Regis Corp (RGS) 2006 Q4 法說會逐字稿

At this time I would like to welcome everyone to the Regis Corporation 2006 fourth-quarter and year-end conference call. (OPERATOR INSTRUCTIONS). If you wish to access the replay for this call, you may do so by dialing 1-800-405-2236, using access code 11066728#.

I would like to remind you that to the extent the Company's statements or comments this afternoon represent forward-looking statements, I refer you to the risk factors and the conditionary 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 their Website at www.RegisCorp.com.

With us today are Paul Finkelstein, Chairman and Chief Executive Officer, and Randy Pearce, Senior Executive Vice President and Chief Financial and Administrative Officer.

After management has completed its review of the quarter we will open the call for questions. (OPERATOR INSTRUCTIONS). I would now like to turn the call over to Mr. Paul Finkelstein for his comments.

Thank you, Chris, and good morning, everyone, and thank you for joining us. To say the least, this was a very challenging year, and frankly I'm glad the year is behind us. We've obviously had enormous challenges, the biggest one being the sluggish same-store sales that resulted primarily from the continuation of the long hair phenomenon, as well as an historic hurricane season.

In spite of all that we faced in 2006, Regis continued to grow both in absolute terms and relative to our industry. We continue to be very bullish about our long-term prospects.

Let's talk about the fourth quarter. Revenues increased 7% to $636 million. Consolidated same-store sales increased 0.10%, at the lower end of our guidance range. Domestic service comps, however, increased 1%.

Fourth-quarter operating income increased 54% to $75.9 million. Excluding the net benefit of the termination fee and expenses associated with the Sally merger, and other noncore charges noted in the press release, operating income increased 2% to $50.1 million.

Fourth-quarter net income increased 41% to $41.5 million; however, excluding the same items previously mentioned, net income decreased 6%, to $27.6 million, or $0.60 a share, compared to fiscal 2005. Operationally the $0.60 per share met the midpoint of our guidance range. Excluding the noncore items, fourth-quarter EBITDA increased 7% to $81 million.

We ended the quarter with 11,333 salons, 90 hair restoration centers and 54 beauty schools, a net increase of 188 locations during the quarter, and up 484 locations compared to a year ago. During the quarter we completed 10 transactions, acquiring 136 salons and one beauty school. Organically we built 122 corporate salons and closed or relocated 106 others. Our franchisees built 80 salons and closed, sold or relocated 45, for a net increase of 35 franchise salons during the quarter. As of June 30, 2006, we had 7559 company-owned locations and 3774 franchise locations.

Total debt at the end of the quarter was $622 million, and our debt to cap ratio was 41.7%. During the quarter we very aggressively closed underperforming salons and took other noncore charges. The fourth-quarter noncore charges totaled $228.4 million and, as I mentioned before, were detailed in our press release. Our strongest performers were SmartStar within Wal-Mart and SuperCuts. Our weak performers were our mall-based concepts.

We are not satisfied with our performance this year and are eager to regain our historically strong financial performance. However, we do not make business decisions based on short-term results, but rather on achieving significant increased shareholder value based on investing in businesses with bright futures.

As I mentioned in the last conference call, we are cutting back our expansion this year because ramp-ups have been slower due to the long hair cycle. However, we know that fashion will change, and when it does happen we are well positioned to capitalize on this. In fact, we see evidence that this change is happening out.

During the year, we continued to acquire beauty schools. We have significant challenges amalgamating disparate cultures in our different beauty school acquisitions, and must spend unnecessary funds to build our infrastructure so that we can very effectively and efficiently comply with the Department of Education issues and other challenges relating to Title IV funding. We're obviously disappointed with the financial performance of our beauty schools, although the fourth-quarter performance is not indicative of our true operational performance for the quarter. Thus, fiscal 2007 will see minor beauty school expansion until we get our infrastructure set. The long-term prospects for beauty schools are very exciting to us. We still believe we can add a lot of value and potential EBITDA margins, far in access of what our traditional core business generates.

Hair Club for Men and Women performed beautifully. That division is extremely well managed with EBITDA margins in excess of 30%. Our cross-marketing efforts have not yielded any significant results; however, our expectations were quite modest and we'll continue to work on cross-marketing initiatives in the months ahead.

The big challenge for our hair restoration business is one of growth, yet the opportunities are boundless, with us only having a 5% market share. There will be acquisitions in the hair restoration business, and we may very well add another price point to this division.

