Regis Corp (RGS) 2002 Q4 法說會逐字稿

Good morning, my name is Chris and I will be the conference facilitator today. At this time I would like to welcome everyone to the Regis Corporation Fourth Quarter and Fiscal Year End 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 morning's press release, call Regis Corporation at 952-947-7748 and a copy will be faxed immediately.

Before management begins their formal remarks, I would like to remind you that to the extent of the company's statements or comments 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, the call is being recorded on behalf of Regis Corporation and is copyrighted materials. It cannot be recorded or rebroadcast without the company's express permission and your participation implies consent to our taping. If you wish to access the replay for this call, you may do so by dialing 1-800-428-6051, access code 299910.

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 up for questions. If you would like to ask a question, press star-one on the push button telephone. If you wish to withdraw your question, please press star 2. I will turn the call over to Paul Finkelstein for his comments.

Good morning. We had an excellent year especially when one considers the weakness in the retail sector, and the fact our same store sales increase was one of the lowest in our company's history. Regis has never been, nor will it ever be a same store sales grower. It's a total revenue growth story.

Let's talk about the fourth quarter first. Revenues increased 17% to almost $450 million. Organic growth grew 6% through a combination of building 98 corporate salons, coupled with a 2.4% same store sales increase. Earnings for the quarter increased 11% to 50 cents a share in line to the guidance we provided in April. Fourth quarter EBITDA increased 8% to $59.1 million.

The quarter was actually stronger than reported due to the fact that the $3.2 million settlement with the EEOC was a 5 cent per share fourth quarter charge. We settled the salon level discrimination claim with the EEOC for purely financial reasons as we wanted to get this behind us. Very frankly, we did not agree with the EEOC's position but the amount of time that lapsed between the original complaint and today made it almost impossible for us to defend our position.

In addition, the legal costs alone were estimated to be $2 million. Government related EEOC and other labor related costs have been and will continue to be part of our expense structure for many, many years. These costs are very hard to anticipate and some years they may well be under $1 million and in some years they may be over $3 million.

We have very aggressive training programs to try to ameliorate these cost factors, but nonetheless, When you have a 70,000 some-odd W-2s, and a 49,000 employee count, these costs are inevitable and never-ending in a service business.

Let's review our fiscal year ending June 30th. As I mentioned in the beginning of conference call we are extremely proud of our financial performance. EPS grew 18%. Once again, this underscores the importance of total revenue growth to our strategy. Fiscal 2003 EPS results were a function of not only total revenue growth but of gross margin improvement and due to our operational staff paying close attention to expense control especially in the (federal) area.

Consolidated revenues increased 16% to almost $1.7 billion. Organic revenue grew 5% as we built 397 corporate salons; coupled with a 1.2% same store sales increase. In addition, we acquired 560 company owned salons and 198 franchise salons during fiscal 2003 which contributed $153 million of our revenue growth during the year.

We had three major acquisitions during the year. In July 2002, we acquired 328 BoRics salons. In December we acquired 25 Vidal Sassoon salons and four Vidal Sassoon academies. Tangentially, we are in the process of finalizing the Vidal Sassoon Studio concept and are very excited about the opportunities to grow this underdeveloped business. We should be opening two or three salons in the United Kingdom and the United States sometime this winter.

Finally, in May we purchased 286 Opal concept salons out of bankruptcy. As we mentioned in our last conference call, even though we acquired Opal during fiscal 2003, we consider the Opal acquisition to be the first acquisition of fiscal 2004.

Systemwide sales for the fiscal year increased 23% to a record $2.8 billion. Our franchisees opened 257 salons. We ended the fiscal year with a total of 9617 salons or an increase of 933 salons, versus a year ago. 5563 are company owned. 4054 are franchise.

Net income increased 20% to a record $86.7 million. Fully diluted earnings per share increased 18% to $1.92. We continued to strengthen our balance sheet during fiscal 2003 with our debt to cap ratio decreasing from 40% to 35%. The strength in our balance sheet enabled us to opportunistically make the Opal deal, even though we had exceeded our open for buy acquisition budget prior to the May Opal acquisition. We firmly believe that continued balance sheet strength will allow us to take advantage of opportunistic buys beyond our planned acquisition goals.

