Regis Corp (RGS) 2007 Q1 法說會逐字稿

Good morning my name is Heidi and I will be your conference facilitator today. At this time, I would like to welcome every one to the Regis Corporation 2007 first quarter conference call.

[OPERATOR INSTRUCTIONS]

I would like to remind you that to the extent the company's statement or comments this afternoon 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 measured 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 Paul Finkelstein for his comments. Paul, you may begin.

Thank you, Heidi and good morning everyone. Thank you for joining us. I will be dividing my prepared remarks into two sections. First, I will give a quick review of the quarter and touch on the highlights. Our press release outlines our financial results in great detail. I will then share with you a spectacular new initiative that we will be undertaking. This initiative is a milestone for Regis and offers us huge opportunities in the years ahead.

Let's now review the quarter. First quarter revenues increased 9% to $639 million. Operating income increased 7% to $44 million. First quarter net income, which met the high end of our guidance, increased 4% compared to last year. We were in fact $0.02 above the high end of the range but the incremental $0.02 relates to items associated with income taxes and marketing expenses.

First quarter EBIDTA increased 9% to 74 million. We ended the quarter with 11,490 salons, 89 hair restoration centers and 55 beauty schools, a net increase of 157 locations during the quarter and 557 locations compared to the year ago period.

During the quarter, we completed nine transactions acquiring 83 salons and one beauty school. Organically, we built 129 corporate salons and closed or relocated 48 others. Organic and acquisition salon activity led to a net increase of 164 corporate salons during the quarter. Our franchisees built 66 salons and closed, sold or relocated 73 salons, for a net decrease of 7 franchise salons during the quarter. Company-owned salons as of September 30th were 7,723 and our franchise salon count as of the same date was 3,767.

Total debt at the end of the quarter was $691 million. Our debt-to-cap ratio was 44%. I realize that investors are tired of hearing about the long hair cycle as am I and its dampening effect on our comps. However, I believe it continues to have a significant impact on our near-term earnings. While we are highly confident that this will eventually cycle to our benefit, we do not have a crystal ball and do not know precisely when visitation patterns will normalize. That being said, we are starting to see favorable style trends. Let me give you an example of how significant this trend is on our comps. Let's do the math together.

Last year, customer visits were off 3.7% on a like-for-like basis. Therefore, we started the year with 3.7% negative comps. We ended the year with a 70 basis point positive comp in North America, so, in fact, we had a 4.4% comp increase absent the effect of reduced salon visits. The 4.4% comp reflects our price increases, increased hair coloring and the introduction of new services. The 4% figure mirrors our long-term comp goal, thus when visitation patterns moderate, our comps should gravitate towards historical levels and we should once again be in a position to enjoy double-digit EPS increases.

Please be assured that we are not just sitting back and waiting for salon visitation patterns to become favorable. We are working very hard at implementing the initiatives we talked about in our last conference call. Two initiatives are quite promising.

First, hair extensions are not only for long hair but for volume as well. It is a lucrative service with the average ticket being anywhere between $400 and $600. Because of the challenges associated with sourcing hair and training, we are rolling out the hair extension program to 50 to 100 salons at a time. The early results are very exciting.

Second, in August, we began to test market a customer loyalty program for Trade Secret. On October 1st we rolled out the program to all of our Trade Secret Salons. This program has two levels, both of which allow Regis to capture customer data. The customer may sign up for free or for a one-time fee of $9.95, they can select to become a select member. A select member receives a free gift, 10% discount the day she enrolls and special coupon offers. To date, 140,000 customers have signed up with 27% opting for the select membership. We needed a 20% factor to offset additional expenses associated with this type of program, thus, we are well above that number. What's interesting to note is the difference in average ticket. Our Trade Secret average ticket is $23. The average ticket for initial purchases of the free loyalty program customers is nearly $31 and select customers is over $50.

Now our Hair Club for Men and Women Division performed beautifully. As we mentioned in our last conference call, our big challenge long-term is one of growth. There are a number of acquisition candidates in the hopper.

In addition, we are very pleased with the improvement in our UK and Continental European operations. While our corporate and franchise salons continue to face challenges their recent performance has met or exceeded our expectations. The results of our school division have been disappointing, however, please rest assured that the major issues related to infrastructure and that this can be a very promising business with EBIDTA margins well in excess of 20%.

