Regis Corp (RGS) 2007 Q3 法說會逐字稿

My name is Rob, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Regis Corporation 2007 third quarter conference call. All lines have been placed on mute to prevent any background noise. If anyone has not received a copy of this mornings press release, please call Regis Corporation at (952)806-1798 and a copy will be faxed to you immediately. If you wish to access the conference for replay you may do so by dialing 1-800-405-2236 using access code 11085693#.

I would like to remind you that to the extent the Company's statements or comment 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 of to nonGAAP financial measures mentioned in the following presentation can be found on the web site 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 conference over to Paul Finkelstein for his comments. Please go ahead, Paul.

Thank you Rob, and good morning, everyone, thank you for joining us. Third quarter revenues increased 8% to $655 million. Same-store sales were flat at 0%, which was in line with our guidance. From an apples-to-apples basis, which excludes last year's $5.7 million transaction charge, related to the terminated merger agreement with Alberto-Culver, and this year's impairment charge related to the sale of our Beauty School division, operating income increased 8% and EPS increased 15% to $0.55 a share. EBITDA increased 7% to $78 million.

We ended the quarter with 11,627 salons, 90 hair restoration centers and 56 beauty schools, for a net increase of 60 locations during the quarter. 484 locations compared to the year-ago period. During the quarter, we built 176 salons, acquired 45 locations and closed or relocated 124 others. We had a net increase of 115 corporate on locations during the quarter. Our franchisees built 53 locations and closed, sold or relocated 108 [for when] that decrease of 55 franchise locations during the quarter. Company-owned locations as of March 31st numbered 8,001. Franchise locations numbered 3,772. Total debt at the end of the quarter was $668 million and our debt to cap ratio was 42.3%. These current levels are acceptable and necessary to maintain investment grade status.

The sales trend for the quarter was really quite interesting. January was significantly adversely affected by bad weather. We had many salons in Texas and Ohio that were open for literally an hour and then closed because of ice or snow. Those salons, obviously, had huge negative comps. North American service comps became much stronger in February and March, with service comps running positive 1.5% in February, and 3.5% in March.

Product comps are another story. Despite the fact that we had anniversaried the loss of Nexus during the quarter, our product comps declined by 2.3%. One factor that hurt for our comps was the tougher comparison we were up against in the third quarter last year, when we deeply discounted several vendor product lines that had been repackaged. In addition, product comps have been impacted somewhat by diversion, but even more importantly, by the fact that mass retail hair care lines have become more appealing to the consumer. However, the mass merchants do not have 61,000 hairstylist recommending specific products to their customers. So, long term, we have a huge competitive advantage and opportunity to continue to build a retail product business.

On the margins side, our payroll]controls have been excellent. And we have had a significant improvement in our retail product margins. The big news, obviously, is the announced merger of our Beauty School business into the Empire Education Group. As you know, we have made a major commitment to enter the beauty school business. During the last several years we've purchased 50 beauty schools for close to $100 million. While we are troubled with our performance we are not troubled with the decision to go onto the industry. We think it can be highly profitable and our vision remains as bullish as it ever has. In fact, more bullish because of the merger with Empire.

Empire will control 51% of the voting stock of the Company and Regis will be a 49% investor. Accounting convention dictates that we account for this transaction using the equity accounting method rather than full consolidation. This venture is by far and away the fastest and most efficient way to enhance shareholder value. The Beauty School Business, under Frank Schoeneman's leadership, should be a $200 million business within 3 to 5 years, with EBITDA running in the 20% range. The Empire management is excellent and is both experienced and incredibly competent. Our businesses are also geographically dispersed with minimal geographic conflicts.

