Regis Corp (RGS) 2009 Q3 法說會逐字稿

Good morning. I will be your conference facilitator today. At this time, I would like to welcome everyone to the Regis Corporation third quarter 2009 conference call. (Operator Instructions). I would like to remind you that to the extent the company's statements and comments 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. Reconciliations to the non-GAAP financial measures mentioned on the following presentation can be found on the website at www.regiscorp.com. With us today are Paul Finkelstein, Chairman, President and Chief Executive Officer and Randy Pierce, Senior Executor, Vice President and Chief Financial Administrative Officer. After management has completed it's review of the quarter, we will open the call for questions. (Operator Instructions). I will now turn the call over to Paul Finkelstein for his comments. Paul, you may begin.

Thank you, and good morning, everyone, and thanks for joining us. The current retail environment has been an incredibly challenging one for virtually all retailers. Today, we reported third quarter earnings per share from continuing operations of $0.49 contrasted to $0.44 last year. The $0.49 includes $0.01 per share for lease termination costs incurred during the quarter. And as you can recall, last year included $0.07 of one time incremental tax expense relating to repatriation of international cash. The margins during the quarter are difficult to measure due to the shift in Easter. Now, same store sales for the quarter are negative 4.5%. The Easter shift probably hurt the quarter by about 1%. Our sales results were essentially on plan. We did, however, exceed our profit plan primarily due to the continued focus on expense control as well as an unbudgeted tax benefit that Randy Pierce will discuss later in the call.

We are assuming the consumer is becoming more frugal. Although, this may be a good thing for our economy in the long term, it does create short term challenges. Our core business, our Sweet Spa, which is value, Walmart and Supercuts in particular, performed much better than our much higher priced concepts. The Regis service comps were negative 10.8%, value concepts service comps were essentially flat to down 1%. Consolidated product comps were negative 6.5%. Product comps did perform better without Trade Secret which illustrates the basic difference between a traditional retail concepts such as trade and beauty salons where our stylists touch people every day and can recommend products. Our strategy will continue to be the same strategy that we articulated on our conference in January. Thus, my remarks today will be brief.

Mainly, we'll continue to reduce our capital expenditure and acquisition spend. Continue to cut expenses where all possible and pay down debt.

Long term, there is significant growth opportunities for us. Today, we have over 12,800 locations. When the economy turns and the customer visitation patterns stabilize, our acquisition on capital spend opportunities will still be available. Unlike many other retailers, there is no limit to our uni-growth. Some day we should own or franchise 30,000 to 40,000 locations. In addition, our research shows that there are more salons for sale than ever before.

Most certainly, gained market share from independent salon closures.

Frankly, not much has changed since the January call. Our January business was okay, but not great. February was actually quite good performing well over planned. And March of course, was poor in large part due to a late Easter. It's also interesting to note, that Europe now is mirroring the United States. During a January conference call, I referred to a continental business being quite strong. However, January, February,and March results on the continent of Europe pretty much mirrors ours. The UK environment is still very difficult. We have plans to close a significant number of under performing stores in the UK. We will go into this further during the next conference call.

Our Trade Secret sale closed on February 16th. We continue to perform certain transitional functions for the new owner of Trade. We are reimburse with these functions and they are gradually being phased out. The back office should be phased out sometimes during the month of September. We continue to work on closing stores getting rent relief and to date, we have closed or about to close 47 stores and getting rent relief in 45 stores.

Hair Club continues to perform well, although we are forecasting the drop in EBITDA of several million dollars for fiscal 2,010, solely due to the economy. We are getting more new entrants into the Hair Club program than ever before, but we do have a significant number of people dropping out due to the $250 to $300 monthly charge. We feel that this is totally related to the economy. By the way, increased new entrance or a function of increased advertising due to significantly low advertising rates.

During the quarter, we completed the Cool Cuts 4 Kids acquisition. This is our first entry into a children's haircutting concept.

Cool cuts has 67 locations generating approximately $15 million in revenue and 18% in store level cash flow. Cool Cuts is certainly a good growth vehicle for us, as this is an uncrowded field with significant company owned and franchise growth opportunities. Our investment and empire education group continues to perform well and EBITDA should be in the $15 million to $16 million range of fiscal 2009, contrasted to $9 million last year.

