Regis Corp (RGS) 2008 Q2 法說會逐字稿

Good morning. My name is Val and I'll be your conference facilitator today. At this time I would like to welcome everyone to the Regis Corporation second quarter 2008 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 800-405-2236, access code 11104730 followed by the pound sign.

I would 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 the Web site 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, you may begin.

Thank you very much, and good morning, everyone.

As you all know from the press release, we did have a disappointing second quarter. It gives us little comfort to know that many retailers had similar difficulties during the holidays.

Regis morphed into a mature company. In the current environment same-store sales are the major driver of profitability. As many of you know, this was not the case in the 1990s. Regis at that time was a total sales growth story.

To reiterate something we have talked about ad nauseum, we do need same-store sales increases of at least 2% to leverage our fixed costs. Results above 2% give us positive leverage, results below 2% create negative leverage.

I'll be very brief with my statistical analysis as we have issued a very detailed press release. Total revenues for the quarter increased 4%. If one considers the deconsolidation of beauty schools, excluding Vidal Sassoon, and adds back the deconsolidated beauty school sales number, total revenues would have increased 6.5%.

Same-store sales for the quarter declined 0.8%. Earnings per share was $0.51, contrasted to $0.59 per share last year. Excluding the benefit of the workers' comp accrual adjustments, EPS would have been $0.46 this year and last year would have been $0.54 without a $0.05 per share one-time tax credit.

With a negative comp of 80 basis points, the earnings of $0.46 a share correlates to our sales performance. Randy will go into greater detail describing our second quarter results in his remarks.

Our strong business segments include the European continent, excluding the United Kingdom, Supercuts and Hair Club for Men and Women. Our system-wide store count increased by 51. We built 74 new salons, we acquired 19 salons, and our franchisees built 69 salons.

Other miscellaneous items, first, Intelligent Nutrients should have a product line on the shelves this May. Our share of the losses from Intelligent Nutrients will approximate a couple million dollars this year. Intelligent Nutrients should continue to lose money in fiscal 2009, however, this loss should be more than offset with profitable sales of Intelligent Nutrient products through our company-owned salons.

Next, the Provost transaction will close in late January. Likewise, the Empire Beauty School performance has been right on plan. We also repurchased $50 million of stock in the first six months of the year.

Lastly, Randy will talk about our expense control initiatives during his presentation. Randy will also talk about fiscal 2008 guidance.

During the October 22, 2007 first quarter conference call, we pointed out that service comps were the strongest in years, Unfortunately, second quarter results were disappointing. The most important issue, in fact, the sole issue, is what are we doing to right the ship. The second quarter results are totally unsatisfactory and unacceptable.

Let me outline our plan. First, on the service side, we'll very aggressively increase prices. In the past several years, we have increased prices annually in about 2500 of our company-owned stores. From January through April we intend to increase our salon prices in at least 6000 of our company-owned stores.

We expect most of our franchisees to also increase prices. We do price by market. Lacrosse, Wisconsin is very different from San Francisco. The average ticket in these salons should increase by over 6%, as a result of price increases.

The issue with respect to price increases is simply will they stick? In some instances in the past, when we raised prices, we have lost customers, however, we are highly confident that we will be very successful in implementing the price increase strategy.

Our salon competitors are all facing significant minimum wage increases and inflation is certainly with us. We forecast significant price increases within the entire salon industry.

Let's do the math together. Five years ago, our female customers visited salons every four to five weeks, spending about $18 per visit, which comes out to about $200 per year on services. Now let's assume that she now visits our salons seven times a year and spends $20 per visit, contrasted to the $18 per visit two years ago. She'll be spending far less in total, about $140 per year. This continues to be a very affordable luxury.

We think this pricing strategy makes a tremendous amount of sense and we are highly confident that it will be implemented successfully. It's also of interest to note that 45% of our customers are males. The male business has been far more stable.

Next, on the product side, there are several things that we are focusing on. First, our 62,000 stylists must do a much better job in converting a service customer into a retail product customer. Our operations staff does an excellent job in focusing our field staff. For example, many years ago, hair color was a minuscule percentage of our salon business. Our operation staff focused on it and now in Regis salons it is a third of our business. Our training programs, compensation and incentive programs, contests and the like will focus on increasing our combo tickets, which is the nomenclature for a dual sale, retail coupled with service.