This is really the best of all worlds. Regis will be able to add its financial strings to Empire, and will still be able to add a tremendous amount of value in the education and marketing arenas, as well as offering the services and programs of Vidal Sassoon Academies which are not part of this transaction, and Horst Rechelbacher, who is an industry icon as far as the hairstylist is concerned. Regis salons will now also have the added advantage of doubling the number of beauty school graduates which can be funneled into our salon operations. We will also be able to build up a fantastic brand with Empire becoming, by far and away, the dominant Beauty School Education System in the country. Everyone wins here. Regis shareholders, Empire, and the Department of Education. If our forecasts are even closely achieved, we will recoup much more than $20 million after-tax impairment charge relating to this transaction. This transaction will also allow Regis to focus on its core business. We would have to have made a significant investment in both people and systems if we would have continued to operate on a stand-alone basis. We are obviously very excited about this transaction and it should close on July 1st.

I would like now to talk about some other initiatives. Let's first talk about Intelligent Nutrients. We're in the final stages of R&D with respect to our hair-care line and the line should produced and on our shelves by late fall or early winter. Horst Rechelbacher is extremely committed to this project and is working very hard every day to come up with a very special and unique line. The hair-care line will initially have 12 skus and the shampoo price points will be in the $20 range.

During our second quarter conference call in January 24th, we talked about the possibility of Wal-Mart filling in to the Professional Products business in 500 locations. To date, this has not occurred. So, obviously, the article and advertising age wasn't accurate. The diversion fund, Paul Mitchell continues to makes positive headway and we are heartened by the commitment of Procter & Gamble. It will take about a year for the Procter & Gamble Professional Product inventories to be reduced in the quality kings of the world. The real culprits continue to be identified, and will be on our website and L'Oreal, TG and [Furik] all understand that they will become industry pariahs if they don't clean up their acts.

On the acquisition front we have been quite active. Currently our pipeline is full. Our business in the European continent continues to be very good, and Hair Club is also performing excellently. Trade Secret loyalty program continues to operate on plan, with about 600,000 customers participating.

We have a significant opportunity in the hair extension business. Thus far we have not done a good job in implementing our hair extension program, however, rest assured that we are extremely focused and committed to making the hair extension business a very important one for us. At $700 a pop, it doesn't take very many services to impact our comps, I am highly confident that our performance in this arena will be much better in the months to come. Randy Pearce will go into greater depth with respect to initiatives reducing our indirect spend and reducing inventory levels. Deliotte Consulting is assisting us on this project, and we are confident that there will be a significant payback.

Randy will also share with you our thoughts on our 2008 outlook. We continue to be extremely conservative and hope to deliver results significantly greater than we are forecasting. This of course all depends on fashion. And we are starting to see fashion change in front of our eyes. We are not, at this point in time, however, going to project comps within our historical range of 2.5 to 4.5%. Although it's inevitable that comps will eventually return to that range through a combination of price increases, more people getting their hair cut more often and additional services such as hair extensions.

We will be projecting acquisitions and new builds to be on the conservative side. And we'll consider buying back up to $100 million worth of Regis stock during next year. We have recently signed an agreement to purchase 30% of Goldman Sachs's interest in a chain of beauty salons controlled by [Umono] in Japan. This will take very little of our management time and we do not forecast any EPS loss in this venture. It is by far and away the most efficient way for us to enter the Japanese market and hopefully expand our business with Wal-Mart in Japan. I have been in the beauty business for 40 years and have not found any 4-year period of time this challenging. It is inevitable that business will get better and we are highly confident that when it does we will be able to take advantage of it and get right back to our double digit EPS growth.

Randy Pearce will now continue our presentation.

Thanks, Paul, and good morning, everyone. The results we are reporting today includes a $23 million pre-tax impairment charge associated with the Beauty School transaction, which on an after-tax basis reduced our earnings by nearly $20 million, or $0.43 a share. Therefore, absent this charge we are reporting third quarter earnings today of $24.9 million or $0.55 per diluted share. These results included two items which together generated about $0.05 of benefit that we had not built into our initial guidance.

