Regis Corp (RGS) 2005 Q1 法說會逐字稿

Good morning, my name is Felicia Friesner (ph), and I will be your conference facilitator today. At this time I would like to welcome everyone to the Regis Corporation first quarter 2005 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, please call Regis Corporation at 952-947-7798, and a copy will be faxed to you immediately. If you wish to access the replay for this call, you may do so by dialing 888-203-1112, access code 839652. 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 non-GAAP financial measures mentioned in the following presentation can be found on their website at www.regiscorp.com.

With us this morning are Paul Finkelstein, chairman and chief 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. Today's call is being recorded. If you would like to ask a question during this time, please press star 1 on your touchtone telephone. If you would like to withdraw your question, press star 2. I would now like to turn the call over to Mr. Paul Finkelstein for his comments. Please go ahead, sir.

Thank you and good morning, everyone. I know that most of you have been on previous conference calls, and for the last 10 or 15 quarters I have announced that we've had an excellent quarter. Today I am announcing that we had a fine quarter. Revenues increased 10 percent to $506 million with same-store sales increasing 9/10 of 1 percent; they rebounded nicely in September. Earnings per share was 55 cents, even with last year and in line with our revised guidance. However, when one peels the layers off the onion, there are several factors to consider.

First, our first-quarter earnings were initially projected to show a very modest increase. Last year's first-quarter comps and, in particular, our August comps were very strong. Last year's product comps were not sustainable, and last year we had the benefit of tax refunds.

Lastly, first-quarter revenues this year were negatively impacted by approximately $4 million due to hurricanes. We lost nearly 3,300 salon days due to the hurricanes, and many of the salons in the affected areas that were open suffered a significant downturn on traffic. We did elect to pay our people. The costs associated with preserving the income of our associates was in the 3-cent range. So, all things considered, our first-quarter results were satisfactory. We ended the quarter with 10,262 salons, a net increase of 100 salons during the quarter. We acquired 65 locations and four transactions of which we brought back 58 franchise locations. We built 121 corporate salons and closed or relocated 64 others. Our franchisee has built 64 salons and closed or sold back to us 86 salons for a net decrease of 22 franchise salons during the quarter. Company-owned salons and schools as of September 30, 2004, numbered 6,360. Our franchise salons numbered 3,902. Our debt at the end of the quarter was $309 million, and our debt-to-cap ratio improved to 30.1 percent.

Let's talk about the rest of the year. On September 22, we reduced our fiscal 2005 guidance very modestly due to the impact of the hurricanes on our first-quarter results. However, we remain highly confident that we will once again deliver record revenue on earnings, meeting our long-term growth objectives of low to mid-teen revenue and earnings growth. Our beauty school acquisition program is moving along extremely well. Assuming we make no additional school acquisitions, we project that the school business will generate over $27 million in revenue during fiscal 2005. As beauty education has become a meaningful amount of revenue for us, today we begin breaking out beauty school revenue and direct school costs on our income statement.

I mentioned on previous conference calls that we would not enter the beauty school business if we did not believe we could generate at least $100 million or more in revenues for us. We are confident that we will achieve this goal within two or three years and should shortly be announcing significant beauty school acquisitions.

On the acquisition front, while we did not announce any significant acquisitions during the first quarter, we virtually had our year finalized and will be releasing information on acquisitions within the next several months. It is highly likely that we will exceed our initial acquisitions budget for the year, and that most of our acquisitions will be completed during the first seven months of our fiscal year. We are assuming that fiscal 2005 will continue to be somewhat lackluster relating to same-store sales. I promise that even though I have nightmares concerning women with long hair, I will not bring it up anymore, because the trends will inevitably change to shorter, shaped hair, but there is very little we can do about this other than know that we will always have these cycles.

