Regis Corp (RGS) 2006 Q1 法說會逐字稿

Good morning. My name is Stephanie, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Regis Corporation 2006 First Quarter 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 1-800-405-2236, access code 11041534 pound.

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. Reconciliations 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 Executive Officer, and Randy Pearce, Chief Financial Officer and Executive Vice President.

[Operator Instructions].

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

Well, good morning, everyone, and thank you for joining us. As you have all seen in our press release, first-quarter revenues increased 15% to $584 million. Same-store sales increased 0.7%. Net income decreased 12% to $22.2 million, or $0.48 a share. Hurricanes Katrina and Rita reduced first quarter EPS by $0.03. Randy will soon discuss these in his comments. Excluding the hurricanes, we met the low end of our earnings guidance.

EBITDA increased 8% to $68 million. We ended the quarter with 10,952 salons, 90 hair restoration centers and 35 beauty schools, a net increase of 84 locations during the quarter, and 815 locations compared to the year-ago period. During the quarter, we completed 13 transactions acquiring 48 salons and 11 beauty schools. We've built from scratch 125 corporate salons and closed or relocated 42 salons.

Organic and acquisition activity led to a net increase of 142 corporate units during the quarter. Our franchisees booked 57 salons and closed or sold back to us 105 salons, for a net decrease of 58 franchise salons during the quarter. As of September 30th, we had 7,108 Company-owned salons and 3,844 franchise salons. Total debt at the end of the quarter was $600 million, and our debt to cap ratio was 43.2%, still solidly an investment grade.

While Randy will discuss the financial impact of the hurricanes in a few moments, I wanted to mention a few things regarding the storms. First, 26 salons are still not operating today, including 7 salons completely destroyed. This does not include the 156 salons closed in the Florida due to Wilma -- closed as of yesterday, that is.

We've donated $200,000 of product to a relief agency, Gift in Kind. We've rushed a significant amount of emergencies compensational disaster pay to our stylists in the affected areas immediately following the storms. Fortunately, all of our employees in the affected areas are accounted for. In a service business such as ours, employees are, in fact, our most important asset, and we must make sure that we expend every effort to give them the security that they need.

During the quarter, we added 11 beauty schools to the 24 we owned at the end of fiscal 2005. We now have 35 schools, and we believe that we will soon become the nation's largest operator of beauty schools. We have our industry's best education programs within our salons, and we look forward to translating this competency to our beauty schools. As the world's largest employer of stylists, we have a keen interest in the development of potential employees.

We do intend to raise the bar in the beauty school education by improving curriculums, increasing job placement rates and thereby lowering student default rates. There should be other beauty school acquisitions in fiscal 2006, and we could end the year with approximately 50 locations. There will be additional beauty school acquisitions in fiscal 2007. Thereafter, there will be a balance between beauty school acquisition growth and organic growth. We continue to believe that the beauty school business should generate $100 million in annual revenues within 3 years.

While we're obviously not pleased with our first-quarter results, we are encouraged by the relative strength of our domestic service comps, which increased 1.8% versus a 0.9% increase a year ago. About a third of this increase related to the price increases that were implemented during the fiscal 2005. By the way, October domestic comps through yesterday are well above 2%, and both service and product comps are positive.

While product comps for the first quarter were disappointing, decreasing 0.5%, we are quite bullish that our unique holiday -- that our unique and exclusive holiday promotions should be quite successful. And we look forward to positive product comps as well. While we're obviously not pleased with the drop in our share price, but we are in this for the long term and are eager to regain our historically strong stock price appreciation.

Nothing goes up in a straight line. However, if we run the business in the future as we've run it in the past and, in fact, double our sales and profits over the next five to seven years, we are highly confident that the stock price will follow. After all, a significant increase in size is a very positive influence on multiples. Our recent venture into -- ventures into hair restoration and beauty schools are also positive factors that position us for long-term growth. All three of our operating divisions have similar characteristics.

We are the dominant player in each arena. We have plenty of competition, but very few significant competitors, and yet have relatively minuscule market shares. Thus, we are as bullish as ever about our future. We are scheduled to present at the Bear Stearns Small Mid-Cap Investor Conference in New York City, on November 8th. And our annual shareholder meeting will be held at our corporate offices, at 9:00 AM tomorrow, October 27th.

Randy Pearce will now continue with our presentation.

