Regis Corp (RGS) 2007 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. My name is Mary, and I will be your conference facilitator for today. At this time, I would like to welcome everyone to the Regis Corporation fourth quarter and fiscal year 2007 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 the replay for this call, you may do so by dialing 1-800-405-2236, and enter the access code of 11091868 followed by the pound.

I would also like to remind you that to the extent the Company's statements or comments this morning represent forward-looking statements, I refer you to the risk factors and other cautionary factors in today's news release, as well as the Company's SEC filings. 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, President, 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, please go ahead.

Thank you, Mary. Good morning, everyone, and thank you for joining us. I am glad that fiscal 2007 is over, but I have made similar statements for the last three years. As you know, fashion has had a significant impact on our entire industry, and Regis is certainly not immune. However, our business is healthier than the numbers dictate. We are primarily in the service business, and our service comps are starting to strengthen. North American service comps increased 1.3% this year, contrasted to 1.1% last year.

Let's talk about fourth quarter results. As you know last year we benefited from the Alberto-Culver breakup fee which was booked in the fourth quarter. After removing extraordinary and nonrecurring items, operational EPS was $0.53 versus $0.60 a share last year. We did however, meet the low end of our guidance range. Consolidated comps for the quarter decreased 0.1 of 1%. Comps were at the lower end of our guidance range, so we expected that earnings would also be at the low end of our guidance.

Fourth quarter revenues increased 6.2% to $675 million. Revenues for the year increased 8.1% to $2.627 billion. System-wide sales including the sales of our franchisees are in excess of $3.75 billion. We ended the quarter with over 12,400 system-wide locations. Our system-wide location count includes locations in which we hold an ownership interest, including our recent investment in Japan. Of the 12,400 locations, 12,027 are corporate and franchise units, which are made up of 11,881 salons, 90 hair restoration centers, and 56 beauty schools, for a net increase of 254 corporate and franchise locations during the quarter, and 550 locations compared to the year-ago period.

During the quarter we completed 11 acquisitions acquiring 213 salons. We built 85 corporate locations and closed or relocated 55 others. Organic and acquisition salon activity led to a net increase of 243 corporate salons during the quarter. Our franchisees built 75 salons and closed, sold, or relocated 64 salons, for a net increase of 11 franchise salons during the quarter. As of June 30, we had 8,244 company-owned locations, and 3,783 franchise locations.

Our balance sheet continues to be quite strong. Debt at the end of the quarter was $709 million. Our debt-to-cap ratio was 43.7%, and our EBITDA for the fiscal year was a record $317 million. For the fiscal year ending June 30, same-store sales increased 0.2 of 1%. As I stated before, consolidated North American service comps increased 1.3% versus 1.1% last year. This trend is extremely healthy, and shows that we are gradually coming out of the fashion cycle.

As we have stated many times before, it is inevitable that service comps will increase primarily due to demographics, as the population ages, individuals have to get their hair cut and colored more often. We are primarily a service-driven business. Once we get more people going into our salons to get their hair cut and colored, we have a better opportunity to convert these customers to become retail product purchasers as well.

Our top performers were hair club, strip centers, and SmartStyle. Results of our mall-based concepts were disappointing. Our biggest challenge, of course, is retail product sales. Consolidated product comps were a negative 1.8% for the year. Our margin trends were excellent.

Salon payroll controls remained excellent despite minimum wage increases, as service margins improved 30 basis points compared to the fourth quarter last year. We continue to see significant improvement in our workers' comp claim expenses. Retail product margins improved 200 basis points compared to the fourth quarter last year. Hair Club comps were in excess of 8% in the quarter, and fiscal 2007 Hair Club EBITDA increased 12.4% to $35.4 million.

The merger of our beauty school division into the Empire Beauty Group was completed on August 1st. Our beauty school segment showed a significant improvement in profitability in the fourth quarter, as our EBITDA margin was 15.6% compared to 1.4% for the fourth quarter last year. We are very bullish about the prospects of our investment in Empire, and believe that EBITDA margins should be in excess of 20%, and sales should be approaching $200 million within the next three to five years.

I would like to address the issue of our product comps. There are several external factors relating to our weak performance. First, diversion. Sales of diverted product continue to increase. Diversion data is available on the beauty industry fund Website, and is also now available on our Regis Website. We are identifying those product lines which Regis is allocating less linear footage, and those lines which are increasing shelf space.

We are gratified that companies such as Paul Mitchell, Joico, and Graham Webb are significantly reducing diversion. Please rest assured that Regis is not battling the divergence issue alone. Many of our competitors have written letters to major manufacturers informing those manufacturers that they are not pleased with their lack of commitment in enforcing anti-diversion programs.

The second major external factor relates to the mass lines such as Neutrogena and Pantene, These lines are getting better, their price points are more affordable, and they represent a significant challenge to us.

Lastly, on the external front is the fact that we have more competition today than we have ever had. Victoria Secret is morphing into a beauty store, Banana Republic is adding a shampoo line, and other sophisticated retailers are getting into this market segment.

There is however an internal factor relating to our poor results. We must do a better job in merchandising product. We are highly confident that you will see a significant change in our results, not necessarily in the first half of 2008, but certainly in the second half of fiscal 2008.