Likewise, we feel that the economy will be a difficult one, primarily due to factors such as relatively high unemployment coupled with much higher energy costs. We know that it is very difficult for investors to put Regis into any one specific category. We are a unique, one-of-a-kind company that needs explanation and, sure, we are a retailer, but we are also a service retailer. We really don't have a significant amount of sexy "in" businesses. Hot, sexy concepts can be knocked off, and we are immune to that risk. We are also virtually immune to the risks associated with outsourcing, foreign competition, and technological obsolescence. In short, we are the quintessential replenishment business and highly, highly predictable. Our strategy is to continue to focus on giving excellent customer service, bringing our customers back, and maintaining our margins.

Wal-Mart continues to be an outstanding business for us. As you know, Wal-Mart has recently increased its forecasted Supercenter openings for its new fiscal year, and we should benefit accordingly by building and opening more SmartStyle company-owned Wal-Mart salons this year than in any year in our history. Our balance sheet is extremely strong, and we are now in a position to look at other ways to significantly enhance shareholder value, whether it is on the dividend or stock repurchase front. We also have the ability to look at much larger deals that could benefit Regis long term.

So while our first quarter was satisfactory, given the factors that I previously mentioned, we continue to be extremely bullish about our prospects for a long time to come. Randy Pearce will now continue.

Thanks, Paul, and good morning, everyone. Our first-quarter revenues increased 10 percent, yet our earnings were essentially flat, growing slightly to $25.5 million, or 55 cents per diluted share. Paul discussed the impact of the hurricanes on our first-quarter performance. In September we revised our guidance to account for this impact. Today we are reporting first-quarter results that were in line with our revised guidance.

Once again, our first-quarter revenue and earnings performance were negatively impacted by the multitude of hurricanes that affected nearly 650 of our corporate salons in the Southeast United States. Six hundred and forty-four salons were closed for at least one day during the quarter. In addition, we lost nearly 3,300 salon days due to the storms. Many of our salons in this region that were open for business experienced slower-than-usual traffic due to the storms, and the impact they had on the residents in the affected areas. In total, the hurricanes reduced our first-quarter revenue by about $4 million and reduced our earnings by nearly 3 cents per share. We do not foresee any significant hangover effect of the August and September storms into our second fiscal quarter.

Let me now talk a bit about beauty schools to follow up on some of the comments Paul made. Nearly two years ago we acquired our first beauty school academies as part of the Vidal Sassoon acquisition. Today Regis currently owns and operates 11 beauty schools and academies and, as you know, our plan is to acquire and build quite a few more over the next few years. Because of this growing business, you'll notice in today's press release that we have now started to report our beauty school revenue and direct costs as separate line items on the face of the P&L. We started doing that with our first-quarter results for the new fiscal year, and we have also reclassified these same line items for the year-ago period for purposes of comparability.

This reclassification of revenue and costs impacted nearly all of our operating expense ratios but only to a minor degree. All of my comments regarding our first-quarter performance will reflect this reclassification. Today on our corporate website, you will find a quarterly P&L for our prior 2004 fiscal year that reflects this reclassification.

Let me now jump in and give you a bit more detail behind our first-quarter results, and I'll start first by discussing revenues. Our consolidated revenues increased 10 percent in the first quarter to a record $506 million. As you know, our long-term growth expectations include both organic and acquisition growth, with each representing roughly half of our total revenue growth. This quarter organic growth represented 45 percent of total revenue growth, while acquisitions represented the remaining 55 percent of total increase in revenues.

We were pleased with the execution of both strategies during the quarter. Obviously, these percentages will vary on a quarter-by-quarter basis due to the timing of new store openings and acquisitions. However, over a long period of time, the mixture of organic and acquisition growth should be very consistent with our long-term expectations. You will find a table in our press release today that breaks out first-quarter revenues for each of our salon concepts.

Service sales increased 11.3 percent in the quarter and our higher-margin retail product sales grew 6.2 percent. In addition, our product sales mix for the quarter was 29.5 percent of total company-owned salon sales, similar to the product mix we reported for the same period last year. We continue to become much better product merchants each year, and we are all well on our way to generating nearly $600 million in retail product sales this current fiscal year.

