Regis Corp (RGS) 2003 Q3 法說會逐字稿

Good morning. My name is Charlene and I will be your conference facilitator today. At this time I would like to welcome everyone to the Regis Corporation third quarter fiscal year 2003 earnings conference call. All lines have been placed on mute to prevent any background noise. If anyone has not yet received a copy of this morning's press release, please call Regis corporation at 952-947-7798 and a copy will be faxed to you immediately.

Before management begins their formal remarks I would like to remind to you the extent the company's 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 SEC filings. 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. Your participation implies consent to our taping.

If you wish to access a replay, you may do so by dialing 800-800-428-6051, access code 289355. 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 would like to ask a question during this time, please press one, four on your push button telephone. If you wish to withdraw your question, please press one, three. I would now like to turn the call over to Paul Finkelstein for his comments. Paul, you may begin.

Good morning, everyone, thank you for joining us. We have a strong third quarter primarily due to total revenue growing 17 percent, to over $420 million. System wide sales increased 28 percent to almost $700 million. Payroll controls continued to be excellent with service gross margins increasing 40 basis points. Salon contribution increased 50 basis points by 18 percent. EPS increased 15 percent to 4600 share. Last year's 40 cents per share exclude as four cent non-recurring tax benefit. Operating cash flow increased to $39 million and EBITDA increased over 16 percent to $56 million. Same-store sales remained weak, decreasing 7/10 of one percent, reflecting the general retail malaise coupled with a shift in Easter. The third quarter really was an extension of the second quarter, calendar shifts and weak economy negatively affected both quarters. However expense controls were excellent. While same-store sales growth is important to us, total revenue growth is key.

Our newly constructed store and acquisitions continued to achieve results above plan, while international profits remained strong. Retail product sales also have been hurt over the last 12 months. The primary reason is that there are no big new hot products. We have the benefit of brands over the last three, four years, which have added tens of millions of dollars to sales, while we do have hot products they pale by comparison in terms of significant impact. However, long-term we continue to be very bullish about the product business. We estimate we have a 10 percent share of all products sold in beauty salons and barber shops in the United States with L'Oreal and Procter & Gamble spending literally billions of dollars buying professional product companies, the future is bright indeed. These companies are extremely sophisticated and have the wherewithal to continue to grow these brands. Thus we see continued consolidation primarily by Procter & Gamble, L'Oreal, which is a real plus going forward.

Let's move on to fourth quarter expectations, consolidated revenues are budgeted to increase between 13 and 14 percent on a same-store sales expectation of half a percent to one and one half percent. Total revenue will be, should be approximately $440 million. EPS is forecasted to increase to a range of 48 to 51 cents, an increase of seven to 13 percent. Fiscal 2003, which ends in June, revenues are projected to grow to nearly $1.7 billion, an increase of 15 percent. EPS is expected to be in the $1.90 to $1.39 range, increase of 18 percent. Fiscal 2003 revenue and EPS growth will exceed our long-term growth objectives, low to mid teens, marginally due to acquisitions. As you recall, we completed our initial acquisition goals early in our first fiscal quarter, operating cash flow on EBITDA should increase to 153 million and 226 million respectively. In today's press release, you will find detailed guidance relating to our initial expectations for fiscal 2004. I would like to highlight a few of those items for you now.

It's important to note that our initial revenue and earnings expectations exclude the benefits from future acquisitions. Revenue is expected to grow to approximately $1.8 billion, an increase of over six percent. Consolidated same-store sales are budgeted to increase one to one and one half percent. We are not projecting a return to normal domestic same-store sales growth of two to four percent for at least another year. Excluding acquisitions, earnings are forecasted to increase six to nine percent to a range of $2.04 to $2.07 per share. We plan to acquire approximately 400 salons representing over $100 million in annualized revenue. Assuming these salons are acquired evenly throughout the fiscal, we should see additional five to eight cents of earnings accretion for the next fiscal year, it's important to note that if we do start to see a pickup in the economy sooner than we expect, an incremental increase in annual same-store sales of one percent should add as much as 10 cents per diluted share.

We plan to add about 450 newly built corporate stores net of closings and close to 200 franchise stores net of closings. We expect capital expenditures to be in the $85 to $90 million dollar range, including approximately $25 to $30 million dollars for salon maintenance. We are forecasting to spend $60 to $75 million on acquisitions, bringing our total capital budget, including acquisitions to approximately $145 to $165 million. With our acquisition growth strategy already being achieved, fiscal 2003, we're now looking at acquisition opportunities for fiscal 2004. As part of our fiscal 2004 acquisitions strategy, we hope to acquire Opal Concepts which is in bankruptcy with a closing in mid-May. Opal has approximately 300 salons of which 100 are company-owned, 200 are franchised. We would ordinarily make this kind of acquisition during the first quarter of the next fiscal year. However, we do not have the luxury of determining a closing date when buying a business out of bankruptcy.