I would like to outline a partial list of initiatives that we are undertaking with respect to increasing our product sales. First, we have hired Lynn Hempe, who has extensive trend merchandising experience to be our Chief Merchant. Second, we are in the process of formulating a significant transformation for Trade Secret. Trade Secret will expand its assortment well beyond the professional hair care market. Trade Secret has 630 excellent locations in the best malls and strip centers in the country. Trade Secret will become a trendy, exciting, industry leading beauty boutique, not just a professional hair care concept.

Regis has always had a strategy of appealing to wide rather than narrow niches. An appropriate analogy relates to the manufacturers of mass consumer products. If they can't find a way to deal profitably with Wal-Mart, their universe shrinks yearly. Increased diversion, coupled with better mass retail hair products, makes it essential for us broaden our assortments in our product categories, into face, skin, fragrances, bath and body treatments, and the like.

After all, we have a great franchise in Trade Secret and terrific locations. We will morph into a beauty boutique. We can't solely be a professional hair care store. This is our challenge and we will succeed. It is not rocket science.

We have learned a great deal from the Sophora's beauty secrets and ULTA's of the world. We visited our Trade Secret competitors who have bucked the tide. Their professional hair care product sales are down, but they have more than made up for the shortfall by adding other beauty categories. We will follow suit this year.

We also have a huge advantage over those other retailers in that we have 62,000 hair stylers, who can and will do a much better job of converting a service sale into a retail product sale opportunity. We are also working with our manufacturers, so that professional lines can be more innovative and by fiscal 2009 Proctor & Gamble should have significantly reduced it's diversion and come up with very exciting new initiatives, on which they are presently working. This should also pay significant dividends. I also hope that by 2009 L'Oreal will be successful in reducing its diversion program, but only time will tell.

In fiscal 2009, we should be ready to have a major launch with Intelligent Nutrients. Intelligent Nutrients most recent product development continues to be very exciting. The Trade Secret customer loyalty program has already signed up over 800,000 customers, and during late fiscal 2008, we should start seeing significant positive results by merchandising more specifically to our Trade Secret customers. We are currently designing a customer loyalty program to work in some of our strip centers and our MasterCuts division.

Our hair extension program continues to grow, and the issue here is training. Hair extensions should be a 3 to $6 million business for us within a year. On the share repurchase front, we repurchased $80 million worth of stock in fiscal 2007, and plan to repurchase up to another $100 million worth of stock in fiscal 2008. Our expense control initiatives are proceeding on plan, inventory levels increased 1.3%, while revenues increased 8%. Randy Pearce will go into the indirect spend reduction program during his presentation.

Our acquisition program continues to be extremely strong. Our largest acquisition in fiscal 2007 was the Fiesta acquisition completed on June 19th. Fiesta has 175 locations, and in excess of $44 million in annual revenues. Our acquisition pipeline is strong with over $40 million in committed deals, which should close by the end of the first and second quarter. We are well on the way to make $75 million worth of acquisitions in fiscal 2008. These acquisitions are significantly accretive.

Strategically, we also feel that in many instances, we should partner with the very best companies and people available. As you know, we recently bought 30% of Goldman Sachs' 49% interest in a 175 unit beauty is a lain Group in Japan. This puts us in a position to be able to service Wal-Mart's needs in Seiyu. As you also know, we have a 50/50 joint venture with Horst, who was the industry icon in the product arena.

We will also have an equity interest greater than 50% in the Empire Beauty School Group and there will be other partner arrangements in the future. We are not afraid to partner, quite to the contrary, but we need to make sure that we are protected going forward, so where necessary we have the ability to control these partnership investments in the future.

Our Wal-Mart division continues to perform extremely well. We added 248 salons this year, including eight franchise locations. We now have over 2,000 SmartStyle salons, and almost 2200 total salons in Wal-Mart, and expect to grow that number by at least 200 stores a year for many years to come. Parenthetically, we generated $500 million in revenues for Wal-Mart last year.

In conclusion 2008 should be another modest year for us, but our business is getting stronger, witness our North American service comps. Although the first half of fiscal 2008 will continue to be a challenging one for our product sales, we are very bullish about our product sales opportunities in 2009 and beyond. I would like now to address our stock price. As you know, the markets have been extraordinarily volatile. Many retail stocks have been hard hit.

Obviously, the drop in our share price does concern us. Our management's interests are parallel to those of our shareholders. We of course, do not determine the price of our stock. You do. One thing we do know is how resilient we are. We have limited risk factors and a quintessential replenishment business, both service and retail product.

We are the only dominant company in what is a very affordable luxury. Our average ticket is only $18, we are ten times larger than our next competitor, and we have a 4% North American, and 2% worldwide share. We are highly confident concerning our future. Don't be surprised if we accelerate our stock repurchase program. I am not a patient individual. In fact, I am impatient to a fault. Please rest assured that we do not accept flat results. While 2008 should get slightly better, 2009 should really be a good year for us.

Thank you for your patience. Randy Pearce will now continue our presentation.

Thanks, Paul, and good morning everyone. As you are aware, our quarterly earnings guidance directly correlates to our same-store sales guidance. At the beginning of our fourth fiscal quarter, we had forecasted earnings to be in the range of $0.53 to $0.60 per share, which correlated to a same-store sales range of 0 to 2%. With actual same-store sales growth coming in essentially flat for the quarter, this correlates with the low end of our earnings range, or roughly the $0.53 per share of operational earnings that we are reporting today.