Our product comps for the quarter were disappointing. The product margin issues related to the four lines being repackaged are behind us. However, we have another six months of the negative effect of eliminating Nexxus from our salons. We are pursuing other significant new product initiatives, but it is premature to comment at this time. As you know, product sales have a 500 basis point positive margin differential over service sales. The selling of product is a huge core competency of ours and we continue to be bullish about our prospects.

On the diversion front, we are heartened by the efforts that Procter & Gamble is making. We feel that Susan Arnold and her team are committed to curtail division. They have very recently eliminated three Sebastian distributors who were major culprits for the respective diversion, and we strongly believe that when Procter & Gamble gets diversion under control, it will put enormous pressure on other manufacturers to follow suit.

We are reiterating our fiscal 2007 forecast, which shows very modest growth relative to our historical results. However, there are signs that the extended period of reduced salon visits that we have experienced could be waning. We have seen more celebrities and fashion authorities moving towards shaped and/or short hairstyles. Historically it has taken six to 18 months for this to filter down to the masses. However, we do see it coming.

Demographics are very favorable for us, as older people look far, far better with shorter hair, and likewise, more and more people are anniversarying their cutbacks in salon visits. From a comp respective, we are only damaged the first year of an individual's going from shorter to longer hair.

We're also looking very carefully at our corporate expense structure and have engaged Deloitte to study our infrastructure, systems and procedures. Please rest assured that we are not just sitting back, waiting for fashion to change. We have many initiatives in place to increase our business, including, but not limited to, educating our stylists and customers that long hair requires maintenance, or else split ends will result; broadening the services offered by some of our concepts; introducing new customer loyalty programs. We've always had customer loyalty programs, but we're in the process of rolling out a very sophisticated customer loyalty program in Trade Secret, with our very useful data from 1.5 million of our customers, by next year.

We're fine-tuning our direct marketing campaigns, in particular our gift cards in our Regis salons. We are implementing price increases.

We have a four-page makeover spread in People Magazine's Style Watch Fall 2006 issue, which has just hit the newsstands. We will merchandise these makeovers in all of our salons. Our marketing programs in fiscal 2007 will focus on makeovers and adding additional services, including hair extensions, in many of our Regis and higher-end salons.

We have approximately $100 million remaining on our Board-authorized $200 million stock repurchase plan. It's likely that we will exhaust this authorization during the current fiscal year. Should our stock price continue at current levels, the Board may move to increase the current authorization. However, given our opportunity and appetite for continued salon -- profitable salon growth, it is unlikely that we will pursue a multi-$100 million share repurchase in the immediate future. Our preference is to reinvest in cash-generating businesses.

We're still able to purchase terrific salon businesses at three to 4.5 times cash flow, but we continue to allocate capital expenditures to our highest-return concepts. We believe this build-and-buy strategy is better long-term than buying back stock.

We are scheduled to present at the Prudential Back-to-School Conference in Boston on September 6th, and at the Oppenheimer Conference in New York on September 12th. We certainly appreciate the confidence and support given to us by the great majority of our shareholders, and we'll expend every effort to increase shareholder value for them.

Randy Pearce will now provide his prepared remarks.

Thanks, Paul, and good morning, everyone. As Paul mentioned, our reported fourth-quarter earnings of $0.90 per share came in well above plan due to the gain we recorded from the termination fee we received from Alberto-Culver. This was partially offset by related terminated acquisition costs and other noncore expenses recorded during the quarter.

We do recognize that these noncore items add some noise to our fourth-quarter P&L. As much as we would have liked to group all of these items on one line item on the P&L, accounting convention does not permit us to do so; therefore, we have done two things in an attempt to be as informative and as transparent as possible.

First of all, we have separately identified and quantified each of these noncore items in today's press release. Second, if you go to our corporate Website, you will find a schedule for each of our business segments that reconciles the reported fourth-quarter results to our operational performance.

Given all of this disclosure, I don't want to be redundant, so I will focus my comments this morning on our operational performance for the quarter. And if anybody has questions on these items, we can certainly address them in the Q&A.

As Paul mentioned, our operational earnings came in at $0.60 per diluted share, which met the midpoint of our guidance range for the quarter.

Before I begin discussing the results of our various business segments, let me give you a brief overview of our overall operational performance during the quarter.

Our initial expectation for the quarter was for operational earnings to be in the range of $0.58 to $0.62 per share, and that was based on a same-store sales range of flat to 1.5%. Given that our overall consolidated comps grew 10 basis points for the quarter, one would expect that our earnings would be closer to the low-end of the range rather than the midpoint.

