Regis Corp (RGS) 2009 Q4 法說會逐字稿

Good morning. My name is Julie; I will be your conference facilitator today. At this time, I would like to welcome everyone to the Regis Corporation fourth-quarter and fiscal year 2009 conference call.

All lines have been placed on mute to prevent any background noise. If anyone has not received a copy of today's press release, please call Regis Corporation at 952-806-2154 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 800-406-7325, using access code 4119600, followed by the #. The replay will be available 60 minutes after the conclusion of today's call.

I would like to remind you that, to the extent the Company's statement 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.Regis.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 and year, we will open this 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, Julie, and good morning, everyone, and thank you for joining us.

I am pleased to report operational earnings ahead of plan at $0.59 a share, versus a plan of $0.51 a share. Randy Pearce will go into the details of reported earnings and nonoperational items in his portion of the transcript.

In times like these, one must focus on cost control and on controlling margins. Major factors for earnings being ahead of plan are our strong discipline relating to cost control, as well as a $0.06 per share tax benefit. Both our product and service margins were better than planned. Product margins were more favorable on our promotional items, but on major cost savings initiative relates to payrolls. We've been gradually shifting most of our value concepts to a leveraged payroll plan whereby the stylist earns more dollars on incremental sales but at a lower percentage of incremental sales. In other words, if the stylist had an effective commission rate of 45% and that same stylist increased sales by $10, she would now get $4.20 or 42% commission on the incremental business rather than $4.50 or 45% commission. This obviously works against us when sales go down. However, in the long run, we are highly confident that with price increases and appropriate scheduling, we can increase the productivity of our stylists and at the same time reduce their effective payroll costs.

In addition to improved payrolls, we benefited from reduced travel expenses and reduced workers comp costs.

Fourth-quarter same-store sales were negative 4%, which was essentially on plan. Service comps were minus 3.7% versus plus 2.7% last year. Many and June customer visit were slightly weaker than trend, primarily due to the stimulus that was paid last year. Our average ticket increased 3.1%; customer accounts decreased 6.8%. Our core business, which is value, performed much better than our higher-priced concepts.

Regis division comps were a negative 11%, value comes (inaudible) service comps on minus 1.4%.

Hair Club continues to perform better than planned. However, as we stated in our last conference call, we are budgeting Hair Club to have a slightly lower EBITDA performance in fiscal 2010, solely due to the economy.

Let's move on to the big story of this summer, and that is the re-equitizing of our balance sheet. Times change. For many years, in fact for too many years, debt was inexpensive and too readily available. We grew our company by accessing debt. We have spent hundreds of millions of dollars on new construction and acquisitions, and due to the fact that we never had a same-store negative year in our history until this year and due to the predictability of our cash flow, we felt it was prudent to appropriately leverage our balance sheet.

We even purchased close to $170 million of our common stock. Life is good, perhaps too good. However, we always have a strategy of trying to be conservative.

Our debt-to-cap ratio was mostly in the low 40s because we cherished our investment-grade status. Then came the biggest economic shock since the Great Depression. Therefore, it was time to change the strategy and focus on the balance sheet. We successfully raised gross proceeds of $336 million by issuing 13.2 million shares of common stock and selling $172.5 million worth of convertible senior notes. We used the proceeds to pay down debt and we believe we put the debt covenant issue behind us.

We realized that we could not access the capital markets for several years, so we felt that we were far better off being conservative and raising perhaps too much equity rather than too little. We wanted this re-equitization of the balance sheet to be a permanent fix. This was not the most popular decision with all of our shareholders. However, most were extremely supportive.

It's important to note that dilution would have occurred either way. We were looking at interest rate costs increasing by as much as 400 basis points, which would have reduced our earnings by a third. Thus we decided to issue stock. As long as we're going to have dilution, we might as well (technical difficulty) a bunch of our debt.

The answer to us was obvious, and we had total Board support. Thus we took our medicine and got the balance sheet less leveraged for now. We fully understand what leverage can do for us, and when the economy proves and our visitations normalize, we will resume our North American salon growth strategy. CapEx and acquisition opportunities will continue to be there. Our business model still works with respect to both new construction and acquisitions.