Thanks, Paul, and good morning everyone. As Paul just mentioned, our first-quarter earnings per share of $0.48 that we're reporting today was $0.03 below the low end of our initial guidance range for the quarter, which was due entirely to the impact of hurricanes Katrina and Rita. Saying it another way, excluding the $0.03 per share impact from these hurricanes, our first-quarter earnings met the low end of our initial guidance.

As you know, our quarterly earnings guidance correlates to our same-store sales guidance. For example, for our first fiscal quarter, we had forecasted same-store sales growth to be within a range of 50 basis points, to 2%, and earnings to be within a range of $0.51 to $0.56 per share. With actual same-store sales growth coming in at 70 basis points for the quarter, this would correlate to the low end of our earnings range, or $0.51 a share.

As Paul noted previously, the impact of hurricanes Katrina and Rita resulted in $0.03 per diluted share of expense during the quarter. Many of you will recall that last year in our first quarter, when the state of Florida was hit with a succession of hurricanes, we lost 3,300 salon days and an estimated $4 million in revenue, which reduced our earnings last year in the first quarter by $0.03 per share.

This year, hurricanes Katrina and Rita did not impact us quite as bad in terms of lost salon days and lost revenues. However, our operating results were still impacted by the same $0.03 per share. There were a few items related to the hurricanes this year that we did not incur last year. Specifically, this past quarter, we wrote off $450,000 of fixed assets, primarily associated with the destruction of 7 of our beauty salons.

In addition, we donated $200,000 of professional retail product to a charity called Gift in Kind, which was distributed to residents in the affected areas. Finally, due to the extent of the destruction, the amount of disaster pay that we directed this year to our stylists was significantly higher than the year-ago period. So enough about the hurricanes. I'd like to transition now by giving you a bit more detail behind our first-quarter operating results.

Historically, our comments on the quarter have primarily focused on our consolidated results rather than our business segments. Although we still plan on discussing our consolidated results this morning, we also thought it may be helpful to first start off by providing a bit of commentary on the operating performance of each of our business segments. A breakout of our segment performance is found today in our press release.

I'm going to begin with our largest segment, which is our North American Salons. Our North American salon revenue, which represented 84% of our consolidated first-quarter revenue, increased 10% during the quarter to $494 million. This revenue growth was due to a 13% quarter-over-quarter increase in the number of company-owned salons that we operated as well as a 1.1% increase in same-store sales growth.

Service revenue in our North American salons grew 12% in the quarter to $337 million, fueled by 1.8% increase in same-store sales. Product revenue grew 7% in the quarter to $147 million, despite a decline in product's same-store sales of 70 basis points. Royalties and fees from our North America franchise salons declined 4% during the quarter to $9.8 million.

This slight reduction was primarily due to a net quarter-over-quarter reduction of 47 franchise salons in North America due to franchise buybacks as well as slightly negative comps reported by our franchise salons in the first quarter of this year. Our combined gross margin rate for North American salons was very comparable to that of last year, coming in for the quarter at 44.2%.

Our first-quarter service margin rate came in at 42.5%, which was slightly above plan and represented a 20-basis-point improvement over the same quarter last year. Our service comps of 1.8% for the quarter were twice as strong as last year's first-quarter results and, therefore, fuelled service margin expansion in our fixed costs payroll concepts. This occurred despite the additional compensation we paid to employees impacted by the hurricanes. Our salon payrolls throughout all of our Salon divisions were once again extremely well managed this past quarter.

The improvement in our service margin rates, however, was more than offset by a 40-basis-point reduction in our retail product margin. First-quarter product margins came in at 48.2% and were negatively impacted by the inventory we donated during the quarter for hurricane relief, as well as negative same-store sales and our products experienced at our Trade Secrets Salon division -- which as you know, Trade Secret is predominantly a product-focused concept. Recall that because we have a fixed cost payroll structure at Trade Secret, a negative product comp will cause pressure on our product margins.

Site operating expense, which includes costs directly incurred by our salons, such as advertising, insurance, utilities and janitorial costs, and our rent expense -- those two expense categories were both in line with our expectations and similar to the year-ago period. However, our G&A expense as well as our depreciation and amortization expense for our North American salons, each increased 30 basis points in the first quarter this year over the comparable period a year ago.

