Regis Corp (RGS) 2007 Q2 法說會逐字稿

Good morning, ladies and gentlemen. My name is Mary and I will be your conference facilitator today. at this time I would like to welcome everyone to the Regis Corporation 2007 second quarter 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 952-806-1798 and a copy will be faxed to you immediately. If you wish to access a replay for this call, you may do so by dialing 1-800-405-2236. Access code 11080740 followed by the pound sign. I would like to remind you that to the extent of the company's statements or comments this morning represent forward-looking statements, I refer you to the risk factors and other cautionary factors in today's news release as well as the company's SEC filings. Reconciliation to non-GAAP financial measures mentioned in the following presentation can be found on their website at www.RegisCorp.com. With us 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'd now like to turn the call over to Paul Finkelstein for his comments. Paul, you may begin.

Thank you, Mary. And good morning, everyone. Thank you for joining us. Pardon my voice. I'm just getting over a cold.

Second quarter revenues increased 8% to $657 million. Same store sales increased 0.5%, which was at the upper end of our guidance range. Second quarter net income decreased 2% to $27 million. However, EPS was flat with a year-ago period at $0.59 a share. This quarter, our EPS includes a nickel per share related to the reinstatement of job tax credits which Randy will comment on in a few moments. We are pleased with our operational and quarterly performance which, absent the tax credit, is at the upper end of our guidance range.

Second quarter EBITDA increased 2% to $79.3 million. We ended the quarter with 11,570 salons, 88 hair restoration centers, and 55 beauty schools -- a net increase of 79 locations during the quarter, and 502 locations compared to the year-ago period. During the quarter, we acquired 15 salons, built 85 salons, and closed and relocated 39 others. We had a net increase of 61 corporate owned salons during the quarter. Our franchisees built 62 salons and closed or sold or relocated 43 salons, for a net increase of 19 franchise salons during the quarter. Company-owned salons as of December 31 numbered 7,784. Franchise salons numbered 3,786. Total debt at the end of the quarter was $677 million, and our debt to cap ratio was 43%. These current levels are acceptable and necessary to maintain investment grade status.

The good news is that there's no systemic change in our model. In fact, business is getting stronger. Our quarterly service comps plus 1.3%, versus 0.7% last year, we virtually doubled our service comps. Last summer, we shared with you our prediction that service comps would start firming up because certain celebrities were starting to cut their hair. But trickle-down effect to the masses can be anywhere from 6 to 18 months, so we are right on the mark. More and more people seem to be cutting their hair and our service business should respond accordingly. During this challenging cycle, we have initiated many programs such as being long hair experts, and going into the hair extension business. By the way the main issue with respect to hair extensions is training. We're now offering hair extensions in about 80 of our salons and are in the midst of training 100 additional salons. This should be a multimillion dollar business given time and patience.

On the product side of the business, I'd like to share with you our thoughts as to the current state of affairs. There has been a dearth of new product line extensions and new product lines which have contributed to industry-wide malaise. In addition, the cessation of Nexus within our salons has cost us a million dollars of sales per month. The Nexus issue is now behind us; however, more and more companies are going into the shampoo business. Retailers such as Victoria's Secret are plunging in head first into the beauty category and this of course is not helpful.

On the positive side the version is starting to abate. The ACNielsen statistics for the last two quarters show a decrease in diversion with a notable exception of L'Oreal. I believe that the pressure we have put on manufacturers coupled with our Intelligent Nutrients program with Horst is having positive results. As an example, Paul Mitchell diversion has been reduced by 14%. And Procter & Gamble's efforts have yet to pay dividends but I am highly confident that P&G will get its diversion under control.

Many of you have recently read that Wal-Mart may very well go into the professional product business in 500 locations. In the event that happens, and I'm not so sure that it will, I think that this will be a huge wakeup call to our industry's manufacturers. We feel that the manufacturers have been extremely short-sighted as to the negative effects a diversion will have on the cache of the professional product category. We believe they will understand the seriousness of the problem and the solution, of course, is to make sure that retailers such as Target, Walgreen's and the like do not have an assured source of supply. Once an assured source of supply does not exist you will see professional product eliminated from the planograms of these positional retailers. There's also a huge opportunity for Intelligent Nutrients by Horst. We are a patient company and want to make sure that Intelligent Nutrients is implemented in the right fashion. There are all kinds of logistical issues such as stability testing and the like and whether the inproduct hair care line is available this summer or fall is irrelevant. It should eventually be a huge line and should have a tremendous impact on our industry.