The incremental $0.02 of upside in the quarter was essentially due to our workers' compensation costs coming in lower than expected -- the result of continued success in our -- with our salon safety programs. This improvement in workers' comp expense was partially offset by lower-than-expected profitability in our school -- school segment, which I'll speak to in a little bit.

Other than these two items, our fourth-quarter operational results came in essentially on plan. There were no surprises with our retail product margins, our controls over salon payroll costs remained excellent despite a tough sales environment, and, consistent with our intentions, we repurchased over $20 million of stock during the quarter.

Let me now transition my comments by giving you a bit more detail behind our fourth-quarter operating results for each business segment. A breakout of our segment performance is found in today's press release. And as I mentioned just a moment ago, if you go to the non-GAAP reconciliation section of our Website, you'll find a schedule for each of our business segments that reconciles the reported fourth-quarter results to our operational performance. And my comments this morning are going to focus on our operational performance.

Let's begin with our largest revenue segment, which is our North American salons.

Our North American salon revenue, which represented 83% of our consolidated fourth-quarter revenue, grew 7% during the quarter to $525 million, but was nearly $7 million below plan. Our fourth-quarter revenue growth was due to an 8.5% year-over-year increase in the number of net new company-owned salons that we operated, combined with a 40 basis point increase in same-store sales.

Service revenue in our North American salons grew 8% during the quarter to $368 million, due in part to a 100 basis point increase in service same-store sales.

Product revenue grew 3% in the quarter to $147 million, which included a 100 basis point decrease in product comps. Product comps continue to be negatively affected by our discontinuation of the Nexxus product line once Nexxus decided to go mass, and by continued diversion of professional retail products in unauthorized distribution channels.

Royalties and fees for our North American franchise salons declined 2% during the quarter to $10.1 million. This slight reduction was primarily due to a net year-over-year reduction of 123 franchise salons, due primarily to franchise buybacks.

Our combined gross margin rate from North American salons came in essentially on plan, at 43.6% in the fourth quarter. Despite the tough sales environment, we were very pleased with our service margin rate, which came in at 42.4% during the quarter, and that was 20 basis points better than our fourth-quarter rate last year. This improvement underscores our attention to controlling payroll costs during this challenging comp environment.

Our retail product margin rate for our North American salons came in at 46.5% in the fourth quarter, which was slightly better than our plan. Despite the slight improvement from plan, our retail product margin rate was 140 basis points lower than the same period a year ago.

If you remember, we noted in our press release and conference call that we held on March 21st that our fourth-quarter product margins would be impacted by a few factors, the largest of which related to the repackaging by suppliers of several top product lines. These factors impacting our retail product margins are now essentially all behind us, and we continue to anticipate that our product margin rate should bounce back in our current 2007 fiscal year to the upper 48% range.

The next item I'd like to discuss is the line item titled site operating expense, which includes costs directly incurred by the salon, such as salon advertising, workers' compensation insurance, telephone, utilities and janitorial costs.

Our site operating expense came in at exactly 8% of sales, which was a reduction of nearly 100 basis points over the same quarter last year. This improvement in rate was primarily due to reduced workers' compensation costs that we realized throughout fiscal 2006, including our fourth quarter. Several years ago we implemented return-to-work programs and salon safety programs. We began to see the benefits of our efforts in fiscal 2006 in the form of reduced frequency and severity of injury claims.

When you cleanse our North American salon operating results of the noncore charges, all of the other expense categories generally came in close to plan and had rates that were comparable to the same period a year ago, so I don't feel there's any need to further discuss any of the expense line items.

The net effect of all the items we just discussed caused fourth-quarter operating income for our North American salons to improve to exactly 14% of sales, up 60 basis points over the same quarter last year.

Next let me review our fourth-quarter performance in our international salon segment. This segment includes our company-owned salons, located primarily in the United Kingdom, as well as our franchise salons located in the continent of Europe.

International salon revenue, which comprised 10% of our consolidated fourth-quarter revenue, declined 1% over the same period a year ago, coming in at $64.2 million, which was nearly $2 million below plan. This decrease in revenue was due primarily to a same-store sales decline of 4% (technical difficulty) quarter.

The service revenue component declined 3% in the fourth quarter to just over $40 million. Service revenue was impacted by a 6% decline in service same-store sales. On the other hand, retail product revenue increased 6% during the quarter, largely the result of positive same-store sales of 1.6%.