With the Opal acquisition being part of our fiscal 2004 acquisition growth strategy of the $11 million purchase price, will be included in our $60 to $75 million acquisition budget for fiscal 2004. We have not included the Opal transaction in our fourth quarter fiscal 2003 or full-year fiscal 2004 estimates. As you know, we do not give guidance relating to accretion from acquired stores before acquisitions are completed.

Let's put our 2004 guidance in perspective. Last April, our initial guidance of fiscal 2003 was $1.76 a share. An increase of eight percent over fiscal 2002. This guidance was increased several times during the year due to the positive effect of acquisitions coupled with margin enhancement. As I mentioned earlier, we expect fiscal 2003 earnings per share to actually increase 18 percent to approximately $1.93. We expect the similar experience for fiscal 2004. And we would be disappointed if we did not have low to mid-teen EPS growth which mirrors long-term expectations of low to mid-teen top and bottom line growth. Let's move on to the continent of Europe. Our back-office consolidation is virtually complete, and we should see significant economic benefits for fiscal 2004, which should be in the $1.5 to $2 million range.

I would like the move on to another topic which relates to me personally. I have 225,000 option that's were issued 10 years ago and terminate by the end of this calendar year. As you know, I have never exercised an option in my life and frankly, I wanted to go to the board to try to get an extension relating to the exercising of my options. However, the accounting treatment for Regis is just awful. So I will be exercising these options in a very orderly fashion, it's my objective to do this in a fairly large chunks because people do have short memories and even though I am explaining reasons to you, it make sense to try to get this behind me as soon as possible.

As you know, we continue to concentrate on growth opportunities and I want to give you a update of our plans at this point in time. We're in the process of opening three Jean Louis David salons on Long Island, very excited about future projects for Jean Louis David in the metropolitan area. Also in the process of finalizing plans for Vidal Sassoon studio concept and we'll be building the Vidal Sassoon studios in cities that already have a Vidal Sassoon presence. We'll hopefully open several studio salons in England and the United States prior to December 2003. We'll continue to see a disproportionate amount of growth outside of the mall environment. In addition to expanding our existing strip center brands, we are looking for opportunities to expand the Regis salon and trade secret concepts outside of regional malls.

For example, early last fall we acquired Beauty Warehouse in Kansas City, comparable to Trade Secret Concept located in high traffic strip center locations, feeling this can provide us with significant opportunities and hope to secure similar sights in Minneapolis within the effects 12 months. Our sales in Wal-Mart salons continued to grow dramatically. Just last week we opened our 1,000th corporate salon in Wal-Mart, five years ago our total system wide sales for Wal-Mart were $93 million. The company owns salons representing $64 million, and Cost Cutter representing $29 million. Fiscal 2003, which ends this June should see system wide sales in Wal-Mart approach $282 million, with small style company owned salons generating $227 million, and franchise cost cutters generating $55 million. Our projections for 2004 include adding 200 salons to our 1250 salon base. Approximately 40 will be franchised, and we're projecting system wide Wal-Mart sales to increase 21 percent to $340 million.

Finally, before transitioning, we are most gratified we have switched from NASDAQ to the New York stock exchange. We think we will have better exposure and certainly less volatility by making this move. We feel there is value in trading with the world's largest and most recognized equity market. Randy, if you will please continue, we will then open it up to Q&A.

Thanks, Paul. Good morning, everyone. We're very pleased today to report record results for Regis in terms of third quarter revenues as well as earnings. Our revenues increased nearly 17 percent during the quarter, and our earnings brew to 46 cents per share, meeting the upper range of our expectation and beating that of the street by a penny. As you'll recall, last fiscal year in our third quarter, we reported earnings of 44 cents a share, which included four cents of non-recurring income tax benefit. Therefore, excluding the prior year tax benefit our current year third quarter earnings of 46 cents reflects a quarter over quarter growth rate of 15 percent.

Despite a tough economy, we're able to post record results this past quarter through the continued success of our new salon construction and acquisition strategies, as well as continued control over salon payrolls. The tough economic climate continues to impact our same-store sales results, but not to the same extent as other retailers. We're a service retailer that's in a replenishment type business, our customers replenish haircuts, hair color and hair care products on a regular basis. Even in difficult economic times such as these, Regis will be impacted but not to the same extent as a typical retailer. Let me mention after I review third quarter results, I will spend a moment providing you a few additional thoughts regarding our budgeted growth plans for next fiscal year, fiscal 2004. Let me give you some detail behind our third quarter results and I will start first by discussing revenues.