Future for product sales is bright indeed, although fiscal 2007 will continue to be a challenging one. We have Intelligent Nutrients in 675 salons and we're pleased with our sales to date. ,We should be introducing one significant new product per month, which is the right way to implement the Intelligent Nutrients program within our stores. Our Trade Secret loyalty program is progressing extremely well, and with over 350,000 customers signed up, we are well ahead of plan.

Our business in Europe has improved significantly and profits are well ahead of plan. It's also highly likely that we will enter Japan within the next three to six months. Wal-Mart has a significant presence in Japan, and would like us to consider partnering with them. We have repeatedly told them that we wouldn't be able to expand with them in Japan without a suitable management structure. We feel that we have found such an infrastructure.

Hair Club continues to perform extremely well with EBITDA increasing 12%, and net income increasing 15% during the quarter. Wal-Mart continues to be a bulwark of new salon construction and we should be adding about 230 salons in Wal-Mart this year. On the beauty school front, we continue to be troubled by our performance. However, please rest assured that the school business is a very good one and we are currently exploring ways to maximize this valuable asset.

It's premature to talk about this today, but within the next month or two, you should be hearing very exciting news about our beauty school business. During the second quarter, we repurchased 335,700 shares of Regis stock at $37 per share. Through the first six months of our fiscal year, we repurchased 1,015,050 shares of Regis stock at an average price of $36.92. We have approximately $66 million remaining on our board-authorized $200 million share repurchase plan. Randy Pearce and I will go on the road next week to meet with investors on the West Coast. We're also scheduled to present at the Bear Stearns retailing conference in New York City on February 28. And in March, we plan to market in New York City and Boston.

The last three years have been challenging ones, due to the industry-wide decline, in salon visitation frequency. Our financial model remains quite compelling, and I want to thank our management team for expending a tremendous amount of effort to focus on expense control and keeping the morale of our field personnel up. We continue to focus on our core competencies which are to run salons in a $20 average check price point and run them extremely well. Our training programs are second to none and patient investors should reap significant rewards in the years ahead. Randy Pearce will now continue with our presentation.

Thanks, Paul. And good morning, everyone. As Paul just mentioned, our second quarter earnings of $0.59 a share included a $0.05 benefit related to a lower effective income tax rate during the quarter which resulted from the government's retroactive reinstatement of jobs credits. Therefore, excluding this tax benefit, our second quarter operational earnings came in at $0.54 a share, which was at the higher end of our previously issued guidance. As you're aware, our quarterly earnings guidance directly correlates to our same store sales guidance. We had forecasted our second quarter same store sales to be within a range of negative 1% to positive 1%. And earnings to be within a range of $0.50 to $0.56 per share. With actual same store sales growth coming in at positive 50 basis points for the quarter, this correlates with the upper half of our earnings range, or roughly $0.54 a share. Absent the income tax benefit, I believe we had a pretty straightforward quarter so let me now transition my comments by giving you some more detail behind our second quarter operating results, for each of our business segments. A breakout of our segment performance is found in today's press release.

I'll begin with our largest segment, which is our North American salons. Our North American salon revenue, which represented 83% of our consolidated second quarter revenue, grew 7% during the quarter to $545 million. This revenue growth was due primarily to an 8% quarter over quarter increase on the number of company-owned salons that we operated. Service revenue in our North American salons grew 9% during the quarter, to $372 million. This increase included a 160 basis point increase in service same store sales. Product revenue grew just over 2% in the quarter to $163 million. And was tempered due to a decline in product with same store sales of 1.6%. Royalties and fees from our North American franchise salons declined 3% during the quarter to $9.5 million. This slight reduction was primarily due to a net year-over-year reduction of 83 franchise salons, due to franchise buybacks.

Our combined gross margin rate for North American salons came in at 43.9% -- essentially identical to the 44% rate we reported last year in our second quarter. We were very pleased with both our service margin as well as our retail product margin rate. Our second quarter service margin rate came in on plan at exactly 42% and represented a 10 basis point improvement over the same quarter last year. This slight improvement was largely due to improved service comps during the period of 1.6%, versus 1.3% during the year-ago period. Our controls over salon payrolls remained outstanding. Our retail product margin rate for the second quarter came in slightly above plan at 48.2% and was comparable to the rate we reported in the same period a year ago. As a result of our focus on inventory management, we are certainly pleased to report a gross margin rate north of 48% during the holiday season which as we all know can have a tendency to be more promotional in nature.