The PROVO business of the European continent is somewhat sheltered from the economic environment due to over 80% of its stores being franchised. Provo should have EBITDA in access of EUR30 million, this calendar year up EUR$28 million in 2008.

Traditionally, we have given, next year's guidance during our 3rd quarter conference call. But as we stated in January, it is impossible to predict how long and how deep the recession will be. Thus, we have made a decision not to provide precise quarterly sales and earnings guidance or annual guidance unless until conditions normalize. We will then evaluate the guidance topic. We would however, like to provide some insight into our internal fiscal 2010 expectations. Based on the current economic environment, comps could be in the range of minus 3% to plus 1%. And EDITBA would therefore be in the range of $200 million to $240 million. However, CapEx and acquisition spend should be between $90 million and $100 million including maintenance CapEx of approximately $55 million to $60 million. We plan to pay down approximately $30 million to $50 million of debt.

Biggest challenge that Regis has in this business environment is to maintain the morale of our people. Because in the service business, the people are your product. Even though the current economic environment is the worse I have seen since I have been in business, I'm still quite bullish about our future prospects. Our business model remains very profitable. Ours is the quintessential replenishment business with our average consumer spending less than $200 per year on salon services. This is the first year on the 87 year history, that we will have negative same store sales. And yet our core business, namely Value concepts, such as Walmart and Supercuts will essentially be showing flat comps. We continue to focus on increasing average ticket, and we have, or will shortly increased prices at 5,000 company owned salons, which will have a 2.5% to 3% positive impact on average ticket over the next 12 months. Customer visitation patterns will eventually normalize. And once the economy rebounds, Regis' strategy will be to resume its salon growth worldwide. Although we are ten times larger than our nearest competitor, we only have a 4% North American share and 2% worldwide share. So our future is great indeed. Regis is extremely liquid (inaudible) in addition which we have discussed in prior quarters is less of a problem today than it was before the disposition of trade. As we are able to utilize discontinued operations accounting And gain more in terms of covenants. Toda we are in full compliance with (inaudible) covenants and the few that we have cushioned with respect to the covenants. The amount and duration of this cushion is dependent on our same-store sales performance. As we continue to pay down debt, the potential cost of what's left with respect to restructuring, a covenant becomes less of an issue.

We're obviously running the company very conservatively today, which we think is prudent. And this no where reflects the bullishness that we feel of our company long term. Randy Pearce will now continue with our presentation.

Thanks Paul and good morning everyone. Let me begin with two items that we discussed with you last quarter. The first relates to the (inaudible) of our Trade Secret retail product division, which was finalized midway through the 3rd quarter, on February 16th, of 2009. As we discussed with you last quarter, this transaction was accounted for using discontinued operations, accounting treatment. What this effectively means is that the current and historical performance of Trade Secret must be removed fro the operating results of of the continuing business units , aggregated and separately reported below the line on an after tax basis. That's true for our overall consolidated results as well as for our North American salon segment P&L.. The net Trade Secret results appear on the P&L in the line item called Loss on Discontinued Operations for both the current and prior year periods. Our net income doesn't change but the individual revenue and expense line items above it will. Results from our discontinued Trade Secret operations contributed a nonoperational loss of $0.28 a share in the 3rd quarter. We had expected this as the major portion of this loss related to our final write-off of Trade Secret inventories that accounting convention precluded us from recording last quarter. For those of you working with financial models, please go to our corporate website and you will find reconciliation that removes Trade Secret results from our on-going operations. This same reconciliation also bridges our over all reported earnings for the 3rd quarter to our operational earnings. We are trying to be as transparent and helpful as possible. Also, feel free to contact either Mark Bosland or Alex Forliti, here at Regis, should you have any additional questions regarding our models. The second item I want to address relates to earnings guidance. As Paul said last quarter, we made the decision to discontinue providing sales and earnings guidance, at least until economic conditions normalize. However, we did furnish a reference point by stating that if same-store sales were to be at negative 5% for the entire third quarter, we would expect our operational earnings to be just over $0.40 a share. Our actual comps declined 4.5% in the third quarter. And our reported earnings from continuing operations came in at $0.49 a share. That included $800,000 or about $0.01 a share for lease termination cost occurred in the quarter. So operationally, we came in at $0.50 a share, which was about $0.07 or so better than our comp sales would have indicated. This upside was largely due to our continued focus on expense control, as well as an unbudgeted favorable adjustment to our income tax rate. I'll talk a bit more about both of these items later. So, on an operational basis, our third quarter earnings of $0.50 a share compared to $0.51 that is we reported in the comparable period last year. Recall that last year in the third quarter, we incurred a one time income tax charge of $0.07 a share associated with the repatriation of the international cash following our joint venture transaction with Franck Provost. As Paul mentioned the shift in the Easter holiday season also effects the quarter over quarter sales and earnings comparisons as well.