During the first quarter, our beauty school revenue doubled to nearly 6.1 million, primarily due to the acquisition of Blaine Beauty Schools during the fourth quarter of our prior 2004 fiscal year. We anticipate generating slightly higher revenues during our second and third fiscal quarters each year due to modest seasonality in the school business. As a result, we also anticipate school direct costs will be lower as a percentage of sales during these same two quarters.

I'll now switch to franchise revenues. In the first quarter, our franchise revenues grew slightly by 2 percent to $26.5 million. For the quarter, franchise royalties and fees increased 3 percent while franchise product sales declined by about 1 percent. The decrease in our franchise product sales and the slight growth in franchise royalties and fees can be primarily attributed to modest reduction in franchise salon count as of September 30, 2004, compared to the year-ago period. However, our franchise business remains healthy, as evidenced by the 64 new franchise salons built during the quarter. We believe our franchisees will build 200 to 300 new salons this fiscal year.

As we reported in our press release on October 7th, consolidated same-store sales for the quarter increased 90 basis points, which was at the higher end of our first-quarter forecast range of flat to 1 percent. We were encouraged by our first-quarter service comps, which grew 1 percent compared to a 40-basis-point increase in the first quarter a year ago. Our service business continues to be impacted by the economy as well as fashion trends. Long-term, we anticipate that our service same-store sales will return to the range of 2 percent to 4 percent. Our retail product comps also grew, increasing 60 basis points in the quarter on top of very strong 7.9 percent comps during the year-ago period. We continue to anticipate that our retail product comps will remain relatively modest during the next two quarters, as we anniversary some difficult comparisons.

I'll now talk a bit about our first-quarter gross margins. As I just mentioned to you a few moments ago, effective today, we have reclassified all of our revenue and expenses associated with our beauty school business into separate line items on the P&L. We did this both for our current year as well as the comparable period a year ago. Reclassifying the beauty school revenue and expenses out of our margin had the effect of reducing our combined salon gross margin rate by about 30 basis points.

Our first-quarter overall combined gross margin came in at 44.7 percent of total company-owned salon sales, which was below our initial plan and was 20 basis points lower than the comparable period last year. As we'll discuss in a moment, a quarter-over-quarter improvement in our retail product margins was more than offset by a decline in our service margins. So let's now talk about our service margins.

As we noted in our press release on September 22nd, our decision to compensate our employees in areas affected by the hurricanes while the salons were closed did have a material impact on our first-quarter service margins. As a result, our first-quarter service margin rate came in at 42.9 percent, which was below our initial plan and was 60 basis points lower than the same period a year ago. Fortunately, some of the downside to our first-quarter service margin rate was offset by improved salon payrolls in other areas of the country.

Looking ahead, we continue to expect that our service-margin rate for the full 2005 fiscal year should be in the range of 43 percent, an improvement from our first-quarter rate.

Let me now discuss our retail product margins. During the first quarter, our retail margins came in at 48.9 percent. As we expected, our first-quarter product margin rate did improve over the same quarter a year ago, growing by 80 basis points. This improvement over the past 12 months was due to improved purchasing power as well as a shift in mix toward selling higher-margin merchandise.

We continue to expect product margins for all of our fiscal 2005 to be in the mid-49-percent range.

I'll now discuss rent expense. Our consolidated rent expense in the first quarter this year came in at 15.1 percent of company-owned salon revenue, which was a rate a bit higher than what we initially planned and was 50 basis points higher than the same period a year ago. The increase in this fixed-cost category was primarily due to lower-than-expected revenue in our first quarter, which we have previously talked about. We continue to expect our rent expense rate for all of fiscal 2005 to be approximately 15 percent.

I'll now address the direct salon expense category, which includes costs directly incurred by the salon such as salon advertising, insurance, utilities, and janitorial costs. This expense category came in essentially on plan at 8.9 percent of first-quarter sales, which was also comparable to the 8.8 percent rate we reported in the first quarter last year. The slight deterioration of 10 basis points was largely due to the lower same-store sales growth in the first quarter this year versus the year-ago period.

Looking ahead to the balance of our 2005 fiscal year, we continue to expect the direct salon expense category to be comparable to our fiscal 2004 rate of 9 percent.