However, as Paul mentioned, our reported earnings for the quarter came in $0.09 higher, at $0.62 per share, primarily due to larger than expected benefit from reduced workers' compensation costs. I will discuss this item in greater detail in a moment. However, the takeaway here is that our operational earnings were $0.53 for the quarter, which did meet the low end of our guidance.

Absent the reduced workers' comp cost, I believe we had a relative straightforward quarter from an operational perspective. Also recall that a year ago we reported fourth quarter earnings of $0.90 a share. As we discussed last year, this was inflated by $0.30 per share due to the one-time gain we recorded from the termination fee we received from Alberto-Culver, partially offset by related terminated acquisition costs, and other noncore expenses that we recorded during that quarter.

Due to this noise in our fourth quarter results a year ago, we have once again separately identified and quantified each of these noncore items on our Website. My comments this morning are going to focus on comparing our fourth quarter fiscal 2007 results against our prior-year operational performance, which has been cleansed of prior-year noncore charges.

Let me now transition my comments by giving you a bit more detail behind our fourth quarter operating results for each of our business segments, a breakout of our segment performance is found in today's press release, and I will begin with our largest revenue segment, which is our North American salons. North American salon revenue, which represented 81% of our consolidated fourth quarter revenue, increased 4% during the quarter to $546 million. This revenue growth was due to the net increase in the number of new and acquired company-owned salons that we operated year-over-year, offset by a 40-basis point decline in same-store sales.

Service revenue in our North American salons grew 5.6% during the quarter to $389 million, due in part to a 100-basis point increase in service same-store sales growth. Fourth quarter product revenue was essentially identical with that of the same period a year ago, coming in at $147 million, which included a 420-basis point decrease in product comps.

As Paul discussed, our product comps continue to be negatively affected by continued diversion of professional retail products, as well as perceived improvements due to mass retail products. Royalties and fees from our North American franchise salons in the fourth quarter came in at $10.1 million, essentially identical to the same period a year ago.

We ended our fiscal year with a total of 2,168 franchise units, which remain virtually unchanged over the past year. Although we added 143 new franchise units to our system in fiscal 2007, we essentially had an equivalent number of franchise buybacks and closures throughout the year. Our combined gross margin rate for North American salons came in essentially on-plan in the fourth quarter at exactly 44%, and that was an improvement of 40 basis points over the same period a year ago.

We were once again very pleased with our service margin rate, which came in on-plan at 42.3% during the quarter. This rate was virtually identical to our service margin rate of 42.4% that we reported last year in our fourth quarter. Our operating people continue to do an outstanding job of focusing on payroll control during this challenging comp environment. Our retail product margin rate for our North American salons came in at a very strong 48.5% in the fourth quarter, and that was an improvement of 200 basis points over last year's fourth quarter rate.

As you recall, last year our product margin was negatively impacted by a few factors, the largest of which related to the repackaging by suppliers of several top product lines. This year our focus has been on growing our retail gross margin. We are very pleased with the results from our efforts, especially during this challenging retail comp environment.

The next item I would like to discuss is the line item titled site operating expense, which includes costs directly incurred by the salon, such as salon advertising, workers' compensation insurance, telephone, utilities, and janitorial costs. Our site operating expense came in at 6.7% of sales. This rate was significantly better than planned, and was 130 basis points better than the same quarter last year.

The major reason for this rate improvement was further reduction to our insurance claim reserves, primarily workers' compensation. We have talked about this in the past, and in fact last quarter we had indicated that our actuary spelled further reductions could be forthcoming, if favorable trends continued. Having said that, we had certainly not budgeted for an adjustment of this magnitude.

A couple of years ago, we aggressively focused our efforts on reducing escalating costs associated with workplace injuries in our salons. We implemented new safety programs, and we worked with injured employees and their physicians in return-to-work programs. The benefit of our labor began paying 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 authorized reductions to our prior year's claim reserves. This year in our fourth quarter, we recorded an additional benefit of $7.5 million. This is just one example of how we continue to focus on expense control during this tough sales environment.

Let me now address our general and administrative expense for our North American salon segment. Major items included in this expense category would be salon advertising expense, as well as salon supervisor salaries, benefits and related travel for our supervisors as well. Our G&A rate in our fourth quarter was very consistent with rates that we reported in the previous three quarters of fiscal 2007. Our fourth quarter G&A rate came in essentially on plan at 5.6% of revenue. However, this rate was 70 basis points higher than the corresponding period a year ago. I would characterize this increase between the two quarters as mostly timing related.

Last year, if you recall, our fourth quarter rate was a bit lower than normal, due in part to a reduced level of salon advertising expense, as well as slightly lower levels of supervisor salaries, benefits, and travel costs. Likewise, our fourth quarter rent rate also came in on-plan at 14.8% of sales, yet this represented a 60-basis point increase over the same period last year. Last year our fourth quarter rent rate benefited from certain annual landlord adjustments that impacted our rent and common area maintenance accruals.

In addition, this year, we continue to experience negative leverage in this fixed cost category, as minimum rents, common area maintenance charges, and real estate taxes are all increasing at a rate slightly faster than same-store sales. Our fourth quarter depreciation and amortization expense came in at 4.2% of sales, which was above plan, and was 50 basis points higher than the comparable period last year.

This past May, we sold five, high-end, money-losing salons that we operated under the Heidi's trade name. Although the related fixed asset write-off caused our fourth quarter D&A rate to spike up a bit, this sale will certainly help future earnings. The net effect of all the items I just discussed caused our fourth quarter operating income for our North American salons to come in at 13.8% of sales, down 20 basis points over the same quarter last year.