Just a couple of points before I turn the call over to Randy -- our UK businesses still remains extremely difficult. We plan to close up to 80 stores within the next six months. These stores are presently losing $2.5 million annually. By the way, we did close 70 locations prior to the end of our leases in North America, and we received rent reductions in 46 locations.

Our 55% interest in Empire Education Group should eventually be monetized. Their performance has been excellent with EBITDA for the year increasing to over $16 million, contrasted to $9 million last year. Empire is budgeting a significant increase in EBITDA for fiscal 2010.

As you know from past conference calls, our long-term strategy continues to be to focus on our value concepts. They have performed much better than most retailers in this economic environment, and when customer visitation patterns anniversary -- and they will anniversary -- will ramp up on new store construction.

The value concepts have a better return on our investment with boundless growth opportunities. As I mentioned in previous conference calls, ours is one of the few businesses who had a feeling relating to growth. We presently have lost 13,000 salons in our portfolio, and our future is limitless as we certainly have the infrastructure and the opportunity to one day have 30,000 to 40,000 stores.

I would now like to address our 30% ownership in Provalliance, a chain of 2500 franchised and Company-owned locations located primarily on the European continent. As we've discussed in our revenue press release dated July 6, this business has been hard hit by the downturn in the European economy. This has not only impacted the base business but also had a big impact on several of their recent acquisitions. Based on the current trends, the accounting dictates that we write down our $110 million investment in this business by $28 million.

In many ways, the situation parallels our school business. When we partnered with Empire, we took a write-down and the first results were below expectations. Despite the disappointing first-year results, we knew the business model was solid and we believed the empire management team would execute, and they certainly have. My crystal ball tells me today that our investment in Empire will far exceed our book value when we monetize this investment.

Similarly, we have a tremendous amount of confidence in the Provo business model and the Provo management team. My expectation is that, long term, they will create command is value far beyond our initial investment.

Finally, I would like to address our outlook for fiscal 2010. Last spring, we provided some commentary on fiscal 2010. Today, we still expect comps of negative 3% to positive 1%, and we expect comps to improve throughout the year, with the first quarter being the most difficult. At these comps we should be able to generate cash flow -- excess cash flow of $30 million or $50 million, which will be used to pay down additional debt.

With that, I would like to pass the baton on to Randy.

Thanks, Paul, and good morning, everyone.

Today, we are reporting the fourth-quarter fiscal 2009 operational earnings of $0.59 a share, which is up from the $0.55 we reported in the fourth quarter last year. For many years we've talked about the direct correlation of our earnings with our same-store sales performance. With our actual comps coming in at negative 4% for the quarter, we would have expected our operational earnings to be about $0.51 a share, which included an incremental $10 million of planned cost-saving initiatives, which we discussed with you in recent quarters.

Therefore, our operational results of $0.59 a share is $0.08 higher than what our comps would indicate. $0.06 of this upside to our earnings was the result of a lower-than-expected income tax rate during the quarter primarily due to the statutory expiration of certain prior-year tax positions. The remaining $0.02 of net benefit was derived from strong expense control in a number of areas, including salon payroll costs, partially offset by a greater-than-expected operational loss from our European salon investment with the Franck Provost business.

As you are no doubt aware, we also have several nonoperational items running through our fourth-quarter P&L that caused our actual reported results to be a net loss of $0.11 per share during the quarter. Let me take a moment to identify and quantify these nonoperational items, and there were four items which on a net overall basis served to reduce our earnings by $0.70 per share in the quarter.

The first and the largest item is a non-cash charge we recorded of $28 million, or $0.65 a share, associated with the partial write-down of our European investment in the Franck Provost salon chain. We talked about this in our revenue release on July 6 as well as in our recent S-3 registration statement.

The tough state of the European economy continues to negatively impact the Provost business. As a result, we wanted to get this issue behind us, so we were conservative and wrote down a portion of our investment in the fourth quarter.