Let me know transition my comments by giving some detail behind our third operating results by business segment. A breakout of our segment performance is found in today's press release. And as usual, I will begin with our largest segment which is our North American salons. Let me once again remind you, that the current and prior year results of Trade Secrets have been removed from individual revenue and expense line items on the North American segment P&L, as required by the discontinued operations accounting treatment. I'd also like to point out that the financial statements in our press release today include two new line items related to the sale of retail product by Regis to Premiere Salons, who now owns Trade Secrets.

As we discussed last quarter, Regis has agreed to provide certain transitional support services to Premiere including the supply of certain retail products at Regis' cost. In order to separate these results from our on going operations, we have added a revenue line called Product Sold to Premiere and a related expense line item labeled Cost of Product Sold to Premiere. These two items exactly off set each other and have no impact on the profitability of Regis. Therefore, I will exclude these two line items for the remainder of my discussion. On a continuing basis, total North American salon revenue which represented 88% of our consolidated third quarter revenue decreased 1% during the quarter to $521 million. This revenue decline was the result of a total same store sales of 430 basis points partially off set by revenue from company owned salons that were built or acquired over the past year. Service revenue in our North American salons declined 50 basis points during the quarter to $412 million. This reduction was due to a decline in service comps during the quarter of 3.7% partially off set by revenue from new and acquired salons over the last twelve months. We continue to feel very good with our growth in the average service ticket, which increased 3.5% during the 3rd quarter, largely due to recent price increase initiatives. However, more than off setting the increase in average ticket was 7.2% decline in the same-store. due to the economy and the late shift in the Easter holiday season. Product revenue from the continuing operations fell 4.5% in the quarter to $100 million due to a decline in product same-store sales of 7%. Royalties and fees from our North American franchise salon fell 7% in the third quarter to $9 million. New franchise units that were added to the system over the past twelve months, were more than off set by franchise buy backs, franchise uniclosures and relocations. In addition, our franchise salons are experiencing the same softness and same-store sales tends as our company owned concepts are experiencing.

Let's now talk gross margin. Our combined gross margin rate for the North American salons came in on plan at 43.7%. And that was down 20 basis points from what we reported last year in our third quarter. As I'll discuss later, most of this planned margin decline related to service. Despite an extremely challenging sales environment, we were very pleased to report that our third quarter service margin rate came in on plan at 42.2% down 20 basis points from the same period last year. We had planned for a service margin rate to be down a bit this quarter, due to certain manufacturers passing along slightly higher cost increases in our service supplies. Our salon labor cost however came in on plan, and once again, we were very pleased with our ability to control these costs during the extremely difficult sales period. Our retail product margin rate for the third quarter came in at 49.8%, identical to the rate we reported in the same period last year. We'd actually planned for a slight improvement in rate. As last year in our third quarter, we were selling through some higher cost inventories we had obtained in connection with a few acquisitions. Off setting this planned improvement in product margin rate, was a change in our current year sales mix as a larger percentage of the retail sales continues to come from lower margin promotional items. Once again, we are not promoting or discounting at a higher rate but consumers are continuing to be more value focused and are buying our promotions at an increased rate.

