. Our debt to capitalization ratio continues to remain solidly investment grade standing at exactly 40 percent at the end of September, which was a slight improvement from our June 30 rate of 40.2 percent.

We continue to feel that our internal cash flow and our available debt capacity should be sufficient to cover our salon expansion costs as well as our scheduled debt retirements and dividend payments.

We continue to expect that our EBITDA this fiscal year will increase to approximately $220 million and our after tax cash flow should grow to about $148 million. We expect to spend about $75 million of our cash flow on salon and corporate capital expenditures, and as you can appreciate acquisitions are always a bit harder to predict due to the timing of when opportunities present themselves to us.

However this year we're budgeting to spend another 50 to $65 million or so of cash on acquisitions. Based on these budgeted assumptions we do not expect to see a material change in our overall debt levels, however our debt to capitalization ratio should continue to improve as the fiscal year progresses due to expected growth in our equity.

And just a few more items. Our first quarter consolidated effected income tax rate came in at 37.5 percent which was slightly better than the rate we initially budgeted, due to the fact that we saddled some prior year income tax audits with the IRS during the quarter. Our fiscal 2003 results will include full year performance from the two French franchise businesses that we acquired last year.

As a result our current year consolidated tax rate should improve over last year due to the benefit of reduced international taxes. We are budgeting that our consolidated effective tax rate for the remaining three-quarters of our 2003 fiscal year should be in the neighborhood of 38.3 percent.

As the next item I have the net income we reported today for our first quarter increased to a record $19,717,000 or 44 cents a share. This 44 cents a share was eight cents or 22 percent higher than the 36 cents we reported in the first quarter last year.

And as we stated before the 44 cents exceeded our initial plan for the quarter as well as the consensus sweet estimate by a penny a share.

And let me make a few comments regarding earnings for our entire 2003 fiscal year. A few days ago on October 16th we issued a press release announcing several recent acquisitions that we expect will immediately be accretive to our current year earnings.

In addition our first quarter earnings that we're reporting today exceeded expectations by a penny a share.

As a result of these factors we have increased our earnings guidance for fiscal 2003 to a range of a dollar 82 to a dollar 85 a share which represents an increase of 14 - 16 percent from the dollar 59 per share we reported through all of last fiscal year.

This growth rate is very much consistent with our long-term strategy of growing our earnings double digit. As the year goes on there may be additional up side to this range of earnings due to the accretion from any additional acquisitions we may do were from increased product margins, which we will validate in our upcoming fiscal inventory counts.

Obviously any potential up side to our future earnings assumes that our lack luster economy doesn't deteriorate any further.

Let me now provide you with some information regarding our salon counts. At the end of first fiscal quarter at the end of September we had a total of 9,138 salons which was a net increase of 454 units over the number of salons we had at the end of our previous June 30th fiscal year.

In today's press release you'll find a table that breaks out our salon counts for each salon division. For our entire 2003 fiscal year we are planning to build 435 new company owned salons from scratch and we're on plan to open around 300 new Supercuts, Cost Cutters and International franchise units in addition our salon base continues to grow through our salon real estate acquisition strategy.

So that's that. With that Paul and I would love to answer any questions you may have. So if you can step in and provide some instructions as to how people can ask their questions please.

Gentlemen but first I'd like to apologize there was an error in the phone number I was given from to give you people for the press release. If you'd like a copy of the press release please call 952 947 7798.

The question and answer session will begin at this time. If you have a question please press 14 on your push button phone at this time and if you'll like to withdraw your question please press 13.

Your questions will be taken in the order that they are received. Please stand by for your first question gentlemen.

Your first question comes from . by your question.

Thanks congratulations on a great quarter on a difficult time. I wanted to talk about the organic salon growth - two questions first is if you have any idea what you're planning for next fiscal year and second if we could talk a little bit about the Regis division . I know there's been a couple of new initiatives whether it's Jean Louis David or starting to develop the Regis concept itself off the mall, can you just give us what your current thinking is as to the timing of an acceleration of lost mall growth for that division and how many salons you're expecting this year and next year.

Well I'll give it a shot, with respect for your first question all model as you know is fairly consistent throughout the years, organic growth should be anywhere between seven and 10 percent. In good years same store sales should be three or four percent and when the economy is more difficult two to three percent and new salon constructions will probably be the same five or six percent as it has been in prior years.

With respect to the Regis division growth outside the malls, we're currently looking for real estate. We've found some locations for the Regis brand we have not yet signed any leases. We have agreed to certain locations in the New York area so did Jean Louis David.

We won't see much of this in fiscal 2003, we're just getting our feet wet, we'll see a lot more in fiscal 2004.

OK for the Regis brand are you looking at Lifestyle centers or what kind of real estate are you looking versus the other strips that you're in.

Yeah we are looking at Lifestyle centers and we're obviously looking at certain locations where malls just don't exist but population has increased, especially a foreign population and certain shopping environments we think are very appealing.

Then with Jean Louis David that you said that you were looking at some locations, are those in Manhattan, are you ready to branch out of Manhattan and can you quantify how many you think you'll add next year.

