Regis Corp (RGS) 2004 Q4 法說會逐字稿

Good morning. My name is Tony and I will be your conference facilitator today. At this time I would like to welcome everyone to the Regis corporation fourth quarter and full fiscal year 2004 earnings conference call. All lines will be placed on mute to prevent any background noise. If anyone has not 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. If you wish to access a replay for this call, you may do so by dialing 888-203-1112. And the access code is 305702. I would like to remind you that to 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. Reconciliation to the non-GAAP financial measures mentioned in the following presentation can be found on our website at www.regiscorp.com. 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 star, one on your touchtone telephone. If you wish to withdraw your question, please press star, two at any time. I would like to start by turning the call over to Mr. Paul Finkelstein for opening comments. Paul, you may begin.

Thank you very much. Good morning, everyone, and thank you for joining us. We had an excellent quarter. Fourth quarter revenues increased 13% to $509 million with same-store sales increasing 1.5%. Net income increased 21% to 27.3 million or 59 cents a share, meeting the top end of our guidance. Fourth quarter EBITDA increased 13% to $66 million. We not only set records for the quarter but for our fiscal year as well. Fiscal year revenues increased 14% to $1.9 billion, same-store sales increased 2.6%. Net income increased 22% to $105 million or $2.29 a share, meeting the top end of our guidance range. We ended the year with 10,162 salons. During the year we completed 41 transactions acquiring 411 salons and beauty schools. Organically we booked 252 corporate salons and closed or relocated 188. Organic and acquisition salon activity led to a net increase of 675 corporate salons during the year. Our franchisees booked 268 salons and closed or sold back 398 to us for a net decrease of 130 franchise salons during the year. As of June 30, 2004, we had 6,238 corporate salons and 3,924 franchise salons. Total debt at the end of the year was $301 million and our debt to cap ratio was 30.5% which represented a 440 basis point improvement over the previous year. It is interesting to note that our debt to cap ratio has now improved nearly 1,000 basis points over the previous two fiscal years. I would like to summarize the highlights of the year.

We opened our 10,000th salon during the fourth quarter. We have joined a very elite group of companies that own, operate, and franchise more than 10,000 stores and we anticipate adding about 1,000 stores a year indefinitely. The Holiday Hair acquisition in April, 2004, will add approximately $45 million of revenue and is significantly accretive. Holiday Hair has excellent brand name recognition in the state of Pennsylvania and is definitely a crown jewel for us. In June, we acquired six Blaine Beauty Schools located in Massachusetts. The beauty school business should be a 20%-plus pretax generator and we hope to have $100 million beauty school business within three to five years. During the fiscal 2004, we repurchased 544,000 shares of stock. We have almost $47 million remaining of our authorized $100 million buyback. With the world of sell side research changing significantly, visibility is very important to us. We believe we have an attractive investment story to tell and during fiscal 2004, we participated in six investor conferences and seven institutional road show events. We plan to be similarly active in fiscal 2005. We continue to appear regularly on CNBC and other networks and April Fortune ranked Regis as the 790th largest corporation in the United States, climbing 46 spots compared to last year's ranking. We will continue to work hard to increase our visibility. Our comps for the year were better than planned although we continue to be in a very difficult environment. Consumer spending at best is lackluster, the price of gasoline, obviously, has an effect on discretionary income, and there is no question that salon visitation patterns, while quite predictable, have lengthened somewhat in direct relationship to the length of hair. So while 2004 generated results better than planned, we see 2005 being more of the same in terms of long hair and modest discretionary income on the part of the consumer. However, this is the quintessential replenishment business. We never have had a negative annual same-store sales result in our over 80-year history. We feel highly confident that although 2005 will be challenging, we will continue our string of positive sales comps.