The first item relates to $0.04 benefit derived from reduce workers' compensation costs which I will address further in a few moments. The second item was a $0.01 benefit from a slightly lower than expected income tax rate in the quarter due to increased jobs, tax credits, therefore, excluding these two items, our third quarter operational earnings came in at $0.50 per share. As you are aware, our quarterly earnings guidance directly correlates to our same-store sales guidance. We had forecast our third quarter same-store sales to be within a range of flat to positive 2%, and earnings to be within range of $0.50 to $0.56 per share, with actual same-store sales growth coming in flat at 0% for the quarter. This correlates with the lower end of our earnings range or roughly in the $0.50 per share of operational earnings that we are reporting today. Absent the workers' compensation and income tax benefits, I believe we had a pretty straightforward quarter from an operational perspective.

And let me now transition my comments and give you some further detail behind our operating results by each -- for each business segment. A breakout of our segment performance is found in today's press release. Following that, I will discuss our fourth quarter guidance as well as our preliminary fiscal 2008 outlook. Let's begin with our largest segment which is our North American Salons.

North American Salon revenue which represented 82% of our consolidated third quarter revenue, grew 7% during the quarter to $540 million. This revenue growth was due primarily to corresponding quarter over quarter increase in the number of company owned salons that we operated. Service revenue in our North American Salons grew 9% during the quarter to $380 million. This increase included a 120 basis point increase in service, same-store sales. Product revenue growth was just over 1% in the quarter to $150 million, and was tempered due to a decline in product same-store sales of 4.2%. Royalties and fees from our North American franchise salons declined 2% during the quarter to $9.4 million. This slight reduction was due to a net year-over-year decrease of 8 franchise salons primarily due to our franchise buyback program.

Our combined gross margin rate for North American Salons came in at 43.9% in the third third quarter, which was an increase of 60 basis points over the same period a year ago. Our third quarter service margin rate came in at 42.1%, which was identical to our third quarter rate last year. We were certainly pleased with our service margin rate, which underscores the attention that our operating people continue to give to controlling payroll costs, which is the largest expense item that we have.

Our retail product margin rate for our North American Salons came above planned, improving to 48.6% in the third quarter which was 250 basis points better than the year-ago period. As you know, last year, our product margins were negatively impacted by discounting, associated with the repackaging of several top product lines. This year our focus has been on growing our retail gross margin. We were very pleased with the results from our efforts, especially during this challenging comp environment.

Site operating expenses came in at exactly 8% of sales. This rate was significantly better than planned, and was 60 basis points lower than the same period last year. The major reason for the rate improvement this quarter was a reduction in workers' compensation costs. We had certainly hoped for this reduction but we had not necessarily budgeted for it. If you recall, a couple years ago, we aggressively focused our efforts on reducing escalating costs associated with workplace injuries. We implemented new safety programs, and we worked with our injured employees and their physicians in return to work programs. The benefit of our labor has paid off over the past year, as we are now experiencing a significant reduction in the frequency and the severity of injury claims. As a result, our insurance actuaries have authorized reductions to our prior years claim reserves. We recorded such a reduction in our fourth quarter last year and this year as well. This year in our third quarter, we recorded an additional benefit of $2.9 million or $0.04 per share. Our actuaries have indicated that there likely will be additional benefit in our fourth quarter, should our favorable trends continue. This is just one example of how we continue to focus on expense control initiatives during this tough sales environment.

Next, let's talk about rent. During the third quarter, our rent expense grew to 14.7% of sales, which was up 20 basis points over the same quarter last year. No surprise here, as we continued to experience a bit of negative leverage in this fix cost category as rent rates are increasing at a rate slightly faster than our same-store sales growth. As percent of sales, our general and administrative expense rate came in essentially on plan during the quarter at 5.5% of sales, which was up 20 basis points over last year's third quarter rate. This slight rate increase in the third quarter was largely due to a national meeting held for all of our Super Cuts Salon managers, which takes place only once every 18 months.

Our depreciation and amortization expense came in essentially on plan, improving 10 basis points during the quarter to 3.8% of sales. The slight improvement was due to our planned reduction in new salon construction this current fiscal year. The net effect of all the items I just discussed caused our third quarter operating income for our North American Salons to improve 80 basis points to 12.9% of revenue.