The second item relates to our efforts to close certain underperforming salons prior to the end of their current lease term. As you know, we launched this project in early fiscal 2009 for a relatively small number of our salons in North America. Late in the fiscal year, we expanded this project to include the potential closure of up to 80 additional salons in the United Kingdom.

During the fourth quarter, we encourage incurred lease-termination fees and recorded fixed-asset write-offs that, on a combined basis for both of these projects, totaled $5.8 million or $0.09 a share.

The third nonoperational item related to an unplanned favorable adjustment of $3 million or $0.05 a share to our prior-year workers compensation and insurance claim reserves. This is a continued result of our successful salon safety and return to work programs.

The final item related to just under $0.01 a share of expense that primarily related to a small write-off of distribution center inventories that had been solely used to support our Trade Secret operations. This expense is recorded within the line item titled "loss on discontinued operations."

We've included, in today's press release as well as on our corporate website, a concise reconciliation that bridges our reported earnings to our operational earnings for the quarter. Also, feel free to contact Mark Fosland or Alex Forliti here at Regis should you have additional questions regarding your financial models.

I will now transition my comments by giving a bit more color behind our fourth-quarter operating results for each of our business segments. Our breakup of our segment performance is found in today's press release. My comments this morning are going to focus on our operational performance. I will begin with our largest revenue segment, which is our North American salons.

Let me once again remind you that the current and prior-year results of Trade Secret have been removed from the individual revenue and expense line items on the North American segment P&L, as this is required by the discontinued operations accounting treatment. I'd also like to point out that the financial statement in our press release today once again includes two line items related to the sale of retail product by Regis to Premier Salons, who now owns Trade Secret. As we've discussed in past quarters, Regis has agreed to provide certain transitional support services to Premier, including the supply of certain retail products at Regis' cost.

In order to separate these results from our ongoing operations, we've added a revenue line item that's called "product sold to Premier," and we've added a related expense line item that's labeled "cost of products sold to Premier". These two items exactly offset each other and have no impact on the profitability of Regis. Therefore, I'm going to exclude these two line items for the remainder of my discussion.

Our total North American salon revenue, which represented 86% of our consolidated fourth-quarter revenue, decreased 3% during the quarter to $523 million. This revenue decrease was the result of a decline in total same-store sales of 390 basis points, partially offset by revenue from Company-owned salons that were built or acquired over the past year.

Service revenue, which represented 80% of North American revenues, declined 280 basis points during the quarter to $417 million. This reduction was due to a decline in service comps during the quarter of 3.5%, partially offset by revenue from new and acquired salons over the last 12 months.

We are pleased to say that our same-store sales benefited during the fourth quarter by an increase in average ticket of 3.1%, in large part due to price increases we implemented during our third fiscal quarter. However, more than offsetting the increase in average ticket was a 6.6% decline in same-store customer visits during the quarter, as many consumers are lengthening their visitation patterns due to the economy.

Product revenue fell 5.1% in the quarter to $97 million, due to a decline in product comps of 5.8%. Royalties and fees from our North American franchise salons were down 6% in the fourth quarter to $9 million.

New franchise units that were added to the system over the past 12 months were more than offset by franchise buybacks, franchise unit closures, and relocations. In addition, our franchise salons are experiencing the same weakness in customer visitation patterns and same-store sales trends as our Company-owned concepts.

I'm now going to talk about gross margin. I'm very pleased to report that our combined gross margin rate for North American salons came in much better than planned at exactly 45%. That was 100 basis points better than the rate we reported last year in our fourth quarter.

As I will discuss in a moment, we experienced margin improvement in both our service and our product areas. We are extremely pleased with these results, especially when you consider that challenging sales environment.

We are pleased that our fourth-quarter service margin rate improved to 43.6%, which was better than our plan and was 80 basis points better than the same quarter of last year. Reduced salon labor costs, as Paul pointed out, were the single-largest contributor to our improved service margins. We proactively adjusted many of our salon commission plans when we implemented our recent price increases. As a result, we were able to leverage the increase in average ticket and improve our overall labor costs during the fourth quarter. Now, having said this, we expect that some of this benefit could be dampened during our current 2010 yea, due to a planned increase in healthcare and supply costs, and to a lesser extent to minimum wage increases. At this point in time, we expect that, during fiscal 2010, our service gross margin rate for North American salons should be comparable to slightly better than the 42.6% rate we reported for all of our 2009 fiscal year.