I'll now talk about the line item titled "Franchise Direct Costs." Franchise direct costs came in at 52.6 percent in the first quarter of our current fiscal year, virtually identical to the rate of 52.5 percent we reported in the first quarter last year, so there's not a lot to talk about here. We continue to project our franchise direct costs to be in the 53- to 55-percent range for all of fiscal 2005.

I'll now address our general and administrative costs, which, incidentally, we previously had titled on the face of the P&L as "Corporate and Franchise Support Costs." Our general and administrative cost category includes all of the indirect costs we incur to support our worldwide company-owned salons; to support our franchise units as well as our beauty schools. Specific expenses within the G&A category include costs associated with our field supervision, our salon training and promotions, our two distribution facilities, and our corporate offices. This expense category for the first quarter of our 2005 fiscal year came in on plan at 9.6 percent, a 30-basis-point improvement compared to the same quarter last year. This expense category in the first quarter last year was a bit higher than normal. As you recall, last year in the first quarter we wrote off loans associated with split-dollar life insurance policies as we were required to do under Sarbanes-Oxley.

We continue to expect that the full 2005 fiscal year rate should be less than 9.5 percent of consolidated revenues.

I'll now switch to our two depreciation and amortization expense line items. Both categories were consistent with our expectations and were identical to our prior-year first-quarter results. During the first quarter this year, the salon portion of our D&A was 3.4 percent, and the corporate portion was 70 basis points. Looking ahead to the balance of our current fiscal year, we continue to expect that the rates for both categories should be comparable to those that we reported here in the first quarter.

The combined effect of all of our revenue and expense items I've just discussed have caused our four-wall salon contribution rate -- this is before any corporate overhead -- to come in at 17.3 percent of first-quarter company-owned salon sales. Given the interruption in business that we experienced this quarter caused by the weather in the Southeast United States, we are pleased with our salon performance.

After you factor in corporate overhead, first-quarter operating income increased to $43.2 million, or 8.5 percent of sales, down 90 basis points from the same period a year ago. Despite a challenging first quarter, we still believe that our operating income rate for all of fiscal 2005 should be quite similar to the 9.4 percent rate we reported last year.

I'll now drop down to interest expense, which came in at $4.3 million, or 85 basis points of total first-quarter sales, a slight improvement of 10 basis points from the first quarter last year. Our total debt at September 30th also came in generally where we expected it to be, standing at $309 million, which was an $8 million increase from our June 30th debt levels. Our debt-to-capitalization, however, continues to remain solidly investment-grade, now standing at 30.1 percent as of the end of September, which was a 40-basis-point improvement from our June 30th rate of 30.5 percent.

We continue to feel that our internal cash flow and our available debt capacity should be sufficient to cover our salon expansion costs, as well as our scheduled debt retirements and our dividend payments. We continue to expect to spend up to $115 million of our cash flow this year on capital expenditures, which includes the construction of 550 to 600 new corporate salons. As you recall, we also initially anticipated spending an additional $90 million of our cash flow this year to acquire salons. As you know, this is always a difficult number to predict due to the timing of when acquisition opportunities present themselves to us. We have now revised our acquisition estimate and now believe that we could spend $140 million or so this year acquiring not only salons but beauty schools as well. Much of that incremental increase in our anticipated acquisition expenditures relates to beauty schools. This number could continue to move in the future as well. However, if we do see an opportunity that makes sense to us, we are very fortunate to have the balance sheet strength to immediately act on it. Leverage is not an issue to us, as our debt-to-capitalization ratio will remain solidly investment-grade in the low 30-percent range, and debt-to-EBITDA coverage ratio is a very strong 1.2 times.

I have just a few more items. Our consolidated effective income tax rate improved 90 basis points in the first quarter to 35.6 percent, which was a 40-basis-point improvement over the rate that we expected in our first quarter and a lot of that was due to a change in the mix of income. In other words, this quarter we experienced proportionately more income from our international businesses, which are taxed at lower rates.