Next, I will review the third quarter performance of our International Salon segment. This segment includes our company owned salons located primarily in the United Kingdom, as well as our franchise salons located on the continent of Europe. International Salon revenue, which comprised 9% of our consolidated third quarter revenue, increased nearly 18% versus the same period a year ago coming in at $61 million during the quarter. This increase in revenue was largely caused by a quarter over quarter improvement in both the euro and British pound exchange rates, which contributed 11 percentage points of the overall entries. In addition, our International Salons enjoyed improved same-store sales in the quarter.

The service revenue component increased 15% in the third quarter to nearly $35 million. Currency gains were partially offset by a 4.2% decline in service same-store sales. Likewise, product revenue also grew, increasing 26% during the quarter due to currency gains, as well as solid, positive same-store sales growth of 12.4%. Royalties and fees from our International franchisees increased just over 13%, due primarily to the currency gains, as well as a slight increase in the number of franchise salons opened at quarter end.

Our overall International gross margin rate came in below plan, declining 80 basis points to 43.7%. Our third quarter service margin rate of 45.7% was essentially in line with last year, therefore the overall decline in gross margin rate pertained to reduced retail product margins. Our third quarter product margin rate came in at just under 40% or 210 basis points lower than the same period a year ago. As we've disclosed in the past, our UK business uses of retail calendar of 13, 4 week periods. As a result, the Christmas holiday selling season for our UK business is reported in our March quarter. Therefore, the decline in retail product margin was simply due to an increased mix of hair appliance sales during this years Christmas holiday season, which has slightly lower margin.

However, partially offsetting this decline was a rate improvement in virtually every other line item. For example, site operating expenses improved 10 basis points. G&A expense improved 30 basis points. Rent improved 20 basis points and depreciation and amortization improved 10 basis points over the same period a year ago. This quarter-over-quarter rate improvement in all of these categories was favorably influenced by improved same-store sales. As a result of all the items I just discussed, our International Salon operating income rate came in at 6.7% of revenue in the third quarter of this year compared to 7% in the same period last year.

I'm going to now speak to Hair Club for men and women. And as Paul mentioned, this business is incredibly consistent in the revenue and profit contribution for the quarter, once again, exceeded our expectations. Frazier Clark and his management team at Hair Club continued to perform exceptionally well, as far as we were concerned. Third quarter revenue from our hair restoration centers increased nearly 12% to $31 million and represented 5% of consolidated revenue. Operating margin improved 80 basis points in the quarter to a rate of 20.6%. Again, we remain very pleased with the performance of this segment of our business.

Next, I will address a few items relating to the performance of our schools segment in the third quarter. And I'm going to be brief here and hit just a few of the highlights, given the new future direction that Regis is taking with Frank Schoeneman and his management team at Empire Schools Group.

Our school revenue grew 27% during the quarter, just over $23 million, and comprised 4% of our consolidated revenue. This increase in revenue was due to the increase in the number of cosmetology schools we opened and operated as well as the growth in student enrollment. Of the third quarter operating income increased to $3.9 million or 17% of revenue, up from 2.2 million or 12.1% last year at this time. Despite this nice increase, our operating income still fell a bit below our plan due to our efforts in amalgamating these disparate businesses. As Paul mentioned, we are excited about the long-term opportunities that can be realized in our school operations by Empire's experienced school management team.

Let me now switch gears. And I would like to make one quick comment regarding our third quarter G&A rates rate, which overall grew 100 basis points to 12.7% of sales. When you look at our various segments, you will see most of this increase came from our corporate segments. We had budgeted for corporate G&A to increase in our third quarter and it did, growing 70 basis points to exactly 5% of sales. There were several reasons for this. Our third quarter rate increased due to fees that we paid to Deliotte Consulting, in connection with our inventory and our indirect spend project. It was increased due to quarter over quarter changes in certain benefit accruals and was due to costs that Regis incurred associated with our joint venture with Intelligent Nutrients. Beginning in our fourth fiscal quarter, which is our current quarter we expect that our overall consolidated G&A rate should come down and should be in the range of about 12% of sales.