Our retail product margins rate for the fourth quarter improved to 51%, which was a 190 basis point increase from the rate we reported last year in the fourth quarter. We had planned for this improvement in rate largely due to two factors that artificially depressed last year's fourth-quarter profit margin rate.

Last year in our fourth quarter, we wrote off some slow-moving inventories. In addition, during the prior-year fourth quarter, we were in selling through higher-cost inventories that we obtained in connection with several acquisitions.

Let me make one other comment regarding product margins, and this is more prospective in nature. Effective this past May 15, we made a decision to pay all new stylists here it Regis a product commission rate of 8% rather than the traditional rate of 10%. We did this because, in the majority of instances, our products are purchased by consumers that are simply walking by our salons. Over time, the reduced commission arrangement will help improve our product margins even further without negatively impacting product sales.

Let me now address our site operating expense, which includes costs directly incurred by our salons such as advertising, insurance, utilities and janitorial costs. Our reported site operating expense came in at 7.7% of sales during the quarter. That was up 60 basis points from the same period a year ago. Let me say that the expense we reported in both the fourth quarter this year as well as last year benefited from significant unplanned reductions in our workers compensation and other insurance reserves.

As you know, the frequency and the severity of our insurance claims continued to decrease, due in large part to enhanced salon safety measures and aggressive return-to-work programs. As a result, our insurance actuaries continued to authorize reductions to our prior-year claim reserves, which amounts to $3.2 million in the fourth quarter of fiscal 2009 and an identical $3.2 million in the fourth quarter of the previous 2008 fiscal year. Therefore, if you factor out these benefits from both quarterly results, our fourth-quarter fiscal 2009 site operating costs would have been 8.3%, up 60 basis points from the comparable period a year ago. This increase was mostly due to the P&L reclassification that we initiated and discussed with you during the last two quarterly conference calls.

Certain expense items which had previously been categorized within our rent expense have now been appropriately reclassified into our site operating expense. These items primarily related to utilities and rubbish removal cost for which Regis pays its landlords as part of our lease agreements.

Next, we will talk about our North American general and administrative expense, which came in at 5.3% of revenue during the fourth quarter. This rate came in 20 basis points better than plan and 40 basis points better than the same period last year.

The planned improvement related to the numerous cost-cutting initiatives we implemented last fall. As you recall, we reduced our field supervisory staff by about 10% due to our reduced growth plans, and we also reduced the budget for certain marketing expenses. And as we saw last quarter, we continue to see a significant reduction in our overall field supervisor travel costs, in fact more than we expected. Much of this improvement is related to the implementation of further expense control initiatives by our operating management team. In addition, we've reduced expenditures for salon, manager and his staff meetings. These reductions in travel costs is a great example of how are our entire organization here at Regis continues to focus on expense control during these difficult sales environment.

Rent expense, which is primarily at a fixed cost, came in at 13.9% of total fourth-quarter sales. That was 20 basis points better than the rate we reported last year in the comparable quarter. The reclassification of certain expenses from rent into site operating expense that we just discussed favorably reduced our fourth-quarter rent rate by 80 basis points. However, offsetting this rate improvement was negative leverage in this fixed-cost category caused by reduced sales volume.

Depreciation and amortization came in slightly better than plan at 3.4% of sales, which was identical to the rate we reported last year in our fourth order. Our lower level of capital spending during the fiscal 2009 year helped us to offset the negative leverage from reduced same-store sales.

The net effect of all the items I just discussed caused our reported operating income to come in at 15.3% of sales, up from 14.7% last year. On an operational basis, which excludes such items as the benefit from prior-year worker comp reserves and lease termination costs, our operating income from North American salons improved to 15.1% of fourth-quarter revenue, up from 14.1% in the same period last year.