We're looking at a couple at three right now in Long Island for instance which is commuting distance from Manhattan and you know the name has plenty of ground recognition in those markets.

Right right OK great thanks.

You're welcome.

Your next question comes from . Please state your affiliation followed by your question.

good morning and good quarter. Randy you talked about the margin gains you saw the expansion there a lot of it driven by mix but also you made the comment about 50 business points of leverage did appear on the Regis division. I wonder if you could just expand on that a little and what drove that and potentially that might be of benefit down the road.

Well sure the let me just step back a little bit obviously we live and die with payrolls we're surface retailer over 50 percent of every dollar we bring in goes back out in terms of payroll and related benefits so all of our operating folks are constantly focusing on this. We did see though that in probably beginning in the first part of the current calendar year that in our Regis salon division payrolls were tightened even stronger. Regis salons have always managed payrolls exceptionally well but especially in this difficult economic environment our Chief Operating Officer I think in all of her operating folks continued to focus on managing payrolls even better than ever before and we started to realize some of that benefit. There could be - you know I would generally say that you know we started to see a bit of a trend since the first of the calendar year, we were certainly reluctant to budget or expect that that's going to continue in the future. Only time will tell. It did continue in this quarter. It could be continuing in the second quarter, our December quarter as well.

Although we're reluctant at this point to expect it or expect that that will translate into incremental earnings for us, only from the standpoint that I think as Paul mentioned, this is a very - always a challenging quarter for all retailers, especially in light of the shortened Christmas holiday season.

So in terms of modeling going forward, we could see a bit of margin improvement on the service side in our second quarter, we're not expecting that necessarily in our models. And we would not expect to see that in the third and fourth quarter as we anniversary it.

OK. Good.

And then Paul, in your comments you talked about in, you know, in terms of the U.K. business focusing a lot on cost synergy, streamlining those businesses, integration, that sort of thing. And I'm wondering if we'll see that borne out in lower franchise direct costs, is that the line item? We'll see that coming down? Or do you think that's actually going to be pretty flat around that 54 percent level even in the next year?

No you'll see it coming down, especially in the fourth quarter.

The - and I think you're referring to the Continent rather than the U.K. because in the U.K. we're company owned.

Yes. OK. Thank you.

You're welcome.

You're welcome.

Next question comes from . Please state your affiliation, followed by your question.

. Good morning guys.

You mentioned the physical inventory that you're going to be taking on your product inventory. Could you talk about what the historical inventory shrink percentages have been in the past?

Oh very minor. I mean, again Greg we have generally found that the book to physical inventory adjustment for years, and years, and years, continues to be very negligible.

In recent years, what I'm referring to it isn't shrink, it's a fact that our margins are improving over time not deteriorating. And we found that that has been driven from two factors.

One has been a bit of a mix play where some of the better selling merchandise today is a bit higher margin merchandise, so that's had a favorable effect.

And the second has been that we're buying better than ever before. We like to talk about the fact that, in terms of industry, Regis has a two- percent worldwide share, four- percent domestic share. But in terms of product we estimate that here in North America we have a 10 percent share.

So we enjoy a lot of purchasing synergies and we take physical inventories twice a year. As you know we do not have a perpetual inventory system in our salons. So we take physical inventories twice a year, and we firm up our estimates as a result of the physical inventories.

And we are - we have seen and we are cautiously optimistic that we should continue to see margin improvement as we continue to buy better than ever before.

: OK. But importantly, the shrink itself hasn't been a big economic factor in the past?

No it hasn't, it has not.

: I could ask one other question.

You've made obviously lots of - chunks of acquisitions over the last few years. Is it possible for you to break out the relative success of the acquisitions by class, by annual class? Specifically how is the performance of these acquisitions aged over time? Is there a noticeable trend that, you know, in subsequent years the performance of the business gets better, or is it stagnant years after you buy them?

Greg these businesses have generally been around for 10, 15, 20 years. And they pretty much respond as our regular Regis businesses response because we're not going to buy anything which is really so in the environment we're buying like concepts and likewise you know we're not buying you know real high end mould based concepts.

So they tend to act as our normal businesses act over a lengthened period of time.

: So there isn't a wide in performance between the acquired businesses and your existing businesses in those what ever classes your buying in?

No because they're all fairly mature businesses.

: Got you. OK thank you.

As a reminder ladies and gentlemen if you have a question please press one four at this time.

Your next question comes from please state your affiliation followed by your question.

I was wondering if you could tell me what your expectations are in the number of Smart Style salons for the year? How many new openings you plan on doing?

A lot those but I think because sometimes delay some of their openings but we're fairly comfortable with about 150 to 160 company owned and perhaps 40 franchise units.

OK great thanks very much.

You're welcome.

There are no further questions - I'll turn the conference back to Mr. Finkelstein and Mr. Pearce to conclude.

Well thank you very much for joining us and we do appreciate your support have a good day.

Ladies and gentlemen that concludes the conference for today thank you all for participating and have a nice day. All parities may now disconnect.

Thank you .