One example of our compensation changes is a modification we recently implemented in our service commission programs. We now require stylists to have a higher ratio of retail sales to total sales before they can advance to a higher service commission level.

However, most importantly, on the product side, we have just announced the purchase of PureBeauty and BeautyFirst. In several of our past conference calls, we talked about the fact that we were going to morph our Trade Secret stores into beauty boutiques, and PureBeauty gives us the vehicle to quickly accomplish this task.

Within a relatively short period of time, we will rebrand most of our Trade Secret stores to PureBeauty. The new PureBeauty will combine the very best of both brands, bringing together PureBeauty's strength in skin, cosmetic and bath with Trade Secret's existing professional hair care platform and exceptional, I mean, really exceptional real estate.

We'll be opening the brand-new PureBeauty concept in the Mall of America in March. There should be a significant Women's Wear Daily article promoting the opening.

About 18 months ago, Steve Hudson and an investor group acquired PureBeauty and BeautyFirst. Regis was a 20% partner. During the last 12 months, albeit with slightly lower basis, PureBeauty and BeautyFirst comps under Steve's leadership have increased 3.7% and 6.5% respectively. Trade Secret comps have decreased 8% during the same time period. Bath, body, skin and cosmetics and comp is 23% of PureBeauty sales versus 2% for Trade Secret, thus the rebranding of Trade to PureBeauty will bring the division more upscale, more boutiquish. We'll have 750 doors in the very best locations in North America.

It's of interest to note that Sephora has about 180 locations in the U.S. and Ulta has 237 U.S. locations. The demographics, family income in particular, should be very appealing to the perspective vendors.

We're in the process of testing a myriad of product lines in our stores and the final assortment will be finalized based on the results of these tests. Steve Hudson will be Chairman of this division. He has a stellar record. His investor group purchased Hair Club several years ago for $75 million. 20 months later, they sold it to us for $210 million and Steve was the visionary leader.

The PureBeauty purchase contract was signed only several days ago. Our strategy on a macro level, the morphing of Trade into PureBeauty has been determined. However, as we all know, the devil is in the details, the micro, product assortments, Cap Ex, inventory levels, and greatly increased advertising and marketing spend are critically important.

Norma Knudsen, Regis' EVP and Chief Operating Officer of Trade wants to counsel to Steve to finalize our plans. We believe that price through to the increase in combo ticket sales and the Trade Secret transformation will pay significant dividends in the months and years ago.

Randy and have I been talking about growing our earnings for several years. As you know, our earnings have been flat and our stock has taken a huge hit. The fact that other retailers have also taken a big hit gives us very little comfort.

We feel the upturn is inevitable, however, the Trade Secret business turnaround will take some time, but we're highly confident that our overall business will turn and we'll have significant earnings growth in the years ahead. We cannot be precise and tell you exactly when this will occur, but please rest assured we'll be working very, very hard every day to increase our shareholder value.

One final note on our plans for the use of capital in fiscal 2008. Our plans have always been to utilize capital in a manner that maximizes shareholder value and we have communicated our intentions to repurchase up to $100 million in Regis stock this fiscal year. This was based on executing acquisitions and investments of $75 million this fiscal year.

We have also stated that as accretive acquisition and opportunistic acquisitions arise, we will adjust and reduce our share repurchase budget to help fund acquisitions exceeding the $75 million budget. As of the end of December, we have completed over $53 million in acquisitions.

The PureBeauty, BeautyFirst acquisition, as well as several other upcoming salon acquisitions and investments, will put us well over our $75 million budget. As a result, it is likely that we will not repurchase any additional Regis shares this fiscal year.

Randy will now continue with our presentation.

Thanks, Paul, and good morning, everyone.

Our second quarter earnings of $0.51 a share that we're reporting today met the low end of our previously issued guidance. However, the $0.51 included a benefit of about $0.05 a share due to a better than expected adjustment to our prior year's workers' compensation reserves. I'll discuss that in more detail a bit later. Therefore, excluding this workers' comp benefit, our second quarter operational earnings came in below plan at $0.46 a share. The shortfall was virtually all same-store sales related.