Site operating expense, which includes costs directly incurred by our salons such as advertising, insurance, utilities, and janitorial costs, as well as our depreciation and amortization expense, were both in line with our expectations, and were both similar to the year-ago period, so there is no need to discuss these line items further. We did, however, experience second quarter rate increases in G&A expense, and in rent expense, both of which, however, we had planned for.

Our North American salon G&A expense came in at 5.6% of revenue, which was on plan, yet was 80 basis points higher than the same quarter a year ago. This increase was largely due to a planned shift in the timing of salon advertising from our first quarter into our second. The increase in our second quarter G&A rate essentially offsets the favorable quarter over quarter variance that we experienced in our first quarter this year. Therefore, year to date, we're fine. Brand expense also came in essentially on plan at 14.3% during the second quarter which was 30 basis points higher than the comparable period a year ago. The rate increase in this fixed plus category continues to be a reflection of a reduced level of North American salon same store sales results. It's interesting to note, however, that over a long period of time, our rent rate has remained remarkably consistent in the low 14% range. The net effect of all of the items I just discussed caused operating income for our North American salons to decrease 110 basis points in the second quarter to 12.7% of revenue. Again, this decline is largely due to the planned shift in salon advertising that I just talked about.

Next I'll comment on our international salon segment, which includes our company-owned salons located primarily in the United Kingdom and also includes our franchise salons located on the continent of Europe. First, in terms of a brief overview, you'll note our comps in the second quarter this year, although still slightly negative, improved over the same period a year ago, as did our total revenue, our operating income, and our operating margin rate. International salon revenue, which comprised 9% of our consolidated second quarter revenue, grew 13.7% over the same period a year ago, coming in at $60.4 million. Our international service revenue, our product revenue, as well as our franchise royalties and fees all grew double digits.

The quarterly revenue increases this past quarter were mostly anticipated, and were due to a combination of a continuing benefit from foreign currency rates, as well as organic growth. Our overall combined gross margin rate in our international salon segment came in at 44.3% of revenue, which was off 20 basis points from the same period last year. Our service margin rate came in essentially on plan at 47.2%, which was identical to the rate we reported last year in the second quarter. However, we did see a very modest decline in our second quarter retail product margin rate, which would decrease 20 basis points to 37.9%. The slight decline was essentially due to sales mix. For example, we continue to be quite successful in selling hair appliances in the United Kingdom which have slightly lower gross margin rates. We remain very pleased with our positive retail product comps in the U.K. which came in at a positive 5.2% during the quarter.

More than offsetting the slight decline in our overall gross margin rate was a 40 basis point improvement in site operating expense which came in at 4.5% of second quarter revenue. The quarter over quarter improvement was in large part due to last year's second quarter rate being a bit higher than normal, due to the timing of when certain expenses were incurred. The international salon expense categories, all of the other ones were largely in line with plan and were comparable to the period a year ago. In total, the net effect of the factors we just discussed caused our international salon segment operating income rate to improve 30 basis points to 7.1% of international salon revenue.

Next, our hair club business, both top and bottom line, continues to perform very well. Revenue from our hair restoration centers increased 10% in our second quarter, to $29.7 million, and represented nearly 5% of our consolidated revenue. Hair Club's overall gross margin rate improved 230 basis points to 59.7%. We experienced improvement in service margin as well as product margin due to recent price increase initiatives. Partially offsetting the improvement in gross margin was a 110 basis point increase in general and administrative costs to 22% of sales. This increase was in large part due to the result of higher levels of advertising and marketing expenditures this past quarter, due to a new hair transplant advertising campaign, a revised website launch, and increased media placements during the quarter. The other expense line items for Hair Club were essentially in line with our expectations in the year-ago period, so therefore in total the operating margin rate for Hair Club grew to $6.4 million, and in terms of rate improved 100 basis points at 21.5%. And in addition, Hair Club's EBITDA margin improved to 29.5%.