Next, let's review our fourth 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 11% of our consolidated fourth quarter revenue, grew 18.6% over the same period a year ago, coming in at $76 million. There were two major reasons for this large overall increase.

First, just over one-half, or 950 basis points of this revenue increase, was caused by a quarter-over-quarter improvement in the euro and British pound exchange rates over the U.S. dollar. Second, our U.K. results for the fourth quarter and full fiscal year included an additional week of revenue and expenses, due to our 52/53 week retail accounting calendar that we use there. This occurs once every five years. The additional week of revenue contributed 510 basis points of the overall increase.

Absent those two factors, the balance of our fourth quarter revenue growth was due to new and acquired salons, partially offset by a 1.9% decrease in overall comps. The service revenue component increased 18% in the third quarter to just over $47 million. Once again, most of this increase was due to currency gains and the extra week of sales. Although our international service comps declined 4.9% in the fourth quarter, this was a 110-basis point improvement over the same period a year ago.

Product revenue also grew, increasing 27% during the quarter, due to currency gains, the extra week of revenue, as well as solid, positive same-store sales growth of 5.7%. Royalties and fees from our international franchisees increased 7.6% due to currency gains. We had a total of 1,574 franchise salons opened and operating at the end of fiscal 2007 that were in our international segment, and that was a slight decrease of 13 units over the past year.

Let's now talk about our gross margin for our international salon segment. Our overall international gross margin rate improved 50 basis points in the fourth quarter to 46.6%. This rate improvement was essentially due to stronger retail product margins, although our service margin rate was also up slightly in the quarter. Our fourth quarter service margin rate came in at 47.7%. This rate was essentially on-plan and was 10 basis points better than the comparable period last year, so there is not much reason to discuss that further.

Our international product margin rate, however, was also strong, coming in at a rate of exactly 44% in the fourth quarter this year. That was up 200 basis points over the same quarter last year. As you know, we have started shipping some product from our distribution center in Chattanooga, Tennessee, to our United Kingdom operations, in order to take advantage of purchasing power, which has helped our U.K. product margins.

In addition, improved accuracy and controls over our international salon inventories continue to be a focus of ours, as supported by our most recent inventory count. Let me now switch gears and address site operating expense, which came in a bit higher than planned during the quarter, increasing 90 basis points to 5.4% of sales. Part of this increase was due to the timing of salon advertising expenditures between the two quarters. However, the primary reason for this growth in this expense category was due to increases in our favorable electrical utility contracts, which recently came up for renewal in the U.K. following expiration of a two-year contract.

I will move on to the other line items of our international salon P&L, and when I speak to them, I have cleansed these items of noncore charges that we recorded in the fourth quarter last year. I will start first with our general and administrative expense category. Our international salon G&A expense improved in the fourth quarter to 16.1% of revenue, down from a rate of 17.6% in the same period last year. We had forecasted a significant improvement, largely due to VAT and local tax adjustments recorded in the fourth quarter last year.

Next, our international rent expense came in exactly on-plan at 21.8% of fourth quarter revenue, an increase of 160 basis points over the comparable period a year ago. Once again, we had planned for this increase. Part of this was due to the mix of having an extra week of U.K. rent expense included in our fourth quarter results this year, as well as the impact that negative comps has on our fixed cost category.

The last item I will address on the international salon P&L deals with depreciation and amortization expense, which came in on-plan, improving 30 basis points in the fourth quarter to exactly 3.7% of sales. Most of the planned improvement is the result of last year's depreciation expense being slightly higher than normal, due to fixed asset write-offs in connection with a handful of salon remodeling and relocation projects. The net affect of all the items I just addressed caused our fourth quarter operating income rate for our international salon segment to come in at 6.2% of sales.

I am going to briefly speak to Hair Club for Men and Women. I have said it before, this business is an incredibly consistent and the revenue and profit contribution for this quarter once again exceeded our expectations. Darryll Porter and his management team at Hair Club continue to perform exceptionally well. Fourth quarter revenue from our hair restoration centers increased just over 11%, to $31.9 million, which was approximately $2.5 million above plan. Hair Club revenues represented nearly 5% of our consolidated fourth quarter revenue.

Our fourth quarter operating margin rate for Hair Club came in at 21.3%, or 130 basis points stronger than the comparable period a year ago. In addition, fourth quarter EBITDA margin came in very strong at nearly 30%. 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 school segments in the fourth quarter. I am going to be brief here and hit just a few highlights, given the new future direction Regis is taking with Frank Schoeneman and his management team at Empire Education Group. Our school revenue grew 21% during the quarter, to just over $21 million, and comprised 3% of our consolidated revenue. This increase in revenue was due to the increase in the number of cosmetology schools that we owned and operated, as well as growth in student enrollment and certain tuition increases.

Our fourth quarter operating income increased to $2.5 million, or 11.6% of revenue, compared to an operating loss of $500,000 last year at this time. Despite this nice increase year-over-year, we remain very excited about the long-term opportunities that can be realized in our school operations with Empire's experienced school management team.