Now that concludes my comments concerning our individual business segments. Maybe just a couple of other points before we get into the guidance. We ended the quarter with a total of 11,773 locations, and that was a net increase of 484 units over the previous 12 months. For the quarter we added a net total of 60 locations. In today's press release you'll, once again, find a detailed table the breaks out our location activity, and year end salon counts for each division. Anecdotally, I think we're also very pleased with the continued efforts that our entire management team has on focusing on inventory controls, and if you were to notice on our balance sheet, our inventory levels have come down over the last three months by about $11 million, and are essentially flat with our fiscal year end balance of $194 million. Again, we are very focused on inventory control and we are very pleased with the efforts that we've been able to accomplish to a date with more to come.

All right. Let me now transition into our earnings guidance for the balance of our current 2007 fiscal year. As noted in today's press release, we continue to reiterate our full fiscal 2007 guidance. We are not making any changes. For the full year we continue to believe revenue should grow to approximately $2.6 billion, and earnings, absent the goodwill charge, will be in the range of $2.10 to 2.24 per share. Today's press release also includes our guidance for the fourth quarter of our current fiscal year. We forecast revenue to be in the range of $663 million to $675 million which includes a same-store sales assumption of flat to 2%. Based on this comp sales range, our fourth quarter earnings this year should therefore be in the range of $0.53 to $0.60 per share.

Remember that last year in our fourth quarter, our results of $0.90 per share included a lot of noise due to various non-core items such as the gain we reported from the Sally Beauty transaction. A year ago we estimated that absent these items our earnings for the quarter would have been about $0.60 per share. However, as we also said last year, the $0.60 was higher than expected by $0.02 to $0.03 due to various benefits such as a favorable adjustment to our worker's compensation claim reserves and reduced levels of salon marketing expenses in the quarter. So, overall, we are expecting essentially flat results in the fourth quarter this year when compared to last year.

As we have done in the past several years we are now including -- or we are including in today's press release a detailed forecast pertaining to our upcoming 2008 fiscal year. Just a couple of items I would like to point out. First of all, our new venture with Empire Schools, which is estimated to close on around July 1st, will be accounted for, as Paul mentioned, using the equity method of accounting, rather than full consolidations.

Although both of these accounting methods produce the same bottom-line results, the equity method requires that we show only our share of the after-tax earnings of the joint venture. In other words, school revenue and related expenses will no longer be included in the individual line items of our consolidated results. Only the after-tax earnings will be shown. As a result, our consolidated revenue will be reduced by $60 million next year, which in turn will reduce our overall sales growth rate from 4% to only 1%. Certain expense ratios will be impacted as well. We therefore try to be as transparent as possible as to the impact of this accounting treatment that it will have on our consolidated 2008 financial results. And in our press release today, we have quantified the impact of deconsolidating the school results from the various line items of our P&L. We hope that's helpful, but, as always, give us a call if you have questions.

One last school related comment. Although schools will continue to be profitable, our fiscal 2008 results have been reduced by $0.05 per share due to one time transition and integration costs that we expect to incur next year as we transfer the business to Empire's management team in Pennsylvania.

It is worth noting that our fiscal 2008 budget, once again, excludes revenue and accretion from future acquisitions. This is consistent with our past practice over many years, as it is difficult to estimate the nature and the timing of future deals that are not yet even on our radar screen. Likewise, our forecast does not include accretion from any additional share repurchases that we may do next fiscal year. And, by the way, that is a topic at our board meeting later this week.