Next, let's review the second quarter performance of our beauty schools. Revenue increased 46% to nearly $22 million, and comprised about 3% of our consolidated revenue. This increase was related to the operation of 55 schools at the end of our second quarter this year, compared to 35 schools at the end of the second quarter last year. As we've discussed in the past, the various expense ratios for the beauty school division continues to fluctuate quarter over quarter, due to the mix of schools we have acquired over the past year.

While there's still room for improvement, we are pleased to report that our school segment returned to profitability during the quarter, after posing -- posting negative operating income in each of the two preceding quarters. Beauty school operating income was $2.6 million, or 11.8% of revenue in our most recent December quarter. Let me now turn to a few housekeeping items. First, let me speak to our interest expense and our debt levels. As we had expected, our second quarter interest expense came in at $10.7 million. Our total debt on December 31 stood at $677 million, down approximately $14 million from the previous quarter. We do expect that our debt levels should continue to decline slightly during the balance of the year, and we expect that we should end the fiscal year with a total debt level in the range of $670 million. Our debt to capitalization ratio remains solidly investment grade ending the quarter at 43%. As you know, the cash flow characteristics of our company are very strong and highly predictable. Our EBITDA grew to just over $79 million in the second quarter, and our after-tax cash flow increased over 6% to $58 million.

Next, let me address our income tax rate. As we've already discussed our second quarter rate of 29.6% was abnormally low due to the retroactive restatement of jobs credit. President Bush signed that law into effect during the last week of December. Looking forward, however, we anticipate that our effective tax rate should be in the range of 34 to 35% during the second half of our current 2007 fiscal year. Before I turn the call over to Q&A, I'd like to reiterate our third quarter and full-year 2007 earnings guidance that appears today in our press release. As you know, the key assumption behind our earnings guidance is same store sales growth, and our earnings guidance directly correlates to our comp expectation. As a result, our full-year guidance continues to call for earnings to be in the range of $2.10 to $2.24 per share, based on a comp expectation of flat to positive 1%. Despite a reduced income tax rate, we believe that it would not be prudent at this point in time to raise the expectation bar too high. We would much rather be in a position to deliver positive surprises in the future.

For our third fiscal quarter, we expect earnings to be in the range of $0.50 to $0.56 per share, based on an assumed same store sales range of flat to positive 2%. In closing, I'd like to make a comment on our practice of providing quarterly and annual earnings guidance. Historically, we have provided the street with quarterly revenue, same store sales, and EPS guidance. However, the trend amongst publicly-traded companies today is towards -- to provide annual guidance only. In fact, nearly half of all publicly-traded companies today are now providing annual guidance only. Many of you have also urged us to adopt this practice. As the only publicly-traded hair salon company, we will continue to provide thorough, consistent information to all current and potential investors. Our practice of providing quarterly guidance is an example of this. However, we are currently evaluating the merits of providing quarterly guidance, as it often leads to short-term investing, and increased share price volatility. This unintended consequence of providing more information to our investors is certainly not consistent with our goal of creating long-term shareholder value, and in fact the matter is, we don't manage our business based on 90-day increments. So aligning our guidance practice with how we manage the business obviously resonates with management here at Regis and with many of our investors. We have not, however, made a final decision on our guidance policy yet. If and when we make any changes we'll certainly keep you updated, but we wanted to at least provide you with our current thinking. This contemplates my prepared remarks, or completes my prepared remarks, and Paul and I would now like to answer any questions you may have. So Mary, if you can step in and provide some instructions, and could help people ask some questions, we'd appreciate it.

Thank you, Paul and Randy. [OPERATOR INSTRUCTIONS] And our first question comes from Mike Hamilton. Please state your company name followed by your question.

Good morning. Mike Hamilton, RBC Dain.

Hi, Mike.

How are you today?

Good, Mike, thanks.

Two questions for you. First one ties to the hair restoration. At the time of the Hair Club acquisition, you were not overly aggressive as to how fast you might pull in some effective cross-marketing. And we're now at a stage where I think by most expectations we would begin to see a little bit. And just wondering what you're finding, what you're seeing, and just wondering what you're finding, what you're seeing, and what you're trying to do strategically as you look forward?

We're still working on it. We have not had any significant degree of success. The business has responded extremely well, but not because of cross-marketing. The biggest challenge that Hair Club is how it's going to continue to grow. And it may very well have a different price point in terms of another division like we have in malls with Regis and MasterCuts. We very well go international. But the cross-marketing efforts have not had any significant success for us.