Our G&A expense grew to 5.7% of revenue due to higher supervisory travel expenses during the first quarter of this year, a reflection of higher fuel costs. In addition, our G&A rate increased a bit from slight from slight de-leveraging due to first-quarter comps coming in below the 2% range.

Depreciation and amortization increased to a rate of 3.7%, due in part to the $450,000 of fixed asset write-offs associated with the hurricanes, as well as an increase in asset write-offs from store closures and remodeling projects. The net effect of all the items I've just discussed caused the operating income for our North American salons to decrease 100 basis points in the first quarter to 12.6% of revenue.

Next, let's review the first-quarter performance of our international salon segment. This segment includes our company-owned salons located primarily in the United Kingdom as well as our franchise salons located on the continent of Europe. International salon revenue, which comprised 9% of our consolidated first-quarter revenue, was nearly flat with the same period a year ago, coming in overall at $51.5 million. Increased revenue from new salons was essentially offset by a 3.6% reduction in same-store sales during the quarter.

The service revenue component declined 2% in the quarter to $31.4 million. This decrease was primarily due to a 5.9% decline in service same-store sales, partially offset by revenue growth from 15 new corporate salons added during the past year. Product revenue grew 4% during the quarter, the result of positive same-store sales growth of 2.4% as well of sales from new salons added during the past year. Royalties and fees from our international franchisees were essentially flat during the period.

As I mentioned just a moment ago, our total international salon revenue of $51.5 million was essentially flat this quarter, when compared to the same period a year ago. We believe our first-quarter revenues were negatively impacted in part by the London bombings in July.

For example, our international same- store sales in July were off 6.5%. However, as the quarter progressed, they got better. In August, they were off 2.5%. And in September, they were off 1.6%. So they have recovered somewhat since the bombings. However, the overall economic environment in the United Kingdom is the weakest it's been in over a decade. So we do expect some continued weakness in future periods.

I will now discuss our gross margin rate. Our international salon gross margin rate declined 160 basis points in the first quarter to 43.8% of revenue due to a reduction in our service margin rate. Our service margin declined 290 basis points during the first quarter to 45.8%, largely due to a 5.9% decrease in international service comps.

In addition, an increase in the cost of product used in our service business also reduced our international service margin. As we refined our inventory account procedures in the UK, we recently modified our product and service usage percentages. The resulting detriment that this modification had on our international service margin rate, was offset by a corresponding benefit to product margins, neither of which had a material impact on our overall consolidated margins.

The decline in service margin rate was partially offset by improvement in our retail product margin rate, which increased 250 basis points in the quarter to 38.5%. As I just mentioned, this improvement was associated with the refinement made to our product usage percentage for our UK corporate salons.

Next, our site operating expense category came in at 3.5% of first quarter revenue. That was an improvement of 60 basis points from the same period a year ago. This improvement in a way was largely due to the timing of when certain salon level expenses were incurred such as advertising.

Moving on we experienced increases in our international rent expense and our general and administrative expense categories during the quarter. Our rent expense in the first quarter came in at 19.1% of sales. Although this represented a 200 basis point increase over the same quarter last year, our current year rate of 19.1% came in essentially on plan.

A reduced level of comps in the first quarter this year compared to last, was the primary reason of the rate increase of this fixed cost category. The balance of this increase related to rent reviews for some of our UK salons. As we discussed in the past, rent reviews are performed on all of out UK salons at least every five years resulting, at times in market rate adjustments.

Our International G&A rate increased 400 basis points during the quarter to 20.5% of sales, primarily due to three factors. First, this fixed cost category was negatively impacted in the first quarter by negative comps. A second item related to severance costs that we accrued this past quarter associated with our European franchise operations.

Lastly our G&A rate was negatively impacted by the timing of certain market initiatives in the first quarter. However we expect our international marketing expense for the remainder of the fiscal year to be slightly lower than last year.

Our depreciation and amortization expense for our international salons came in at 3.5% of revenues, which was in line with our expectations and identical to the prior year of first quarter rate. In total, the net effect of all the factors we just discussed caused our operating income rate for our international salons segment to decline 680 basis points to 6.3% of international salon revenue.

Next, let's review the first quarter performance of our Beauty Schools. Our Beauty School revenue more than doubled in the first quarter of this year to $13.2 million, but represented about 2% of our consolidated revenue. The increase in revenue was primarily related to the operation of 35 schools at the end of our first quarter this year, compared to 11 schools at the end of the first quarter last year.