Based on same-store sales assumption of 1 to 3% we are budgeting fiscal 2008 earnings from organic growth to be in the range of $2.01 to $2.27 per share. On an operational basis, or on an apples-to-apples basis, we are forecasting our fiscal 2008 earnings to actually be up slightly over fiscal 2007. In other words, one must add back certain one-time, non-operational items that negatively impact next years budget, such as the $0.05 per share reduction and the earnings due to the school transaction, and incremental FAS-123 R expense, and compare these results to fiscal 2007 operational earnings of about $2.10 a share once you exclude the one-time income tax and workers' comp benefits. We certainly believe there is upside in fiscal 2008 to our stated earnings range from acquisitions, from share repurchase activity, from expense control initiatives and from sales picking up to historical standards.

Let me now touch on our 2008 budget assumptions regarding cash flow and debt levels. Assuming the midpoint of our earnings guidance range we expect our EBITDA next year to be just over $300 million, and our after-tax cash flow to be approximately $215 million. Most of our cash will continue to be reinvested back into the business by buying and building salons, as our combined acquisition and capital expenditure budget for next year is $175 million, which is comparable to what it was this year. We remains solidly investment grade. We are forecasting our debt levels over the course of fiscal 2008 before any share repurchases, to be in the neighborhood of $660 million. This leverage would yield a debt to EBITDA ratio close to 2 times, and a debt to capitalization ratio near 40% by the end of fiscal 2008. For a more detailed summary of our guidance, please refer to our press release as well as to our corporate web site.

Now that concludes my prepared remarks. And Paul and I are now happy to answer any additional questions you may have. So, Rob, can you step in and provide some instructions? We'd appreciate it.

Thank you, Paul and Randy. The question-and-answer session will begin at this time. (OPERATOR INSTRUCTIONS) First question is from Jeff Stein from Keybanc Capital. Please go ahead.

Good morning, Paul. Paul, wondering if you could talk to us a little bit about your plans to try to energize your product sales? It seems that that has been a major drag the last couple years. You discussed this morning, training initiatives for your hairstylists. But what exactly are you doing in that regard? And also can you talk about your plans for trying to train your stylist to do hair extensions? It almost sounds like there's some execution issues in terms of getting some of these initiatives roll -- actually rolled out at the salon level?

Jeff, let's talk about the product issue first. Intelligent Nutrients is a big step for us. We're not going to reap the benefits until the third or fourth quarter of 2008. But it could be a very, very significant product line for us. Those of you who really understand the hairdressing business will understand that Horst is an icon, and probably the only one left. So that could be a very big business for us, but we have to be somewhat patient because the line is not yet completed. But I think the big bang for our buck will also occur second -- third and fourth quarter when Procter & Gamble starts to rollout some new initiatives. There's really been nothing new in Wella for four years. And P&G has totally changed professional management. They have been in our office. We are impressed with them, but it takes time for them to come up with new lines, new initiatives. But they are such a good company. They will give L'Oreal a big run for their money. We're very bullish in terms of what can be done with P&G.

We are also going to have to obviously be even far more effective with our 61,000 hairstylists, making sure that if they convert a service opportunity into a product sale. That is what we do for a living. I think we just have to execute better. As you know, Jeff, when I joined the Company, we had 3% retail product sales in our total business. Now, it is 30%. So we certainly have the ability to do it. It does take some time. And it takes a lot more effort. One of the things we also have to consider is we have a 15% share of all products sold in beauty salons and barber shops in North America. Contrast that to 2.5% service share. These ratios and standards are difficult to maintain. Nonetheless, our locations are fabulous. Our people are energized. Intelligent Nutrients and P&G will definitely add a tremendous amount of value, but not first and second quarter. With respect to hair extensions, it is a training issue. And we have to do a better job, and we are doing a better job right now on focusing on making sure that more of our people are getting trained quicker. And we are starting to see significantly better results there as well, Jeff.

Final thing,Paul, just back to Intelligent Nutrients, are you guys -- it sounds like the launch is going to be a bit later than expected. Can you talk a little bit about the reasons for that?

Of course. You can't rush them. He is going to come up with something spectacular. And whether it's second quarter or third quarter, we want it to be right. And he has very, very high standards, he understands what has to be done. He owns 50% of this Company, and believe me, he can be a very impatient guy. I just don't want to set expectations that are unrealistic, Jeff. If we beat the time period, all the better.