As you're aware, our quarterly earnings guidance directly correlates to our same-store sales guidance. We forecasted our second quarter same-store sales to be within a range of positive 50 basis points to 2.5% and earnings would therefore be in a range of $0.51 to $0.57 per share.

Actual same-store sales growth, as Paul mentioned, came in at negative 80 basis points for the quarter, which was 130 basis points below the low end of our guidance. As you remember, for every one percentage point change in comps, this has an annual impact of $0.12 to $0.13 a share, or just over $0.03 on a quarterly basis, therefore, the 130 basis point shortfall in comps correlates to an earnings impact of about $0.05 per share, resulting in the $0.46 of operational earnings that we're reporting today.

Absent the impact from our same-store sales shortfall, I believe we had a pretty straightforward quarter. And let me now transition my comments by giving you some detail behind our second quarter operating results and we'll go through each business segment as we typically have done in the past. A breakout of our segment performance is found in today's press release, and I'm going to begin with our largest segment, which is our North American salons.

Revenue from our North American salons, which represented 84% of our consolidated second quarter revenue, grew 6% during the quarter to $576 million. This revenue growth was due primarily to a 7% quarter-over-quarter increase in the number of company-owned salons that we operated.

Service revenue in our North American salons grew 7% during the quarter to $399 million. Our service comps were flat during the quarter, therefore the entire increase was essentially due to new and acquired salons.

Product revenue grew just over 2% in the quarter to $167 million and was tempered due to a decline in product same-store sales of 3%. We continue to face near-term challenges with our retail product comps due to a variety of factors that Paul has addressed in the past, and as we previously stated, we also had a very poor Christmas holiday selling season this year.

Royalties and fees from our North American franchise salons grew 4% during the quarter to $9.9 million. This increase was primarily due to an acquisition of 42 Canadian franchise salons that took place in our preceding first quarter.

Absent this acquisition, new franchise units that were added to the system over the past 12 months are being slightly more than offset by franchise buybacks, franchise unit closures and relocations.

Our combined gross margin rate for North American salons came in slightly below plan at 42.8% and was down 110 basis points from what we reported last year in our second quarter. As I'll discuss in a moment, most of this margin decline related to product.

Our second quarter service margin rate for our North American salons came in on plan at 41.5%, yet this represented a 50 basis point decline over the same quarter a year ago. Most of this quarter-over-quarter change related to the accounting reclassification we discussed with you last quarter relating to retail to shop product transfers.

In addition, the amalgamation of our recent Fiesta salon acquisition, which has slightly highly salon payroll costs, caused a slight decrease in our overall service margin rate. We continue, however, to be very pleased with our underlying controls over salon payrolls.

Our retail product margin rate for the second quarter came in below plan at exactly 46%, down 220 basis points from the rate we reported in same quarter a year ago. There were three primary reasons for this.

First, we made a decision on December 15th to begin discounting our retail holiday merchandise due to poor sell-through at that point in time. We sacrificed margin but we were successful in reducing nearly 75% of our holiday merchandise by the end of December, and as a result we anticipate our product margins to return to the 48% range beginning next quarter. Anecdotally, we were also successful in reducing our overall inventory levels by nearly $6 million since the end of our preceding September 30th fiscal quarter.

A second factor that reduced our product margin rate related to negative payroll leverage we experienced in our Trade Secret salons in the second quarter due to negative product comps of 7.2%.

The final item impacting product margins simply related to a mix play. Products that we sell to our franchisees, which are at a lower average margin, have increased following our first quarter acquisition of the 42 Canadian franchise salons.

Site operating expense is the next item I'm going to talk about, and site operating expense includes costs directly incurred by our salons such as advertising, insurance, utilities and janitorial costs. Our site operating expense rate improved 100 basis points in the first quarter coming in at 7.6% of sales.

The major reason for this rate improvement was further reduction to our prior year's workers' compensation claim reserves. We've talked about this in the past.

This second quarter adjustment, which exceeded our expectations by about $0.05 a share, is the result of a successful salon safety program we implemented a few years ago. This is just one example of how we continue to focus on expense control during this tough sales environment.

Our independent insurance actuaries recently indicated that further reductions, albeit more modest, could be forthcoming if favorable trends continue the balance of this year.