During the quarter, we acquired as Paul mentioned 11 schools in two transactions. Today with 35 schools we now have operations in 8 states, as well as, in the United Kingdom. Even though this is a very small component of our consolidated operations, you will notice that the profitability of our school business as a percentage of sales declined during the first quarter of this year.

Prior year first quarter results with only 11 schools was more heavily influenced by the five Vidal Sassoon schools that we had which were highly profitable due to the ability to charge higher tuitions, as well as, less administrative support costs due to no title, poor funding.

Also we remember that we still are in the very early stages of amalgamating and growing the school business. We anticipate that many of the expense line items will fluctuate from quarter-to-quarter due to mix as we continue to integrate the school group we do expect significant leverage in operating expenses, resulting in improved cash flow and operating income.

As Paul mentioned just a moment ago, we anticipate finishing this fiscal year with about 50 schools. As we anniversary fiscal year 2005 school acquisitions, we will provide additional detail regarding this part of our business.

And then lastly in terms of segments, we'll talk about Hair Club for Men and Women. Revenue from our hair restoration centers was nearly $26 million during the quarter, and represented 4.5% of our consolidated revenue. We acquired Hair Club for Men and Women as you recall last December, on December 1st.

So we do not have revenue and expense information for the comparable period a year ago. However, this business is incredibly consistent and the revenue and expenses for the quarter were in line with our expectations, and were quite similar to the results we reported in the previous quarters.

With operating margin rates north of 20%, for the third quarter in a row, it is safe to say that we are very pleased with the performance of Hair Club for Men and Women. So that kind of concludes my prepared remarks concerning our individual business segments. And I'll now put it all together and very briefly discuss our consolidated operating results. Starting first with revenue

First quarter consolidated revenue increased 15% to a record $584 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 past quarter our organic growth, which included same-store sales increases -- an increase of 70 basis points represented 27% of our consolidated revenue growth, while acquisitions made during the previous 12 months represented the remaining 73%.

Obviously these percentages will vary due to the timing of new store openings, as well as acquisitions. However over a longer period of time the mixture of organic and acquisition growth should be roughly equal. As you're also aware the service sales line item includes service revenue from our salons, service revenue from Hair Club for Men and Women, as well as tuition and service revenue from our beauty schools.

First quarter service sales grew 15% to a record $391 million. Our first quarter revenue growth included a service comp increase of 1.3%. While first quarter service comps of 1.3% were 30 basis points higher than the year ago period, they were nevertheless still below our historical range of 2% to 4%.

However, we were encouraged by the fact that domestically our service comps grew 1.8% compared to 90 basis point gain during the comparable period a year ago. We believe this suggests that our price increases that we recently implemented are holding. Product sales, that line item on our P&L includes retail products sold to our consumers and our salons, and our cosmetology schools, and in our Hair Restoration Centers, as well as -- it includes products we sell to our franchisees.

Retail product sales grew 17% during the first quarter to $174 million. In addition, our product sales mix for the quarter was 29.7% of consolidated revenue, up 40 basis points from the product mix in the same period last year. Our overall product comps declined 50 basis points during the quarter, compared to a 60 basis point increase during the same period a year ago.

Long-term we forecast retail product comps to be in the 2% to 4% range. First quarter franchise royalties and fees grew nearly 5% to $19.5 million. This increase was primarily related to our acquisition of Hair Club, which has 49 franchise locations. Our overall franchise business remains quite healthy, as evidenced by the 278 new franchise salons constructed during the past 12 months.

And now I'll talk a little bit about our first quarter margins. Our combined gross margin rate for the first quarter improved 40 basis points coming in at -- exactly at 45%. Our service margin rate for the first quarter came in at 43.3% of service sales, identical to the rate we reported in the first quarter of last year.

In general we saw a payroll improvement in our North American salons, largely due to strong service comps. This payroll improvement was offset by compensation paid to employees impacted by the hurricanes as well as, reduced service margins in our international salons, largely due to reduced comps.

I'll now switch to our retail product margins. Our first quarter product margin rate came in at exactly 49%, which was an improvement of 140 basis points over the same quarter last year. This improvement was largely due to our December 1st acquisition of Hair Club.

Hair Club, as you know, enjoys higher retail margins than our core salon business, due to the specialty nature of the Hair Club business. As mentioned earlier, an improvement in the product usage percentage in our UK business also contributed to the overall improvement in product margins. These benefits were partially offset by the product we donated this past quarter to victims of the hurricanes.