Also, another piece of good news -- with the passage this month of tax legislation concerning jobs credits, we now anticipate that our income tax rate for all of fiscal 2005 will continue to improve perhaps to the low 35-percent range.

Next, we are reporting first-quarter net income today of $25.5 million, or 55 cents per share, in line with the earnings we reported in the first quarter last year. Once again, our first-quarter earnings were dampened by the impact the hurricanes had on our revenue and expenses. However, looking ahead to the balance of the fiscal year, we remain confident that we will achieve our long-term growth objectives and will be able to report yet another fiscal year of record results, including the accretion from anticipated salon and school acquisitions, we reaffirm our previous expectations that current-year earnings will grow to a range of $2.51 to $2.59 per share, an increase of up to 13 percent. If you look solely at our second fiscal quarter, the one that will end this December 31st, we are forecasting consolidated revenues to grow to the range of $525 million to $530 million, and that includes the same-store sales expectation of 1 percent to 2 percent. Diluted earnings per share are expected to be in the range of 65 cents to 68 cents a share, which is an increase of up to 13 percent for the second quarter. For a more detailed summary of our guidance, you can always refer to our corporate website at www.regiscorp.com.

Let me now provide you briefly some information regarding our salon counts. At the end of our first fiscal quarter at the end of September, we had a total of 10,262 salons, which was a net increase of 100 units over the number of stores we had at June 30th, the end of the previous fiscal year. Once again, in today's press release, you'll find a table that breaks out our salon counts for each of our salon divisions.

So that's it. With that, Paul and I would be more than happy to answer any questions you have. So, Operator, if you can step in and once again provide instructions, we'd appreciate that.

(OPERATOR INSTRUCTIONS)

We'll go to Mark Chekanow of Sidoti and Company.

Good morning. Could you talk a little bit about the service costs and the process you went through when initially trying to estimate the impact of the hurricanes? You did come in at the low end of your range, so I guess walk us through how you went about the assumptions, how you would compensate the employees, and where maybe some of the variances were that caused you hit the lower end of the range as opposed to the middle and the high end that you would typically hit.

Well, Mark, a lot of this, again, was done in the so-called "heat of battle" here, because we were doing this as we were continuing to pay our people. We did not have any idea how long some of these stores could be closed. We came in -- you're right -- we actually came in slightly below the initial range of revenue. We came in at $506 million. We initially estimated $507 million to $511 million. With that initial range of earnings expectations, I think we're at 59 cents to 62 cents, and coming in below the initial range of earnings, we thought that we would probably be in that 55 to 59-cent range. A big uncertainty was how long we would have to continue paying our people. We also experienced a lot of other costs associated with literally having to write off some of our salon assets that were blown away; stores that had a number of repair and maintenance expenditures. So, again, we felt that we would be in the 55- to 59-cent range, and I think, after the proverbial dust has settled, we did find that about 3 cents a share, $2 million of expense went out, paying our people repairing our salons, writing off salon assets.

Okay, well, even if you add the 3 cents and you get to 58, that is a little bit below the 59 to 52. Were there any other cost issues that surfaced around the quarter that would be material, going forward?

No, nothing systemic. As always, you know, $700,000 of pretax income represents a penny a share, so it's not a lot for the $3 billion company. There is always, at times, you can get timing issues relating to expenditures of advertising, professional fees, et cetera. Nothing that we look for, Mark, that is going to continue to drag on second, third, or fourth quarter earnings. In fact, we continue to reiterate our annual earnings expectations, and that we feel we should achieve our long-term growth of achieving double-digit revenue and earnings increase this fiscal year.

Okay, and one other change of topic here -- with the realignment of the merchandise strategy at Regis and at MasterCuts, when you look long term about growing your overall product business, are you setting the groundwork right now for putting in Assisted D (ph) -- I guess, the inventory management systems that you have a trade in place at some of your other concepts, and can you prioritize what's the next most important rollout of better inventory management systems?

Well, let me take a stab at that. Trade represents about half of our total retail product sales. So first, second, and third, that has been our historic focus. Trade also, because the lion's share of sales within the Trade Secrets salon is product. We have sales consultants that are on the floor, which we are able to train, they are disciplined, they are able to utilize the systems, and it's proved to be very, very successful here not only in terms of planograms but also automatic replenishment. So it's been successful in Trade.