Our North American salon G&A expense came in at 5.8% of revenue. There's not much to discuss here as our second quarter rate came in close to plan and was comparable to the rate of 5.6% we reported in the same quarter a year ago.

Rent expense also came in at essentially on plan at 14.5% during the second quarter, which was 20 basis points higher than the comparable period a year ago. The slight increase in this fixed cost category continues to be a reflection of a reduced level of North American salon same-store sales results.

Depreciation and amortization came in at 3.8% which, again, was essentially on plan and was identical to the rate we reported last year in our second quarter. So, again, not much to discuss here.

The net effect of all the items I just discussed caused our operating income for our North American salons to come in at 12.2% of second quarter revenue compared to a rate of 12.7% last year at this time.

Next, let's review the second quarter performance of our international salon segment, and 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. Beginning this year in fiscal 2008, our international salon segment also includes our Vidal Sassoon academies in the U.K., or schools, from Vidal Sassoon, and we no longer report schools as a separate school segment, as you recall.

Our overall international salon revenue represented 11% of our consolidated second quarter revenue and increased 21% over the same period a year ago, coming in just over $73 million for the quarter. Nearly one half of the overall revenue increase was due to a quarter-over-quarter improvement in the euro and the British pound exchange rates over the U.S. dollar.

Absent the currency impact, the balance of our second quarter revenue growth was due to the inclusion of the Vidal Sassoon academies and the addition of new and acquired beauty salons, partially offset by a 4.7% decrease in overall comps. The service revenue component, which included a 5.8% decline in service comps, grew 23% in the quarter to $43.2 million. Once again, much of this increase was due to currency gains as well as the inclusion of Vidal Sassoon academies. In addition, our international sales benefited from organic and acquisition growth.

Product revenue also grew, increasing 20% during the quarter, due primarily to the same two factors, currency gains and the inclusion of Vidal Sassoon academies. As we discussed last quarter, the strong product comps in the U.K. that we've enjoyed last year have started to soften, coming in at a negative 2.6% in the second quarter.

Lastly, royalties and fees from our international franchisees grew just over 16% during the quarter.

Let me switch gears and discuss our gross margin rate. Our international salons combined gross margin rate improved 80 basis points in the second quarter to 45.1% of revenue. As I'll discuss in a moment, this improvement was driven by an increase in our retail product margin rate.

First, let me talk about our service margin rate, which fell below plan in the second quarter to 44.3%, down 290 basis points over the same period a year ago. The margin decline was largely due to negative payroll leverage from a 5.8% decline in service same-store sales, partially offset by the inclusion of the Vidal Sassoon academies in the U.K.

However, we did experience significant improvement in our second quarter retail product margin rate, which came in at 47.1% compared to a rate of 37.9% in the same period last year. We had planned for a rate improvement, but the actual rate came in much better.

Our international product margin rate is improving as we continue to migrate towards a similar product distribution model that we have here in the states. As we've discussed in the past, we are now shipping some product from our distribution center in Chattanooga, Tennessee, to our U.K. operations in order to take advantage of our global purchasing power, which has helped our U.K. product margins.

In addition, our second quarter product margins also benefited from a favorable inventory adjustment following our most recent physical inventory count. We are benefiting from more complete and accurate counts through the use of inventory scanners.

I'll now address the other expense categories for our international segment. Our site operating expense category came in at 5.1% of second quarter revenue, which was up 60 basis points over the same period a year ago.

We had expected about one half of this rate increase, due in part to the inclusion of the Vidal Sassoon academies, as well as the timing of salon advertising expense. The balance of the rate increase was due to overall same-store sales, which declined 4.7% in the second quarter.

Our international G&A expense rate met plan during the quarter, coming in at 16.1% of sales. That was an improvement of 300 basis points over the year-ago period.

This planned decrease was due to a quarter-over-quarter reduction in franchise advertising expense, and to a lesser extent to reduced bad debt expense. In addition, our G&A expense in the prior year quarter was higher than normal due to employee severance expense that we recorded.

Next, our international rent expense rate came in above plan at 19.6% of second quarter revenue, an increase of 120 basis points over the same period last year. We had budgeted for a slight rate increase in this fixed category, however most of the unexpected increase related to a retroactive rent increase assessment for one of our London Vidal Sassoon salons following a rent review.