I will now switch gears and I would like to make one quick comment regarding our fourth quarter G&A rate that appears in the corporate segment of our P&L. Although our G&A rate came in essentially on-plan at 5% of sales, this rate was 50 basis points higher than the same period a year ago, and there were two primary reasons, which we have discussed in the past. Our fourth quarter rate increased due to some severance costs that we recorded in the quarter, as well as fees paid to Deloitte Consulting, in connection with our inventory and indirect spend project.

With that, that concludes my comments regarding our individual business segments. But I would like to discuss, or make a comment about our effective income tax rate. Once you factor out the impact from our previously-reported school charge, as well as the benefit from the previously-reported retroactive reinstatement of jobs credits, our underlying effective tax rate in fiscal 2007 came in on-plan at 34.2%, including a fourth quarter rate of 31.7%. We continue to forecast our effective tax rate for all of our 2008 fiscal year to be in the area of 34%.

I also want to mention and echo something that Paul said, that during the fourth quarter we repurchased 985,000 shares of our common stock, spending $38 million in the quarter. This satisfies our objective of repurchasing $100 million of stock over the past five quarters. Our objective is to repurchase up to an additional $100 million of stock during our current 2008 fiscal year.

Before I turn it over for questions, I would like to make couple of additional comments. For the entire 2007 fiscal year, we reported earnings of $1.82 per share. However, excluding the goodwill impairment charge, the previously reported income tax benefits, as well as one-time benefits derived from reducing our workers' compensation accrual, our operational earnings we estimate were about $2.05 per share in fiscal 2007. The challenge we face is not necessarily expense control, but rather it relates to revenue generation, and today that is especially true for retail product sales.

As we have said before, we need our overall same-store sales growth to be in excess of 2%, in order to be able to leverage inflationary cost pressures. Every 1 percentage point change in comps, translates to about $0.13 of earnings per share on an annual basis. In fiscal 2007, our average ticket increased 3.6%, which is essentially within our historical comp range of 3 to 4%. We were pleased with that.

However, this increase in average ticket was nearly offset by a 3.5% reduction in comp store customer visits. Although we continue to experiment with new initiatives to drive sales, we really do need external factors to swing in our favor, in order for to us achieve double digit earnings growth. In the meantime, we continue to be quite aggressive in controlling costs.

For example, our operating people continue to control salon payroll costs extremely well. We are enjoying significant reductions in our workers' compensation costs, due to salon safety and return-to-work programs. Our inventories are very well controlled today, and our expense control project, with the assistance of Deloitte Consulting continues to gain traction. My point here is that we continue to focus on expense control, and overall we believe we are doing a very good job of it. Again, our recent flat earnings growth is primarily a function of reduced comps and not expense control.

I have one final item to address. Today's press release includes information regarding our earnings outlook for both the full 2008 fiscal year as well as our first quarter. Our previously issued guidance for fiscal 2008 was for earnings to be in the range of $2.01 to $2.27 per share, based on a same-store sales expectation of 1 to 3%. It is too early to tell if our annual comp guidance is perhaps a bit aggressive. Certainly it is no surprise that product comps will continue to be a challenge for us in the near-term.

Despite this, our internal earnings outlook has indeed improved, due to accretion from recent salon acquisitions and expense control initiatives. However at this time, we do not believe it is prudent to make any change to our previously-issued annual guidance. It is far too early in the year to do so, and it does no one any good to set the expectation bar too high.

As a result, at this point in time, we are reaffirming our fiscal 2008 earnings guidance of $2.01 to $2.27 a share. For our first fiscal quarter of 2008, we believe earnings should be in the range of $0.43 to $0.49 a share, based on a comp expectation of 0 to 2%.

So that is it. Paul and I would now like to answer any questions you may have. Mary, if you could step in and provide some instructions, we would appreciate that.

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from Neely Tamminga with Piper Jaffray. Please go ahead.

Good morning. Paul, could you speak a little bit more about this conversion you are thinking about over at Trade Secret. I think it's an interesting and very compelling idea, particularly for this division, and its placement within their various real estate locations. Just wondering if you could speak a little bit more, the timing to be converted some time this year. Would that be chain-wide at this point by the end, 12 months from now. Have you locked in any sort of agreements with some key vendors, and are we looking to be a little bit more prestige or masstige, any sort of color you can give. And then I also have a follow-up question.

One thing we do have is 630 spectacular locations. We know that our assortments have to change. In the whole face, skin, bath, body category, one of our significant competitors out there has a 20, that category represents about 23% of that company's sales, in a footprint very similar in size to our own. For us, that category represents 2%.

So whether we get some of the lines they have, or identical lines that can perform at least as well at perhaps lower prices, we will go into those categories. We will initially start with taking five locations in Minneapolis, and that should be done certainly well before year end. That will be done before holiday. We are working with [Shay] Architects, who are major, major players in the retail business in terms of being able to redesign our stores.

Obviously, new stores will have a different look from the existing stores, but the assortments can change very, very quickly. We will expect that, and obviously we will experiment with different concepts relating to different kind of demographics, because our stores, our salons are not exactly identically placed. Some malls are higher end than others. But this will definitely be more prestigious, this will be more boutiquish. It is a very exciting project for us, and we know exactly what to do.

The what is easy, the how is an issue, and we are going to be experimenting with obviously many different vendors. It is very interesting to note, and very startling for us, that when we analyze our select customers with respect to the 850,000 individuals now signed up in our loyalty program, 26% of them had an income level of over $125,000. That is an amazing statistic, and a manufacturer would have to be out of his mind not to do business with us. So we think we have a lot of running room here.