It is interesting to note that September profits were in excess of $700,000 and met plans. We continue to be bullish, long-term about this division.

During the quarter, we purchased almost 680,000 shares of stock for $25.1 million or $36.88 per share. We have approximately $75 million remaining on our board-authorized $200 million share repurchase plan.

I'd like to take a few minutes to take a very exciting announcement.

As I speak, a press release is being issued announcing a professional salon product joint venture with Horst Rechelbacher. This announcement is of such significance that it obviously does merit a separate press release. The name of the company is Intelligent Nutrients Inc.. The product line will be called IN, Intelligent Nutrients by Horst. Intelligent Nutrients line is presently being sold in approximately 1,000 salons in the United States. As many of you know, Horst founded Aveda in 1978 and in 1997, sold it to Estee Lauder for $300 million.

I would like to now share with you some additional insight into the joint venture and its impact on Regis. The introduction of IN will help us in two ways.

First, it is a very exciting product line which will engender a tremendous amount of publicity and should significantly increase our growth and earnings prospects in the years to come.

Secondly, the expected impact IN will have on reducing diversion will also add to our profitability as Regis has a 15% share of all professional hair product sales in North America. We believe that diversion accounts up to 20% of all professional product sales. When one does the math, one can see the positive effect on our comps. The IN products will be sold in our corporate and franchise salons and will also distribute IN products to other salon owners. This is a very special line. It is an organic, harmonic lifestyle line that includes edible beverages like coffees and teas, aromatics and other supplements which are hair related.

Hair care and personal care products are in a development stage and will be in our salons this winter or spring. The product line is made largely from food-based ingredients that are harmonically grown using organic forming methods. The mission of IN is to provide products that have protective and nutritional value and can be used both internally and externally. IN strongly believes that consumers should never put anything in or on their bodies that does not have nutritional and protective value.

As you all know, Wal-Mart has made a huge bet on organics. This is the way of the world and we will have the most exciting organic product line our industry has ever seen. It will also be guaranteed to be diversion free. We believe that this initiative, coupled with a commitment made by Susan Arnold of Procter & Gamble, will help turn the tide against diversion. Our manufacturers will have to take a far more proactive role in greatly reducing or eliminating diversion. Those who don't will suffer the consequences.

The beauty industry has been developed by unique and charismatic individuals, Madam Arden, Madame Rubinstein, Charles Revson, Estee Lauder, Vidal Sassoon and Paul Mitchell are examples of these very special personalities. Horst is known by hundreds of thousands of hairstylists and is an industry icon. Horst impact on hairstylists and salon owners cannot be overestimated. This is a spectacular opportunity for us. Horst knows the consumer better than anyone else in our industry. He and many others are very much aware of the ground swell of consumer activism relating to unhealthy ingredients using products on the shelves of retail stores worldwide. With Aveda he introduced aromatherapy to the American consumer. Now with IN, he has once again taken the lead by providing healthy, innovative, organic products made with food-based ingredients.

Regis' financial model bases our profitability on selling IN in our salons. Regis will see no income from the joint venture for five years. We have made a five-year commitment to donate 100% of our share of the distributed profits from the joint venture to fund cosmetology school scholarships. We will make our profits by selling IN in our salons. We strongly believe that many players in our industry will buy this product. Long-term it should be an excellent business for us.

The world of business is changing dramatically. The lines that use to delineate manufacturer versus retailer are becoming extremely blurred. A prime example of this is Loreal buying a retailer body shop as well as buying a significant interest in a distribution company. Our venture will enable us not only to have a whole new profit center but be to be in better control of our own destiny.

Randy will talk about the financial impact of this in greater depth but we are not expecting any profits for 2007. In fact, we are expecting to show a loss up to $0.10 a share. Profits for 2008 are also planned to be modest, profitability should be substantial for 2009 and beyond.