Our depreciation and amortization expense for our international salons came in at 3.5% of revenues, which was in line with our expectations and was comparable to our prior year second quarter rate. In total, the net effect of the factors we just discussed caused our international salon segment operating income rate to improve 180 basis points to 8.9% of international salon revenue.

Our Hair Club business, both top and bottom line, continues to perform very well, with virtually every line item on the segment P&L coming in on or better than plan, but let me highlight just a couple of items. Revenue from our hair restoration centers increased 11% in our second quarter, coming in slightly above plan at just over $33 million and represented 5% of our consolidated revenue.

Much of this double-digit revenue increase relates to the acquisitions over the past 12 months of seven franchise Hair Club units and they are now operated as company-owned units. Hair Club's overall operating income in the quarter met plan, growing nicely to $7 million, up from $6.4 million in the same period last year, and Hair Club's EBITDA margin was nearly 29% in the quarter. Once again, we remain very pleased with the performance of this segment of our business.

Next, let me make a couple of brief reminder-type comments regarding beauty schools. As you know, we merged our Title IV-funded beauty school business with Empire Education Group on August 1st, which was our preceding first fiscal quarter.

As you also know, the merger means that the school business was deconsolidated from Regis' financial statements and we no longer report school performance under a separate business segment. Our proportionate share of the after-tax school performance is now included on our P&L under the line item called equity and affiliated companies.

This line item not only includes the after-tax results of schools but also our equity interest in other joint venture partnerships, including Intelligent Nutrients. Anecdotally, our proportionate share of Empire's after-tax school earnings came in ahead of plan at $634,000 for the quarter.

I'd now like to make a quick comment regarding our second quarter corporate G&A rate that appears on the corporate segment of our P&L. Our G&A costs for the quarter came in on plan at $33.6 million, which was down $800,000 from our preceding first quarter. Our second quarter results included $2.3 million of professional fee expense associated with merging our continental Europe business with Franck Provost.

In addition, our corporate G&A included $1.2 million related to consulting fees paid to Deloitte in connection with our expense control initiative project, which incidentally is going very well. Deloitte has completed their portion of the project so we no longer will incur significant consulting fee expense in future quarters.

With that -- that concludes my comments regarding the individual business segments, but let me just turn to a couple of housekeeping items. First, I'll speak to our interest expense and our debt levels. As we had expected, our second quarter interest expense came in on plan at $11.8 million and our total debt on December 31st stood at $767 million, which was up $58 million from our previous June 30th fiscal year-end. We expect to end the year with total debt in the neighborhood of $800 million.

During the second quarter we repurchased $50 million of stock, or 1.7 million shares at an average price of $29.37. Our investment grade debt to capitalization ratio stood at 45.2% at the end of December.

As you know, the cash flow characteristics of our company are very strong and highly predictable. Our second quarter EBITDA came in at $78.6 million, which was down slightly from the year-ago quarter due to our deconsolidation of schools.

Our effective income tax rate came in slightly above plan during the second quarter at exactly 37% compared to 29.6% in the same period a year ago. Remember that last year our second quarter rate was abnormally low due to the retroactive reinstatement of jobs credits. As we expected, the adoption of FIN 48 at the beginning of this fiscal year caused our second quarter rate of 37% to be higher than our estimated annual rate of around 35.5%. As we discussed with you last quarter, this is simply a timing issue as we expect to have a slightly lower tax rate of 34 to 35% in the second half of this fiscal year.

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 third fiscal quarter. As you know, the key assumption behind our earnings guidance continues to be same-store sales growth and our earnings guidance directly correlates to our comp expectation.

As we typically do halfway through the fiscal year, we are now tightening our comp and earnings guidance for the full fiscal year. Based on six-month actual results, and believe me, we are not changing our expectations for the second half of the year, but based on the first half of actual results, we now believe that total comps for the full 2008 fiscal year should be in the range of 25 basis points to 125 basis points, which would result in earnings range of $2.01 to $2.14 a share.

For the third fiscal quarter we expect earnings to be in the range of $0.48 to $0.54 a share based on an assumed same-store sales range of positive 50 basis points to 250 basis points.