Okay. Thanks.

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

Hi, guys, good morning. First question I had, again, I know you guys don't like to comment on the progress of the quarter that is going on, but obviously the weather has been a little bit colder in the month of April here to start out. I just wanted to get a sense, if you are seeing any impact on traffic just as a result of that? And then, secondly, you touched on it briefly in terms of the Trade Secret Loyalty program. I just wanted to see if there's any plans going forward to roll-out to maybe some of the other concepts that you have in the chain?

With respect to your first question, April is a funny month because of the timing of Easter. Early April, obviously, was very weak. It is starting to strengthen significantly in the last week or so. And, Randy, do you want to comment on question two?

With Trade Secret, again, the Trade Secret Loyalty Program that we introduced, we continue to see a lot of good success there in terms of, I think Paul mentioned, we have about 600,000 customers that are currently enrolled. We continue to see that the average spend on those customers is about $11. The average ticket is $11 greater than the division averages. So we are very encouraged by that. We continue to work with the outside consulting firm that helped us designed the Trade Secret program, on trying to redesign the program away from a product focus program to a service focus program. And Chris [Burghley] and the operating people here at Regis are continuing to work on that at this point in time. I'm sorry.

Yes, at this point and time, it looks like the next divisions that will be affected will be Holiday Hair, which is part of our Promenade division and Master Cuts.

Okay. And I guess a follow-up question here. Just with regard to the Empire Education Group merger, it sounds like you have some goals set in terms of revenue over the next 3 to 5 years, but, just wanted to confirm that, essentially, if you can get those EBITDA margins up to about 20% within that same time frame, or if that's something that's just going to take a little bit more time after you get through the initial integration costs, or just, how quickly do those numbers ramp up to that 20% range that you guys thought you could initially get those school [through]?

Years 2 or 3.

Okay. Thank you.

Thank you, our next question comes from Mike Hamilton from RBC/Dain. Please go ahead.

Good morning. A couple detail questions first, on the discussion of corporate expense and sequential improvement into fourth quarter. Is, IN staying in corporate overhead as an expense or is it going to be shifting somewhere else?

There are two components of IN, Mike. If you look at our consolidated P&L there is going to be the major component, will continue to be down into other income and expense. That is our proportion, a 50% share in the joint venture. We also have -- Regis is incurring certain expenses associated with Intelligent Nutrients that are not being absorbed into the joint venture itself. And we've been trying to keep track of that. That is going through G&A. But most of the reason for the improvement in G&A going into next quarter is some of the items that I referred to, the, I think some of the professional fees we are paying Deliotte Consulting are scheduled to come down a bit. Also we had certain benefit accrual adjustments in the quarter this year which we will not have in the quarter up coming.

Along that line, Randy, could you comment at all on what your expectations are on what you hope to be able to drive from the Deliotte work?

Yes, but, I don't want to be too precise at this point in time. But, let me share with you, we talked about inventory. We had Deliotte come in several quarters ago and just do an assessment overall. One of the initial opportunities that we all recognized was to reduce inventory levels and protect gross margins, perhaps in the future better than we had in the past. We started focusing immediately on that project. We have seen some very good results. I commented on the balance sheet that we are seeing inventory reductions and reduced inventory carrying costs. We are pleased with that.

The next phase of this was looking at other areas,what we call, indirect spend. And we're getting good traction early on in certain areas, office supplies for example. We -- organizationally, we procured office supplies in a decentralized fashion. We now, have sent out an RFP and we have been able to benefit next year by savings of $1.5 million simply by centralizing the procurement of office supplies. We have got a number of other initiatives that we are currently starting to work with here at Regis, areas such as marketing, in terms of printing and collateral material, in terms of small parcel, whether it's out of our distribution centers or FedEx, there is a travel expenses or another area we're looking at. We have -- our consultants at 30,000 feet have given us some numbers that show multi-millions of dollars of potential savings.