Let me now address our site operating expense which includes costs directly incurred by our salon, such as advertising, insurance, utilities and janitorial costs. Our third quarter site operating expense came in at 8.9% of sales, which was 30 basis points better than planned due to the timing of advertising expenditures as well as reduced current year worker's compensation cost. Although this rate of 8.9% was better than planned, site operating expense was 80 basis points higher than the rate we reported last year in the third quarter. This increase was solely due to a P&L reclassification that we initiated and discussed this with you last quarter. Certain expense items, which had previously been categorized within our rent expense, have now been appropriately reclassified in the site operating expense. These items primarily related to utilities and rubbish removal costs for which Regis pays its landlords as part of our lease agreements. Our North American salon G&A expense came in at 5.4% of revenue which was 30 basis points better than the same period last year and 50 basis points better than our initial plan. Although some of this improvement both to the prior year as well as the plan, related to a reduced level of marketing expenditures, most of the improvement was due a reduction in field supervisor travel cost. We are seeing a significant reduction in our travel cost due to our cost saving initiatives and as well we're seeing fuel costs coming in lower than what we had initially budgeted. Rent expense which is primarily a fixed cost came in at 14.1% of total third quarter sales which was the same rate we recorded last year in the comparable quarter. The reclassification of certain expenses from rent into site operating expense that we just discussed favorably reduced our third quarter rent by 80 basis points. However, off setting that rate improvement was negative leverage in this fixed cost category caused from reduced sales volume. Depreciation and amortization came in on plan at 3.6% of sales which was 20 basis points higher than the rate we reported last year. The increase in rate is again caused by negative leverage from reduced same-store sales. The net affect of all the items I just discussed caused our operating income from continuing North American salons to come in at 12.7% at third quarter revenue compared to 13.6%. and the comparable period last year.

Next, I will review our third quarter performance of our International salon segment. Analyzing the line item comparison for the business is difficult. As we discussed with you during the last few quarters, analyzing the quarter over quarter line item comparisons for this business continues to be very difficult. This segment includes our company owed salons located primarily in the United Kingdom. Historically, our international salons had also included results from our franchise business on the continent of Europe. However following our joint venture transaction with Franck Provost, European business was deconsolidated effective January 31st of 2008. As a result, our third quarter fiscal 2009 international segment does not include any continental Europe activity, whereas one month of activity was fully consolidated in the comparable period a year ago. So for this reason, the quarter over quarter comparisons remain tough. However I'll provide a bit more color behind the quarterly change at revenue, and also give you some high level comments on any expense categories that may have surprised us during the quarter. Once again, those of you who build segments models you may want to speak directly with Mark Fosland or Alex Forliti here at Regis and they can help you. Total revenue from international salons represented 6% of our consolidated third quarter revenue and came in at $36 million, a reduction of $20 million from the same period a year ago. About one fourth of this decline or $5 million was due to the deconsolidation of our continental Europe franchise salon business. The balance of the quarter over quarter sales decline was largely due to the two factors. The first related to foreign currency as nearly $12 million of the overall decrease was due to a quarter over quarter decline in the British pound exchange rate against the strengthening U.S. dollar. The second factor related to declining sales in our core business with our UK salons experiencing an 8.1% decrease in overall third quarter comps. From a profit perspective, our international segment met plan by generating third quarter operating income of $880,000, and improvement of more than $360,000 over the same period a year ago. However, all of this planned improvement was due to a vacation accrual adjustment we recorded in the third quarter this year.

Let's now speak to Hair Club. Our Hair Club business continues to perform well. However, as Paul mentioned, the economy is starting to impact this business. Nevertheless, our operating results for the third quarter essentially met plan. And let me highlight a couple of items. Third quarter from the hair restoration centers came in at $35 million. Which was slightly up from last year and represented 6% of our consolidated third quarter sales. Hair Club's revenue benefited from the acquisition of the two franchise centers and the construction of five new corporate locations over the past year. This revenue growth was essentially off set by negative comps of 2.9% during the quarter. The third quarter operating margin rate came in at 13.8%. Although this rate was down from the rate of 20.3%, we reported last year in the third quarter, it nevertheless met plan. As expected, we experienced lower operating margins at the two recently acquired franchise centers as well as the five recently built locations. Additionally, we had planned for a year over year increase in advertising spent. The negative comps have also put pressure on both our service and product margins. Hair Club's third quarter EBITDA margin came in at over 22%. We remain very pleased with the performance of this segment of our business.