I have some additional comments relating to our sales reporting that I will cover in a few minutes. We also opened our first Vidal Sassoon studio in the United States in June in Northbrook Court, a high end mall outside of Chicago. Results to date are above plan. Let's now look at our future plans and outlook for 2005. We continue to remain confident that we will once again deliver record revenue and earnings meeting our long term growth objective of low to mid teen revenue and earnings growth. Now, this morning, we appeared on -- on CNN/FN and we also had a Reuter's release concerning our guidance. Our guidance, as you know, never has reflected acquisitions. We modify our guidance as we make acquisitions. So our guidance for fiscal 2005 has been 2.43 to 2.47. The street guidance is about 2.60. So what we will be doing and we will be making a release this afternoon, is increasing our guidance to a range of 2.55 to 2.62 because we have historically made acquisitions and we are planning to continue to make acquisitions to be more in line with the consensus, with free consensus estimates, so that release should be in your hands within several hours. Our strategy is quite simple. With comps forecasted to be lackluster we are focusing on the preservation of our margins and our expense control. We plan to expand the beauty school business and this should be a very profitable venue for us. We also have a significant amount of acquisitions that we are working on at the present time. If the majority of these close, there is a very good chance that we will close our acquisition window by the end of the second quarter and that only modest acquisition activity for the second half of the year.

Once these transactions are completed, we will be providing additional revenue and earnings guidance. We continue to believe that Asia is the market we should enter. I will be visiting Japan next week and hope that we will eventually enter this market although I think it is highly unlikely that we will do so in fiscal 2005. In the coming months, we have scheduled to present at three investor conference, two of which are new to us. On September 14th we will present to the Oppenheimer Beauty Industry Conference in New York, on October 5th we are scheduled to present at the Credit Suisse First Boston Holt Advisor Conference in Boston and on October 6th we are scheduled to present at the McDonald Consumer Growth Conference in New York. I would like to make two additional comments before passing the baton onto Randy. First, as we have discussed with many of you we are considering reporting revenue and same-store sales results on a quarterly basis. From time to time, we experience the rational price movement in the shares of Regis due to anticipated and reported monthly same-store sales and revenue results and we do not believe this volatility reflects the relative predictability of our recurring revenue business. In addition we do not believe this volatility is reasonable given that we have demonstrated for many years that this is not a same-store sales story, it is a total sales growth story. Further, monthly sales results can be preceiving in that subtle pound of shares may have a noticeable impact on our sales over a 30-day period. These shifts are most often smoothed out over a 90-day period. It is our wish when investor to hold a long term view of our business, as we do, and not base their buy or sell decision based on four weeks of results.

We have spoken with many of you and we appreciate your candor and input. We encourage your continued counsel as we reach a decision on this topic. This decision will not be made in haste and no change will occur in policy will be made until fiscal 2006 at the earliest. My second comment relates to our capital structure. As you know, we are solidly investment grade and with debt to cap hovering around the 30% range, we have an enormous amount of flexibility in terms of allocation of our capital. So consider another dividend increase and we will consider being more aggressive as of late with the stock buyback but the biggest robust will be continuing to grow our business both organically and via acquisition. The school business and Asia give us additional opportunities and we are financially partial to be able to take advantage of these opportunities as they present themselves. We are quite fortunate and obviously very bullish about our future. Before Randy continues our presentation, I would like to go back to the press release we will be making. Obviously, this has been a source of some confusion to the street and we want to eliminate that confusion, so we will be making -- obviously, we have, in the past, given annual guidance, and current quarterly guidance which we'll modify based upon acquisitions as they come on board. Randy?