Royalties and fees from our international franchisees decreased 5%, due primarily to an increase in franchise closures during the fourth quarter this year compared to the same period a year ago, as well as a softening of franchisee same-store sales.

Our overall international gross margin rate came in right on plan at 46.1%, but, as we expected, this rate was 150 basis points lower than last year.

Our service margin rated improve 30 basis points to 47.6%, despite the decline in service comps during the quarter. This rate improvement in our international salon segment was due to lower supply costs recorded during the quarter, partially offset by slightly higher salon payroll costs due to the reduced same-store sales growth. Having said this, we continue to be very pleased with our tight payroll controls during this tough sales period.

More than offsetting the improvement in service margin rate was a budgeted reduction in our retail product margins. Our international product margin rate came in at exactly 42% in the fourth quarter this year, versus a rate of 48.4% in the same quarter last year. Recall that last year in our fourth quarter, our international product margin rate was stronger than normal, as it benefited from a favorable inventory adjustment following our fourth-quarter physical count.

When you cleanse our international salon operating results of noncore charges, our site expense and our rent expense categories generally came in close to plan and had rates that were comparable to the same period a year ago. However, there are two line items that I want to briefly discuss.

The first is our international general and administrative expense, which improved 120 basis points in the fourth quarter to 17.6% of sales. We had budgeted for an improvement in our G&A rate, due to a planned reduction in salon advertising expense and lower level of franchise development costs that were incurred in the fourth quarter a year ago.

The second item relates to our depreciation and amortization expense, which increased 40 basis points in the fourth quarter to exactly 4% of sales. Most of the increase in this fixed cost category relates to the decline in same-store sales. As a result, our fourth-quarter operating income rate for our international salon segment declined 70 basis points, to 7.1% of sales.

Let me now very briefly speak to Hair Club for Men and Women, which continues to perform extremely well. Fourth-quarter revenue from our hair restoration centers grew 10% to $28.7 million, which represented about $1.5 million above plan. Hair club revenues contributed nearly 5% of our overall consolidated fourth-quarter revenues.

Our fourth-quarter operating margin rate of 20% was in line with plan and in line with previous periods. For the full year, Hair Club's EBITDA margin was very strong, coming in just nearly 30%. We remain very pleased with the performance of this segment of our business.

Next I'll discuss the fourth-quarter performance of our schools. Our school revenue nearly doubled during the quarter to $18 million and comprised 3% of our consolidated revenue. The quarter-over-quarter growth rate in revenue was due to an increase in the number of cosmetology schools we now own and operate. As of this past June 30th, we owned and operated 54 schools, up from 24 locations at the end of our fourth quarter last year.

Despite the growth in revenue, our school division recorded a $545,000 operating loss in the fourth quarter this year, versus a profit of $1.1 million in the same period a year ago, and there's, obviously, a few reasons for this.

First of all, our school revenue in the fourth quarter this year, on a relative basis, fell below last year, due to a reduced level of enrollments and an increase in dropped students. We have seen this trend developing this year. As you know, this is essentially a fixed cost business and a reduction in tuition revenue translates into a reduction in earnings, almost dollar for dollar. This has been a transitional growth year for us in the school business. In hindsight, a bit of momentum and focus were perhaps lost by the former owners during the time we were -- they were selling their businesses to us, and also by Regis during the time we were implementing new school process and procedures.

The recent enrollment trend also impacted our operating expenses in a couple of additional indirect ways.

First, as we continue to gain more experience, we felt it was prudent at the end of our fourth quarter to increase our bad debt reserve for uncollectible tuition by $1.3 million relating to inactive students. Parenthetically, let me say that this $1.3 million increase is transition-related and is not a trend we expect to incur in future quarters.

Second, we elected to spend more marketing dollars in our fourth quarter in an attempt to bolster our critical late-summer, early-fall enrollments. Anecdotally, this seems to be working, as our August and September enrollments appear to be tracking much closer to plan.

As Paul mentioned, we're not happy with the overall performance of our school division this past quarter. As we've said before, we are, clearly, in the early stages of amalgamating and growing the school business. And as a result, we anticipate that many of the expense line items will fluctuate quarter to quarter due to the timing of acquisitions and the nature of the expense structure of the businesses we acquire. We continue to work on initiatives and evaluate opportunities to improve the profitability of our schools. And as Paul stated, the long-term prospects for beauty schools remain very exciting to us.