What we really need to do is make sure that, before I commit to any numbers, that we have a detailed action plan for those new initiatives, and be able to say, not only how much it is going to be, but when we expect to achieve it. I do feel highly confident though, that in fiscal 2008, we will show additional savings coming out of these Deliotte Consulting project, that is not built into our budget, and maybe could be, I am going to low ball this, but it could be several millions of dollars.

Is the Deliotte agreement fee bases or are they carrying a piece of the cost savings?

It is an hourly rate. There is no contingency as it relates to savings.

Thanks. Lastly, Paul, could you take a couple minutes and comment on what you would like to do tactically with Hair Club next year?

Hair Club, as you know, is extremely well run. The big challenge with Hair Club is, how do you grow it? No pun intended here. And we're looking at acquisitions in Europe that are very, very promising. We're also looking at a different price point. There are other businesses out there that could be folded into Hair Club in Boca Raton and have a different price point and a different kind of market. So, and we'll continue to, as franchisees' want to sell, we'll continue to buy franchisees' out. And there is no reason why Hair Club won't continue its growth pattern. It is extremely well managed.

Thanks. My consistent question, are you seeing anything that is giving you optimism on ability to cross-sell out of the salons?

No.

Okay. Thank you very much.

You're welcome.

Thank you. Our next question comes from [Chris McPhee] from Credit Suisse. Please go ahead.

Hi, good morning, Paul and Randy.

Hi, Chris.

Well my compatriot there just stole my thunder, because I was actually going to ask the same question about Hair Club which was, with revs up 12% and that business is really strong, what do you do to leverage that strength by continuing to grow that business? And I think you kind of answered that question already, so thanks.

You're welcome.

Thank you. (OPERATOR INSTRUCTIONS) Our next question comes from Laura Richardson from BB&T. Please go ahead.

Thanks. Hi, everybody.

Hi, Laura.

I wanted to follow-up on a comment you made earlier, Paul, about the worst four years you have seen in all your years in the hair business. I've heard you talk about the industry issues like diversion and competition on the product sales side and then the hair fashions impacting the service component of the business. But are there other big issues that you think are impacting it? I don't know, customer issues? Economic issues? Competitive issues?

There are no competitive issues that I am aware of. We are very, very close to other salon chain owners and they have the same kind of issues that we have. Over time, the demographics will work in our favor. As the population ages, those people just need to get their hair cut and colored more often. And I do believe that initiatives we are undertaking with respect to the product end of it will also pay dividends in the years ahead. I just haven't been through a period of time where you have four years of comps in this range. It's just is baffling.

Follow-up to that, if you don't mind, is, if you look at the comps and the service comps in particular, looks like [distribution] on the Wal-Mart locations have really fared better the last couple years than all the mall-based locations. Any thoughts on that?

Well, the mall-based locations obviously have had their issues and had their problems. And the problem is stores close. We had a whole bunch of salons in wings that are no longer anchor based. So, it's --

So, traffic is an issue.

Sure. But, once again, overtime, the better malls are getting filled up. The (Inaudible), Wal-Mart continues to be a very, very good sales and profit generator for us. There is no reason in the world that we are not expecting to add 230 to 250 salons a year with Wal-Mart.

Anything -- besides the Trade Secret club you have, any other ideas you have for marketing to drive more traffic into those mall locations?

The best thing you can do is good quality work. Word of mouth of is your very, very best form of marketing. Obviously, the malls themselves, if they have more traffic, we have more traffic. The reality is, we don't spend very much money pulling people into the malls because that expenditure really isn't rent. We expect mall traffic based on the rent we pay.

Makes sense. Okay, thanks a lot. Good luck.

Thank you. At this time, we have no further questions. I will turn now turn the conference back to Paul.

Thank you, Rob. And thank you all for joining us.

And ladies and gentlemen, if you wish to access the replay for this call, you may do so by dialing 1-800-405-2236 with an ID of 11085693#. This concludes our conference for today. Thank you all for participating and have a nice day. All parties may now, disconnect.