We have always said that we are going to try to enhance the systems at the other salon concepts that we have but, again, those business units carry a relatively small portion of inventory, and the lion's share of their sales is product. So the rollout is going to be very, very slow and opportunistic, at best. We are using things, though, such as planograms, that are helping our salon managers merchandise product and helping them stock the faster-moving product. So, Mark, I don't know if that's directly answering the question, but we have no immediate plans to be as aggressive in our other salon divisions with automatic replenishment that we have been with that Trade Secret program.

We'll go to Jeff Stein, Keybanc Capital Markets.

Good morning, guys. I'm wondering if you could talk a little bit about the beauty schools, since you are beginning to break those out as a separate line item and wondering, number one, now that you're interested in getting into that business, it seems that more and more of these transactions are becoming available. I'm just kind of curious -- are you approaching the owners of these businesses or are they approaching you? And why, suddenly, are they selling? That's number one. And, number two, wondering if you could just talk about some of the key metrics that we should be focused on in this business on a go-forward basis? Obviously, comp-store sales is not a good barometer here, but maybe you could talk a little bit about enrollment trends in the business and historically how volatile enrollment has been and tuition and various other factors that would help us be able to model this business, going forward.

Jeff, it's Paul. I'll give it a shot. We are going after the crème de la crème, and we are taking a good, hard look at the ages of owners, and those who are -- in a pool that would be possible sellers we're going through first. We have, as you know, a green light and a totally open playing field in terms of the salon acquisitions. There is really no one of significance being against us. That's not the case with the school environment. There are plenty of private equity funds that are going aggressively into all school businesses -- secretarial, truck driving, beauty, or whatever. So we have to be a little bit more aggressive, a lot more opportunistic with respect to the beauty school end of it, and it's been equally divided. About half the people that -- we are soliciting as many school owners as they are soliciting us.

The enrollments are key, obviously, but assuming that unemployment stays well north of 5 percent, enrollment should not be an issue, going forward. If anything, we are saying tuition increases, and these tuition increases usually range from about $1,000 to $1,500. So when I went into the beauty industry, I won't tell you how long ago, Jeff, the average tuition was $600. Now it's $11,000 or $12,000, and it's going to go up to $13,000 or $14,000. So these trends are all very positive. But I think we have to understand that it will take us two to three years to get to $100 million. That's less than 5 percent of our revenues. So while your question is obviously very, very relevant, I think in two or three years it will be more meaningful than perhaps today.

(OPERATOR INSTRUCTIONS)

We'll go to Kevin Foll of Next Generation Equity Research.

Hi, guys, just a quick follow-up on the salon academies, speaking of the acquisition budget of up to $50 million for salon academies, how many does that assume potentially this year?

Thirty to 50.

Thirty to 50 academies? And would that be a good number to use going forward or would you ramp that up potentially with the opportunity?

Well, we'll pay more initially than we will on future years. The ones that come in in the future, we'll be able to buy, I think, at a lower EBITDA ratio.

Okay, and going on to the direct-cost portion of that, it looks like they've increased the direct cost portion versus last year for salon academies. What was driving that again?

Well, a lot of it is going to be the fact that we just did the acquisition of Blaine, and we haven't integrated it fully. But looking forward, I think we've said that the direct cost should be in the range of about 75 percent of school revenue, which yields about a 25-percent margin before any indirect cost overhead. And, as we also stated, Kevin, we will see a little bit of seasonality to this business in the December quarter and the March quarter, because we'll have a little higher margins in those quarters because of enrollment will be higher in those two quarters than compared to the other two.

That makes sense. And then on the SmartStyle -- how many are you assuming this year, organic growth in the SmartStyles this year and then going forward with Wal-Mart's ramping up of that?

We'll probably go from 175 or 80 up to 200, but we don't have total control over that. A lot of things slip. It could be as high as 215, 220. But we'll have our biggest year in SmartStyle in terms of growth.