There are many other highlights of fiscal 2003 including but not limited moving from the NASDAQ to the New York Stock exchange on March 27th. In addition, we moved up 92 slots to number 836 on Fortune Magazine's annual listing of the largest 1,000 publicly traded companies. We also were recently added to the Russell 1,000 index which is a composite of the 1,000 largest publicly traded companies ranked by market cap.

Finally, our continued growth was rewarded with stock price appreciation. During fiscal 2003, our stock appreciated 8%, while the S&P declined by 2%.

Before talking about our outlook for 2004, I would like to talk about three additional subjects.

First, I would like to comment on our monthly same store sales results. As all of you know, this is the quintessential replenishment business and over time the revenue stream is quite predictable. From time to time, we have a one week or a one month comp result either positive or negative which is totally out of character for our company. I have been in this business for 37 years and have spent millions of dollars researching the causes of these semi-volatile comps. Frankly, no one really knows why they exist. With nearly 10,000 stores in the system, we can't even blame the weather.

Let's look at the July same store sales results which were released several weeks ago. The July comps were strong at 1.9%. However, the first three weeks were better than the last week. Likewise, thus far in August, August has been a strong month for us even on a basis of historical standards.

The point I'm trying to make is that one month's comps either significantly positive or negative doesn't reflect the consistency and predictability of Regis. Over time people need to buy product and cut and color their hair on a regular basis. Most of our investors understand this and don't pay much attention to one month's extremely positive or negative comps.

The next topic I'd like to discuss is training. All of us on this conference call are obviously focused on the numbers. Our budgeting process within the company is extremely sophisticated and of course we focus on the numbers, but from an operating point of view we try to focus on doing the right thing and the right thing is making sure that we have a better product. Meaning, better service. We spend $16 million a year training our personnel. No competitor spends anything close to this amount. As a result, we feel that we do have a better product.

We have won many Telly awards which is the training industry's equivalent of the Oscar and we insist that all of our salon staff goes through monthly workshops. We provide them with videotape instruction which serves as a role model for new techniques and new styles. In addition, we have several hundred educators providing on site training so our stylists can continue to improve their skills.

We are in the process of converting 167 of our videotapes to DVD training. The DVD training aspect will enable our stylists to get immediate feedback on whether they are doing the right thing. VHS training does not give us the advantage that DVD training does. Once again, over time we think our training will get even better and our stylists will get even better.

As you know, we acquired four Vidal Sassoon academies during fiscal 2003. And the Vidal Sassoon advanced education is second to none in our industry. We feel that we can aggressively merchandise the Vidal Sassoon continuing education programs to our own staff members to a far greater extent than we have done in past years, which will not only build our Vidal Sassoon academy profits, which parenthetically are already extremely strong, but further enhance the skills of Regis stylists.

Lastly I would like to come on the other press release which we issued this morning stating that the Board of Directors has approved an increase in our stock repurchase program for a maximum of $100 million. Three years ago we initiated the stock buy back program with a maximum of $50 million There was very little activity for the first year or so, but during fiscal 2003 we repurchased $26 million worth of Regis stock. This mostly related to taking option proceeds and purchasing stock and in addition buying stock on the open market equating to the number of shares we issued relating to acquisitions that were made by issuing stock.

In addition, as we previously stated, our debt to cap ratio is now in the mid-30s and we were generating a tremendous amount of cash and desire to have the flexibility to purchase Regis stock in the marketplace when we feel conditions are appropriate to do so.

Let's talk about our outlook for 2004. As you know, in our press release dated May 12th we gave guidance that EPS should be in the $2.07 to $2.10 range without acquisitions. We are very comfortable projecting that both revenues and EPS for fiscal 2004 and beyond should grow low to mid teens. Given the confidence we have in our business and given the fact we have closed several deals, we are now increasing our EPS guidance to $2.10 to $2.13 per share. As is our custom, once we make additional significant acquisitions, we feel these numbers should increase.