Our consolidated revenues increased 16.8 percent in the third quarter of our 2003 fiscal year, to a record $422,315,000. Each operating division reported a overall sales increase for the quarter. In addition, our franchise revenues grew to $25.4 million in the quarter, an increase of nearly 30 percent due in large part to our acquisition of Jean Louis David. You will find a table in our press release that breaks out third quarter revenues for each salon division. Total service sales brew exactly 18 percent in the third quarter, and our higher margin product sales increased 11.7 percent. Our product sales mix represented exactly 29 percent of our total company-owned sales in the third quarter, comparable to the 30 percent rate we reported in the same period last year. When you add in sales from franchisee salons, system wide sales in the third quarter grew to $697,653,000, an increase of 28.3 percent. We expect to report system wide sales of $2.8 billion for our 2003 fiscal year. Regis is by far the leader in the salon industry, yet we only have a two percent worldwide market share and four percent domestic share, which means we have plenty of opportunity for continued successful growth.

As we reported in our press release on April 7, same-store sales for company-owned salons came in below plan at negative 70 basis points for the third quarter, which included negative service comps of 1.2 percent, and positive retail product comps of 40 basis points. Our third quarter comps were negatively impacted primarily by the shift in the Easter holiday from March last year to April this year. Although our overall comps were lower than expected, our consolidated revenues nevertheless grew nearly 17 percent in the quarter due to the continued success of our new store construction and acquisition growth strategies. Through the first nine months of our current fiscal year, same-store sales increased overall by 60 basis points.

We continue to budget our comps in the range of 50 basis points to one and one half percent for the fourth quarter of our fiscal year, our June quarter. I will now talk a bit about third quarter gross margin rates, which reflect continued improvement. The expansion in our gross margin should not necessarily come as a surprise to anyone as this has been a trend of ours in recent years and was also something we had anticipated for our third fiscal quarter. However, having said this, our overall gross margin rate improved a bit more than what we had budgeted. During the third quarter this year, our overall combined gross margin rate improved to 45.4 percent, compared to an overall rate of 44.1 percent that we reported in the same period last year.

As I will now address, both the service and the product portions of our business contributed to the increase in our overall gross margin rate. Our fiscal third quarter service margin rate improved to 43.5 percent, and that was up 40 basis points over the same period a year ago. Consistent with what we discussed with you last quarter, the primary factor driving our service margin rate improvement was lower payroll costs, primarily in our Regis salon division, a trend that began in the third fiscal quarter last year. Looking ahead we expect our service margin rate for fourth quarter, our June quarter, should be comparable to the 44.1 percent rate that we reported in our fourth quarter last fiscal year.

I will now switch to retail product margins, which during the third quarter our product margin rate improved to 50 percent, an increase of 340 basis points over the same period a year ago. We did expect a significant improvement in our third quarter product margin primarily due to the fact that our third quarter margin last year was lower than normal due to some discounting that occurred back then in connection with our roll-out of our repackaged MasterCuts private label line. Having said this, our current year third quarter margin came in even better than we expected. This incremental improvement was primarily due to favorable results from our most recent fiscal inventory calc (ph) that we took at the end of January. More importantly, we expect product margins for fourth fiscal quarter to be in the mid 48 percent range.

Let me now address the other expense line items impacting our third quarter operating results and start first with our rent expense. Our consolidated rent expense in the third quarter came in at 14.9 percent of company-owned revenue, that was up 70 basis point over the same period a year ago. We had expected that our rent rate would increase in the quarter due to several factors, all of which we discussed with you in the past; the first factor related to our recent acquisition of Jean Louis David back in April of 2002. The JLD chain has very few company-owned salons however most of the ones we have are billboard type locations located in Manhattan, that have higher base minimum rents.

A second factor related to a slight increase in common area maintenance cost primarily in our regional malls. We include common area maintenance costs in our rent expense category and as we discussed in the past, landlords are experiencing higher insurance and maintenance costs which they are passing on to their tenants. Smaller tenants like Regis are frequently forced to absorb a higher share of these costs.

A third factor that impacted our third quarter rent percentage was lower than expected same-store sales growth. We do expect our rent expense for all of our current fiscal 2003 should come in around 14.8 percent of company-owned revenues.

Let me now address the direct salon expense category, which includes costs directly incurred by the salon such as salon advertising, insurance, telephone, utilities and janitorial costs. The direct salon expense category in the third quarter came in at exactly nine percent of company-owned revenues. This was 10 basis points higher than the 8.9 percent rate we reported in the third quarter last year, in part due to the timing of current year salon advertising expenditures. Looking ahead to the balance of our 2003 fiscal year, we expect the direct salon expense category to come in 10 basis points or so higher than the 9 percent rate we reported for all of fiscal 2002. This slight increase primarily relates to increased worker's compensation costs which we discussed with you in previous quarters.