Thanks. My other question is on the beauty school side, and if you could just give some of your thoughts as you have begun integration and begun, if you will, more homogenization of this business -- what you think you need to do, what it's going to take from a management effort and strategically, kind of where you're trying to position now?

You know, we'd rather go into depth next quarter because as I mentioned in my transcript, we should have an announcement within 30 or 60 days that we think is significant. But the -- we've made over 400 acquisitions in the beauty salon business, and we haven't had any cultural integration issues at all because we buy basically plain vanilla businesses. That wasn't the case in the beauty school end of it. We have bought disparate businesses, disparate cultures, and we have a huge need to get infrastructure. As you know it's government regulated, and when these systems and platforms, and we're working very diligently on that. The beauty school business, if run correctly, has EBITDA margins well in excess of 20%. And we're very confident long term that we'll get there. But like we can't be more specific right now because we are working on something else, and once again it is premature to go into it right now. But as soon as we have something we'll certainly have a press release and we'll update you next quarter if for some reason this program does not transpire.

Very good. Thank you. That's it for me.

Welcome.

Thank you. Next question comes from Jeff Stein. Please state your company followed by your question.

Hi, Paul and Randy. It's actually [Mary Rizatko] at KeyBanc Capital Markets in for Jeff today.

You don't sound like Jeff at all.

Just two quick questions. First if you could maybe clarify in the impact of the Intelligent Nutrients joint venture on the quarter, and what the impact should be in 3Q and 4Q?

Sure. This past quarter, as we started up, the December quarter, as we continue to start up the initial steps of our joint venture with Intelligent Nutrients, we incurred just around $800,000 of net expense in our P&L this past quarter. Impacted us just a little over a penny a share. Pretty much as we expected. In our third and fourth quarters, we'll continue to see slight escalation in that expense as we continue to roll out this program to our salons. I would give you a range that in our third quarter at this point in time we're kind of looking somewhere in that $0.02 to $0.03 cent per share impact on our third quarter earnings, and it may grow slightly more than that, in the fourth quarter.

Okay. Excellent. And then my second question was great job on comps -- especially domestically. I was wondering if you were willing to expand a little bit on what you've seen going into January.

We don't give monthly comp information. January business has been difficult in large part due to weather. I think many retailers are experiencing the same problems we are.

But over many years, Paul's right. I mean you can look at certain months, coming off the holiday season -- the month of January, regardless of how exuberant or disappointed we ever could be in comps. It really doesn't mean a lot to the quarter, because a lot of people have had their hair done -- hair services performed and bought product over the holiday season. Having said that, as we look forward, March is always a stronger month for us and that's probably the key month to us for the quarter.

Okay. Excellent. Thanks, guys.

Welcome.

Thank you. Next question comes from John Christensen. Please state your company followed by your question.

Good morning. Kayne Anderson Rudnick.

Hi, John.

Wanted to talk a little bit about productivity on the stylists. This is in regards to service comps. Have you guys seen an impact as stylists, for example, build up a base of business, and when they do that, they may leave and start their own shop? How does that impact your comps? And how does that impact overall stylist productivity?

It's not really material in our business, because only 10% of our salons have appointments. Most of our salons are walk-in business. So stylists really don't get followings. That's not the case in Sassoon or Regis, but we have not had any significant negative impact based on the condition you're talking about. It's not really an issue. Our strategy is quite different from the high end business.

Okay. And I remember last year you guys had mentioned price increases. Could you give us an update on -- for your strategy for the price increases last year? How that went, how the customer took that, and going forward?

It seems to be consistent with last year. It probably represents 20 to 25% of our comps. And it probably did last year as well.

The other thing -- let me just add to what Paul just said -- as we continue to look at a lot of the recent service initiatives that we've implemented over the year, whether it's price increases, whether it's new programs. Paul talked about hair extensions that we're currently rolling out, we've talked in the past about the Trade Secret customer loyalty program, about refining our marketing approach. We have seen that average ticket continues to increase. Over many years our sweet spot in terms of same store sales growth has generally been in that 3 to 4% range, and when you look at average ticket increases over last year, and well, even the second quarter, we continue to be in that 3 to 4% range. However, our overall comps are still showing 50 basis points positive this last quarter, not 3 to 4% positive, because of the lengthening of the customer visitation patterns which we've talked about in the past, largely due to fashion. So a lot of the initiatives that we continue to employ, whether it's price increases or adding other services, continue to be successful for us.