I'll now address our general and administrative costs. All of the expenses within the G&A category relate to 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 fiscal 2006 came in at 12.7% of total sales, roughly in line with our expectations, but 130 basis points higher than the same quarter a year ago.

We had anticipated most of this increase. Our recent acquisition of Hair Club was the major reason behind the rate increase. Hair Club has proportionally higher G&A costs due to their marketing efforts and their customer call center.

In addition, severance costs associated with our European franchise operations also contributed to the quarter-over-quarter increase. Site operating expenses and rent expense each came in roughly in line with our expectations and were similar as a percentage of sales to the comparable period a year ago.

With actual first quarter comps coming in below the 2% range, we did see de-leveraging in these two fixed cost categories, however the benefits we realized from the Hair Club acquisitions offset as de-leveraging. Depreciation and amortization expense increased 50 basis points in the first quarter to 4.4% of sales. This increase was largely due to the increased amortization expense associated with intangible assets, we acquired in the Hair Club transaction.

In addition, our current year first quarter results also include the write-off of $450,000 of salon assets associated with the hurricane destruction of 7 of our salons. Our consolidated first quarter operating income came in at 7.1% of total revenue, or $41.3 million.

Before I turn the call over for Q&A, I just have a few other items, and let me speak to our interest expense and our debt levels. As we had expected, our first quarter interest expense came in at $8.3 million, up $4.3 million of expense that we recorded in the same quarter last year. Our total debt at September 30th stood at $600 million, up $291 million from the same period a year ago.

As you know, the increase in our debt levels and the related interest costs was in large part due to our acquisition of Hair Club. Our debt-to-capitalization ratio, however, remains solidly investment grade. We ended the quarter with a rate of 43.2%. We anticipate that our debt-to-cap ratio should improve to the mid to upper 30% range over the next few years.

As you know the cash flow characteristics of our company are very strong and highly predictable. We're pleased to report that despite a modest decline in earnings per share, our EBITDA grew 8% in the first quarter to $68 million and our after-tax cash flow grew 7% in the quarter. Our overall effective income tax rate for the first quarter came in essentially on plan at 34.5%, which was lower than the rate of 35.6% that we reported in the same quarter last year. As you recall, our prior-year first quarter rate was higher than the underlying rate we reported for the full fiscal year due to the timing of when we were able to realize job tax credits last year.

We ended the quarter with a total of 11,077 locations. That was a net increase of 815 units over the past 12 months. For the quarter, we added a net total of 84 locations. In today's press release you'll find a detailed table that breaks out our location activity and our year-end accounts for each salon division. In today's press release, you'll also note that we are reaffirming our earnings guidance for the full fiscal year.

When you factor out the $0.03 per share impact of the hurricanes this past quarter from our operating results, we still feel comfortable with full-year earnings of $2.42 a share. Our second quarter fiscal 2006 earnings are estimated to increase to a range of $0.61 to $0.66 per share, which correlates to a same-store sales increase of 50 basis points to 2%. This earnings range represents an increase of 7 to 16% from the $0.57 we reported in the second quarter last year. So that's it.

With that, Paul and I would now be happy to answer any questions you have. Stephanie, if you could step in and provide some instructions, we'd appreciate that.

Thank you, Paul and Randy.

[Operator Instructions].

The first question comes from Mitch Kaiser. Please state your company name followed by your question.

Piper Jaffray. Question, I guess, guys, I think I heard you're right. You said that October you were trending well above the 2% both in service and product, I guess even though -- I think the guidance for the first quarter is 1 to 2, I guess, why not may be take a little more aggressive stance, and what you see for the remaining couple of months or the quarter?

Mitch, it's too early to tell. And when talking about domestic comps, as a Randy pointed out in his presentation, the UK is still negative.

It is, yes.

So if you combine it all, we're probably very close to 2%, 1.8, 1.9, which is still a lot better than it had been but it's too early to revise any projections, Mitch.

Okay. And I was curious if you could just talk about may be the strength that you are seeing. Is it kind of across all concepts and product classes or, is there any particular strength in any one concept?

It is across everything.

It is. Good. And I guess the second question would be -- have you seen any improvement on the international side?