In addition to the IN initiative, we are also combating diversion by updating our website to provide all salon owners with a report on a quarterly basis showing which professional lines will have reduced linear footage within Regis Salons. Either because the lines are not effectively controlling diversion or their sales are weak. We will also highlight those lines that are going a good job in controlling diversion. Obviously, we will be very supportive of those lines such as those owned by Procter & Gamble who have made a huge commitment to the eliminate diversion, in order to give our vendor partners an opportunity to get their houses in order, we will not be posting any information on our website until the end of our fiscal year, June 30, 2007.

We are extremely excited about the future of our company. We've seen more and more evidence that celebrities are cutting their hair. As mentioned in the last conference call, it will take approximately a year for this to filter down to our customer base but we feel that our growth opportunities are significant. Even with all the discussion concerning the issues and challenges that public companies have today, we like the facts that we are public, we are able to reward our management who have made this company grow by having their interests aligned with our shareholders. We do not have a desire to go private nor do we desire to have a massive stock buyback. We feel that significant shareholder value will be created in the future and that our patient investors will be highly rewarded. Randy Pearce will now continue with our presentation.

Thanks, Paul, good morning, everyone. As Paul mentioned we are reporting first quarter earnings today of $0.50 a share. As you are all aware, our quarterly earnings guidance correlates to our same store sales guidance. For example, guidance for our first fiscal quarter was for earnings to be in the range of $0.44 to $0.48 a share, based on a forecasted same-store sales range of negative 1% to flat. Our actual comps for the quarter came in at negative 30 basis points, therefore, this correlates with an earnings that should be near the top end of our range or roughly $0.48 a share, rather than the $0.50 we are reporting today. The incremental $0.02 of upside in our first quarter was essentially due to two factors.

First of all, our quarterly results included about a penny a share of one-time tax benefit associated with a favorable ruling we recently received from the IRS an on open income tax matter. The balance of the earnings upside related to salon marketing expenses coming in a bit below plan for the quarter. Other than these two items, our first quarter results came in essentially on plan. As we expected, our retail product margins bounced back strong. Our controls over salon payroll costs continued to remain excellent, despite a tough sales environment and consistent with our intentions, we continued our share repurchase program, buying back $25 million of stock during the quarter.

Let me now transition my comments by giving you a bit more detail behind our first quarter operating result by business segment and a break out of our segment performance as found in today's press release and I will 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, grew 8% during the quarter to $535 million. This revenue growth was due to a 9% quarter-over-quarter increase in the number of company-owned salons that we operated, partially offset by a 20 basis point decrease in same-store sales.

Service revenue in our North American salons grew 10% during the quarter to $371 million. This increase included a 50 basis point increase in service, same-store sales. Product revenue grew 5% in the quarter to $154 million, which included a decline in product same-store sales of 1.9%. Anecdotally, we estimate that the loss of Nexus product sales once this vendor made a decision to take the line mass retail but we estimate the loss of Nexus negatively impacted our first quarter product comps by up to 235 basis points and had a negative impact of up to 70 basis points on our total comps for the quarter. We anniversary the loss of Nexus in January.

Royalties and fees from our North American franchise salons remained essentially flat during the quarter at $9.8 million. New franchise units that were added to the system over the past 12 months are being slightly more than offset by franchise buybacks and franchise unit closures.

We were very pleased with our combined gross margin rate for North American salons which came in at 44.4% in the first quarter, an improvement of 20 basis points over the same period last year.

Our first quarter service margin rate came in at 42.8% which was slightly above plan and represented a 30 basis point improvement over the same quarter last year. We were able to achieve this improvement despite first quarter service comps of 50 basis points compared to 1.8% during the same period a year ago. Also recall that our service margin rate for the first quarter last year was reduced by additional compensation we paid to employees that were impacted by the hurricanes. Nevertheless, our payrolls throughout all of our salon divisions were once again extremely well managed this past quarter.

Our retail product margin for the first quarter of our current fiscal year bounced back nicely to 48.2% which was identical with the year ago period. We believe this validates the fact that our retail product margin issues that we experienced during the second half of last fiscal year relating to the repacking of four top vendor lines are now fully behind us.

First quarter North American salon G&A expense improved 30 basis points to 5.4% of revenue. This improvement in rate, as I previously mentioned, was largely the result of a reduction in salon marketing expenses in the quarter. Partially offsetting this improvement was a 20 basis point increase in rent expense which came in at 14.4% during the quarter and a 10 basis point increase in depreciation and amortization expense which came in at 3.8% of sales. The rate increase in these fixed-cost categories was primarily due to reduced North American same-store sales results in the first quarter this year compared to last year.