Our sales and earnings guidance for the balance of the 2008 fiscal year includes the PureBeauty transaction. Although we certainly expect this transaction to provide future earnings accretion, results will likely be more breakeven in nature during the remaining five months of this current fiscal year due to integration costs as well as flushing through their higher cost inventories through the P&L.

So that's it. That completes my prepared remarks. Paul and I would be happy to answer any questions you may have. So, Val, if you can step in and provide some guidance, we'd appreciate that.

Thank you, Paul and Randy. (OPERATOR INSTRUCTIONS) Our first question comes from the line of Jeff Stein. Please state your company name followed by your question.

Good morning, Paul. Question for you on the PureBeauty transaction. It seems to me that you've got a business in Trade Secret that's doing about $250 million in revenues and probably not producing a great deal in operating profits. So it would seem that you've got a pretty significant leverage opportunity if management at PureBeauty can get Trade turned around.

And I'm wondering what kind of time line are you looking at in terms of beginning to integrate the two businesses, completing the integration and along the way, what kind of inventory markdowns might be necessary to align the inventories of both businesses together and similarly, systems?

We just closed it -- we just signed the purchase agreement last week so we have not had a lot of time to have Steve weigh in as he must weigh in with respect to all of these issues. I don't envision a significant amount of markdowns but, you know, we'll certainly communicate with you if for some reason my assumption is wrong. When I say you, I mean the entire investment community.

I don't think that's going to be an issue. Most of the lines that we'll be paring down are hair-related lines and most of our stores are in malls. We can certainly ship those items to other stores, other Regis stores in the same mall.

With respect to systems and the like, we're going to be having -- the next -- realistically, PureBeauty and BeautyFirst, headquartered in Wichita, will continue to use their own systems and the like for at least four to six months and during that period of time we'll evaluate exactly what the game plan is in terms of transition. Steve Hudson, as you know, will be Chairman and we worked out a financial arrangement where he ends up with a significant percentage of the incremental profit in that division, so there's a lot of skin in the game for Steve and obviously for us, and you're right, we started a very low base so the earnings opportunity are significant for both Steve and for us. I'm sorry I can't be more specific on the timetable. We just don't know.

Sure. I understand.

But you know what? We're impatient, so sooner is better than later and our plan should be set. Most of the integration should be done. I would hope that most of the systems work will be done certainly within the next three to six months.

Great.

There's a little bit of an issue with respect to their POS, but in terms of regular back office systems, that should be easy.

Okay. Paul, can you just real quickly kind of differentiate the PureBeauty and BeautyFirst model from Ulta and also from Sephora? What is your point of differentiation going to be?

Ulta's a big box. It's 10,000-square foot boxes. We're not comfortable with that at all. Between Trade and BeautyFirst and PureBeauty you're talking about 1500-square foot boxes so it's totally different as it relates to Ulta, and Ulta obviously has a different variety of assortments from -- I mean they're a big drug store in a way. We just don't have the space nor the inclination to carry all the lines that they -- all the categories that they carry.

With respect to Sephora, I mean, I think Sephora's the best managed company in our category, bar none. And they're 3500 feet, highly specialized, and we'll have more brands than Sephora per se. It's a whole different experience.

But there's no question, when you look at a PureBeauty operation, it's far more upscale than Trade, but not too far upscale so it's not affordable. But I think you're going to see a whole different -- both French-English boutique experience in PureBeauty, which will morph into Trade. It'll be very, very different. But the three categories, PureBeauty, Ulta and Sephora have very, very different cultures and very different customer experiences and all three work.

Thanks.

Thank you. Our next question comes from the line of Neely Tamminga. Please state your company name followed by your question.

Great. Good morning. It's Piper Jaffray. Thanks for taking my question.

Paul, could you talk a little bit more about -- again, obviously, it's top of mind this transaction that you announced last week. Could you talk a little bit more about some of the category opportunities?

I mean as I looked at it and as I know the PureBeauty and BeautyFirst brands, I think there's definitely a knowledge base of that customer that shops hair and some cosmetics and skin care, but I think that maybe not as much on the cosmetics side as well as fragrance, so would those categories then be included in 1100 square-foot box, or is that kind of -- you can't be all things to all people?