As Randy pointed out, in fact, a couple -- 3 weeks ago, there was an article in The Wall Street Journal, which stated that the UK retail sales statistics were the worst ever in the 23 years they have created those statistics. So, the UK was too good for too long, Mitch, so it just has to have a hiccup, but long-term, it will be fine.

Okay. Thank you.

Thank you. The next question comes from Mark Chekanow. Please state your company name followed by your question.

I am with Sidoti. The domestic service comp of 1.8, at some point, next year, you are going -- this year -- later this fiscal year you will be lapping the price increases. What is your stand may be doing more spread out price increases, or is that it on the pricing side?

No. I think we will be more aggressive than we have been in the years passed, Mitch. And we are starting to see inflation rear its head in the lot of other areas as well. So I think the consumer is going to have to get used to price increases, not only from us.

Okay. And also, when you look a little bit back at your historical operating margins in fiscal '03 and '04, you were well over the 9% range. You got a larger revenue base now, you have got the beauty school, business, you got Hair Club, is this an attainable goal to look out in a couple of years to get back well over the 9% level?

Mark, we look at EPS growth and perhaps EBITDA growth as better barometers in terms of being able to gauge how well we are doing. We had a net decrease of what, Randy, 50 or 60 franchise salons in the quarter, and a significant increase in company-owned stores. And as you know, Mark, we make more margin, more pre-tax margin on franchising than we do on company-owned stores. So if that trend continues, and we see no reason why it won't continue, I think operating margin will become a less important number for us than EPS growth and EBITDA growth. But I mean that's how we look at it; you may look at it differently.

Okay. And then another thing, is there any update on what you guys are doing to spur service comps as far as advertising or your -- I guess your response to the long hair trends? And then also along the marketing lines, any update on the timeframe for the Hair Club referral synergies?

Yes, I mean, that's kind of marketing you can have is a word of mouth advertising and certainly in our business. So the marketing initiatives are minor when you really get down to it. But it does anniversary itself, as we pointed out before, and we are starting to see that it is anniversarying itself and we are starting to see more people in restaurants with shorter hair, thank God.

In terms of Hair Club, we had our annual meeting with 750 attendees, our supervisory personnel and our educators -- just a few weeks ago, and a major portion of the meeting was dedicated to Hair Club. In fact, 4 or 5 of our own employees had transplants, and they could see the before and after. And I think it was very, very well received. We have about 100 salons that are testing -- handing out brochures and the like. That test began a couple of months ago.

Realistically in this kind of business it will take 6 months to a year to have any kind of meaningful impact. I mean, that's just the way it is in this kind of spread out service business. So -- and by the way, that isn't too different from our initiatives in terms of placing hair color, for instance, into Supercuts. It takes a while.

We're highly confident that Supercuts' hair color business will end up being 10% of their total service business. But that will take 3 or 4 years. And likewise, it's icing on the cake in terms of Hair Club. But we think that people will get excited, and all you need is a few people to play, and then a lot more people will play. But once again, it's too early to make any kind of judgments

Okay. Thank you.

Thank you. The next question comes from John Anderson. Please state your company name followed by your question.

William Blair. I guess this is for Paul. Paul, it looks like there are about 84 net new salons added as well as beauty schools in the quarter. Given that, are you still holding to kind of a 600 to 800 net new additions for the year or, have you revised your thinking on that?

Well, we stated on our last conference call that we are going to cut back somewhat in terms of new builds. Now we don't know closures, and we don't know franchise closures, so that's the -- and we don't even know what's going to happen after Hurricane Wilma. But we had, I believe -- Randy, correct me I am wrong, about 550 new build in fiscal 2005 and we're projecting about 100 fewer this year. So, we still think net-net-net, we should be adding 600 stores for the year.

Does that include Hair Club and beauty school?

Yes, but Hair Club --

Minor.

Those are minor.

Okay.

And there will be very, very few new Hair Club locations. We have about 77% DMA coverage for Hair Club. We don't need a lot more locations. When we buy Hair Club businesses, we're buying customer lists.

Okay. And as far as the impact from the hurricanes, is there any impact to Hair Club or the beauty schools and if so, what is the magnitude?

For beauty schools, it's zero. And Hair Club, we have -- the West Palm location is still closed. It's too early to tell what the magnitude will be. It's only a couple days old, but it should not be material in the overall scheme of things.