I will now address the line item titled franchise direct costs and as we discussed with you in past conference calls, you will no longer find an expense line item called other in our operating expense category. Rather we have now labeled this franchise direct costs. This new line item includes the cost of product we sell the franchisees as well as the direct costs we incur at our home office and in other countries to support our franchising activities. Our third quarter franchise direct costs came in essentially on plan, representing 56.8 percent of franchise revenues, compared to 50.2 percent in the third quarter last year. The acquisitions we made during our previous 2002 fiscal year of the two franchise companies have caused this expense category to increase as a percentage of franchise revenues over the prior year. As all costs incurred by our French franchise operations are now included. As we look forward, we're budgeting that our franchise direct costs should come in around 52 percent for our fourth quarter and 55 percent for all of our fiscal year 2003.

I will now address our corporate overhead expense, which is labeled on the P & L as corporate and franchise support costs. As we discussed with you in the past quarters, this line item is what we used to call SG&A (ph). All direct cost that's we incur to support franchise activities have been removed from this line item and have been reclassified in the expense item that we just talked about called franchise direct cost, therefore all expenses remaining within the 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. In terms of actual dollars, this expense category for the third quarter of our 2003 fiscal year came in virtually on plan, at $40.8 million, or 9.7 percent of total revenues. This rate of 9.7 percent was 20 basis points higher than the nine and one half percent rate we reported in the same period a year ago. This increase was due sole to the fact comps in the third quarter this year were lower than the same quarter a year ago. Looking ahead we continue to expect our corporate and franchise support costs for the fourth quarter of our current fiscal year that they should be comparable to the 9.7 percent rate we reported for our third quarter.

I will now switch to two depreciation and amortization expense categories. During the third quarter of our current year, the salon portion of this expense came in essentially on plan at three and a half percent of company-owned sales or 10 basis points better than the 3.6 percent rate we reported in the third quarter last year. Our prior year third quarter rate of 3.6 percent was a bit higher than normal, due to salon asset write-offs during that quarter as a result of the timing of store closures and relocations, which we talked about with you last year.

The corporate portion of our DNA (ph) represented 70 basis points of third quarter sales, identical to the rate that we reported in the same period a year ago. The combined effect of all of the revenues and expense items I have discussed have caused our four-wall salon contribution rate, before any corporate overhead, to improve to exactly 18 percent of third quarter company-owned sales. This rate reflects the health and profitability of our company-owned operations and in this retail environment we continue to be very pleased with our salon operating performance. After you factor in corporate overhead, our overall operating income increased in the third quarter to over 38 million dollars or 9.1 percent of sales.

Let me now speak to interest expense and our debt levels. Interest expense came in essentially on plan at 5.2 million dollars or 1.2 percent of total third quarter sales. Our total debt at the end of March also came in generally where we had expected it to be, standing at $308 million which was up $9 million from the previous June 30 fiscal year end. The increase in debt was primarily due to our acquisition activities during the first nine months of the fiscal year. Our debt to capitalization ratio continues to remain solidly investment grade, standing at 37.3 percent at the end of March, which was a significant improvement of almost 300 basis points from our June 30 rate of 40.2 percent. So again, we're very pleased with that.

We continue to feel that our internal cash flow and our available debt capacity will be sufficient to cover salon expansion costs as well as our future debt retirements and dividend payments. We continue to expect that our fiscal 2003 EBITDA should increase to approximately $226 million, and our after tax cash flow should grow to about $153 million. We continue to expect to spend about $75 million on salon and corporate capital expenditures for fiscal 2003 and will likely spend another $80 million on acquisitions. In addition, our inventories have grown this year faster than what we had expected, which is impacted our debt levels. I will talk more about inventory growth in a moment.

Therefore, based on all of these assumptions we now expect that our overall level of debt at the end of fiscal year 2003 should be approximately $325 million, which would be an increase of $26 million over the previous fiscal year end. We continue to expect that our debt to capitalization ratio at the end of fiscal 2003 should be in the range of 36 to 38 percent, which again we're very pleased with.

I have just a few more items. Let's start first with effective tax rate. As you'll remember last year in our third quarter, our earnings included non-recurring income of $1.8 million or 4 cents a share, associated with implementation of two very successful straight-forward tax strategies. As a result our prior year third quarter effective rate was very low at 32.6 percent. Perhaps more importantly, let's talk about our current fiscal year, this year in our third quarter our consolidated effective tax rate continued to improve coming in at 37.8 percent, which was lower than the basic underlying effective rate of 39.2 percent that we reported last year for all of fiscal 2002. Our current fiscal year results will include a full-year performance from the two French franchise operation that's we acquired last fiscal year. As a result, our current year consolidated tax rate will improve over last year's due to the benefit of reduced international tax rates. Looking ahead to our fourth fiscal quarter, we're budgeting that our consolidated effective tax rate should be comparable to our third quarter rate of 37.8 percent.