I am going to now switch gears and make a quick comment regarding our corporate G&A expense. The major component within our corporate G&A continues to be salaries and related benefits for our 800 or so employees working here in Minneapolis and the 500 associates that work at our two distribution centers. Centralized back office support functions provide leverage to our operating model. As I stated last year Over the past five years, salon counts have increased at a rate of 9%. As I stated last quarter, over the past five years, our company owned salon counts have increased at a compounded annual rate of 9% and our sales have grown double digits. Yet our home office head count has grown at a much slower rate of 5%. Despite this leverage,we continue to be very aggressive with expense control during the challenging times of slow sales growth. I'm very pleased to report that our corporate G&A expense came down nearly $3 million or 9% from the same period last year. As we discussed with you last quarter, the primary reason for this expense reduction was due to our recent cost saving initiatives. We continue to focus very aggressively on expense control and controlling corporate overhead. Once again, we are very pleased with the our results of our efforts. Let me make one other point regarding our corporate G&A. This expense category in our third quarter included ut $1million of home office and distribution center cost relating to providing transitional back office support to our former Trade Secret salons. Premiere, who now owns Trade Secrets is fully reimbursing Regis for all of our costs that we are incurring on their behalf. However accounting convention requires that this expense reimbursement be included on our P&L as other income rather than netted against G&A. So the G&A has come down even more than the $3 million.

Let me make a few comments regarding our effective income tax rate. Our third quarter reported rate of3.7% benefited by approximately 500 basis points which was largely due to the statutory exploration of certain open tax year items. Absent this benefit, our underlying effective tax rate came in on plan during the quarter at 39%. Looking forward, we anticipate the underlying tax rate for the entire 2009 fiscal year should continue to be in the range of 39% to 40%. I would like to now briefly update you on our debt covenant ratios, and I will be very brief. Our fixed coverage ratio at March 31st. And that's the ratio we've been focusing on. Improved to 1.61 times, well above the minimum threshold of 1.50 times. We remain in compliance with all of our other debt covenants including our debt ratio and our minimum network test. During the quarter, we continued to make significant progress in achieving the expense reduction in cash flow enhancement initiatives we announced in the second quarter. I'd like to update you on our progress . Our total debt at the end of March, stood at $702 million. That's down $106 million from our debt balance just six months ago at the end of our first quarter. We remain committed to bring our total debt level down to less than $700 million by June 30th, the end of our current fiscal year. We've already exceeded our plan to reduce inventory levels. When you exclude the impact of the Trade Secret divestiture, our inventory levels are down $33 million over the past two quarters, well above the $20 million goal. Although we do not anticipate inventory levels to change much by the end of June, there could very well be a slight increase from the March level due to additional inventory we plan to bring in to support the back to school season.

As you recall this past October, we implemented a variety of expense reduction initiatives designed to save $20 million this fiscal year. During the third quarter, we achieved over $8 million dollars of expense savings to go along with the $5 million we realized in the second quarter. We now project total fiscal savings to exceed $22 million. So, again we are going to be north of our goal. Year-to-date our capital expenditures, our loans and acquisition spend has totaled $120 million. We remain on track to spend about $135 million for the full fiscal year, which was a significant reduction from our original plan of $170 million. Once again, we are pleased with the success we have achieved so far, and are highly confident that we will meet or exceed our cost saving targets. Now that completes my prepared remarks. So Paul and I would like to answer any questions you have. Chardonnay, can you please step in and provide any instructions? We would

Thank you, Paul and Randy. The first question is from Bill Armstrong with C.L. King and Associates. Please go ahead.

Good morning Paul and Randy. Nice job in a bad economy. Your international service gross margin was up over 500 basis points year-over-year. I was wondering if you can discuss that for us a little bit. How that happened?

Well, a lot of that Bill is going to relate to the deconsolidation of our international operations. If you look at service margin. I did mention to you as well that we did have an expected vacation accrual adjustment. I think I mentioned that. Anyway, that amounted to about 350 basis points during the quarter. So, we are not expecting that is going to continue. That is a one time adjustment. So, again we also had, as I mentioned, the deconsolidation impact. And remain very pleased, though with the underline control of our service payrolls during the tough economy.

So, that vacation accrual was not in the G&A. That was up in the cost of service line.

Yes. In he cost of service, it is going to be largely, in all the segments, it's the cost of the payrolls that we pay our stylists and the related benefits, which would include vacations. So that is included in our service gross margins, yes.