Did you guys see a pickup, I guess, post-hurricane in the Southeastern region? You guys experienced some pent-up demand?

Absolutely. And next year, the first quarter will be even better.

We'll go to Mike Hamilton, RBC Dain.

Good morning. Hoping you could give a little insight in your battle with the credit card processors. What are you seeing in fees and tactically what are you trying to do here?

We've seen, obviously, an increase in fees, especially it seemed like it was on the debit card about -- it may have been six to nine months ago we talked about that, Mike. And since then we have worked with credit card processing fees. We've obtained more favorable rates. We really see it as, quite frankly, a non-event. We're not seeing any escalation in our rates and don't expect it, going forward, either. Our size certainly helps our leverage when we deal with credit card processing.

Doing anything that's getting you any mix shift at the margin?

No.

We'll go to Mitch Kaiser of Piper Jaffray.

Good morning, guys. On the beauty school multiples, could you refresh us what we should be thinking about there? Was it 8 percent -- or -- 8 times EBITDA?

Well, the companies that were paying 8 times EBITDA will have superior growth rates. They have a discount on EBITDA. There may be other companies that we -- that will not have a superior growth rate, and those EBITDAs will probably be in the 4.5 to 5.5 range.

And what would you characterize as superior, Paul?

Go up to 15 percent.

Okay, and then in terms of synergies, I recognize that a feeder program for the salons. Are there other synergies or cost takeouts that you can achieve with those?

Cost takeouts, obviously, will increase as we increase (indiscernible). Be somewhat patient with us. Within a year or two, I think we're going to take the best of the best in terms of systems and the like, and I think there will be a significant improvement in the way we run that business.

Once again, that is star 1 if you'd like to pose a question. We'll go to Mark Chekanow of Sidoti and Company.

This is the first time that you've mentioned higher gas prices. A lot of consumer companies have talked about it in the past. Is there anything that's prompting you now to mention this as a potential concern?

No, other than it's reflective of the overall situation in terms of -- like, who knows what's going to happen after the election? These deficits can't go on forever. We happen to be, I think, blessed in that we are in a quintessential replenishment business, and it is an affordable luxury. Our average customer spends less than $200 a year on a beauty salon or barbershop. But, at the same time, we're not expecting any huge increase in comps, and I think gas price is just one indicator that is obviously a challenge for us.

And just also, you did mention briefly that there were some delays in the timing of some of the acquisitions. Is there anything we should read into that? Any kind of material reasons for delays or, I guess, what's behind that?

No, the beauty school business is a lot different from the salon business in terms of being able to close very quickly, because you have Department of Education issues, and you just have to spend a lot more time on due diligence, a lot more time between the time when the deal is inked and when it closes -- I mean a lot more time.

So these were delays on beauty school acquisitions not salon acquisitions?

Primarily.

We'll go next to Kevin Foll of Next Generation Equity Research.

Hi, guys, just a follow-up on the competitive landscape. I see haircutters going into some of the -- they're going after some of the lifestyle locations, targeting some of the higher-end concepts and also opening some haircut/spa type concepts to take advantage of some of those attractive lifestyle locations. Do you guys envision doing a similar type of strategy or are you guys really going after some of those lifestyle locations?

Well, the lifestyle locations are "hot" in the minds of our developers. Whether -- and we're going into many of them. I mean, a ton of them. Whether or not they will all bear fruit is another issue. The good thing about the mall environment is that in a mall you're in prison. That's not the case with a lifestyle center, when you can pull up right in front of your store. But time will tell what our internal rates of return will be. The rents are no real bargains in the lifestyle centers. So, once again, time will tell, but we are going into them, because that's what's being built today.

Gentlemen, at this time there are no further questions. I'll turn the conference back to Mr. Finkelstein for any additional remarks.

Thank you for joining us.

That does conclude our conference call. If you wish to access the replay for this call you may do so by dialing 1-888-203-1112 with an ID of 839652. This concludes our conference call for today. Thank you for your participation and have a nice day. You may disconnect at this time.