So taking on that last point, we have anniversaried the long hair cycle now. So you're still seeing a decrease in customer visitation?

We haven't anniversaried the long hair cycle yet. We think we're getting there. You can see it on the runways. You can see it with respect to our service comps. But long hair is still an issue. It has not yet -- it has not turned. It is turning. It has not yet turned.

Because I was under the assumption we've been hearing about this for a couple of years now.

Three years.

Three years?

Yep, and maybe four years. We don't know. We do know it's getting better and the numbers don't lie. We have our service comps for the quarter, basically double what they were last year. And it's primarily due to the fact that people are starting to cut their hair. But we don't know when it will end. But the demographics are very helpful. Because older people need to cut their hair. They don't look very good in pony tails.

And the last long hair cycle, do you -- how long did that last?

Oh, they can last anywhere between two and four years. But history doesn't necessarily repeat itself.

Okay. Thank you.

Welcome.

Thank you. Next question comes from R.J. Hottovy. Please state your company followed by your question.

Hi, yeah, this is R.J. Hottovy with Next Generation Equity Research. Good morning, guys.

Hi, good morning.

First question I had was just in respect to the promotional environment that you guys saw in the fourth quarter. And if memory serves me correct that last year you guys saw a 2% hit on the EPS line just because of the promotional environment. Could you just comment a little bit more about what were you seeing out there in the fourth quarter and I guess the start of the -- through the second quarter, and the start of third quarter here?

Yeah, let me take a stab at that. You're right. Last year, right before the Christmas holiday season, we ended up -- we became very promotional. And it hurt our margins and we talked about that last year. This year, we're much more disciplined. I think Norma Knudsen and all of the operating people continue to focus on maintaining margins this quarter. We did not see that it necessarily impacted our sales, but our margins held very strong, so we're very pleased with that. Looking to the third and fourth quarters, a year ago, we were talking about the product repackaging that impacted us, and that is not -- there is nothing like that on the horizon. In fact, we continue to have every expectation that with our continued focus on inventory management and on gross margin rate enhancement that our margins will be significantly stronger the third quarter of this year than last year.

Okay. That's helpful. Second question I had was just with regard to the loyalty program at Trade Secret -- just if we could get a little bit of an update, if there was any meaningful benefit on the comp numbers just because of the program and if there's any plans to extend it to some of the other concepts.

Yeah, all indications are so far, that the Trade Secret, and -- I think we rolled this out in October, the first of October, so it hasn't been out there very long. In fact it wasn't even out there for the entire quarter. So whatever benefit that I'm about ready to recite to you, I don't think you that you can say that it's material to the Trade Secret comps or to our overall comps certainly, but we're seeing a lot of very good early results. First of all I think as of today we have 350 to 400,000 customers that have signed up, just in these last few months. We're very encouraged by that. Trade Secret's average ticket historically has probably been in that $26, $27 range. But what we're seeing with these customers that have signed up is that it's significantly more sales, with the average sale for the customers that have signed up is nearly $38. And then we also have the select program, these are what we refer to really as our Trade Secret junkies and we find that those folks are coming in every 24 days and on average spending almost $55 on it. We're gaining more market information relative to as we expected. Most of our customers in Trade Secret are female. We are finding that over half of the customers are in the demographics of age group of 35 to 55. We are looking now at becoming much more focused in terms of how we are going to continue marketing to those customers, making sure that we retain and bring them back. So we're very encouraged with the Trade Secret loyalty program early results. I know Kris Bergly and some of the operating people that focus on the salon side of the business have learned all this information from Norma Knudsen and I know are looking at ways now to take this loyalty program and starting to think of how we can expand it to salons. Because again, Trade Secret is primarily product focused, salons are going to be primarily be service focused, and now we're just looking at ways to transferring them, so -- early results are very encouraging.

Okay. I guess lastly, here, just a quick follow-up question on the Intelligent Nutrients line. Obviously Paul mentioned earlier in the call that the launch date for the professional line is probably a little bit it's either summer or fall, but just wanted to see with the products that you've already launched in the Trade Secret business, whether or not you were planning on extending that to the salons as well in the near term future.