Now, that concludes the prepared remarks concerning the individual business segments, but let me just continue with a couple of other points.

When looking at our consolidated P&L, you'll notice that our effective income tax rate for the fourth quarter and full fiscal year came in on plan at 35.6%. Please note that last year in the fourth quarter, our effective tax rate of 30.4% was artificially low, as we benefited last year from the positive resolution of 2 prior-year tax periods, as well as additional job tax credits. Looking forward we continue to expect our effective income tax rate in fiscal 2007 to be comparable to that of fiscal '06.

I also want to mention that during the fourth quarter we repurchased 585,000 shares of our common stock, spending just over $20 million doing so.

Before we turn it over for questions, if you don't mind, I'd like to make a couple of additional comments. Our fiscal 2006 performance, when you exclude the noncore items, was a year with no earnings growth at $2.14 a share. The challenge we face is revenue-related, not expense control. As we've said before, same-store sales growth in excess of 2% should enable us to leverage inflationary cost pressures. Every 1 percentage point change in comps translates to about $0.12 of earnings per share on an annual basis. Although we continue to experiment with new initiatives to drive sales, we really do need the fashion cycle to swing from long hair to short hair in order for us to achieve double-digit earnings growth. In the meantime, let me share with you some things we have done and continue to do with our expense structure.

Although we are in a people-intensive business, we continue to successfully manage our salon payroll costs. Nearly one half of every dollar of revenue we bring in goes back out in payroll and related benefits. Despite a tough business environment, our payroll controls remain excellent.

Contrary to what one might expect, we are actually experiencing cost reductions in certain significant employee-related expenses. We saw this occur with workers' compensation in fiscal 2006, and we expect reductions in health insurance costs in our current 2007 fiscal year. I'm not sure many other businesses can make these claims in today's market. We have accomplished these successes through the recent introduction of innovative programs, as well as an operational focus and commitment to affect change.

I've been here at Regis 21 years. As much as I believe we have a centralized home office infrastructure that is both scalable and efficient, Paul and I wanted to seek independent validation. No company is perfect, including Regis. We recently engaged Deloitte Consulting to examine our home office infrastructure and provide us their thoughts as to where we may have opportunities for further process improvement or cost reduction. One area of opportunity appears to be in the area of indirect spend, which we will be focusing on in fiscal 2007.

These are just a few examples of how we continue to focus on expenses here at Regis. We have had many other initiatives that have yielded cost reductions in such areas as technology, procurement, distribution, salary administration, recruiting, treasury, and the like. My point here is that we continue to focus on expense control, and overall we believe we've done a very good job of it. But again, our recent flat earnings performance is primarily a function of reduced comps in this current long hair environment, not expense control.

I have one final item to address. Today's press release includes information regarding our earnings outlook for both the full 2007 fiscal year as well as the first quarter. At this point in time we continue to feel comfortable with our previously issued fiscal 2007 earnings guidance of $2.22 to $2.34 per share, based on a same-store sales expectation of 1 to 2%. Although we do expect our earnings to benefit from certain items, such as fourth-quarter store closure initiatives and reduced workers' comp costs, these benefits may likely be offset by other items, such as reduced budgeted fourth-quarter sales and reduced beauty school profits. It quite frankly is far too early to raise the expectation bar for fiscal 2007.

For our first fiscal quarter of 2007, we believe earnings should be in the range of $0.44 to $0.48 per share, based on a comp expectation of negative 1% to flat.

So, that's it. Paul and I will now be happy to answer any questions you may have. So Christopher, if you could step in and provide some instructions, we'd appreciate it.

(OPERATOR INSTRUCTIONS). Justin Hott, Bear Stearns.

Randy, did I just understand you right? Did you just say that it was too early to raise the bar on expectations for 2007?

That's correct; for the full year, yes.

The question I have is if you're coming to zero to -1% comps for the first quarter, and you're still targeting 1 to 2% comps, what is going to get better that gets you to those numbers? If anything, I would think you would be coming lower on the earnings expectations.

Again, I think seven weeks of results just in the current fiscal year is too early to say that that's what the trend will be for the balance of the fiscal year. Quite frankly, we continue to budget comps in that 1 to 2% range. And if we hit comps -- let's say the midpoint of 1.5% in each one of our following three quarters, we'll be in the range of the -- for the full year that we provided. Paul, I think you want to make a comment.

Let's not forget that the negative effects of Nexxus will disappear after the second quarter. That's a big number.