Thanks, Paul, and good morning, everyone. As Paul mentioned, we're pleased today to report record fourth quarter performance. Our revenues grew 13.5% for the quarter and our earnings grew 21.4% to $27.3 million or 59 cents a share and that was up 9 cents from the 50 cents per share we reported in the same quarter a year ago. As Paul mentioned, the 59 cents per share was at the top end of the expected earnings range for the quarter. For the entire 2004 fiscal year, we're reporting record earnings of $2.29 per share, up over 19% from the $1.92 we recorded in the previous fiscal year. As you know, we also like to focus on the cash flow that Regis generates. We're very pleased to report today that our fiscal 2004 EBITDA grew over 13% to a record $257 million, reflecting the predictable and strong cash flow characteristics of our business. Through the continued execution of our organic and our acquisition growth strategies, we achieved yet another year of record performance here at Regis. I will now jump in and give you a bit more detail behind our fourth quarter and our fiscal year results starting first with the discussion of revenues. Our consolidated revenues for the fourth quarter of fiscal 2004 increased 13.5% to a record $508.6 million, that includes franchise revenue of $27.8 million. For the entire fiscal year, our revenues grew 14.2% to $1.92 billion, which was also a record for us. As we expected, acquisition and organic growth contributed almost equally to our revenue growth for fiscal 2004. In addition, the continued weakening of the U.S. dollar contributed 170 basis points to the increase in our fiscal 2004 revenues. All of our operating concepts enjoyed sales increases during the fourth quarter as well as the entire fiscal year. And you will find a table in our press release today that breaks out our fourth quarter and our fiscal year revenues for each salon concept.

Service sales grew 13.7% and our higher margin retail product sales grew exactly 13% in the quarter. Our product sales mix represented nearly 29% of our Company owned fourth quarter sales. For the entire year our Company owned salons sold $545 million worth of product. That was a 17% increase over last year. We estimate that we now command up to 15% of the professional product market here in North America. As we reported in our press release on July 8th, our fourth quarter same-store sales for Company owned salons increased 1.5%, meeting the upper end of our guidance. For the entire fiscal year we posted an overall same-store sales increase of 2.6% which included growth in service comps of 30 basis points and growth in retail product comps of 8.1%. And I will now talk a bit about our margins. For the entire fiscal year our overall combined gross margin rate came in on plan at 45.1%. As we had expected, this represented a 40 basis point decrease over the combined gross margin rate we reported last fiscal year. Let's now look at the individual service and retail margin components and I will discuss what led to this modest decrease. Our service margin came in as expected, meeting plan both for the quarter as well as for the full fiscal year. Our service margin rates for all of fiscal 2004 remained quite strong at 43.4%. However, this rate was 20 basis points lower than that of the previous year. Our service margin rate for the fourth quarter of fiscal 2004 also came in on plan at 43% but this rate was 50 basis points lower than what we recorded in the same quarter last year.

As you know, each year we generally expect to see a slight improvement in our service gross margin rate due to a mix play. In other words, our fastest-growing salon concepts are those that have the highest service margin rates. However, this year, in fiscal 2004, the slight decline in our service margin rate was primarily due to an increase in credit card processing fees and an increase in state unemployment taxes. We discussed both of these items with you last quarter. These cost increases combined with a lower level of service comps this past year were partially offset by improved salon payroll costs. The consistency of our service margin rate this past year, despite the modest growth in service comps, underscores the success that our operating people have enjoyed in controlling salon payroll costs. I will now switch to our retail product margins. For the entire 2004 fiscal year our product margin rate essentially met plan, coming in at 49.2% including a rate of 50% in the fourth quarter. However, as we expected, our fiscal 2004 annual rate of 49.2% was 80 basis points lower than that of last year. As you recall, last year our retail product margins were favorably impacted by the timing of a larger-than-normal book to physical inventory adjustment that we recorded in the second quarter of fiscal 2003. We're very pleased with our fiscal 2004 product margin rate of 49.2%. In fact, the 2004 results, if you look back over time, the 2004 results were 160 basis points better than our fiscal 2002 results and they were 220 basis points better than in fiscal 2001.