Paul, is this something you would anticipate to be disruptive to the chain in the second half, as you take your reads and make additional conversions? And is that factored into guidance, more importantly? And I will have a follow-up for Randy.

It is not factored into guidance.

Okay. Randy, if you could give me a little more insight into the guidance. Have you assumed the additional $100 million of buyback on the guidance for the full year at this point in time?

No. But again, assuming that the plan is to continue to, likely at this point in time, continue doing it ratably over the course of the year, I would expect the guidance, the earnings accretion from that to be $0.01 to $0.02.

And the Q1 guidance that you guys have outlined, is that reflective of quarter to date comp trends, and could you just share where you are with that relative to the year's outlook?

The guidance that we have for the first quarter does incorporate a more modest level of comps. Again for the full year, we expect 1 to 3% in the first quarter, as we have articulated, we likely could be in the 0 to 2% range. So that is what is reflective in our first quarter guidance.

And that is trend right now. I want to confirm that that is where you are right now?

Again, Neely, we are always cautious, because we don't really disclose comps on an interim basis, but as Paul mentioned, we are seeing a trend of improving service same-store sales. The product sales continue to be a challenge. So, yes, I think it is indicative of what we are seeing.

Great. Thank you, guys. Good luck.

Thanks, Neely.

Thank you. Your next question comes from Justin Hott with Bear Stearns.

Thanks. Maybe you could walk us through how long ago you made this decision on Trade Secret?

Justin, can you repeat the question. You are coming in at a very low voice.

Can you hear me now?

Yes.

Can you walk us through how long you've been thinking about making this move at Trade Secret, and the process you have taken to come to this decision?

We had a couple of road trips over the last month or two, and we visited a lot of people that we are obviously interested in perhaps purchasing one day, so they have opened their books to us. And it became very evident during the last two months that this is something we should do. If anything, as it relates to some self-flagellation here, we probably should have started this process maybe six months prior to, but better late than never.

Because, Paul, it scares me that we hear about this, it is so early in the process and over the last couple of years, when we have heard about things that are early in the process, long hair trend, the Horst initiative, they haven't always gone the way you were looking for them to go, whether it be industry reasons or factors beyond your control. And there was an inventory issue a couple years ago.

I worry that you are going to be adding a lot of inventory in beauty and skin, and all these other categories, to try to transform the business model just because of a judgment a couple of months ago. Really the question I have right now is you are suggesting patience, we are seeing a lot of things delayed, we are seeing the recovery of the industry delayed. What is it that gives you such as such a view here that patience is going to pay off, and this also won't be something that happens quickly and might not work?

Well, I am not nearly as concerned as you, Justin. Not at all. Because we have had competitors open their books, very similar footprints, our locations are better. We know exactly the kind of product categories we should have.

With respect to Intelligent Nutrients, we always said the line would be developed some time in fiscal 2008, and it will be. With respect to the inventory issues, that was a one-shot deal. Justin, we wouldn't say we are highly confident if we weren't. We are not nearly as concerned as you.

Okay. Thank you.

You are welcome.

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

Good morning, everyone.

Hi, R.J.

A quick question for Paul here. I know you guys have a pretty selective screening process when it comes to acquisitions. And from the commentary earlier, it sounds like you have a pretty healthy pipeline coming in. I am just curious what your take on the mindset of the small chain owner is right now. Are there more chain owners approaching you these days in comparison to last year? Any thoughts there?

No. It has been really very, very steady. We turn down about 40 for every one we buy. And the ones we are interested in, you take Fiesta, it was an eight-year gestation period, and there's nobody else really buying them, so we think we should be adding anywhere between 200 and 500 stores a year by acquisition, and we should be able to do this for a long, long time.

Okay.

There are 350,000 beauty salons and barber shops out there. At least 50,000 meet our acquisition criteria. And people do want to sell their businesses eventually, either because of health reasons, or they just have had enough and they are relocating. So we should have a constant flow of acquisition opportunities and a significant number, we will buy anywhere between 50 and 150 of our franchise locations back each year. That is a program that is really unending.

Okay. I guess my next question is, just having to do, if there is any way we could get some guidance as to the different salon counts, or where would you expect the salon counts would be for the different concepts by year end? Any clarity there would be helpful?

We have, R.J., why don't we do this offline. We would be happy to share that with you. Overall, we are expecting to build from scratch about 350 new company-owned stores. Most of that, as Paul mentioned, 200 or more will be SmartStyle salons in Wal-Mart. We can go through and give you some of the, those are gross numbers, then there will be some relocation, etc.

I think we will continue to see that franchisees worldwide will add about 250 to 300 new units, but we are expecting that the net number will be close to flat growth, because of franchisee buybacks, primarily because of that. So again, we will go through some of that with you.

Let me add a little bit of color to that if I can, Randy. In the mall-based concepts, to be building give or take 20%, maybe 50 stores, net/net/net we should be maybe adding 10 stores after relos and closures, and in the strip center environment, building maybe 60, 70 stores and net/net maybe adding 30, after relos and closures.

Once again, Wal-Mart, we should be building anywhere, I think the number will be closer to 230 rather than 200, based upon what is already on our tally sheets. And there are really no relos or closures there, I want to say none, less than two.