The net effect of all the items I've just discussed caused our operating income for our North American salons to increase 20 basis points in the first quarter to 12.8% of revenue or nearly $69 million.

Next, let's review the first quarter performance of our international salon segment. As you know, this segment includes our company-owned salons located primarily in the United Kingdom and it also includes our franchise salons located on the continent of Europe. Our international salon revenue represented 9% of our consolidated first quarter revenue and increased nearly 9% over the same period a year ago coming in overall on plan at $55.9 million. Our first quarter revenue increase was due to the opening of 32 net new salons over the past year as well as currency gains. The service revenue component, which included a 3.4% decline in service comps, grew 7% in the quarter to $33.7 million.

Product revenue from our international salons continued to be strong, increasing 15% during the quarter including a 4.6% increase in product same-store sales. Royalties and fees from our international franchisees grew 4% during the period as well.

Let's switch gears now and discuss our gross margin rate. Our international salons had a combined gross margin rate of 44.9% which was an improvement of 110 basis points in the first quarter. Our service margin rate improved 90 basis points in the quarter to 46.6% despite the previously mentioned 3.4% decline in service comps. Recall that year's first quarter service margin was a bit low as it was negatively impacted by a 5.9% decrease in service same-store sales.

We also experienced an improvement in our retail product margin rate which increased 200 basis points to 40.5%. As we had expected, our international product margin rate is improving as we continue to migrate toward a similar product distribution model that we have here in the states. For example, we're now supplying our company-owned salons in the United Kingdom with an increasing quantity of product that we purchased here in the United States thereby taking advantage of our global purchasing power. Despite a soft UK retail environment, we continue to drive positive product same-store sales.

Next our site operating expense category came in at 4.2% of first quarter revenue, about 30 basis points better than planned. However, the expense represented a 70 basis point increase over the same period a year ago. Recall that our first quarter rate a year ago was lower than usual due in part to the timing of advertising expenditures.

Our international G&A expense rate improved 230 basis points during the quarter to 18.2% of sales. You may recall that our international G&A expense last year was also higher than usual due to severance costs and the timing of marketing initiatives. Partially offsetting the improvement in G&A was a planned 60 basis point increase in rent expense which came in at 19.7% of first quarter revenue. Once again, we had expected this increase due to rent renewal increases incurred over the past year on certain salon properties in the United Kingdom.

Our depreciation and amortization expense for our international salons came in at 3.4% of revenue which was in line with our expectation and slightly better than the prior year's first quarter rate.

In total, the net effect of all the factors we were just discussing caused our operating income rate for our international salon segment to grow to $4.5 million or 8.1% of sales, an improvement of 180 basis points in the quarter.

Next, we'll talk about Hair Club for Men and Women. Hair Club continues to perform above plan. Revenue from our hair restoration centers increased 12% in the first quarter to $29.1 million and represented nearly 5% of our consolidated revenue. Hair Club's overall gross margin rate declined in the first quarter this year by 50 basis points to 57.4% but was actually ahead of our expectation. We had budgeted for a slightly lower gross margin rate during the quarter due primarily to a reduced level of franchise royalty and fees as a result of the franchisees that we acquired during the fiscal year that just ended in 2006.

The other various expense line items for Hair Club were essentially in line with our expectations and in line with the year ago period and as a result, Hair Club's operating margin rate remained impressive at just over 20%.

Next, let's review our first quarter performance of our beauty schools. Our first quarter beauty school revenue grew 46% to $19.4 million, yet comprised only 3% of our consolidated revenue. The growth in school revenue corresponds to the increase in the number of schools we own and operate. At the end of our first fiscal quarter we had 55 cosmetology schools, up from 35 schools at the end of the first quarter last year. We do not anticipate acquiring or opening any additional schools this fiscal year.

Despite the growth in revenue, we are certainly not happy with the current overall performance of our school division. As we have stated in the past, we continue to work on initiatives and evaluate opportunities to improve the profitability of our schools. In the near term, we anticipate fluctuations in the various expense line items. However, as Paul stated, the long-term prospects for beauty schools remain very exciting to us.