We feel there is an abundance of both organic and acquisition growth opportunities domestically and internationally. Our strong profitability and strength in our balance sheet will enable us to exploit the best of these opportunities over the foreseeable future.

Randy will now continue with the conference call.

Thanks Paul, and good morning everyone. We are very pleased today to report record fourth quarter performance. Our revenues grew nearly 17% for the quarter, and our earnings of just over $22 million or 50 cents per share were up a nickel from the same period a year ago. As Paul mentioned, the 50 cents per share fell within our expected range of earnings for the quarter and that we previously communicated to you. For our entire 2003 fiscal year we're reporting earnings of $1.92 per share up nearly 18% from the $1.63 we recorded in the previous fiscal year. We're also very pleased with the fact that our fiscal 2003 EBITDA grew over 17% to a record $227 million. Reflecting the strong cash flow characteristics of our business.

Despite a tough economy, we were able to post record results this past fiscal year 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 store results but not to the same extent as other retailers. We are a service retailer that's in a replenishment type business. Our customers replenish their hair cuts, their hair color and their hair care products on a regular basis. So even in difficult economic times such as these, Regis will be impacted but certainly not to the same extent as a typical retailer. As you know, we love to emphasize this point of distinction to you.

I will now jump in and give you a bit more detail behind our fourth quarter and fiscal year performance starting first by discussing revenues.

Our consolidated revenues for the fourth quarter of fiscal 2003 increased 16.6% to a record $448.2 million. Including franchise revenue of $24.6 million. And for the entire fiscal year our revenues grew 15.8% to a record $1.68 billion, which was a record for us. All of our operating divisions enjoyed sales increases during the fourth quarter as well as the entire fiscal year. And today you will find a table in our press release that breaks out fourth quarter and fiscal year revenues for each of our salon divisions.

Service sales as well as our higher margin retail product sales each grew 17.6% in the quarter. Our product sales mix represented nearly 29% of our overall fourth quarter sales. For the entire year, our company owned salons sold $465 million of product which no one in the salon industry even comes close to. As a result, this gives us tremendous purchasing power leverage. When you add in sales from our franchisee salons, our system-wide sales in the fourth quarter grew to $698 million. We're also very proud to report that for the entire 2003 fiscal year our system-wide sales grew to an unprecedented $2.8 billion which was an increase of 23%.

Our system-wide customer count also continued to grow. This past fiscal year we recorded 143 million customer transactions.

Regis Corporation is by far the leader in the salon industry yet we only have a 4% domestic market share and 2% worldwide share. Which means we have plenty of opportunity for future growth. As we reported in our press release on July 8th, our fourth quarter same store sales for company owned salons came in at 2.4%. For the entire fiscal year we posted an overall of same store sales increase of 1.2%, which included growth in service sale comps of 40 basis points and growth in retail product comps of 2.9%.

Although our overall comps remained somewhat modest in 2003, our consolidated revenues grew nearly 16% due to the continued success of our new salon construction and acquisition growth strategies. This reinforces what Paul mentioned a few moments ago. That our ability to achieve our long term growth expectations is not solely dependent on sale store sales increases.

Let me now talk about our margins. For the entire fiscal year we were pleased that our overall combined gross margin rate improved 90 basis points to 45.5%. In fact, ever since Regis went public in '91, we have experienced improvement in our overall gross margin rate which we believe demonstrates our ability to profitability manage our growth.

Let's now look at the individual service and retail margin components. As we expected, our service margin for all of fiscal 2003 improved to 43.6%, or 20 basis points better than the previous years. This annual improvement was due to lower payroll costs primarily in our Regis salon division as well as continue growth in our higher service margin concepts.

Our service margin rate for the fourth quarter came in at 43.5%. Lower than the rate of 44.1% we reported in the same quarter last year and was also slightly lower than the rate we had budgeted for the quarter. Our service margin in the fourth quarter of fiscal 2003 was impacted in part by service comps coming in below plan at 80 basis points as well as experiencing slightly higher payroll costs in our Supercuts division. Looking ahead, we expect service margins for all of our 2004 fiscal year to be in the range of 43.4% to 43.6%. This expectation has been updated to reflect the budgeted performance of our recent salon acquisitions.