That was helpful. The last question I had was just based on some of the commentary that Wal-Mart had talked about during their earnings call and press release last week, talking about some consumer spending pressures. I was wondering, particularly in the SmartStyle concept, if you were seeing any of that, or if you could speak to that a little bit more?

Once again, we are having issues with respect to product comps and SmartStyle, buy our service comps are doing just fine.

Okay. Thanks and good luck going forward!

Thank you.

Thank you. The next question comes from Mike Hamilton with RBC/Dain. Please go ahead.

Good morning.

Hi, Mike.

First, just want to be sure that I understand mechanisms on beauty schools. First quarter, we will see that business treated as an equity investment, correct?

Yes. There are going to be two pieces to it, though. We closed on the merger on August 1st, so that will mean that we will have one month worth of results in our first quarter, and we are not going to show segment reporting going forward.

We will show segment reporting, we are not going to show the school segment. We are going to take that one month worth of results and because of immateriality and just put it in our North American salon segment, and then going forward, it will show it under the equity method of investment.

So your 665 to 675 basically is going to include a month of schools on the topline?

Yes.

And then, so a blended approach. What are we looking at in that base? What is your range on revenue from salon acquisitions in there?

From future salon acquisitions?

No, the ones that have taken place that are going to be in the base there in the first quarter?

On an annualized basis, we are estimating, Mike, that the stores that we have acquired will add about $50 million. So 12 to $14 million on a quarterly basis.

Okay. Thanks. If we could, I would like to come back around to some of the moves there on Trade Secrets, etc., doing a Carnac imitation, my guess is two years from now we are going to be talking about the mass retailers doing a far better job in some of the products that you are now evolving into, which comes back, I think that some of the success in Trade Secrets and related product sales is going to come from the initiatives that you are driving, the whole program loyalty, and your ability to cross-sell out of your salon stylists, and just wondering if you can talk a little more to what you are seeing in those areas?

I don't really get the question, other than the fact that we have a huge advantage over our competitors in that we actually have people that we touch every day, 160 million customers, and if a stylist puts a product on your hair and on your scalp and you like it, you will buy it. Walgreens and Target are totally disadvantaged with respect to that. People generally get their hair done on a regular basis. It is a very constant kind of business, and that is the one competitive advantage we have, in addition to the fact that we have great locations.

Do you feel like you are making progress in improving the ability of the cross-sell at the salon level?

Well, we work on it every day. We are not giving raises to people unless they will have adequate product sales. We will be far, far more stringent with respect to making sure that that criteria is fulfilled by all of our stylists.

Thanks for the insight. That is exactly what I was looking for.

Thank you.

Thank you. The next question comes from Jeff Stein with KeyBanc Capital Markets. Please go ahead.

A couple questions, Paul. First of all, wondering why you talked about your optimism on the service side of the business, yet your visitations were down 3.5% last year. What is it, other than the anecdotal evidence that we seem to see in the marketplace about shorter hair styles coming back, that gives you reason to believe that you might get any kind of an improvement in visitation?

Our service business continues to get strong, and we don't issue comps other than on a quarterly basis, but if we weren't seeing significant comp improvement in the service end of it, even in August, and it is too early to extrapolate whether or not how the quarter will look, but we are starting to see it, Jeff, and we are seeing it across all concepts.

Okay, all right. Just kind of curious, I agree 100%, Paul. I think that having the stylist in the store selling products is just a huge potential advantage for you, and I was wondering what is it that has been kind of the impediment to keeping you from capitalizing on that advantage up to now?

Well, it hasn't been an impediment. Over the years, when I joined Regis, we had 3% product sales, and now those same salons have 20 some odd percent of their end revenues are product sales. We didn't have Trade Secret then. It takes a long time to really train stylists. They are reluctant to sell product, because they are afraid of losing the customer, or having a reduced tip, and i is really quite the contrary. All they are doing is getting more customer service, rather than less customer service.

It's a question of training and it's a question of also having the lines in, that aren't in Target, that aren't in Walgreens. So it's a constant task, and one that I think we do fairly well. I think we were kind of asleep at the switch, with respect to giving them additional stuff to sell that wasn't diverted, and we are in the process of doing that now. So I think our stylists generally do a good job. I think we have to do a better job of giving them more assortments, so that they can sell their customers.

Got it, got it. Thank you. And one additional question. I am kind of curious at Trade Secret, getting back to the Trade Secret issue, what is your point of differentiation going to be? Obviously, others have done a job and they have been there and they're known for that, Bath and Body Works, Sophora, Ulta, and so forth. What is your point of differentiation going to be, and why is the customer going to shop you when they can buy the same brands almost anywhere else?

Well, Sophora has its own deal and Sophora is excellent. They are really spectacular merchants I don't know what their bottom line is, but they are really good. Our locations are better than the other guys locations. So if we have the right assortments, they will buy our stuff.

And we have 630 locations and you will also see, once we have the assortments that we want, we will take a disproportionate amount of our marketing funds, and really energize Trade Secret, and we will really energize the new Trade Secret. At some point in time, we will get a lot more exposure, we will have a lot more external pull rather than just push.

But are you intending, Paul, to have any proprietary products, or is your pricing structure going to be any different, so that it would entice the customer to buy from you, as opposed to let's say Bath and Body Works.

Jeff, we are not even in that category today. We only have 2% of our business in that category. It is a little premature to tell you exactly what our price points will be. We will have a better take on it next conference call.

Okay. Great. Thanks.

You are welcome.