Next, let's review the fourth-quarter performance of our International Salon that. This segment includes our Company-owned salons located primarily in the United Kingdom.

As we've discussed with you over the last couple of years, the UK economy has been particularly hard hit, and so has our UK salon business. So when reviewing the year-over-year changes in financial performance, most of the trends have been impacted by negative leverage caused from reduced level of same-store sales. However, I will provide a bit more color behind the quarterly change in revenue, and also give you some high-level comments on any expense categories that we may have been surprised by during the quarter.

Once again, those of you who build segment models may want to give Mark or Alex a call here at Regis and they will certainly help you.

Total revenue from our International segment represented 8% of our consolidated fourth-quarter revenue and came in at $46 million in the fourth quarter, which was a quarter-over-quarter decline in sales that was largely due to two factors. The first related to foreign currency, as nearly $13 million of overall revenue decrease was primarily due to a quarter-over-quarter decline in the British Pound exchange rate against the strengthening US dollar. The second factor contributing to the sales decline related to negative comps as our UK salons experienced a 6.6% decrease in overall fourth-quarter same-store sales.

The one item perhaps worth discussing in more detail is product margins. Our International product margin rate in the fourth quarter came in at 55.4%, which quite frankly was much higher than normal. Results from our semiannual physical inventory count were favorable with the entire eight-month adjustment running through our fourth-quarter results, which again artificially increased our product margin rate for the quarter.

Our UK operations continued to experience a reduction in their product costs as a result of having product shipped to them directly from our Chattanooga, Tennessee distribution center rather than buying directly from distributors. In addition, our sales mix has shifted a bit towards higher-margin products, and our shrink rate continues to improve.

The International gross margin rate we reported for the entire 2009 fiscal year was 47.1%, up 30 basis points over the prior year. We expect our product margins in the UK should remain in the mid-low to mid 47% range during our current 2010 fiscal year.

One final item of note relates to our International depreciation and amortization expense, which came in higher than normal during the quarter at $7.7 million. This amount included an additional $2.9 million of expense related to the fixed asset write-offs for those underperforming locations that we hope to close in our current 2010 fiscal year.

Let's now switch gears and talk about Hair Club for Men and Women. Although our Hair Club business continues to perform well, the economy is having an impact with fourth-quarter comps declining slightly by 1.4%.

But let me highlight a couple of items. Fourth-quarter revenue from our hair restoration centers came in at $36 million, which was up just slightly from the same period a year ago and represented 6% of our consolidated fourth-quarter sales. Hair Club's revenue benefited from the acquisition of two franchise centers and the construction of three new corporate locations over the past year. This revenue growth was partially offset by the negative comps of 1.4% during the quarter.

Fourth-quarter operating margin rate for Hair Club came in at 19% which, as we expected, was down slightly from the rate of 20.1% we reported last year in our fourth order. This planned decrease was due to slightly lower operating margins from the two recently acquired franchise centers and the three recently built locations. Negative comps also put a bit of pressure on Hair Club's operating margin rate.

Hair Club's fourth quarter EBITDA margin came in just over 27%, essentially the same as we reported last year in the comparable quarter. It's a very strong rate and we remain very pleased with the performance of this segment of our business.

Let me switch gears once again and make a couple of comments regarding our corporate G&A expense. The major component within our corporate G&A continues to be salaries and related benefits for the 800 or so employees working here in Minneapolis, and the 500 associates that work in our two distribution centers.

Centralized back-office support functions provide us leverage to our operating model. As I've said in the past, over the last five years, our Company-owned salon counts have increased at a compounded annual rate of over 9% and our sales have grown double-digit, yet our home office had count has grown at a much slower rate of 5%. Despite this leverage, we continue to be very aggressive with expense control during these challenging times of slow sales growth.

Our corporate G&A expense came in at under $32 million in the fourth quarter, which is $0.5 million less than the same period a year ago. Our fourth-quarter expense included about $1 million in professional fees related to a one-time tax restructuring project which will allow us in fiscal 2010, our current year, to permanently repatriate nearly $90 million of excess international cash balances with virtually no tax consequences.