Because of our size, we're able to negotiate favorable terms with our suppliers and we continue to enjoy purchasing leverage relative to our competition. Generally, our competition must purchase product through distributors and they pay 50 to 60 cents on the dollar for professional product. At Regis, on the other hand, we buy our product directly from the manufacturer and we pay only 30 to 40 cents on the dollar. Let me now address of the items impacting our operating results and I will start first with rent expense. Our fourth quarter consolidated rent expense came in at 15.2% of Company owned sales and that was certainly comparable to the rate of 15.1% that we reported in the fourth quarter last year. For the entire 2004 fiscal year our rent expense was also comparable to that of the preceding year, improving 10 basis points to 14.7%, largely due to a salon mix and lower common area maintenance expenditures. I will now address direct salon expense and, as you know, this category includes costs directly incurred by the salon, such as salon advertising, insurance, utilities, and janitorial costs. For all of fiscal 2004 the direct salon expense category came in at exactly 9% of Company owned revenues, identical to that of the previous fiscal year and was in line with our expectations. This expense category also came in at a rate of exactly 9% in the fourth quarter, which was a 30 basis points increase over the comparable period a year ago. This higher expense rate in the fourth quarter of fiscal 2004 was primarily due to two factors, both of which were simply timing related. The first factor related to the timing of settling some of our older general liability insurance claims and the second was due to the timing of salon advertising expenditures. Neither of these items are expected to impact future periods.

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 costs we incur here at our home office and in Europe, to support our franchising activities. These expenses which exclude the allocation of corporate overhead costs decreased 240 basis points in the fourth quarter of fiscal 2004 to 52.3% of franchise revenue. For the entire 2004 fiscal year this expense category also decreased, declining 140 basis points to 54.6% of franchise revenues. As anticipated, the improvement was largely due to the consolidation of our European back offices. In addition, lower franchise product sales which have a higher cost component when compared to franchise royalties and fees, that reduction in product sales also contributed to the overall improvement. Franchise product sales were lower due to the 206 franchise salon buybacks we did in fiscal 2004. On a period by period basis, franchise direct costs as a percentage of revenue will fluctuate based on the revenue mix, however, there is an opportunity for modest improvement as our European growth accelerates during the next couple of years. 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 2004 this expense category came in at 9.1% of total revenues, a 50 basis point improvement versus last year. Recall, however, that corporate and franchise support costs during the fourth quarter last year were negatively impacted by a $3.2 million EEOC settlement.

For all of fiscal 2004 our corporate and franchise support costs came in at 9.5% of total revenue, which was an improvement of 20 basis points compared to the previous fiscal year and was in line with our anticipated improvement in this area. Given our ability to leverage our corporate infrastructure, we continue to anticipate modest annual improvement in this category. I will now switch to our two depreciation and amortization expense categories. The salon portion of this expense was 3.4% of Company owned sales for the entire 2004 fiscal year, virtually identical to the year-ago period. Fourth quarter salon D&A improved 10 basis points to 3.5% compared to last year, but was essentially in line with our expectations, so I don't believe there is much to talk about here. The corporate portion of our D&A for the entire 2004 fiscal year was 70 basis points of total revenue, similar to last year. And fourth quarter D&A was 60 basis points, which was also on par with the year-ago period. The combined effect of all of the salon revenue and expense items I've just discussed generated a fiscal 2004 salon contribution rate of exactly 18% of Company owned sales, including a rate of 17.2% in the fourth quarter. An annual rate of 18% reflects the continued health and profitability of our Company owned salon operations. Next, after factoring in overhead costs, our overall operating margin rate for all of fiscal 2004 remained at 9.4%, including a rate of 9.1% in the fourth quarter. Let me now speak to our interest expense and our debt levels. Interest expense for all of fiscal 2004 came in a bit better than plan at $17.1 million or just under 1% of total sales.