Ok, would that be ongoing then or is that just a one shot?

No, Yes, I would say the 350 basis points and call it another 50 basis points related deconsolidation, so 400 in total is not ongoing. It is one time.

Okay. Looking at your comments on fiscal 2010 with a $200 million to $240 million in EBITDA, if you get down to the low end of that at $200 million, will you still be in compliance with your fixed charge coverage covenant?

It all depends on comps. So your picking the low end of the comps. As we sit here today, we anticipate we probably have cushion, I don't know, if it's for nine months or twelve months or longer. Again, it is all going to be built depending on the comps. We continue to work on other initiatives to try to provide us additional cushion as time goes on. We are hoping that business will start getting better in the future. We got time.

Right. Taking your EBITDA range and your CapEx of budget, it looks like you are going to generate free cash flow next year. Would it be possible or desirable, to reduce that by more than $30 million to $50 million that you are talking about?

That $30 million is a pretty good number, Bill.

Okay. Finally, are there any other costs associated with the Trade Secret transition other than those you mentioned in your prepared remarks.

No, no other costs.

Thank you.

You're welcome.

Your next question is from Erika Maschmeyer from Robert W. Baird.

Great job in a tough environment. Could you comments at all about your comps trend so far in the quarter in April?

It's the same as it has been. Obviously there is an Easter bump. But we continue to show 6 to 7 points in terms of negative custom account.

Okay.

But there about the same. Our value concepts are positively comping slightly. And the Regis division is still down up or single digit.

If you are going to allocate blame between the economy and fashion trends, I know that fashion trends, will hurt you first, what would the proportion of that be at this point, do you think?

Oh I would say 80% to 90% would be the economy. But I think we would have to put it into perspective. The people are coming less but that does anniversary. And that's why, we are pretty darn confident that certainly by the end of fiscal 2010, there should be significant moderation with respect to customer accounts.

Erika, just let me echo what Paul has said. We said in the past, our service business which represents 80% of our business. We saw probably up through September of last calendar year, we had the highest margin comps in the past eight years.

We were feeling very good about anniversaring this fashion trend. We have hit a wall as most companies has hit a wall, beginning in October, which leads us to believe this is really the economy now that is impacting us. And once that starts to improve we are well positioned to continue growing.

In terms of your fiscal 2010 guidance, can you talk a little about your thinking behind the comps guidance? And does that include any assumptions for additional price increases in 2010 besides the $5,000 that what you have in fiscal 2009?

Yes, our average value concept ticket is about $15. So we are highly confident, that we-- And our average service ticket company wide is $20. So we certainly think that we can raise prices in 5,000 of our stores for the next year or two. And don't see that is as a problem. The elasticity of demand is quite favorable for us.

Ok, so you haven't seen any negative impact on traffic from that to date.

No.

Great. And then can you give any indication on the comps that you need to leverage your fixed costs in 2010?

Positive 2%

OK, still the same. Are you trying to get that down with your cost reductions?

Well clearly these cost reductions are having a favorable trend towards reducing downward but I still think this point in time, let's just assume it's 2%. It could be slightly less than that.

Ok, thanks very much.

Your welcome. Thank you. Thank you. Your next question is from Jill Caruthers with Johnson Rice and Company. Please go ahead.

Good morning. See if you can talk a little about the debt covenants and your comfort level in fiscal '10 if you hit the $200 million EBITDA level. And what other levels that you can pull outside where the comps come in?

Cost reduction continues to be the one area. Look, we have not cut to the bare bones yet. I think we have done some things prudently without really impacting the underlying business. And I think we are going to be reluctant to cut into the bone. But let me just say this, the other initiatives that we are looking at. I just think that we continue to try to buy ourselves time. And so, you know what? The economy will improve. We all know that. The only question that nobody really know the answer to is how long is it going to take. So as we continue to buy we continued to buy ourselves time, good things could happen. In the interim we continue to look at other options. We continue to talk right now with all of our lending institutions. We have big believers-- and have strong relationships and big believers on continuing to have active dialogues with all of our lending institutions telling them what we are doing, what our thought processes are. We're looking at a lot of option to be proactive perhaps on covenant relief. Not sure we need to do that or are going to do that. But we are just continuing to look at a lot of options if we felt business wasn't going to improve in the near term.