It's a question of production. And sure, I mean, we would hope and expect that eventually, the entire system will have some assortment of Intelligent Nutrients. We're talking about 11,000, 12,000 stores. It's a question of realistically very little of that will be done in fiscal 2007.

So far, we have just under 700 salons that have the Trade Secret assortment out there today. Most -- your point's well taken. Most of them are in Trade Secret. Having said that, we are looking in the month of March to -- the plans are to roll this line out to 135 of the Regis salons, and we'll continue to roll it out, to Paul's point, as we get closer to summer. To more and more salons.

Okay. Thank you.

Thank you. Next question comes from Justin Hott, please state your company followed by your question.

Thanks. Just a follow-up on Intelligent Nutrients. Is it-- from your comments, is the hair care product being delayed at all?

No. Horst had a noncompete, as you know, Justin, with Estee Lauder. He could work on the Edibles and the like, which he has, over the last several years. He's only been able to work on the hair care line for the last year. And that is why it's just taking some time. There's no delay. We knew full well that the launch date -- we were initially hoping it would be May or June. It may very well be July or August or September. Because he has some very exciting stuff coming from his lab, and we want to make sure it's done right, but there's no delay, Justin.

Okay. Thanks. Next question. If the industry is picking up, one of the things I think we've heard in the past is that acquisitions are -- it's not a good time for acquisitions unless the industry is improving. Would you be re-examining your acquisition strategy perhaps going back towards more acquisitions?

I don't necessarily agree with that. We generally buy them at four times cash flow. If they're really big, maybe 4.5 times cash flow and we end up with a 3, 3.5 year pay back. So we are not by design -- anything that -- we never have a pipeline, Justin. If something becomes available, and we want it, we'll jump at it. We are not planning to have any kind of reduced acquisition program. We had very few the first quarter. I mean this past quarter. But believe me, if a 200-store group came along, and the owner finally wanted to cash in, we're there. It's a very, very profitable part of our growth strategy. And will continue to be for a long period of time.

Okay. Thanks. And thinking about Japan on the growth strategy, from your comments, would Japan be predominantly a Wal-Mart strategy if you're going in there? Or would there be acquisitions involved as well?

Well, we would only go in -- we're planning to go in based upon buying a minority interest in a company that already is running beauty salons, and has a long history of running beauty salons. And we would hope that we would be able to expand with Wal-Mart. So, I mean, we will have an infrastructure, and it will take very little of our management time, and the capital outlay is not really significant, so the risk-to-reward ratio long term is very promising.

But just --

But it's not yet signed.

Okay, but minority interest, that would be something that would be new to me for Regis. Is there a different mindset or is this something you've done in the past?

Oh, we've done it with cool cuts. We have a minority interest there. We have a minority interest with pure beauty. We have options to take those people out. So we've done this before, Justin.

Okay. Thanks. I didn't know that.

Justin, just when we look at Japan, though, because primarily because of the distance factor, we've said all long what we're really trying to find is a seasoned management team that has a history of owning and operating beauty salons, and maybe even more importantly, wants to continue owning and operating beauty salons. We don't want to redirect the focus of this management team here to Japan and to have people flying back and forth trying to manage that business. So part of the strategy in Japan has always been for us anyway, that we were going to find a management team and make sure they continue to have skin in the game to grow the business in a profitable fashion without having us to have to have tremendous involvement here in Minneapolis.

Thanks a lot. And the last questions really have to do with diversions. Some of the comments today. There's some big industry changes, L'Oreal is obviously changing their salon distribution, there's been some changes with Sally. I realize you go direct to the suppliers, but what I'm really wondering if you can update us on some of the plans you talked about in the last quarter to control diversion -- how that's moving forward. And really can you explain -- with such strong words about L'Oreal and such strong words about Proctor, I guess in two different directions, how does this really -- what message should we take out of that?

Well, the message frankly is a positive one. I think L'Oreal understands what they have to do. And I think they're committed to do it. Now, when is another issue. Procter & Gamble, I think, have -- I think they have been far more productive in terms of really seeming serious [inaudible] and really committing themselves to reduce it. If L'Oreal doesn't get its act together, I think salon owners will just -- will just reduce their purchases but I have no idea. That's up to them. But the fact of the matter is ACNielsen numbers are available on the web for anybody to look at, and I assume you've looked at them, Justin. And the news is good, the fact that Mitchell is down 14%, and a lot of major vendors are down, is good news. And if you take away L'Oreal and PG, diversion really is on the way, and so long-term, I think we're going to be fine, because once there's not an assured source of supply, it will be removed from planograms.