Our total debt at June 30 was just over $301 million, which was virtually identical to our debt levels from the prior fiscal year. Previously, we had anticipated that our June 30th debt level could be as high as $320 million. However, the acceleration of sweeping local salon cash into our corporate account during the fourth quarter and reduced working capital needs benefited our overall debt levels at the end of the year. Our debt to capitalization ratio, as Paul mentioned, remained solidly investment grade, ending the year at 30.5%, a 440 basis point improvement from the rate of 34.9% that we reported at the end of our prior fiscal year. This marked the second consecutive year of significant improvement in our debt to capitalization rate. We are obviously very pleased with the strength of our balance sheet. As you know, the cash flow characteristics of our company are very strong and highly predictable. We are pleased to report that our EBITDA grew over 13% in fiscal 2004, to a record $257 million. And our after-tax cash flow increased 18% to just over $180 million. We continue to believe that our internal cash flow and our available debt capacity will be sufficient to cover our future salon expansion costs as well as our scheduled debt retirements and our dividend payments. At this point in time we also expect to be essentially cash flow neutral in fiscal 2005, resulting in only modest changes to our current levels of debt. Just a few more items. I will first talk about our effective income tax rate. Our overall effective tax rate for all of 2004 came in essentially on plan, improving to 36%, which was 150 basis point decrease compared to fiscal 2003. The reduction of our consolidated effective income tax rate relates primarily to the improved profitability of our European operations which are taxed at lower rates.

As we look to our current 2005 fiscal year, it is certainly possible that we may see some additional incremental benefit to our tax rate during the year if a few proposed legislative tax changes become law. However, it is too premature at this time to include these potential benefits in our current guidance. And I will now address our earnings. Our net income for the fourth quarter of fiscal 2004 increased to a record $27.3 million or 59 cents a share, which was at the upper end of the range that we previously communicated. And this was also 9 cents per share above the 50 cents that we reported in the fourth quarter last year. Once again, recall that our prior year fourth quarter and our fiscal year results were reduced by nearly a nickel per share due to the $3.2 million pretax charge related to the settlement of an EEOC claim. Also, we should note that foreign exchange had a positive impact of nearly a million dollars to our fourth quarter net income results. For the entire 2004 fiscal year, our net income increased to a record $105.5 million or $2.29 a share, which was up over 19% from the $1.92 per share we reported for all of fiscal 2003. If you were to add back the $3.2 million EEOC charge during fiscal '03, our fiscal 2004 EPS of $2.29 would still represent 17% annual earnings growth. For the full fiscal year our foreign exchange contributed $2.5 million for net income. We ended the 2004 fiscal year with a total of 10,162 salons which was a net increase of 545 units over the number of salons we had at the end of our previous fiscal year. And again, in today's press release, you will find a detailed table that breaks out our salon activity and our year-end counts for each of our salon concepts. So that's it. With that, Paul and I would be more than happy to answer any questions that you may have so, Tony, if you can step in and provide some instructions, I'd appreciate it. Thank you.

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, one on your push button telephone. If you wish to withdraw your question, please press star, two at any time. Your question will be taken in the order that it is received. Please stand by for our first question. We will go first to Jeff Stein with KeyBanc Capital Markets.

Good morning, guys. Just curious, as you see the year unfolding, you're looking for kind of a 1 - 2% comp for the year, wondering if you see that being perhaps impacted at all by what's going on in retail right now, the guidance that Wal-Mart provided yesterday, that they're lowering expectations for August, in other words do you see the first quarter or two below the trend line you expect for the year?

Well, first, Jeff, it is Paul. The -- our first quarter in guidance was 0 to 1. We had a very strong August last year, 4.2% positive comp. And we've forecasted negative comps internally for August this year. And that's how we got to our 0 to 1 for the first quarter. Now, we don't see any -- any change at this point in time, Jeff.

Okay. And Paul, wondering if you could just kind of address the issue of unit expansion on a go-forward basis. I'm -- I'm kind of curious because historically you guys have, you know, purchased 3 to 500 salons a year and you're opening anywhere between 250 and 300 salons net per year, how long can you continue to grow at that pace organically and in the future, would you expect a higher percentage of your salon growth to come from acquisitions than in the past?

The -- we're -- our balance sheet is so strong today, Jeff, that we think we can continue to ratchet up our organic growth. We opened 450 units this year from scratch in terms of new builds. And our budget is well over 500 for fiscal 2005 and we don't see any problem in achieving that number. The -- the acquisitions are always -- always a big question mark. We -- we acquired 400 and some odd last year, about half the franchise buyback, and we're highly confident that we will acquire a like number this year. We don't see that as a big issue. In terms of acquisitions, I don't think that the acquisition pace will be significantly increased in the years ahead, but this is a quality control issue, Jeff. We -- we feel very comfortable organizationally adding gross anywhere between 900 and 11, 1200 salons and net of closures and relocations, anywhere between 500 and 800 net. And we're comfortable with that number. But we think we can maintain that growth for a long period of time, Jeff.