Paul, you mentioned some comments on new product initiatives that you're not in -- that you don't want to go into more detail on on this call. However, can I just ask one question about that? And that would be -- is it geared -- you mentioned it in conjunction with Nexxus. Would that be geared toward getting more sales back into salons, or some other initiative, more product (multiple speakers)

Back into salons.

One more question. Paul, more comments on the long hair trend on this call. Can you just sort of sum up -- we've heard it for a while -- what is different about these comments than what we've heard over the last few comments? You used the word now in terms of the long hair trend. I just want to make sure I don't read anything into it. Can you tell us what you're seeing that is different right now on trends?

Just a couple of weeks ago, Victoria Beckham cut her hair into a bob. She is a big, big fashion player in Europe, and we see much more of that happening today. And it does take six to 18 months for it to filter down. But once people start to shape their hair, do things with their hair, then they need to cut it eventually. We've seen this before. It is frustrating, but once again, it does anniversary itself. And we've been around 84 years and never had a comp decrease. We just don't see anything long-term that's systemically wrong with the business.

As it starts to creep into your salons, do you (multiple speakers)

Start to what?

When do you -- you say six to -- was it 12 or 18 months? I apologize.

Six to 18.

Do we start to see it creep in gradually to the salons, and then all of a sudden we see a big hit, a big growth rate? Could we (multiple speakers)

It's [glacial].

Jeff Stein, KeyBanc Capital Markets.

Paul, wondering if you could comment on price increases and what you have seen in the last couple of years as you raised prices in some of your salons. I know you kind of moved slowly initially because you were concerned about the price sensitivity of your customers. Have you seen any resistance in salons where prices have been raised, and can you talk about your plans for the current year?

No, we haven't. We have quarterly P&L reviews. And we implemented price increases in 2000 stores, and I think there will be many hundreds more that will be implemented within the next 30 to 60 days. The decrease in customer counts -- it's difficult to determine whether it's price or just people growing their hair longer, but we don't think that there's a huge resistance to price increases. I think we'll be more aggressive in the next couple of quarters than we initially planned to be.

Can you talk a little bit about your loyalty program that you've developed at Trade Secret, and what you would expect to yield from that program?

I'll take a stab at that. Norma Knudsen, who is the COO for our Trade Secret division, came to Paul and I several months ago with a proposal that we start looking more specifically at trying to identify who our customer truly is. By that I mean specific customer name, address, e-mail address, etcetera.

Historically, we have computerized point-of-sale equipment in every one of our company-owned salons worldwide. And I'm not talking about just in Trade Secret, but every salon that we have. And that is really the backbone to our infrastructure here. We made a conscious decision years ago when we developed that system not to obtain specific customer information. Because as you know, the people working in our salons are hair stylists, and during peak periods of the day, whether it's weekends or evenings, we didn't want them slowing down the customer checkout process by hunting and packing and putting in birthdays and phone numbers, etcetera. So we know how many mail and female customers we have, we know walk-in versus requests; we don't know specific customer names.

Norma came to us with an idea. This is a national -- there's a company out there that has developed customer loyalty programs for a bunch of national retailers in the past and has had a great deal of success. And really what it is, it's -- a customer -- we just started to experiment with it in three test markets on August 1st. And it's in three markets -- Minneapolis, Kansas City and Dallas. And a customer can come in and receive -- and they will fill out an information card, which includes their specific name and address. And they have a choice of either paying $10 and enrolling in the program. And that $10 fee will essentially help pay for the program. And Best Buy does something like that with their Reward Zone program. But the customer pays $10; they get a free gift worth about approximately $20; they get 10% off their purchases for that day; and then -- and by the way, other customers who don't want to pay the $10 can enroll. They don't get the gift; they don't get the discount on day one. But as they continue to purchase product, they accrue points. And for every $200 worth of merchandise purchases, they get $20 in return.

And what we've seen so far, in just a few weeks of business, is that we have -- is it -- 20,000 people that have signed up just in those salons in those test markets. About 20% of them have paid for the $10 card. And we've seen over the last three weeks 7% of those people have come back to the salon a second or third time already.

The consultants have said that it works well with other retailers. We hope that by a year from now, we should have in excess of 1 million customers on this. We'll be able to target market those customers to make sure they are coming back. If they aren't coming back, we'll specifically target them to come back. So our marketing efforts will become more focused in the future to our best customers. It's too early to say, but potentially several millions of dollars of incremental sales could be generated through this program. And assuming it is successful -- we believe it will be successful -- we will then start looking at rolling it out in other divisions, other salon divisions.