And to add some addition color. Our relationships with these lending institutions are really quite good and they want to work with us. So I think Randy has summarized it pretty accurately.

I appreciate it. This is the last question. I know the product size of the business is more discretionary. Maybe you could talk about some drivers you might have in place to help drive, product sells, possibly some initiatives to help increase that combo (inaudible) .

Well, we continue to significantly increase the private label sales. And as I pointed out in my presentation, the product comps relating to our traditional salon business weren't nearly as negatively impacted as trade. Because we have a huge advantage over Eckards and the Walmarts and the Walgreens of the world. And we are able to recommend product to our service clients now. And while it's discretionary, most people shampoo daily. So whether it's our service business or our product business, these are replenishment businesses. They are good businesses to be in.

Thank you.

Your next question is from Mike Hamilton are RBC Capital Markets.

Good morning everyone. I was wondering-- you give some good color on the lease renegotiations here. How about on your existing rental rollovers. What are you seeing?

We are definitely working well with our landlord partners to get reductions in some instance. But the real problem we have is with taxes and CAMS. And so net, net, net what ever advantages we get with respect to renewals at lower rates and store closures, we still have not the basic rent increase. But we do have some increases with respect to CAM and taxes. So, net, net, net will be the same. And won't move very much and be the same.

Can you comment on trends you are seeing on stylist comp at this stage.

It is easier to get stylist today that it has been in ten years. So, hiring rates are not an issue. We are highly confident, that our service margin will continue to be strong for quite a long period of time. And the mix should help us because our value concepts has lower payrolls than our higher end concepts. And as they continue to garner the larger share of our business, our service margin should continue to be strong.

Do you see an environment the next couple of years where just the natural churn brings you overall payroll reductions?

I think our service margins will be about what they are today, maybe slightly less in the years ahead. Not materially less. I mean not materially more. I am sorry. We will get it with mix. We won't necessarily get it because each concept will be paying a lower amount.

OK and thanks for the insights.

Thank you, our next question is from Daniel Hoffman with William Blair. Please go ahead.

Good morning. Just a little bit of color with regard to the current quarter understanding the Easter shift benefits, just thinking in terms of the decision to provide full year guidance for fiscal year 2010, can you provide a little of a base for where you may be looking at that in terms of how you see fiscal '09 wrapping up maybe a range around that based on a comp sales estimate for the fourth quarter. That would be the first question.

Look we really want to shy away from it because it's difficult to predict. We hate to use the word unprecedented but we are in an unprecedented times. And we are seeing volatility in our comps. We are seeing, as Paul mentioned, April results but we are receiving the benefit from Easter as we expected. It is always tough to identify exactly how that benefit really is. We still believe that the underlying business trends we have seen in the recent quarter are continuing in the month of April. And we always realized the changes in our industry are glacial. We're not going to see improvement or deterioration. At least we haven't. We don't know what the future will hold. I think what-- Let me just generally say, comps will likely be negative in the fourth quarter as they have been in recent quarter. Off setting we realize that that will have a negative impact on earnings. We've talked about for every 1 percentage point change below 2%, it equates to about $0.13 a share per year of earnings. But off setting that, I won't say to an equal degree, but close to it, will be some cost saving initiatives that we will continue to enjoy. So all is not lost here.

OK, and I guess with regard to next year, how much, you are assuming that comp benefit from the price increase that are already under the way or will soon be underway, what are you assuming in terms of expense savings in fiscal 2010, beyond of what you would have realized by the end of this fiscal year?

Marginal at this point. and again in the assumptions, marginal. There will be some more, again, I spoke to the fact that we expect to be $22 million this year. I don't know if it will be somewhere under $10 million, maybe $5 million to $10 million of potential incremental savings next year at this point and time.

And I guess my last question would be from a marketing standpoint, I understand that was one area of some expense favorability relative to plan this quarter. Anything that you have identified where you can drive home even further the value message at some of your value oriented concepts or just increase customer loyalty at point of purchase? I'm thinking particularly on the service side.