Let's now move on to our net income, the third quarter earnings that we're reporting today increased to a record $891,000, or 46 cents a share. Last year in our third quarter we reported 44 cents a share, but again that included 4 cents of non-recurring income tax benefit. Looking ahead to the final quarter of our current fiscal year, we continue to forecast our fourth quarter earnings per share to increase in a range of 48 cents to 51 cents per share. Quarterly revenue is expected to grow to a range of $435 to $440 million, which includes an assumption that consolidated same-store sales will increase in a range of 50 basis points to one and one half percent. For the entire 2003 fiscal year, our reported revenues are expected to grow to a range of $1.67 billion dollars to $1.68 billion. While earnings are expected to increase approximately 20 percent to a range of $1.90 to $1.93 per diluted share.

As I mentioned a few moments ago, I would like to make a few comments regarding inventory levels. We had $156 million of inventory at March 31, which represented an increase of $36 million since our most recent fiscal year end June 30. As always, a large portion of our growth in inventories during the past nine months relates to our need to support our increasing base of new and acquired salons. But a couple of additional factors have also contributed to the overall growth.

First of all, our product sales over the past several months will be below plan causing our ending inventory levels to be a bit higher than what we initially planned. Second, during the quarter we opportunistically purchased excess inventory from another vendors at very favorable pricing and Regis is not an inventory intensive company, even with $156 million of inventory, we support well over $2 billion of system wide sales. But having said this, our inventory levels today are too high and that's unacceptable to us. We're immediately working on reducing our months of on -hand supply, however again having said this, we do like to point out that we're very fortunate as to the nature of our inventories which are high margin, low-cost, salable products with a very long shelf life. There's little danger of obsolescence.

Let me now provide you some information regarding salon counts. At the end of our third quarter, the end of March, we had a total of 9,353 salons which was a net increase of 669 units, over the number of salons we had at the end of June 30 fiscal year. In today's press release you'll find a table that breaks out salon counts for each salon divisions. For our entire 2003 fiscal year, we are on plan to build about 435 brand new company-owned salons from scratch, and we're on plan to open around 300 new SuperCuts, Cost Cutter and international franchise units. In addition, salon base continues to grow through our salon real estate acquisition strategy.

Let me now switch gears entirely and provide you a few additional thoughts pertaining to our financial expectations for next fiscal year, our 2004 fiscal year. Paul has provided you some comments regarding our revenue assumptions as well as our salon growth and related capital expenditure expectations. I will focus my remarks primarily on a few expense line items as well as our fiscal 2004 cash flow and expected debt levels.

Let me start first by talking about our gross margin expectations. Our consolidated gross margins are expected to be in the range of 45.3 percent to 45.4 percent of company-owned revenue next year. Service margins are expected to improve to approximately 44 percent in fiscal 2004, with an expectation for all of our divisions to see service margin rate improvement. We're expecting retail product margins to be in the mid to high 48 percent range during fiscal 2004. On the surface when you compare our fiscal 2004 product margin expectation with our current year rate, you will notice our product margins will decline somewhat next year. There are several reasons, but let me address the largest factor. What we all have to remember is that our product margins in our current 2003 fiscal year benefited from a favorable book to physical inventory adjustment, a portion of which relates to our previous fiscal year. We talked about that with you on our conference call last quarter. Therefore, we're very pleased with an expectation for product margins to be in the mid to high 48 percent range as we continue to purchase product better than ever before.

The next item deals with rent expense, which is expected to increase slightly next year to perhaps just over 15 percent of company-owned revenues. This increase in rate is largely due to our modest same-store sales growth expectations.

Next let me address our franchise direct costs, which we have forecasted to be approximately 51.5 percent to 52 percent of franchise revenue for fiscal 2004, and that's an improvement of over 300 basis points from fiscal 2003. The improvement is largely associated with the consolidation and the elimination of redundant costs in our corporate offices in Europe. As we previously mentioned, the consolidation process will be completed by the end of our current fiscal year. Our fiscal 2004 rate, next year, is consistent with our long-term expectations for this category. Our effective income tax rate is expected to be in the 37 to 38 percent range next year in fiscal 2004, the improvement in our tax rate is attributable to our European operations as international earnings are taxed at a more favorable rate than earnings generated in the United States. We do expect our effective tax rate to continue to improve as the profitability of our European operations continue to grow.

The last item I have relates to the, relates to the P&L (ph), deals with our earnings forecast for fiscal 2004. As Paul mentioned we're budgeting earnings from organic growth to increase six to eight percent next year to a range of $2.04 to $2.07 per diluted share. The EPS computation is based on a weighted average fully diluted share count of 45.2 million shares. Consistent with previous years, our earnings guidance excludes accretion from future acquisitions. Therefore, when you include earnings from our budgeted acquisition activity, we do expect fiscal 2004 earnings to grow double-digit. However, as I'm sure you can appreciate, it's always very difficult to project when deals will occur and what the actual earnings accretion from these deals will be. Because of this, we ask everyone to keep your expectations very much in line with our guidance of $2.04 to $2.07 per share. It does no one any good to raise the expectation bar too high especially in this difficult retail climate. As the year proceeds and as we announce acquisitions, all of us will then revise and increase earnings expectations just as we did this year in fiscal 2003.