Randy, what is the cost of -- it sounds like it didn't take very long to get this program up and running. How much did it cost you to initiate this program, and why not just roll it out to the other salon groups?

The total cost is very little, because again, much of it is -- if we have about 20% of our customers who pay for the program, that virtually goes to offset most of the cost. We also are using, reallocating some of our vendor co-op advertising dollars towards this program. So you're not going to see a net increase in our expense structure here at Regis because of it.

And the second question, a lot of times what we do here at Regis, we have a lot of different initiatives and ideas that take place, and we generally try to experiment with -- in various divisions. And when those experimentations work, the other operating people jump on. And it will happen; it's just a matter of -- we'll just see the results a little further with Trade, and we'll start talking to the other operating people to roll it out there as well.

Mike Hamilton, Royal Bank of Canada Dain Rauscher.

Wondering first of all, just in detail, if you could talk a little bit on your outlook for unallocated G&A in fiscal '07.

That's a tough one. Unallocated G&A. Let me just say this. I'll be happy to have -- because I can't give you an intelligent answer right now; I'm just not -- I don't know.

Let's speak to -- back half of the year, we saw some acceleration going on there. Speak more to trends and what --

Very good. Our overall G&A rate came in for the year; it's going to artificially look low because embedded in the G&A is the net benefit, the net gain we received from the Alberto-Culver transaction. We've looked at G&A, and quite frankly that was one of the things that we continue to look at for many years. If you look over the last four years, our G&A rate has bounced around a bit. But there's been reasons for it. One is because of the acquisition of hair club, which has higher marketing-related expenses that run through G&A. We've also started expensing some stock options. And we've also seen that our same-store sales goes up or down, which has an impact on our G&A rate.

When you cleanse all of that, we have seen our G&A rate remain remarkably constant over the last four years, going from about 11.3% four years ago, to arguably maybe 11.2% this year. We've seen that we've incurred additional cost in Sarbanes-Oxley over the last few years. So without that, our G&A rate could be actually coming down. We feel we have -- there is an opportunity to further leverage G&A as we go forward, and that's one of the reasons we decided to bring in Deloitte Consulting. And there is some opportunity there -- not huge, but we will start working on that. But overall we feel we've been very good at controlling expenses.

And by the way -- and I'll make one more comment. Our G&A rate -- just for those people not totally familiar with Regis, our G&A rate is -- about half of it is our corporate overhead here in Minneapolis and some of the operational support offices we have around the world. So that would be the people and the occupancy costs. The other piece of it, the other half, is probably equally divided between our field supervision, which is the salaries and travel expenses of our hundreds of field supervisors around the world that oversee our salon operations, and the other half represents our two distribution centers. We feel good about G&A and continue to focus on expense control.

Thanks. My other question, if you could speak to near-term concept trends and comps. I'm assuming your international, by virtue of how weak last year was, has turned favorable. First of all, is that accurate? And if so, which concepts are giving the most pain right now?

The net income in Europe is getting better. Fourth quarter was better. That's the continent, which is largely franchise. Our comps in the UK are still negative, although not as bad as they have been. So we're not yet turned positive. But the retailing environment in the UK is still quite difficult. We're not alone here.

In terms of domestic concepts, on the basis of what you're seeing here, the seven weeks, where is the relative weakness?

It's product comps. (multiple speakers) could be better, but it's product comps. And we've already addressed that. And long-term, especially with the commitment we have from Procter & Gamble, I just can't see that this will be a continuing problem long-term. I don't know how long it'll take to shake out, whether it's the end of fiscal 2007 or beginning of 2008. But, as we alluded in our prepared comments, we're going to have some very, very exciting initiatives, not only for our company, but for the industry as well, that we'll be announcing sometime in the second quarter.

Karen Lamark, Merrill Lynch.

Going back to the comp question, you're expecting a modest acceleration into fiscal '07. Is it just the anniversarying of Nexxus and the price increases that you'll be working through the pipeline and doing, or is there some specific operational initiative that you expect to gain some momentum in the year?

The price increases in Nexxus alone will not create a situation where we'll be positive 1, 1.5. We need more than just that. But we have enough initiatives going on that we think we can get there. It's a question of execution. It's a question of making sure that our long hair expert program, for instance, is implemented better. We can execute better; there's no question about it. And will.

Turning to the balance sheet and cash flow, CapEx and maybe some acquisition guidance for the next fiscal year?