I will now switch to our retail product margins. For the entire 2003 fiscal year, our product margins improved 240 basis points to a very strong 50%. Including a rate of 49.3% in the fourth quarter. There were several reasons for the expansion of our product margin this past year, all of which we talked with you about in previous quarters.

Our merchandising strategy has taken an more traditional retail focus in recent years due to the significant increase we enjoyed in product sales. For example, we've introduced retail plan-o-grams in all of our salons. We have implemented the new JDA merchandising system in order to obtain greater detail and accuracy as to our retail sales data. In addition, the automatic replenishment function is in place in all of our Trade Secrets salons, where over half of our retail product sales are generated. These initiatives have certainly contributed to the growth in our retail product margins.

Our increased purchasing power has also had a favorable impact on our product margins over time. We estimate that Regis Corporation has a 12% share of the entire professional retail product market in North America. No other salon chain comes close to this. Due to our size and purchasing power we continue to buy product better than ever before. As we look ahead to our 2004 fiscal year, we continue to budget product margins to be in the mid to high 48% range.

And I will now address just a few other items impacting our operating results starting first with rent expense.

Our fourth quarter consolidated rent expense came in on plan at 15.1% of company owned sales, an increase of 30 basis points over the same quarter of the previous year. For the entire 2003 fiscal year, rent expense increased as expected by 50 basis points to 14.8%. We had budgeted that our 2003 rent rate would increase due to a couple of factors which we’ve discussed with you in the past. The first factor that impacted our fixed cost rent percentage was a lower level of same store sales growth in fiscal 2003 compared to the preceding 2002 fiscal year. A second factor related to our acquisition of Jean Louis David in April of 2002. The JLD chain has very few company owned salons, however, the ones we do have are billboard-type locates in Manhattan that have higher base minimum rents. Looking ahead to our current 2004 fiscal year, we expect our rent expense to remain comparable to our fourth quarter 2003 rate of 15.1%.

Let me now address the direct salon expense category which includes costs directly incurred by the salons such as salon advertising, insurance, utilities and janitorial costs. This expense category came in at 8.7% in the fourth quarter which was a bit better than planned and 20 basis points better than the same period a year ago. Reasons for this improvement included a very slight reduction in salon advertising expenditures in the fourth quarter this year as well as reduced freight costs. For all of fiscal 2003, the direct salon expense category came in at exactly 9% of company owned revenues. Identical to that of the previous fiscal year. Looking ahead to our current 2004 fiscal year, we expect that the direct salon expense category should remain comparable to the 9% rate we reported in 2003.

I will now address the line item titled Franchise Direct Costs which includes the cost of the product we sell to our franchisees, as well as the direct cost that we incur here at our home office and in France to support our franchising activities. These expenses, before any allocation of indirect corporate overhead costs, increased 100 basis points in the fourth quarter of fiscal 2003 to 54.7%. For the entire fiscal year, this expense category grew to 56% of franchise revenues. Up from 49.1% for all of fiscal 2002.

The acquisitions we made of the two French franchise companies during our previous 2002 fiscal year caused this expense category to increase in fiscal 2003 as all of our direct costs incurred by the French franchise companies to support franchising companies are now included. Growth in sale of retail product to our franchisees has also contributed to the year over year increase in this percentage. Looking to the future, we are budgeting that our franchise direct cost should improve in 2004 to approximately 53% of franchise revenues.

I will now address our corporate overhead expense which is labeled on the P&L as corporate and Franchise Support Costs. Expenses included within this category relate to costs associated with our field supervision, our salon training and promotions, our home office and our distribution centers. During the fourth quarter of fiscal 2003, this expense category came in at 9.6% of total revenues which exceeded our initial expectation and was also 30 basis points higher of the same quarter of the previous years. This increase was due to our legal settlement with the EEOC. For all of fiscal 2003, corporate and franchise support cost came in at 9.7% of total revenues, up 10 basis points from the previous year. Looking ahead to the 2004 fiscal year, we do anticipate that our corporate and franchise support costs should be 10 to 30 basis points lower than the 9.7% rate we reported for all of fiscal 2003.