Okay. Great. And then, Randy, one of things I noticed in looking at the product margin in the beauty schools, there is some significant variation there. This quarter was low 20s and previously has been in the '60s. Can you talk a little bit about that?

Yes, if you look at the dollar amount, John, I mean, it's nothing. It's like $56,000. So, obviously, an immaterial change in dollars on such a small base is going to cause larger percentage swings. Having said that, I'm suspecting that there's probably a little bit of geography issues there, that maybe some cost could have been included in service margins rather than retail margins. Again, I'm only suspecting that. As we talked about before, we've added quite a few stores recently. And we're amalgamating information from their system into ours, and we'll refine that as time goes on.

Okay. Fair enough. Thank you.

You are welcome.

Thank you.

[Operator Instructions].

And the next question comes from Jeff Stein. Please state your company name followed by your question.

KeyBanc Capital Markets. Question, Paul, relating to Hair Club. Wondering are you guys going to stay at about 100 salons with respect to this cross marketing initiative? And when would the next stage of the rollout be? And secondly, could you share with us any compensation system that you have developed or are testing initially for hairstylist referrals?

I don't want to share with you today what the compensation systems are because we're testing them. And it could put us in an awkward situation with our own stylists, Jeff. I think you could understand that. The first question, 100 salons, yes.

100 salons are obviously -- we will roll it out. It depends on what works and what doesn't work. But there is no reason that we won't have by the end of the year at least 1,000 stores, maybe more than that. We would hope that would be the case.

Okay, fair enough. And you indicated you are seeing positive comp trends in products during the month of October. Is that just kind of happening on its own or have you done anything proactively to change either the merchandise mix, pricing, packaging, or anything else that might be instrumental in driving the positive trend you're now seeing in product sales?

I think that's a question of anniversarying. But more importantly, appliance sales, flat irons in particular that average $130, are still booming. But we are very -- we're cautiously optimistic. The holiday season should be a real good one for us. Every major vendor has unique promotions for us that nobody else has. And in January through March, Joico KMS and Graham Webb's Back to Basics are having a major repackaging, and that's very exciting as well. So -- keep our fingers crossed -- but products should be just fine.

Okay. And in the UK, given the fact that comps are still negative and given that you have a relatively fixed payroll structure over there, have you done anything to adjust the payroll levels in the stores to reflect the lower levels of activity? And should we expect profitability to at least flatten out as we go forward here?

Well, as we go forward, we expect business to get better. There's no reason why it wouldn't get better. You know how these swings unfold, Jeff. We -- every week, we're adjusting hours in the UK. So to answer your question, yes, we're right on top of it. When past profitability will be restored, in large part, is based on comps.

Okay. And two other real quick questions. First of all, with respect to pricing, you indicated that consumers should get used to higher prices because of inflation. Do you have any specific plans in terms of raising prices over the balance of the year that you could share with us?

Other than we -- no specific plans other than we will raise them.

Okay. And how about -- can you comment on the acquisitions pipeline at present?

Jeff, we never have an acquisition pipeline. We -- right now, we're in contact with maybe 6 or 7 relatively small transactions that we're working on. But there are at least 50,000 beauty salons alone in North America that we would like to buy. So it's a question of unearthing them.

Okay, thanks.

Thank you, Jeff.

Thank you. The next question is a follow-up from Mark Chekanow. Please go ahead.

Hi. On the 2Q guidance, is it fair to say that that includes some sort of revenue impact from Wilma or should we be expecting a release at some point when you, I guess, finalize when you estimate the impact to be?

Yes. The guidance, Mark, excludes any impact at this time from Wilma. It's just too early to tell, since it just really hit Florida this weekend; it's too early to tell.

Okay. And then also you talk a little bit about the inventory account systems, like for the progress on the scanners, and I guess at the salon level some confidence that we won't have any more of these adjustments on the book to physicals -- more concerned on the negative side that maybe those days are coming to an end.

Well, no, I wouldn't go so far as to say that. I thank that there always will be a book to physical adjustment, because again we are used -- in between counts, we use estimated usage percentages. Having said that, we gain more and more intelligence and modify our estimated usage percentages based on sales trends that we're capturing through our POS system. The scanning techniques and things that our operating people are now focusing on to give us added comfort that we will have more complete and accurate counts. And I'm hopeful that, yes, we should not see large unexpected differences. Having said that, we will always have some level of book to physical adjustment although I think as time goes on it will -- should be minor.