Okay. Great. Thank you very much.

Thank you.

Thank you. Your next question comes from John Thompson. Please state your company followed by your question.

It's actually Don Thompson from Credit Suisse. Randy, earlier you said that -- just to go back to Hair Club for a minute, that sales were increasing, you were happy about that, but you were also spending about 22% of sales as the business is starting to push transplants. Is that saying that you're pushing away from the typical Hair Club replacement and moving more towards the transplant business? And then I think, Paul, you actually said that you were looking at international growth there as well. Can you comment on that?

With respect to question one, our transplant business has been pretty consistent this year, versus last year. So there has not been a significant shift.

We've just been updated marketing campaign. So no significant shift.

And with respect to -- look, we did not buy Hair Club just keep it where it is. We think it can grow. And whether it grows internationally, or grows by acquiring a lower price point similar concept, we don't -- we might do both. But Hair Club growth is very important to us. And we have an excellent management team, and they'll make it happen. We're very confident about that.

Are you talking about acquiring a lower price point company domestically or internationally?

Probably domestically.

Okay. Thanks.

You're welcome. Did you mention that?

Thank you. Our next question comes from Justin Boisseau. Please state your company followed by your question.

Hi, it's Justin from Gates Capital. You talked a little bit about the SG&A being up in the quarter due to advertising. And the fluctuation between Q1 and Q2. What are your expectations for the second half of the year?

Well, again, we're fine year to date so I would say that if you look at our six month number, it's probably going to be very comparable over the next couple quarters. Our consolidated G&A rate for the full year should come in high 11% range, right around 12% for the year. I think you'll see those numbers should be very consistent in third and fourth quarter. At least that's our expectation at this point.

Okay. And then you'd -- I believe you'd previously said you anticipated executing on the full $100 million share buyback authorization by the end of the '06-'07 year. Is that still your plan?

Yeah, it's $200 million, first of all and about -- so your question is about at the -- I think it was at the sometime in our fourth fiscal quarter we made an announcement that we were going to accelerate our share repurchase and buyback $100 million worth of stock over the upcoming 12 months. That's still our plan.

That's right. Yeah, sorry. Okay. Thanks.

You're welcome.

Thank you. Next question comes from Jake Slosser. Please state your company followed by your question.

Hi, it's actually [Jake Schlossberg], [Shoria] Capital. My question is really more related to the operations on the mall-based stores and this is just strictly from observation. It seems like on some of the MasterCuts lines, on some of those lines, that we have a lot of people waiting outside, and just kind of some random order, I guess, they work off of a list, and I've seen people just kind of leave, not waiting for their turn, because they've got kids or what not on the weekends. Have we ever thought of maybe using a restaurant type technology where we hand somebody a buzzer so that they can walk and shop and then come back and we actually capture that revenue?

You know what? Kris Bergly is our Chief Operating Officer. Kris -- and he's here. And Kris, can you update?

We actually tried that technology about, I want to say 12, 13 years ago, something like that, in the Regis salon division, and unfortunately, it did nothing to improve the rate of people returning to us. They would just come back and put the buzzers back. So if they're frustrated by the wait, the fact that they had a buzzer didn't help.

And by the way I'm glad we got a lot of frustrated people waiting. My God. Business will be terrific.

Yeah, no, I just -- it was something unusual that you've got these little kids or maybe I don't know if there is any way we can pick up some ancillary sales. I know some of these stores don't have receptionists or anything, and that they're -- the people that are cutting the hair are checking out, but it just seemed like --

You know, that's a good idea. We'll look at it.

Okay.

Thank you.

Thank you.

Thank you. If there are no further questions I'll turn the conference back to Paul.

Well, thanks for joining us, everybody. Have a good day.

Thank you. Ladies and gentlemen, if you wish to access a replay for this call, you may do so by dialing 1-800-405-2236. With the I.D. number of 11080740 followed by the pound sign. This concludes our conference for today. Thank you all for participating and have a nice day. All participants may now disconnect.