I will now switch to our two depreciation and amortization expense categories. The salon portion of this expense was 3.5% of company owned sales for the entire 2003 fiscal year which included 3.6% in the fourth quarter. Both rates essentially met our plan and were identical to those in the related periods of fiscal 2002. The corporate portion of our D&A also came in on plan at 70 basis points for the entire 2003 fiscal year which included 60 basis points in the fourth quarter. Both rates again met plans and were comparable to those in the related periods of the previous year so I don't feel there's any reason to discuss the items much further.

The combined effect of all of the salon revenue and expense items I have just discussed caused our salon contribution rate for all of 2003, this is before any allocation of corporate overhead, it caused or salon contribution rate to improve 50 basis points to 18.3% of company owned sales. This included a contribution rate of 17.9% in our fourth quarter. These rates reflect the health and the profitability of our company owned salon operations and frankly in this economic environment we were very pleased with our salon performance.

Next, after factoring in our corporate overhead costs, our overall operating margin for all of fiscal 2003 improved 20 by basis points to 9.4% including a rate of 9.1% in the fourth quarter.

I will now speak to our interest expense and our debt levels. Interest expense for all of fiscal 2003 came in essentially on plan at $21.4 million or 1.3% of total sales. Our overall debt at June 30th stood at $302 million which was up only $3 million from the prior fiscal year. Our debt levels came in a bit lower than what we had originally expected primarily due to a timing issue as we were able to defer about $10 million of estimated income tax payments until the first quarter of fiscal 2004. Our debt to capitalization ratio continues to remain solidly in investment grade and as Paul mentioned stands now at 34.9% at the end of June which was a significant improvement of 530 basis points from the rate of 40.2% that we reported at the end of our previous fiscal year. Again, we are very obviously pleased with the strength of our balance sheet.

The cash flow characteristics of our company are very strong and highly predictable as most of you know. We are pleased to report that our EBITDA grew 17% in fiscal 2003 to a record $227 million and our after tax cash flow increased to just over $153 million for the year. We continue to believe that our internal cash flow and our available debt capacity will be sufficient to cover future salon expansion costs, as well as scheduled debt retirements and dividend payments. We expect our fiscal 2004 EBITDA to increase to a range of $245 million to $250 million. And our after tax cash flow should grow to about $170 million. We expect to spend $85 to $90 million this year on salon and corporate capital expenditures and will likely spend another $75 million or so on acquisitions. Based on these assumptions, we expect to be essentially cash flow neutral in fiscal 2004 resulting in very little change to our overall levels of debt.

And I have just a few other items and I will first talk about our effective tax rate. Our overall effective income tax rate for fiscal 2003 came in essentially on plan improving to 37.5%. Looking to the future, we expect our effective tax rate for all of fiscal 2004 should remain comparable to that of fiscal 2003.

I will now address our earnings. The net income that we reported in the fourth quarter of fiscal 2003 increased to a record $22.5 million or 50 cents a share. The 50 cents per share was well within the earnings range that we communicated and was a nickel more than the 45 cents we reported in the fourth quarter last year. For the entire 2003 fiscal year, our net income increased to a record $86.7 million, or $1.92 per share. Up nearly 18% from $1.63 we reported in fiscal 2002.

In our earnings release that we issued today you will note that we have once again revised our earnings guidance upwards as we now feel comfortable with fiscal 2004 earnings to be in the range of $2.10 to $2.13 a share. The additional earnings growth is primarily due to earnings accretion from salon acquisitions that we completed. This represents an earnings increase of about 9% to 11% from $1.92 per share that we reported in fiscal 2003. As the year goes on, there should be additional upside to this range of earnings, due to accretion from additional salon acquisitions or from improved operating performance, which will help us achieve our long term strategy of growing earnings in the low to mid teens.