Let me now touch on our fiscal 2004 budget assumptions regarding cash flow and debt levels. We expect our EBITDA next year to increase to at least $240 million, and our after tax cash flow should grow to at least $165 million. Most of our cash will continue to be used to build and acquire salons and Paul has discussed the specifics with you. Therefore, we're budgeting our debt levels over the course of next fiscal year to remain relatively consistent with the $325 million of debt we expect to have at June 30th, 2003. We will continue to remain a solid investment grade credit. So that's it. With that, Paul and I would be now happy to answer any questions you may have, so Charlene, if you could step in and provide instructions, we would appreciate it.

Thank you. The question and answer session will begin at this time. If are you using a speaker phone, please pick up the hand set before pressing numbers. Should you have a question, please press one followed by four on your push button telephone at this time. If you wish the with withdraw your question, press one followed by three. Your question will be taken in the order they are received. Please stand by for your first question.

Our first question is coming from Jeff Stein (ph). Please state your question.

Good morning, guys. Two questions: First of all, wondering if you could talk a little bit about the inventory situation. It seems like almost on a regular basis inventories have presented a problem and I'm just wondering if there is anything either systemic or if it's just a cultural issue of a company that's more service-oriented than product-oriented that consistently seems to result in higher than expected inventory levels and lower turns than expected.

Let me take a stab at that, Jeff (ph). Over the past year, I would say, I'll speak for myself, generally speaking I have been generally satisfied with the level of inventories. We did see that they were a little higher at the end of our second quarter at the end of December because of slow down in the sales. We had expected that inventories would likely remain relatively flat too in the third quarter compared to the second quarter, virtually no growth rate, but despite that we did see an increase of almost $12 million, I believe, in the third quarter alone.

Inventories are too high and I do think that it is a cultural challenge for us because we are a service provider. Inventories are an important part of our overall business model. They're important to our revenues and our profit ability. But having said that, our inventories are not like other retailers where you have the threat of seasonality (ph) or obsolescence. Because that we generally have not focused maybe to the extent on inventories as other typical retailers might. Having said that, I would estimate, Jeff (ph), that our inventories levels today of $156 million may be, give or take $20 million, too high. Our turns, you know, let me speak it a different way, the $156 million represents almost nine months of inventory of supply on hand. It's too high, I think in the short-term I'm not saying, long-term, but short-term we're going to try to get it down to about seven and a half months of supply which again equates to about $20 million of opportunity and we have immediately started focusing on that.

The one thing I want to emphasize, though, where he not like other retailers and when you see inventory levels where they're at today, do not expect that our margins are going to be hurt in the future because of incremental discounting.

Randy, do you even need seven and a half months? Why couldn't you operate this business with three to four months of inventory?

Well, as I mentioned, Jeff (ph), the short-term expectation was to try to bring it down to seven and half months from the current level of nine. I don't know what long-term we can get it to. We obviously have plan-a-grams (ph) in all stores where there's a certain amount of safety stock we require salons to have simply for display presentation. I think there's opportunity longer term to be below seven and a half months, but time will tell in terms of what we think that number should be.

Final question, Paul, maybe you could address this, can you talk a little bit about SuperCuts? The trend there over the last couple years has been kind of flattish (ph) to slightly negative comps. Wondering what initiatives you're undertaking to try to revitalize that business and get the comp trend growing at a more positive rate.

Yeah, I think you have to look at it in perspective, Jeff (ph). The SuperCuts base is much higher than a strip center base. In other words, the average sales per SuperCut store are greater than other strip center concepts. I think part of the problem relates to our past success. Having said, that no, we're not happy with the comp that's we're generating. We have a brand new design, we have added hair color, we have a new ad campaign, so we think that he have made some significant initiatives in terms of making sure that we have, set the stage for much better comps going forward. It will take some time. We are not pleased with our results over the last year or two and we are doing something about it.

OK. And can you talk a little bit about real estate strategies in terms of what you're going to do in the malls? It seems that the cost of operating in malls continues to grow animal traffic continues to languish. How many Regis salons might you be able to relocate over the next several years in lifestyle centers? And is that a strategy?

Well, we are looking to go outside the malls as we, you know, as I mentioned in this conference call and past conference calls, we think the bulk of growth long-term will be outside the mall environment. But having said that, the malls are not going to disappear. We make very high returns on the mall, on our mall business, on new salons perform extremely well. Renewals become the problem. I think we are right now having some initiatives with respect to capping our cam costs. So long-term I'm far more bullish today than I was maybe six months ago in terms of being able to have some certain cost containment programs going in to effect in the mall environment.

OK. Thanks.