Let me now speak to our interest expense and our debt levels. As we had expected, our first quarter interest expense came in at $9.8 million, up from 8.3 million of expense we recorded in the same quarter last year. Our total debt on September 30th stood at $691 million, up $69 million over the past three months. This increase is primarily timing related. We made a customary corporate income tax payment in our first quarter and in addition we are front-end loading our annual share repurchase budget.

We anticipate that our debt levels will come down as the year progresses as we expect to end the fiscal year with total debt in the neighborhood of $660 million or so. In the meantime, our debt to capitalization ratio at September 30th remains solidly investment grade at 44%.

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 increase in earnings per share, our EBITDA grew 9% in the first quarter to $74 million and our after-tax cash flow increased 10% to $53 million.

Before I turn the call over to you for any questions you may have, I'd like to reiterate our second quarter and full fiscal year earnings guidance that appears in today's press release.

As you know, the key assumption behind our earnings guidance continues to be same-store sales growth. Our earnings guidance directly correlates to our comp expectation. As you know, fashion changes in our industry are glacial, therefore, while we see positive long-term business trends we have trimmed back our full-year comp expectation by 100 basis points from a range of positive 1 to 2% to a range of essentially flat to positive 1%. We do believe that product comps in particular will be a bit stronger in the second half of the current fiscal year once we anniversary the loss of Nexus product sales.

We have also slightly moderated our earnings expectation for our school business. The impact of these actions, however, has largely been offset by incremental earnings accretion from our acquisition and share repurchase programs. As Paul mentioned, our full year earnings expectation has also been modified to reflect start-up costs that we will incur from our new joint venture with Intelligent Nutrients by Horst.

We estimate first year impact of this to be no more than $0.10 a share. As a result, our new full-year guidance is for earnings to be in the range of $2.10 to $2.24 a share. For our second fiscal quarter we expect earnings to be in the range of $0.50 to $0.56 per share and that is based on an assumed same-store sales range of negative 1% to positive 1%.

That's it. That completes my prepared remarks. Paul and I would now be happy to answer any questions you have. Heidi, if you can step in and provide instructions, I'd appreciate that.

Thank you, sir. [OPERATOR INSTRUCTIONS]. Our first question comes from Jeff Stein with Keybanc Capital Markets. Please go ahead.

Good morning, guys. First question on the joint venture. Randy, I'm wondering if you could give us some indication in terms of how you see that $0.10 hit or up to $0.10 hit kind of playing out over the balance of the year. How much would be booked in Q2, 3 and 4, and secondly, I'm wondering if you might tell us a little bit about how this venture is structure. Are you putting up any money as an investment initially and maybe perhaps you can talk to us a little bit about how the P&L would be impacted by this venture? In other words, is it marketing expenses? Is it distribution costs? What lines on the P&L will be impacted?

Sure. Paul's pointing at me.

What do you want to do Randy?

Let me try answering some of that and Paul I'm sure will chime in with some others. Jeff, we expect - as Paul had mentioned, there's a lifestyle line which does not include professional hair care products just yet but the lifestyle line will be rolled out initially and it will be rolled out in most of our Trade Secret stores as well as some of our higher end Regis Salon concepts. That will be followed by a more larger scale rollout of the professional hair care product line once those formulations and bottles are perfected and as Paul mentioned that will happen in the latter half of this fiscal year. So we see a gradual build of both revenues and expenses.

As it relates to the expenses, the up to $0.10 a share we expect the first quarter to be impacted maybe by a penny or two and Jeff, at this point in time the biggest bogey that we have, the unknown relates to really it's marketing. We're going to have a lot of marketing initiatives behind launching this venture whether it's going to be public relations, collateral material, advertising perhaps it's on television. Perhaps it's going to be in national magazines. They'll be travel expenses promoting this with both Horst and Paul and so the timing and the amount of marketing expenses is really the unknown and we will have more specificity as the year goes on, but most of the expense will be more backend loaded in the fiscal year as we continue to grow the existing business and launch the new hair care product line.

Is the lifestyle line going to be exclusive to Trade Secret and some of the Regis Salons?