Okay. Understand. So you'll -- obviously continue to book to physicals, but you don't given, with the help of the scanners and some other adjustments, you don't think you will have the degree or the severity of any of those adjustments. You think would be a lot less going forward.

That's our expectation, Mark. Yes.

Great. Thank you.

You're welcome.

Thank you. The next question comes from Peter Yufil (ph). Please state your company name followed by your question.

Schneider Capital Management. Paul, given some of your comments earlier with respect to the UK, have you seen that pricing for acquisitions decline given the recent events. And is that an area you would focus on more so?

In the UK you're talking about.

Yes.

Yes. We're more aggressive in terms of acquisitions that we have been in years. But you're talking about small groups or in many instances just individual units. But we're buying them for 3, 3.5 times cash flow. It's a pretty good return.

Right. Where do you, under sort of a normal environment, when the comps get back to normal, where do you sort of see the G&A expense of percentage revenue coming in? And how much leverage do you think you can get through acquisitions over the next few years?

You're speaking specifically in the international division?

Yes.

I'm taking a guess at this because the 20% rate that we experienced here, in this quarter is higher than normal. Could we see it somewhere in that 17%, 18, I would expect so.

I mean you were below that last year.

Correct.

So I guess I'm wondering -- 16% you were last year, do you think you can get that -- I mean, can that get down to 10, 11, 12?

Well, probably not that low necessarily because again half of what goes into the G&A expense line item is field supervision and related costs like travel expense et cetera. So, that's going to be more of a variable cost as we grow business that will what will increase. However, you're right that that other factors are more fixed cost we should be able to leverage. We had almost 17% G&A cost rate last year in the quarter. A lot of it's going -- in last year in the quarter, we had comps of nearly 6%. So we can't lose sight of that, that's unsustainable. And any time you have comps at that high it's going to reduce your fixed cost rate. I still think in the near term we should be looking to somewhere in that 17%, 18% range. A lot of it will depend on comps.

Okay. All right. Thanks a lot.

You're welcome.

Thank you.

[Operator Instructions].

And the next question comes from Mike Hamilton. Please state your company name followed by your question.

Good morning. RBC Dain. A couple of questions, if I may, on beauty schools. Given what you rolled in there and some of the dynamics in changing margins as we get mix shift. Can you comment a little bit on what kind of one time costs are in there this quarter?

Virtually no one time costs are in there.

Okay. No purchase accounting adjustment --

...No.

Nothing. Okay. Could you maybe make some comments then on what you anticipate in seasonality of the business?

Yes. It's very little in terms of seasonality; generally speaking enrollments will be a little bit higher. And lot of the seasonality we are talking about is student enrollment. Student enrollment in the fall quarter, like any college or university, will be a bit higher. But again, this is a very predictable business where enrollments take place throughout the year and we are not expecting a significant a material amount of seasonality in this business. Having said that, but, lot of times you know enrollments will be a function of unemployment as well. We are not expecting that unemployment will significantly improve as a result we expect that our enrollments have remain relatively consistent throughout the year.

What are you seeing in terms of trends on Student Loan loss issues? That's certainly one of the thing you have an opportunity to bring to bear in the business model.

Well, you absolutely right. We think we can reduce student default rates. We've been focusing initially Mike on acquiring for schools that have a solid track record that are like Blaine -- very well recognized in the New England area. One other thing that we see is that if we can start placing our students in some of our Regis salon concepts, and we also recognize that can't place them all in the Regis salon concepts, otherwise that's going to be pain it for the school business because other competition may come into the area. But having said that we can't reduce student default rate, although, today they're not very high overall because of the quality of the schools we're acquiring, but we thing overall we can manage that by placing more students in our salons and help them repay the loans.

Finally, shifting over to Hair Club, anything to comment on in terms of the cross marketing that you are planning out at laying out front half of next year?

No. Other then it's still in the embryonic stage. We are testing it at 100 of our stores, and we'll update you on future conference calls.

Super, thanks.

You're welcome.

Thanks you. There are no further questions. I'll now turn the conference back to Paul.

Thanks, everybody. Have a good day.

Thank you. Ladies and gentlemen, if you wish to access the replay for this call, you may do so by dialing 1-800-405-2236 with an ID number of 11041534 followed by the pound sign. This concludes the conference for today. Thank you all for participating, and have a nice day. All parties may now disconnect.