You're welcome. By the way, one other point, Jeff (ph), relating to your question relating to inventory turn. We have a lot of small salons and the strip center salons basically, you know, generate a couple hundred thousand dollars in revenues. Turns there are going to be far more difficult than our Trade Secret type salons where we have, you know, $4-500,000 in sales or we have a real good turn. The smaller salons will not have that kind, are that turn because you need a minimum amount of merchandise to be in those stores to have any kind of representation.

OK. OK. Thank you.

Thank you. Our next question comes from Ellen Schlossberg (ph). Please state your question.

Thank you. Just to follow up first on the inventory question, if we shouldn't expect to see any implication on margins, in other words, you know, the shelf life if you have to discount, how do you plan to bringing that inventory level down? Is it just the fact that you can cut back on order purchases? Or how do you get that down?

That's primarily going to be the strategy, just going to buy less. Now, it's a bit of an art because what we don't want to do is every month we'll have different product lines that we'll feature in terms of promotions. We don't want to impact the business going forward. We want to make sure that we have adequate stocks of the best-selling merchandise. So Ellen (ph), what I would, my expectation is that if you look at fiscal 2004, I'm going to pick a number, that if our overall revenue with acquisitions are going to be low to mid double-digit, one would generally expect inventories should grow proportionately. What I would expect, though, is that if we are $20 million overstocked today, over the course of next fiscal year through reduced purchasing we should see very little growth, maybe even a slight reduction in overall inventory levels a year from now, despite the fact that a year from now we'll have more than a thousand stores more.

OK. And then do you think any of this is because -- I know you can't really tell us inventory by division or warehouse the stores, probably too fluid for that that. But with this new JDA system and Trade Secret going more on auto replenishment and the fact there may now be more SKUs in the stores that possibly weren't ordered when the managers were ordering SKUs on a weekly basis by hand, do you think that just because of the fact that the SKUs are being ordered potentially more appropriately now that that is adding to the bump in inventory? And that some of it is just a correction?

No, I don't think so necessarily. I think if anything, Ellen (ph), it should be just the opposite, that we should be able to reduce inventory levels for example in a Trade Secret division, simply because of ordering smarter. We're going to be ordering the product that's selling and have less on hand of slower-moving merchandise. I think really what it is, you know, we certainly have allocations of product that we, you know, that we allocate to our stores in addition to the auto replenishment and Trade Secret. Outside of Trade Secret, all the other divisions, we still have managers ordering it and we have people here at the home office critiquing the monthly orders and we just need to get a little more focus on driving inventory levels down a bit, especially in light of the fact that our sales haven't been as robust as we had originally expected.

OK. With respect to service margins, sounds like you have anniversaryed (ph) some initiatives in Regis after this quarter, which -- so you're not expecting improvement in the fourth quarter in that division, it sounds like. But what about other divisions you have been making some adjustments to? I was a little surprised to see a service margin expectation of flat. Are you just being conservative there?

Well, in terms of Regis, I still think, you know, hopefully Sharon (ph) won't hit me with this, but I still think there's some opportunity for margin improvement even in the Regis salon division. We have been very pleased with the margin enhancement over the past year but Sharon (ph) has also undertaken other initiatives to, that I think will help our payroll costs perhaps in the next, over the next three to nine months. Maybe even a little longer than that.

But as you know, Ellen (ph), we have also had some other initiatives in our MasterCuts division, for example, we have introduced a new sliding scale payroll arrangement which we're seeing some very favorable leverage on. Over half of every dollar that we bring in terms of revenue goes back out in terms of payroll. All of our operating divisions and the chief operating officers that lead each one of those divisions day in and day out focus on payroll control, that's controlling the existing payrolls that we have as well as looking for other initiatives to help leverage it and we're doing an excellent job on that and next fiscal year we are continuing to expect that through a combination of those initiatives and probably a mixed play with our faster growing divisions still being our highest service margin concepts, we are expecting that service margin rates should continue to improve 10, 20 basis points or so.

Why shouldn't we see any improvement in the fourth quarter, I guess is where I'm having the disconnect.

Well, I would say if anything, Ellen (ph), if there is going to be, we just like to keep the expectation bar a little bit low.

Fair enough. And then caution on the rent expense, -- a question on the rent expense which was up about 70 basis points, can you just help us understand the breakdown between the deleverage (ph) from the comps and also the extra expense for the JLD stores and cam? And then whether or not those two factors --well, more likely the cam, what is your expectation for cam for next year? Do you assume that it still goes up and that's slightly over 15 percent number, is that just deleverage (ph) in.

Well, it's a little bit of both. Again, Paul mentioned, let me hit the last part of your question first as it relates to the cam expectations, Melissa (ph), our new senior vice president of real estate has had some early on some very, some very important successes in capping some of our common area maintenance increases. We have not necessarily factored that in to the budget for next year, so time will tell. But I think there are some initiatives where we have undertaken which should stem the increase in our common area maintenance year over year.