Let me now provide you information regarding our salon counts. We ended the 2003 fiscal year with a total of 9,617 salons which was a net increase of 933 units over the number of stores that we had at the end of the previous fiscal year. In today's press release you will find a detailed table that breaks out our salon activity and our year-end counts for each salon division. For the entire 2003 fiscal year we constructed 672 brand-new company owned stores from scratch and we acquired 758 units.

Looking to our current 2004 fiscal year, we are planning to build 525 to 575 new company owned salons from scratch and we plan to open 350 to 400 new franchise units worldwide. In addition, our salon base continues to grow through our real estate acquisitions strategy.

Before I turn the call back to the operator, I would like to let all of you know that we have enhanced our website to include a financial outlook section. The intent of this section is to provide everyone with the most up to date and comprehensive summary of our financial outlook for the fiscal 2004 year. Again, you will find this today on our website at www.regiscorp.com. With that, Paul and I would like to answer any questions you may have so operator, if could step in and provide some instructions as to how people could ask questions I'd appreciate that.

Thank you. The question and answer session will begin at this time. If you are using a speakerphone, please pick up the handset before pressing any numbers. Should you have a question, please press star 1 on your push button telephone. If you wish to withdraw your question, please press star 2. Your question will be taken in the order that it is received. Please stand by for your first question. Our first question comes from Jeff Stein from McDonald Investments. Please state your question.

Good morning, Paul. Question on your expansion program. You guys built 672 new salons this past year. Your plan is to build between 525 and 575 in the upcoming year. Is the drop in new organic growth due to the lack of real estate opportunities? Are there other factors involved? Can you also address the issue, how are your strip center Regis salons performing relative to malls, and how many do you have currently.

This is Randy. I'll let Paul handle the second section. As I was going through the transcript, I made a mistake when I said we built 672 new salons this past fiscal year. Jeff, that included franchise units as well. Let me give you the actual numbers. In fiscal 2003, the year that just ended, we built 397 new company owned stores. In fiscal 2004, we are looking to accelerate that growth to the numbers I gave you, somewhere in that 500 to 600 store range. So again I apologize for that confusion.

Okay.

Paul, you want to address the Regis Salons.

Jeff, there continues to be a bunch of huge opportunities to grow other than within and outside malls. There are no capacity issues at all. In terms of how our salons are doing outside the mall environment, they are doing just fine. We wouldn't be continuing to make investments if we didn't have very, very satisfactory ROIs.

Paul, can you tell me approximately how many Regis salons there are outside of the malls and how many you might be building this year.

When you say Regis Salons?

Regis salons specifically.

Less than 20, Jeff. And we will be building perhaps 10 this year and maybe 20 the following year. It will be gradual. We'll go market by market and see where there are holes, holes meaning population growth without mall growth. And it's mostly going to be fill-ins where we already have significant brand recognition and a significant presence in a particular town. Minneapolis is a good example and Denver might be one as well.

Also, kind of curious in terms of acquisition opportunities, they have always been plentiful for you guys, but I am wondering, given the tough economy that we have gone through the past year, are there independents out there that are more anxious to sell now and is there any implication there in terms of the prices that they may be willing to sell to you and therefore the potential accretion you might see over the next 12 months from acquired locations.

When someone is ready -- most of the businesses we buy are owned by people who have been in the business 20 or 30 years. And they're relatively strong financially. We don't see any significant change in terms of better or worse accretion. If anything, the new accounting regs have helped us because we don't have to amortize goodwill. So our paybacks--the median payback continues to be in the two or three year range, assuming we buy a business at 3.5 to 4 times the seller's cash flow and that's pretty good. We don't think we can do better than that.

Final question, we seem to be going through the cycle now for longer hair styles which seems to have had a negative impact on your service revenues. If you go back historically, typically how long can these cycles last?

Well, I'm not going to answer that Jeff. It can be a year or two, it could be four or five. History has -- is not terribly relevant as it relates to this issue going forward. But it does cycle to your point, you are absolutely correct. And when shorter hair becomes more fashionable and as they follow as might as well, because people look better in shorter hair than long hair. We will benefit.