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

Good morning, guys. I want to switch gears far minute, and go back to something Randy said about Hair Club. Randy, you said that they were incredibly consistent, outstanding performance is the other descriptor that you used. Be that as it may, if it is hitting on all cylinders, what plans do you have in the works to actually prime that pump a little bit better, and squeeze more performance out of expanding that business?

We continue to buy back franchisees, and of course the long dollar is better than the short dollar. We continue to look at acquisitions, both in the United States and abroad. We continue to look at the possibility of another price point with another concept, because we can leverage that management.

Our big challenge in Hair Club is to grow it. We are in 80% of the DMA in the United States, so while we will have a couple of more locations, we are not going to have 10 or 20 more locations. It is the other efforts, buying customer lists, and the like that will grow the business.

And what kind of an impact do you know? I know Randy said at the top that Darrel Porter is now leading that team. What kind of impact do you see [Frisch] Clark leaving back in July?

No impact. Zero.

Okay. Thanks.

Thank you. Our next question comes from David Lee with Porter Orlin. Please go ahead.

Hey, Paul. Can you talk about, in terms of operating expense breakdown, where is this workers' comp reversal? Two, it seems like your site operating expense improved quite a bit on a year-over-year basis, and maybe you can address some of that? And why is your depreciation down on a percentage basis year-over-year?

Okay. Site operating expense is exactly where the workers' comp accrual is coming in. So that favorability for the fourth quarter, 110 basis point favorability that I referred to, is because of the workers' comp accrual adjustments. In terms of D&A, did you say you saw it going down?

Well, D&A as a percentage of revenue has gone from 5.5% to 5%. Just wondering why that is the case, not flat?

This is where it gets a little bit confusing, because a year ago we had certain store closures that we were very aggressive with, that was running through our fourth quarter fiscal 2006 results. We did that as an opportunity to offset, we had this big gain coming through from Alberto-Culver. So net/net we kind of looked at the fact that our D&A should be probably be in the mid-4% range on a go-forward basis.

Got you. Can you maybe also talk a little bit about the tax benefit? What is that due to?

Well, overall we have seen the retroactive reinstatement of targeted jobs credit, the Congress enacted, as well as we closed some prior-year tax audits. Again, on a go-forward basis, we think our effective tax rate should be in the 34% range.

Okay. One last question, it seems like your inventory actually improved for 2007 versus 2006. From what Paul said regarding diversion, it doesn't sound like it's going to get better for another two years. Can you maybe address a little bit on that?

Sure. I am not sure what you meant about getting better in two years, but let me just speak to what is going on with inventory. Our inventory levels grew a little over $2 million over the past year, which was only a little over 1% growth rate, despite the fact that the number of company-owned stores that we have increased 7 to 8%. So we are very proud of the fact that if you look at the fact that we added almost 600 new stores this year, the inventory just associated with those stores would cause overall inventories to go up about $14 million.

So what is offsetting this, it only went up $2 million, not 14. So what is offsetting this is probably close to an 11 to $12 million reduction in inventories, which is really salon and DC safety stock. This goes back to a renewed focus on controlling inventories, making sure that we are not going to impact the business in a negative way, but we really don't need to have as much safety stock on hand. So we are weaning that down. We still think that there is opportunity to reduce inventory levels even further in our current fiscal year.

Okay, great. Thanks.

You are welcome.

Thank you. (OPERATOR INSTRUCTIONS) Our next question comes from Daniel Hofkin with William Blair. Please go ahead.

Good morning. Just hoping you might be able to provide a little bit more color on the comp guidance in terms of by segment, retail versus service, if not, quantifying it directionally relative to the past couple of quarters?

I think what we have said in the past that with the annual guidance of 1 to 3%, we do think that we are going to see some movement, some momentum in the second half of the fiscal year because of product, as well as hopefully continued improvement in service, but the annual guidance of 1 to 3% fiscal '08, embedded in that is comp guidance that is probably at 50 basis points, flat to 50 basis points on the low end, and maybe as high as 1% for the year.

As we talked about a few moments ago on the conference call, only time will tell as to whether those assumptions are perhaps a bit aggressive. Nevertheless, we feel very strong that the earnings guidance is still intact of $2.01 to $2.27.

So to clarify, you are sticking to the retail product comp being somewhere between flat and up 1%?

For the full year, yes.

In terms of traffic, is there any way to disaggregate what the trend might be between, I know it's difficult to do, between service and product, or do you measure traffic strictly into the store?

It is just total customer visits. We are unable to really bifurcate that between service and product.

Okay. Then finally, with regard to the Trade Secret initiative, what sort of training do you anticipate, in terms of educating the customer service people regarding the additional lines of product that are outside of the professional hair care?

All of our supervisors in trade have about eight or nine stores, so it's a very manageable group, so the supervisors will be trained and they are trained any quarter anyway. There is really very little incremental cost.

How about just in terms of the actual product itself being somewhat, like in terms of beauty care being somewhat away from the professional hair care?

Some lines will have extensive training, and others lines wont have extensive training at all. We already have a smattering of those categories.

Okay. And that additional expenses, et cetera, related to this, just to reiterate, is not included in the current guidance?

But the expenses should be minor.

Okay. Thank you.

You are welcome.

Thank you. There are no further questions. I will turn the conference back to Paul. Please go ahead, Paul.

Thank you, Mary. And thank you for joining us, everyone. Have a good day!

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