In other words, you don't -- you're not concerned at all about cannibalization as you open new locations organically? That's kind of where I was getting at, Paul? In other words, at some point will you slow down the pace of organic growth and perhaps pick up the pace of acquisitions due to potentially cannibalizing yourself as you open new locations.

With our multiple brands that is not an issue. There is no question that the cannibalization issue, which is a significant one, if we open, for instance, in a market where we have 40 Supercuts. You do have some cannibalization if you open another 10. But if you open 10 Hair Masters in that same market there is very little cannibalization with Supercuts. So our multiple brand strategy gives us all the flexibility in the world that counters any kind of negative effects of cannibalization.

Okay, thanks.

You're welcome.

We will go next to Mitch Kaiser with Piper Jaffray.

Hi, guys. Randy, just a quick question on cash flow. You said it would be neutral for the year. Is that cash flow from operations plus CapEx or is that -- what's your definition on that?

Sure. Mitch, you're -- I don't know if everybody heard that question. But I'm going to repeat it because you're coming through with a lot of static on the question. You were asking whether or not the cash flow from operations this year, where we are predicting very little overall change to our debt levels, how I define that, and really what we're looking at is after-tax cash flow is going to be essentially sufficient to fund our working capital needs as well as our new store construction and our acquisitions. We had said that we will spend this year somewhere between 110 to $115 million on building over 500 new Company owned stores. We will also spend at least $90 million acquiring stores and, as we look, we have said in the past that we have very little need for working capital because we're collecting our cash well in advance of when we pay our bills, so we do look at very modest changes to our current debt levels, so -- of $300 million.

And the acquisitions will add 12 to 15 cents, is that the 400 store thing (inaudible)?

We've got a lot of static on your line. Yeah, 400 stores is probably a good number in terms of acquisitions.

I will try one more if I can. FX you said it added 170 basis points this year.

Right.

What is the assumption in your plan for next?

Right now, we're looking that there should not be a material change to the dollar, whether it is weakening or declining, so we haven't really factored in much of a change.

Sorry about the line.

No problem.

Thank you, sir. We will take our next question from Mark Chekanow with Sidoti and Company.

Good morning. You talked a little bit in the past about what you're doing currently on the merchandising side, different product selections, can you talk a little bit about kind of where that's headed and the reason why you are using products comp, especially would be better in the second half of this year?

The -- it is a never-ending process. We -- we --our big item -- our big lines, the Matrixs(ph) of the world continue to struggle compared to the year before, but we have new lines coming all the time and -- and the fact of the matter is, with our expansion into the strip center environment and the acquisitions of very -- of larger -- larger physical plants, we do have new items that we hadn't had before, so it is a question of integrating those items into our basic formats.

And what about what you're doing with the -- with the different product selections at Regis?

Well, we continue to modify our plan-o-grams based upon our -- our different concepts. For instance, we do have a whole new assortment for Vidal Sassoon and we continue to tweak that kind of merchandising approach.

And switching to acquisitions, you talked about possibly getting more aggressive in beauty schools. I assume -- I mean, does your plan for fiscal '05 include beauty school acquisitions or as they come along would that be incremental to your salon acquisitions?

Initially, we thought it would be incremental but we -- if the number becomes large enough, there will be some cannibalization we're running through our beauty salon acquisition program.

Okay. Thank you.

You're welcome.

We will go next to to Sharon Zackfia with William Blair.

Hi, good morning. A question on service margins for '05, is that something we should expect to improve, some other issues that you mentioned, do they start to go away and/or do we start to lap them? And then secondarily, overall salon contribution, the margins there, is that something where we should expect maybe 10, 20 basis points improvement a year? Or how should we think about mix affecting that over time?