The strategy really here is good. Obviously consumption is down industry wide. So the strategy is to make sure and we have the best brands. Best brand recognition. You take Supercuts. There is no other brand in the world that has Supercuts brand recognition. We have the locations. So we will continue to grow the increased share. And that's the strategy. This is not a marketing driven business. This is an operation on location. A real estate driven business. The only business we have that is significantly marketing driven is Hair Club. And we continue to spend substantial amount--substantial percentage of our revenues on marketing on Hair Club. And the brand recognition is a good strategy with respect to the value of business. Anything in terms of point of sale, at point of purchase, when the customer is bringing up at the ends to drive-- We continue to have huge incentives for both stylists and customers to make one customer into two customers.

Okay.

We have all the early week specials and promotions. That is constant with us. And we talked about loyalty programs and in the Trade Secret rather than service. One of the things we are also doing, we talked in the past about loyalty programs that we've experimented with, was largely in the Trade Secret division which is product service rather than service. But we are looking now at trying to develop more customer data base profile that will enable us in the future to market directly to customers on the service side on the business, but that is something that we are not counting on to be implemented or be effective in the upcoming 2010 fiscal year. But it is a project that we are working on.

All right. Guys, thanks.

You're welcome.

Thank you. Our next question is from Mimi Noel with Sidoti and Company. Please go ahead.

Thank you and good morning. The first question is with regard to the $30 million and $40 million implied allocated for acquisitions, given that Regis is the logical exit strategy for most salon operators. What does the company have to lose by which just dedicating all that cash surplus to prepaying debt and shelving the acquisition strategy for the year?

Well, first of all. It is not $30 million or $40 million. It's closer to $20 million.

Okay.

And most of that would be defensive. We wouldn't be going after anybody. But if a franchisee for instance gets sick And there is a 30 store group and we have, number one, a huge amount of (inaudible) to protect, we have enough allocated to be able to protect our share, to protect our current income stream. It's that kind of acquisition.

Okay.

We are not going out looking for another Cool Cuts.

Got you..

Not to deal. And likewise our CapEx spend is pretty similar. If a strip center is basically going under, and we have a salon generating $100,000 in profitability, we'll move that salon across the street. So most of our CapEx spend is defensive. And in order to maintain share and maintain existing profitability.

Ok, that makes sense. I also wanted to ask about the recent management change at COO. Can you elaborate or provide a little insight what transpired there?

Look, we know we have to fill the post and we will fill the post within the next year or so. We have very, very capable chief operating officers for every one of our divisions. It's business as usual.

Any particular reason for the change?

It just didn't work out.

Okay. And then can you elaborate on the type of growth you are seeing in private label? Are you talking about low single digit or does it push double-digits?

It's about 10%.

Great, OK. And the last question I had was for Randy. And I don't know if you can even hazard an estimate at this point, but

I cannot. Let me try. Let me try. I am sorry, MImi. Go ahead.

I hate to play devil's advocate and force an issue, but in the event you need covenant relief, what is the magnitude of that cost? Or there too many variables, that's fair if that's what the responsibility is.

It's probably, again, all indications are, it could be 300 basis points, give or take.

Okay. Perfect. Thank you very much. That's everything I have.

Thanks.

Our next question is from Bill Armstrong with CL King and Associates. Go ahead.

You mentioned reduced field supervisors. And how you are sure that field operations continue to be properly supervised and controled

Well, we have reduced our supervisor expense primarily due to the fact that a significant part of a supervisor's job was to open new stores. In other words, if a supervisor had eight stores and had to open ten, had to open two, I'm sorry, that's a full time job. So in total, that supervisor would have ten stores. But if that supervisor now had ten stores and had no new ones to open, we could increase (inaudible) control to eleven or twelve, and that's basically what we have done. So it's a question, really relates to a reduction in the new store construction, and that's really caused the reduction in supervisor count.

So, it is not -- It's not reducing the number of visits to the supervisor's stores that are under his responsibility?

No

Okay

These supervisors, these salons are largely in cluster today. There is very little in air fare in terms supervisory visits. That was not the case ten years ago. Our supervisors can drive to virtually every one of their stores.

Right. Okay. Thanks

You're welcome.

And if there are no further questions, I will turn the conference back to Paul.

Thank you, everybody. Have a good day.

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