No, you know, Neely, it's an interesting question because PureBeauty was created, I'll be off, 10 years ago, let's call it 10 years ago, I'll be off a couple of years. And it really was copying the Trade Secret model. But they wanted it to be a little more upscale and have broader categories so over time, 23% of their business is skin, bath, body, cosmetics, contrasted to only 2% with Trade.

So I mean the solution is obviously to model what they've done because since we've talked about in past conference calls, the shampoo business has become very competitive, very fragmented, more and more people are in it including the Victoria's Secrets of the world. So we know what we have to do. We just have to expand our categories.

And the most important thing is that we have 750 fabulous locations. And what really is very attractive from a vendor perspective is that department stores are shrinking, and the Loreals and the Lauders of the world are finding reduced distribution in malls. So we're an ideal outlet for them. And once again, one size does not fit all and Boca Raton is very different from Burnsville and Minneapolis.

So maybe could you help us think out a little bit then -- you know, there's been a lot written about, you know, in these press releases about how PureBeauty has returned to some profitability and there's been some significant improvement under Steve's leadership. What was it specifically? Can you name -- was it just execution error that got PureBeauty and BeautyFirst to the point of needing to be turned around?

Oh, yes. Steve bought PureBeauty out of the estate. It was bankrupt. That was not the case with BeautyFirst. PureBeauty was very badly run, and I mean he turned around Hair Club also, but Hair Club was still making plenty of money. But he's very good at identifying opportunities and, Neely, I would -- I mean we need more time with Steve before I can be more specific, because I'd hate to say something that just isn't so.

Okay. Well, then maybe just one other, just a technical question. I think this is, by the way, up front just a really interesting transaction and so I'm glad to see that PureBeauty and BeautyFirst is going to an operator like Regis, so I think that this is a good decision on your part.

Just a real technical question. Do you have any sense of how many Beauty Club members you acquired when you made that transaction?

No, no, I don't.

Okay. Thank you.

Thank you.

Thank you. Our next question comes from the line of Justin Hott. Please state your company name followed by your question.

Hi. I'm with Bear Stearns. Hello?

Hi, good morning, Justin.

Hi, Paul. Quickly, the one real question I have is how do you rebrand hundreds of stores quickly with Trade Secret without losing customers?

Oh, we're not going to lose any customers because the bulk of what they want is still going to be in those stores. And let's not forget, we have 35, 40-yard line locations in the busiest malls in North America. These are beauty junkies. 26% of our style club membership have family incomes of in excess of $125,000. These people, a whole bunch of them come in on a weekly basis. No, they're not -- they always want the new stuff so we're going give them more new stuff than they've ever had. We think that that is a very low risk factor, Justin.

And Paul, can you just give a quick update on diversion, any improvements or changes from previous conference calls?

No, it remains about the same. Loreal has work to do. Mitchell's going great. You can just -- you can access the BIF Web site, beauty industry fund Web site, the Regis Web site and you can see the winners and losers. It's about the same. The losers are getting worse, the winners are getting better. Overall, diversion continues to be up a little bit.

Any changes in shelf space?

Yes, we've had some changes in shelf space. The lines that are diverting more have had some space taken away or have been moved in our stores.

Paul, just one last question. The PureBeauty acquisition, if you -- I would assume it would be, you know, the typical very inexpensive acquisition you've done before, but if this acquisition wasn't really that much cheaper and if you liked your shares in the 30s and were repurchasing, I would think when your shares fell from the 30s to the low 20s that it would be a lot more accretive to buy shares. Could you give us your feeling on that?

Yes, you know, we have -- we had a 75 to $100 million budget range for acquisitions and investments. We're going to be at least at 110, 120 and we just wanted some dry powder. We'll take the risk of the stock really running away from us, Justin, that would be a pleasant problem to have. And knowing full well that we're taking KeyBanc out of the Empire deal, and that's 20 some odd million dollars, we just wanted to keep some dry powder. Certainly could invest another $50 million, but it's not a need and we can always do it tomorrow, Justin. There's no real rush that compels us to do it.

Okay. Thank you.

We can do it tomorrow. Take care. A belated Happy New Year, Justin.

Thanks, Paul.

Thank you. Our next question comes from the line of R.J. Hottovy. Please state your company name followed by your question.