So for next fiscal year we're still expecting cam charges will continue to escalate at the same rate as they are this fiscal year. As it relates to Jean Louis David, Ellen (ph), I'm going from memory here, but Jean Louis David caused about 10, 20 basis point increase in our overall rent rate because of those prominent Manhattan locations. The comps certainly are having an impact. Last year in our third quarter, I believe we had 3.8 percent overall same-store sales increases, contrasted with negative 70 basis points this year in the quarter and any time you have that, it's going to hurt the leverage and Ellen, I haven't mathematically looked at that, but I would again estimate maybe that's 20 basis points.

OK. Thanks. I will let someone else ask some questions and come back with follow-up.

Once again, ladies and gentlemen, should you have a question, please press one followed by four on your push button telephone at this time. Our next question comes from Mark Chekanow (ph). Please state your question.

Good morning, gentlemen.

Good morning, Mark (ph).

Can you talk a little bit about the current environment, how April is coming about? There's a lot of talk about the Easter shift. Can you give us some insight as to what the month looks like so far and then what the non-Easter weeks look like and just kind of trying to get to why you would expect to return to positive comp if there's some type of catalyst or if you're just assuming at some point you're going to naturally get back to positive comps.

It's Paul. First of all, we are at plan through the first three weeks of April and we're up well over 3 percent. We have been around 80 years and never had a same-store sales decrease on an annual basis. If you assume population growth, if you assume continuing aging of the population, these demographics are extremely favorable. So long-term there's no reason we would expect that comps would remain lackluster. It's a reflection of the economy, primarily. But last two quarters in particular we had, you know, some very, very negative calendar shifts. So April is going as planned. And there's no reason to think that intermediate term the comps won't respond.

OK. Also could you talk a little about the Vidal Sassoon application, where that's on the P&L (ph) and any type of contribution there.

You're only talking about a $50 million business on an annualized basis. It's progressing on plan and the results have basically not material at this point in time. The real growth will be the studio concept and that will take several years to start to roll out.

OK. But could you just, could you let us know where the training revenues are hitting? Is that in the service revenues?

Yes, yes they are.

OK, thanks.

We do have a follow-up question from Ellen Schlossberg (ph). Please state your question.

Hi, thanks. I just wanted to clarify one more thing. The acquisition that you talked about, Paul, Opal, that's not included in the numbers yet, that's, I understand that. But in the guidance for '03, the $1.90 to $1.93, I think that that range is above the high end of the fourth quarter range, if you added the 48 to 51 cents in, I think that that range is above it. I'm just wondering when you're talking $1.90 to $1.93, are you assuming it all, at all, any slight accretion from having Opal in the system for the back part of the quarter?

No, we're not, Ellen. And (INAUDIBLE) We're pretty comfortable with both the fourth quarter estimates and the year end estimates as well.

OK.

And in terms of Opal, buying a business out of bankruptcy is very dicey at best, because last, really the last minute somebody can trump you. So until it's over, it isn't over.

Right. OK, thanks.

You're welcome.

Ellen (ph), just to echo what Paul said, through the first nine months, we're at $1.42 in terms of diluted EPS. We have given guidance this morning that our expect figures for the fourth quarter is 48 to 51 cents, when you tack that on I think mathematically that's how we came up with the full-year guidance of $1.90 to $1.93.

Our next question comes from Peter Iso (ph).

I was wondering if you could talk about the pricing trends in the comps to date, how much price effective and what's your outlook for the upcoming year.

The market really determines pricing, most of the new entrants in the industry have been low price concepts. There has been fortunately no price increases at all for the last couple years. We don't see that. We don't see that changing certainly within the next six months to a year.

OK. And secondly, how is the hair coloring portion of the, that I think you recently introduced in the SuperCuts change?

It's going along just fine. That will take time and the consumer really isn't the issue. It's the hair stylist who he or she has to be comfortable and confident and recommending the service to her customer. That's a glacial opportunity for us, but one that we will realize.

OK. Thanks.

You're welcome.

Once again, ladies and gentlemen, if you do have a question, please press the numbers one followed by four at this time. Our next question is coming from Ellen Schlossberg (ph). Please state your question.

Sorry, I was just about to ask another one and got cut off. Back on Opal, Paul, if understanding what you said, that in bankruptcy you never know when and what you're going to get. But assuming things go the plan and that you do close to deal just prior to the beginning of the next fiscal, do you care to give us any details yet on what type of EPS accretion you would expect from that deal for '04?

No, but you know what? It will be just fine, Ellen. We think it will be a very good deal for us.

I'm sure it will be. All right. Thanks.

There appears to be no further questions at this time. I will now turn the conference back to Paul.

Thank you very much for joining us today. Have a good day.

Ladies and gentlemen, this concludes the conference for today. Thank you for all participating and have a nice day. All parties may now disconnect.