Thanks.

Our next question comes from Mark Chekanow from Sidoti.

Could you go over maybe some of the efforts -- I know you were talking about the training but some of the efforts you are talking about where you are trying to improve the service comps, particularly at the strip centers. Is there any customer service issue that you were able to identify and work through?

Our video training is far more than just technical training. We talk about customer service. We talk about all aspects of the operations and we lump this all under the umbrella. We gather this under the umbrella of training. But it's far more than technical training. We just continue to try to move the bell shape curve slightly to the right every day we come into this office.

It seems you made progress in managing the inventories better and talked about some of that. Where should we expect the absolute dollar level of inventory to trend from here on out?

Probably not going to predict that because we have a perfect record of not being able to predict it accurately. Generally speaking we are adding 1,000 new stores to the system every year and we will have to keep inventory levels generally grow to support that.

As we talk about the past quarter, we are taking more of an active communication roll role with our buyers to slow down the growth in inventories. We are successful with that this past quarter in the fact the inventories did not move virtually at all. There was virtually no increase in our inventory levels in the fourth quarter despite adding about 350 new stores to the system. So we are looking to slow down the growth in inventory and the dichotomy is that our store base will increase. Mark, I don't think you are going to see Herculean increases or decreases in inventories in the next 12 to 18 months.

And lastly, it seems as though you recovered nice from earlier comp difficulties. How many more months in a row do you need to see this improving trend before you can confidently say that one to 1.5% should be 1.5% to 2%. How much evidence do you need to see?

I'll take a stab at it, four or five months?

Okay. Thanks a lot, guys.

Thank you.

Our next question come from Chris O'Donnell from [Cack] Smith Associates. Please state your question.

Good morning. My question relates to the franchisee system. It appears year over year franchise locations are up 6.5% looking at year end locations, year over year, but in the fourth quarter franchise related revenues were up only 1.5%. Do you have issues with deterioration in your franchisees operations?

No, we don't. The year over year -- the growth year over year, quarter over quarter, I should say, is primarily slowed down because we anniversaried on the Jean Louis David acquisition. We have some franchisees on the acquisitions where the royalty rate is much lower than the average of 5% to 6% on average. There is no deterioration to speak of in terms of the franchisee business. Their business will generally mirror the same trends that we are seeing corporately.

And one other point. There has been a significant amount of franchisee buybacks. If there is a buyback, the royalty stream will be reduced, but we get on the other side because our income on that net income goes up we get the longer dollar.

One other thing that may interject before we get off this subject. We acquired the -- the Opal deal closed late in the fourth quarter which had 200 franchisees, franchise locations, roughly. If you are looking at unit count, you will have to average that and you will get a closer number.

Back out at 200 locations from your year end '03 franchise locations --

They are only in the numbers for six weeks.

To get a truer contribution. And also harkening back to an earlier question about inventories. Do you remain confident in your strategy of increasing product sales among your franchisee store base because the inventory growth again was ahead of growth in total stores.

The inventory growth was ahead of the growth in total stores for the year but not for the quarter for the reasons that we just talked about. We do remain confident we will see growth in retail product sales to our franchisees. That's a growing part of the business although albeit not a significant part to our overall profit picture but it is important and we do see it growing. We do not require franchisees to buy product from us. They can buy from their local distributors but we are trying to be as competitive as we can and we have been successful and we will see -- expect to see growth in retail product sales to our franchisees in the years ahead.

And those 200 stores I see that franchise locations grew 1.4% which is almost exactly in line with revenues. Thank you very much.

Just a reminder, ladies and gentlemen, if you do have a question, please press Star 1 on your push button telephones at this time. If there are no further questions, I will turn the conference back to Paul to conclude.

Thank you for joining us. Have a good day.

If you wish to access the replay for this call, you may do so by dialing 1-800-428-6051 with an ID number of 299910. This concludes our conference today. Thank you for participating and have a nice day. All parties may now disconnect.