Good morning, everyone. I'm with Next Generation Research. Two questions for you, Paul. First one having to do with the service comps. Some of the commentary in the press release made it sound like you actually started out the year quite strong and just wanted to see if there's anything you attribute that, you know, that service comp number that we saw just for the first 20 days there?

Well, we -- first of all, you really don't know in this business with 160 million transactions. I'd hate to sound ignorant, but the fact of the matter is October was terrific, and the first half of November was fine, and then the last six weeks of the quarter were bad. And it may have been mall traffic and the like, and maybe just people had foregone -- had waited too long to get their hair cut so they did it in January.

You really don't know until after the fact, but at the same time we haven't implemented price increases in early January in about 2000 of our stores and that probably had something to do with it. But it's impossible, I mean we've had the McKinseys of the world over the years, we spent millions and millions of dollars determining why January this year would be good and absent weather, and January last year wasn't and no one has come up with a truly definitive answer.

The important thing is over time, over a six-month or a year period of time, what are they and what are the fashion changes? The last, I mean -- the issue here, we believe, continues to be fashion primarily. We think the economy is secondary as it relates to comps.

Okay. Well, kind of a secondary question to that is just what's the next step if the price increases that you're going to be enacting don't stick? Is there any other plan of action just with the discretionary headwinds that we see out there, is there any other ideas if they don't stick?

Yes, if they don't stick, we'll have couponing. We'll have specials. We've done this before and I promise you, they won't stick in Eau Claire, Wisconsin. I mean, in some place they won't stick but we are highly confident that they're going to stick in at least 90% of the instances. I don't think that's an issue because our competitors have minimum wage increases and, frankly, the women are spending less money, even if there's a 10 or 15% increase, than they spent five years ago, because they're going less often. We don't think it's an issue.

Okay. Good luck with the acquisition here.

Thank you. And by the way, from what we've seen of our competitors are raising prices significantly. In fact, some of them more aggressively than we are. Next question?

Thank you. (OPERATOR INSTRUCTIONS) Our next question comes from the line of Daniel Hofkin. Please state your company name followed by your question.

Good morning. William Blair. Just, I guess, to follow-up on R.J.'s question on the -- with regard to how strong the quarter had started out. It does sound like the beginning of this quarter is maybe even stronger than how the December quarter started, and I'm wondering if that is, in fact, true? And second, I'm talking, obviously, on the service side. Second, the strategy behind price increases would it make sense to -- you know, what, I guess, thus far through the month of January have you seen in terms of any impact on traffic where you have raised prices? Are you seeing any slippage or is it holding firm through the first months?

It's too early but to answer your question that we've had no negative impact thus far. Yes, we started out stronger in January than even October, but with 20 days it's not enough time.

Okay. What was the -- what type of comparison was it last January just to understand a little bit the year-to-year comparison?

I don't have the first 20 days of January comps last year as it related to the year before. I just don't have that data.

But we did -- overall we ended up with negative 2.3% comps in the month of January worldwide total service and retail.

And I think we had more weather last year in January.

Yes, early.

Yes, we had -- I think we had a lot of ice in Texas and Ohio but there's no question the business is strengthening in January, but it's too early.

Okay. Thank you.

You're welcome.

Thank you. And next question comes from Peter Eisele. Please state your company name followed by your question.

It's Peter Eisele with Snyder Capital. I'm just curious, have you ever before raised prices, you know, weakening, or recessionary-type environment and if so, how well did they stick?

We price by market, Peter, so it's not an overall increase, everybody's going to charge a buck more, that isn't the way we do it. But historically, 85 to 90% of the price increases have stuck through the years. Whether it's been in a recession or a period with ebullient activity. You know, we talk about the failures, but the failures are less than 10 or 15% so it's not a significant number.

And is this across all the (multiple speakers)?

Yes, yes.

Okay. Great. Okay. Thanks very much.

You're welcome.

Thank you. If there are no further questions, I will now turn the conference back to Paul.

Well, these are hectic times, everyone, but thank you for joining us. We appreciate it.

Thank you. Ladies and gentlemen, if you wish to access a replay for this call, you may do so by dialing 1-800-405-2236 with an ID number of 11104730 followed by the pound. This concludes our conference for today. Thank you all for participating. Have a nice day. All parties may now disconnect.