Let me just say I don't want to what Randy has mentioned. Jeff, we close this on October 1st. We put approximately $10 million of cash into the center and have a 50% interest in it. Horst spent an equivalent amount of money developing the line over a period of several years. The business right now is a million dollar business selling to about a thousand salons. We'll be shortly adding hair care and personal care line and Randy's right. You're talking about maybe a penny or penny and some small change for the next quarter. It all depends on when we get the merchandise in terms of when we'll be spending the marketing dollars. So I doubt they'll be a lot of money spent marketing wise in quarter 2 or 3. It probably will be quarter 4 and I think $0.10 is a number which we're not likely to approach or exceed. Once again, it depends on supply.

We hired a president who will start on October 30th. He's an industry veteran and that's where we are today. The line will not be exclusive to Trade Secret. It will be in many of Regis concepts. Obviously, the higher price ones first. It will also be in Vidal Sassoon. It will be in some high-end places like Neiman-Marcus or Saks Fifth Avenue Salons. I mean we know how to distribute this line and when we have more information we'll share it with you probably in the next conference call.

Sure. I was just trying to understand the difference Paul between the two lines. You said that the lifestyle line and then a professional line. So I'm wondering what the difference between the two is. Is the lifestyle line more of a mass market line?

The organics are fairly high priced. So I mean there's a lot of people with moderate incomes are buying organics. Lifestyle really relates to the entire line which includes the eatables and the like and those products will be sold not only in salons but in other retail - through other retailers as well. But the hair care lines will solely be professional and will only be sold in beauty salons. But not only our salons, but other salon chains as well. There are a significant number of major salon chains that are setup with diversion and early indications are that they will be significant buyers of this line because they know it will not be diverted and it has the Horst seal of approval which is material and significant in their industry.

Paul, are you going to sell direct to other salons or will you use distributors like the BFG?

We will not use distributors. You can't control distribution nearly as well.

Got it. Okay, thank you.

You're welcome.

Thank you. Our next question comes from R.J. Hottovy with Next Generation Equity Research. Please go ahead.

Thanks guys. Just a couple of quick questions for you. I wanted to get a sense and this relates to the marketing expenses -- the less than expected marketing expenses in the quarter here. I just wanted to get a feel for what we can expect for the rest of the year on marketing expenses and obviously this will be outside of the marketing related to the new product. I was just kind of looking at the sense of marketing on the core business.

No. I think this quarter was more of a bit of an anomaly and we are not expecting that again, it wasn't a lot of money that we're talking about. Perhaps a million dollars or just over but this is not expected to turn Qs - well for the remainder of the fiscal year it is not expected to turn. Our budgeting continues to be - we haven't modified our marketing budget for the remainder of the fiscal year so it's built into our expectations.

And kind of the same question said here. In terms of the taxes obviously you had the one-time benefit. What do we look at in terms of a tax rate for the rest of the year? What are you expecting on that front?

Well we've publicly said in the past that it will be in the mid 35% range. So 35-1/2% very close to that for the balance of the year and it would have been very close to that in the first quarter had it not - we had that discrete event with the IRS this quarter in our favor.

And then the - I guess the last question I had is in regard to the loyalty program. It sounds like the loyalty program has been fully rolled out at the Trade Secret concept. What can we look at in terms of a timeline for the loyalty program to be rolled out to other concepts?

We just rolled out the loyalty program to all of Trade Secret on October 1st. So we've got less than a month under our belt. We will make sure that that's working very well in Trade and all early indications are that it is very successful. We've been talking with Kris Bergly. Kris is our executive vice president and chief operating officer in charge of many of our salon divisions here at Regis and Chris is very excited about the program and I think committed to rolling it out to the salon divisions as well. Although as you know, Trade is primarily a product focused retailer and as a result we may have to modify the loyalty program slightly for more of a service type of environment. We just don't have any more clarity in terms of what division would likely be onboard to be rolled out next or when that would happen but I would say we'll start seeing some action likely within the next 12 months in other salon divisions.

Thank you very much.

You're welcome.

Thank you. [OPERATOR INSTRUCTIONS] Our next question comes from Justin Hott with Bear Stearns. Please go ahead.