Absent these professional fees, our G&A costs have declined due to our ongoing expense-control initiatives. We are pleased with the results of our efforts.

Let me make one reminder-type comment to you regarding our corporate G&A. This expense category in the fourth quarter included about $2 million of home office and distribution center costs related to providing transitional back-office support to our former Trade Secret salons. As we've discussed with you in the past, Premier Salons, who now owns Trade, is fully reimbursing Regis for these costs. However, accounting convention requires that the expense reimbursement be included on our P&L as other income rather than netted against our G&A expense.

Now, that concludes my comments regarding the business segments. Let me move on to our investments which are reported on the P&L line item labeled "equity in affiliated companies" . This line primarily includes the after-tax results of our investments in Empire Education Group and the Franck Provost business on the continent of Europe.

Our investment in cosmetology schools managed by Empire performed on plan in the fourth quarter with our share of the quarterly after-tax earnings growing to $1.8 million. However, as I mentioned at the beginning of my comments, the reported and operational results related to our European salon investment in Provost came in well below plan.

As we expected, the Provost business has been impacted by back-office integration costs. However, in addition to this, the recent downturn in the European economy has hurt the core salon business as well as the performance of salons recently acquired, especially during the latter half of our fiscal 2009. As a result, during the fourth quarter, we recorded a partial write-down of $27.8 million, or $0.65 a share, to our investment in the Provost salon business. We felt it was prudent to be conservative and write down the investment at this time, given the current state of the European economic environment. We simply wanted to get this issue behind us. We continue to have a tremendous amount of confidence in Franck Provost and his management team and their ability to effectively and profitably grow this business.

Let me make a comment regarding our effective income tax rate, which came in at 33.6% in the fourth quarter. As I mentioned, this rate was lower than we expected, largely due to the benefit we received from the statutory expiration of certain prior-year tax positions. As I previously stated, this benefit served to increase our reported fourth-quarter earnings by about $0.06 a share. Looking forward, we anticipate the underlying tax rate for our current 2010 fiscal year should be in the range of 38% to 40%.

I'd now like to briefly update you on our debt covenant ratios and our initiatives to strengthen our balance sheet. I will remind everyone that, as part of our equity and convertible debt offerings last month in July, we were able to successfully amend our debt covenants with our lenders. The most significant change to our debt covenants was a reduction of the fixed-charge coverage ratio from 1.5 times down to 1.3 times.

Our fixed-charge coverage ratio at June 30 improved to 1.62 times, well above the new minimum threshold of 1.3. Our leverage ratio at June 30 was 2.4 times, but on a pro forma basis, considering the equity and convert transaction, stood at only 1.9 times, well below the covenant maximum of three times.

During the fourth quarter, we continued to make significant progress in achieving the expense reduction and cash flow enhancement initiatives we announced at the beginning of our second fiscal quarter. Let me update you on those results.

We far exceeded our plan to bring total debt levels down below $700 million by June 30. I am pleased to report that our total debt at the end of the fiscal year stood at $634 million, down $173 million from our debt balance just nine months prior at the end of our first fiscal quarter. On a pro forma basis, after last month's equity and convert transaction, our debt levels were further reduced to $462 million.

Let's talk inventory. Inventory levels at the end of our fiscal year came in at $159 million. Now, if you exclude the impact of the Trade Secret divestiture, our inventory levels have been reduced by $38 million over the last three quarters, far exceeding our planned reduction of $20 million. We expect inventory levels for our current 2010 fiscal year to remain relatively flat to our June 30 level. However, there will likely be some seasonal growth in the first half of the fiscal year.

As you recall, this last October, we implemented a variety of expense-reduction initiatives designed to save $20 million through the balance of our 2009 fiscal year. We surpassed our goal and achieved more than $22 million of cost savings, including $9 million in the fourth quarter. In addition, our Regis Grow Smart cost savings program, which we've discussed with you in the past couple of years, yielded annual savings of $10 million in fiscal 2009, of which about half of that was incremental to the prior year.