Our budgeted expectations for fiscal '07 continues to be that we should spend around $90 million building about 350 new company-owned stores from scratch. And in addition, we should spend another $75 million, is what we have budgeted, for acquisitions.

The 90 million includes maintenance CapEx as well.

Yes, that's right.

With the results I guess not showing the benefit of the expansion that you've done -- I looked at the sum of your CapEx in your acquisitions up over 20%, and you're obviously not realizing that dramatic a benefit on the topline or in your operating income. Why not pull back? I know your preference is to continue to expand, but your buybacks are pretty modest and you've got great cash flow. How do you think about capital allocation, in particular considering buybacks and a dividend increase?

You have to separate the 60-some-odd million that we spent buying schools from salons. The salon acquisitions continue to have paybacks of anywhere between three and four years. They're very profitable. There's no reason in the world to stop those. And the school business we already addressed; we'll fix that. And what we've had in the mall-based concepts, if it hadn't been for the very profitable salon acquisitions, our results would have been worse from a (indiscernible) point of view.

If I could just make one quick comment then. Why not just focus kind of on the core salons and execution? You feel like you've got enough resources to handle the expansion as well as blocking and tackling?

We're focusing on everything. We have 11,500 units. But we have -- our ratio of salons to supervisors has remained constant. They know what to do. There's no reason we can't focus on better execution and still buy some very, very profitable businesses. You can do both and we will do both.

The only other -- just if I could add one point to Paul's comments. We did scale back on new store development this year for a lot of the reasons that you articulated. The last couple of year's, on average, we've built from scratch 525 to 550 new stores. And again, we're budgeting about 200 fewer units this year. So we have scaled back. Out of the 350 stores that we are planning to open, probably 215, 225 will be in Wal-Mart Supercenters, SmartStyle. And that's been a good business for us. So we are scaling back and we are redirecting some of that excess cash flow into a share repurchase.

Historically over the years we really haven't done much. As Paul articulated before, we do plan on buying back probably about $100 million this year. We did 20 million over 12 months. We talked about it last quarter. We bought $20 million worth of stock back in the fourth quarter. So for us we are putting the -- we are scaling back on growth somewhat, and we are redirecting some of that excess cash into share repurchase.

And then separately, do you have specific inventory goals? I was assuming there was -- I've heard around your merchandising and potentially an inventory reduction; is that part of your plan for fiscal '07?

Yes, absolutely. I was real pleased (technical difficulty) with the year-end inventory levels when they came out. We ended the year with about $194 million of inventory. Now, if you look at it over from a year ago, it looks like it's up about 9, $10 million. Most of that increase occurred -- all of that increase occurred in our first quarter, our September quarter. When you look at our December quarter, inventory levels came down; March they came down further; June they came down further yet. So we continue to focus on managing inventory levels. And Norma Knudsen and some of her chief lieutenants continue to focus on seeing inventory growth in fiscal '07 to be at a rate less than our salon growth. So, yes; we'll continue focusing on that.

Craig Smithson, Crittenden Retail Space News.

You were talking a little bit about the hair restoration centers, the positive effect of those. You mentioned a possibility of a price increase or an acquisition down the road in that field. Could you elaborate a little bit there? And how many of the 350 that you mentioned for this fiscal are going to be on the hair restoration side?

A very modest -- virtually no new store growth with respect to the hair restoration business. We'll be buying back franchises. We already have bought back a bunch. And we buy customer lists from ma-and-pas that decide to go out of business, and that's a very profitable venture for us. Much like we have in the salon business, we have stratified pricing. And we think there's a significant opportunity to have another price point with Hair Club. The management team is excellent. They can run another (indiscernible) concept, and we're looking very carefully at another leg to put on their table.

Okay. A follow-up question, if I may?

Sure.

Okay. As far as the decision, I guess, to pull the Sally Beauty offer off the table, could you elaborate to some of the things that factored in there?

The major reason was pricing. We've had basically two or three flat years. We're not going to -- we would have had to give away probably two-thirds of our company to the Alberto-Culver shareholders. That was a non-starter. There were other issues, but they were minor. (multiple speakers) was the major issue.

And that decision was made, what, in the third quarter, to pull that off the table?

Yes.

Okay. As far as SuperCuts, do you have any idea about how many of those you might be adding this FY?

Between our franchisees and ourselves, between franchisees and company-owned stores, order of magnitude 150, give or take 25.

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

Thank you for joining us, everyone. Have a good day.

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