How you doing? This is [Chris de Bola]. I was wondering if you could give me a little bit more color of what happened to your working capital this quarter? It looked likes a big change like negative 26 million versus negative 9 million last year.

Yes. The big change was the first quarter income tax payment of about $26 million, I believe give or take. That was more of a timing issue. As you know, we collect our cash well in advance of paying our bills and we traditionally see very little need for working capital and our expectation for the full year in terms of our cash flow budget is that working capital should be essentially flat in terms of it shouldn't be a significant use or source of cash for us. So a bit of an anomaly related to the tax payment that I referred to.

Okay. And another question I have for you is regard to your share count for fiscal year '07. What number are you guys using now and how is that compared to what you guys were using before when we guided to 2007 EPS?

Well I can you what we seem to be. I've got a model here in front of me that's showing that our share for the average shares outstanding for the entire year without any future impact of share repurchase is 45.7 million shares. That's weighted average for the full fiscal year and I quite frankly don't remember what we ended up guiding to prior to that but we did repurchase I think it was 675,000 shares this past quarter so I would assume you tack on another 675 to the number I gave you would have been the prior guidance.

And my last question is in regards to the new product initiative. What kind of price points can we expect? Is it going to be priced similar to what Nexus was, high or lower?

It will be higher. Shampoos will be in the 20 some odd dollar range which is not out of line with an awful lot of higher end professional lines today. Significantly more expensive than Nexus.

Is this going to be similar to Aveda at all or is it completely different than Aveda?

It's quite different.

Okay. Thank you very much.

Thank you. Our next question comes from Jeff Stein with Keybanc Capital Markets. Please go ahead.

Randy, I'm wondering if you could tell us a little bit about the acquisitions you made during the quarter. What is the annual revenue run rate? What will you expect the earnings contribution to be and is that also now baked into the new guidance you've provided?

Well the accretion from that - once again, Jeff, we've reduced our comp guidance for the full fiscal year by about a full percentage point and that would generally equate to maybe $0.12 earnings impact for the full year. We're offsetting that however by items like accretion from acquisitions we've done. Accretion from share repurchase and other business trends that we're seeing that have been favorable recently. I am estimating, I don't have the revenue run rate. Well in fact, maybe somebody's getting that as we speak, but I believe the earnings accretion that we have estimated would be about $0.04 a share for the acquisitions that we've done here so far this current fiscal year and does anybody have a earnings -- I'm sorry, revenue run rate?

Revenues are about $28 million for the year.

Got it. And wondering you had the Trade Secret program in effect now for almost a month. Are you beginning to see a favorable impact on comp store sales at Trade Secret?

Not much. And again, largely it's tough to really look at it without really peeling back the onion because of the impact Nexus continues to have and Trade Secret will be disproportionately affected by Nexus. Having said that, we had 50, I'm trying to think, we had 50 stores I believe in three test markets that were operating I think since August. Sometime in August and then we rolled it out to the rest of the Trade Secret division in October. Jeff, at this point in time, I wouldn't say that it is material. As Paul mentioned, we have 138,000 customers that have signed up. We've seen a very favorable effect on the average ticket for people that are on the select program or for the free loyalty program. But no material change in comps in trade.

It's much too early because we have not yet utilized the data that we have collected at all.

Sure.

When we do, we should see some significant results.

You're saying utilize the data in terms of more direct marketing efforts to those customers at that point.

And Randy, the expenses that you incur for the joint venture is it going to be consolidated into a one-line item joint venture or is it going to be dispersed and we won't be able to see it?

Well it is not by design necessarily, but this will be consolidated with our operating results. This is not significant enough at this point be a separate segment and because, you know, accounting convention requires you to - there's different hurdles as to whether you show it as a separate line item as an equity investment or whether you consolidate. We will have to consolidate this. So what will happen is that the revenues and the related expenses will be amalgamated with our existing line items on our P&L. What we will try to do again, we are not hiding anything, as Paul mentioned beginning in our second quarter and beyond talking fully as to what the - what we are seeing in terms of revenue and related expenses associated with this joint venture.

Good. Thank you.

You're welcome.

Thank you. There are no further questions. I would like to now turn the conference back to Paul.

Thanks for joining us, everyone.

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