Then lastly, in this past October, we also took steps to curtail our growth plans, and we've reduced our capital budget for new and acquired stores from $170 million to about $135 million. Actual expenditures for the entire 2009 fiscal year totaled $131 million, again below our plan. Once again, we are very pleased at the success we achieved in reducing expenses and conserving cash and in paying down debt.

So, I'm about ready to turn it over for questions, but before I do, can I make one quick comment regarding our upcoming fiscal 2010 first-quarter results? We will be taking a first-quarter charge for two items, and we are required to do this.

First, accounting convention requires that we expense the make-whole premiums and the other fees we incurred in connection with the modification of our debt covenants and the prepayment of our debt that took place last month in July. Again, these fees were all done in connection with our recent equity and convert offering. We anticipate recording a pretax charge relating to those fees of about $18 million.

Second, we anticipate recording lease termination and professional fees of about $3.4 million next quarter in connection with our efforts to close certain underperforming salons in the United Kingdom prior to the end of their current lease term. Closing these salons will be accretive to our bottom line and to our EBITDA. We may not be successful in closing all 80 salons that we've targeted but, if we did, our annual EBITDA would improve by $2.5 million.

That's it. That completes my prepared remarks, so Paul and I would be happy to answer any questions you have. So Julie, if you could step in and provide some instructions, we would appreciate

Thank you, Paul and Randy. The question-and-answer session will begin at this time. (Operator Instructions). Lorraine Hutchinson, Banc of America-Merrill Lynch.

I was hoping that you could provide some color on what your weighted average cost of debt will be, now that you've loosened some of the covenants and renegotiated some of your facilities. Perhaps you could give that to us, excluding the convert.

That's going to be tough because I have it with the convert, which is -- the total weighted average cost of our debt will likely be around 8%. Accounting convention is going -- now, that includes the convert, and I am not going to bore you or try to confuse you with all of the accounting requirements here. But the reason why it's higher than what we initially had, even prior to the equity convert offering, is that we have to book more of a market rate of interest for book purposes on the convert, Lorraine, which is causing the overall rate to be about 8%.

Cash interest will be about, it will be 5%, right? So we will pay far less in cash than the book interest.

In total, we expect our book interest expense for the 2009 -- or 2010 fiscal year should be about $40 million, comparable to what we reported in '09.

By the way, cash interest will be about $31 million.

Okay. Then just a bigger-picture question -- you had spoken about, once visitation trends stabilize, you'd resume your North American growth strategy. Can you just give us some color on the expectations for that? I mean, is it solely focused on value? Will it be salon only or can we expect more of these ancillary investments? Just if you could give us a little bit more detail on the future growth prospects.

Oh, no, Lorraine we are reformed (inaudible). It's going to be salons for quite a while. We are not going to go into pig farming, I can assure you of that! (laughter) Realistically, the returns are much greater on the small investment, value salons. So they will get the lion's share of the CapEx. We will especially focus on areas where we have very, very strong brand equity, like Northern New Jersey for Supercuts, and Hawaii for Supercuts, etc. So that's our program.

Thank you.

Paul Lejuez, Credit Suisse.

So I guess I am just looking historically. I think EPS has been the primary driver for you guys in terms of incentive-based compensation. I'm just wondering how, given the changes in the environment and the capital structure, there are new metrics being considered in terms of how you guys are going to get paid.

Going forward, it will be EBITDA, which is consistent with what's happening with a lot of our peer group companies. There will be some additional components relating to other goals that will set forth, such as reduction of debt, average check, whatever. That will all be highlighted in the proxy that will be coming out next month.

Will there be anything related to return on invested capital in that structure?

Not formally. Believe me, Paul, we are focused on enhancing our return on invested capital. As Paul Finkelstein mentioned -- too many calls here -- as Paul Finkelstein mentioned, we are focusing --

Please don't say that! (laughter).

Yes, what am I saying? (laughter)

You've got to stand up for me, Paul.

No, our focus is going to be trying to spend capital in a way that is going to provide us the highest return, including acquisitions of core salon concepts at multiples that would generally be in the 3.5 to 4 times.