Well generally, Sharon, as it relates to service margins, as I said in the prepared comments earlier, that we generally will look at our service margin rate would improve modestly year-over-year, maybe it is 10 basis points in that order of magnitude. Primarily because of a mix player. The fastest-growing concepts are our highest service margin concepts. Some of the factors that we did point to that beginning last quarter, actually in our third quarter, relative to increases in the state unemployment taxes and in credit card processing fees, you know, we're starting to -- on certain things, like credit card processing fees, I think we are starting to get our arms around it. Our guidance continues to be, you know, for service margins to be in the 43% range. Now, we don't see a material change, and we're hopeful that maybe it could slightly improve because of the mix as we go forward. As it relates to the salon contribution rate, or operating margin, let's talk about operating margins, we do have the ability to leverage our corporate infrastructure, our G&A costs, as we grow the business. So generally, we would see that that should also increase on average maybe 10 basis points or so on an annual basis.

But I guess overall salon contribution margin, is that something where we should generally expect it to stay in the 18% range.

Yeah, but it would grow to the extent that we're able to get some leverage in our gross margin that would have a favorable effect. But we are very pleased with the 18% range and it could grow slightly, yes.

Okay, thank you.

You're welcome, Sharon.

We will go next to Mike Hamilton with RBC Dain Rauscher.

Good morning, a couple of questions. First, could you comment off of your -- your 2.55 to 2.62 range, where you're coming down in guidance on first quarter?

First quarter is about 60 cents.

Okay. Thanks.

Give or take a couple of cents.

Yeah, our previous range was I believe 59 to 62 cents for the quarter.

Second, I'm the last person to talk about hair styles, but your last quarter you commented a little bit that you were seeing some very early signs that perhaps there were some shortening trends. And it sounds like your comments today that given the environment, you're probably backing off of that. Is that a fair assessment?

Well, as you know, we're pretty optimistic generally. But your assessment is a fair assessment.

Very good. Well, thank you very much.

Okay.

And once again, if you would like to signal to ask a question, please press star, one on your touchtone phone at this time. Once again, that is star, one to signal with a question. We will go next to Kevin Poll with Next-Generation Equity.

Hi, guys. Great quarter. And just wanted to get your take on the -- obviously, you guys have trended away from the malls in your strategy, particularly over time, and what -- what is your thought on the overall mall traffic trend impacting the product sale portion of your business? Obviously the service is a little more consistent business because you don't rely as much on the walk by traffic, but kind of where are your thoughts there for the back half of the year and going forward?

Kevin, the mall business has stabilized. The -- our non-mall business has had -- we haven't had -- other than Wal-Mart, there has not been a huge significant difference between mall and non-mall. So I think we're in a situation with the overall retail economy, coupled with hair fashions, whether it is mall or non-mall, I personally -- we're pretty indifferent. The -- we can control our costs somewhat better in the non-maul environment, but we've been able to get an awful lot of caps on our cams in the maul environment, so we have not abandoned the malls in any way, shape, or form.

Okay. Great. And then in terms of the mix shift of the product, the product revenues growing faster than the service, I generally model by, maybe, over the next four or five year product sales, just given the incremental comps that have been generating relative to service, maybe accounting for 35% of sales, does that sound like a reasonable number?

That's high.

I think that's too high, Kevin. I mean, we would generally -- what is happening is that certainly as our Trade Secret division grows, that will have a favorable impact on the overall mix, but also recognize that most of our growth organically and through acquisition is coming in strip center locations which has a lower overall mix. So we would generally see modest growth, maybe -- and again, somewhere -- we ended the year close to 29%. We fluctuated at times close to 30%. I would just see continued modest growth in our overall sales mix.

Okay. Great. Thanks.

Thank you. We are standing by with no further questions at this time. Ladies and gentlemen, if you wish to access the replay for this call, you may do so by pressing -- excuse me, by dialing 888-203-1112, with the I.D. of 305702. We would like to thank you for attending today's conference and at this time, you may disconnect.