We have found -- we used to have, several years ago, a portion of our incentive-based comp plan was based on return on invested capital. That incentive comp plan covers about 50 officers of the Company. What we found was that people could not translate the decision-making that they were making day in and day out to what impact that had on return on invested capital. It was too confusing for most people. So what we're doing is focusing on other things here in terms of metrics, not at the expense of return on invested capital but I will think that you'll start seeing an improvement to our ROIC.

Got you. Your guidance I believe on EBITDA was $200 million to $240 million. Correct me if I'm wrong. I guess on the high side, that would imply $60 million per quarter in EBITDA. You just did $80 million-plus, so I am just trying to reconcile the two.

Well, you're going to have a little bit -- the big year-over-year change is always going to be comps. We have said 1 percentage point change in comps equates to about $10 million of EBITDA. So if we did this year -- and Mark, help me -- I think we did $271 million to $275 million of EBITDA. If you assume -- remember our tipping point, our inflection point is generally 2% comps. So if you assume that our comps are going to be at let's say negative 1 -- just pick a number -- that is 30 basis points -- or 300 basis points below our tipping point, which would equate to about $30 million less EBITDA from the $271 million. That's the major factor there.

I will say that we think that range of $200 million to $240 million, I mean I hope we're going to be at or above the high end of that range.

All right, and you mentioned the monetization of Empire. Any sense of timing there?

Oh, it's going to be at least four or five years. Frank Schoeneman is a young man. With relatively high unemployment, and we believe it is systemic, the education business should be a very good business. I mean, his projections for EBITDA over the next two or three years are very, very bullish.

Great, thanks.

As you know, Paul, EBITDA multiples for education business are pretty strong, so we are highly confident that we're going to get all of our investment bank back and more.

Yes, okay, great. Thanks and good luck.

Jeff Stein, Soleil Securities.

Good morning, guys. Two questions for you, Paul. One is the leverage point, and maybe, Randy, you could answer this as well. You've talked about historically that 2% is kind of the threshold you need to hold your SG&A flat and achieve leverage. In kind of this new world of tougher comps, most companies have been able to effectively reduce that leverage point. I'm wondering. Is 2% still a realistic target that we should be looking at go-forward, or might you be able to figure ways to bring that down below 2%? That would be question number one.

Jeff, you know, it could very easily be 1.6%, 1.7%, but 2% is certainly conservative. There are costs that we just have very little control over such as taxes, or occupancy costs for instance, our basic rants are very much in control; the CAM and Texas are beyond our control. Certain insurance category, certainly utilities -- maybe they are going now going down now but they will be going up as day follows night. It's those costs primarily that create the 2% number, and we would rather be conservative.

To your point, it could be slightly less than 2% but not much.

Okay. The other thing, Paul, is you've talked historically somewhere between 250 and 300,000 salons in the United States, and it's a highly fragmented space, largely mom-and-pop. You know, consolidation has been a big story across retail. I'm wondering if you have any statistics that might help us understand what, if any, consolidation trends we should be looking at in the hair salon industry. How much capacity, in other words, might come out of the industry over the next 12 months?

There is excess capacity, Jeff, as you know, in virtually every industry in America, whether it be manufacturing or retail. You know, it's interesting. They've been talking about having too many stores in America for 15 years; it finally came true!

There will be a -- historically, the number one failure rate in urban communities would be restaurants, and number two would be beauty salons and barber shops. That probably will accelerate. The 300,000 some-odd beauty salons and barber shops, 70,000 or 80,000 don't even count; they're in people's homes. But we are seeing about a 5%, 6% industry shrinkage. We think we are right in the middle of it. That shrinkage will create more salon closures than before because the model doesn't work for that mom-and-pop as well as it does -- as well as it did years ago. So that mom-and-pop owner, frankly, is better coming to Regis and earning a 50% commission rate and staying where he or she is in a private salon. Those customers and those stylists that have closed salons have to go somewhere. So we are quite confident that they will come to us. We have the locations and we have the brands, and we have the training. So, we should be able to increase share just because of that dynamic.

Okay. Finally if you could address the issue -- you talked about taking your commission rates down. I'm wondering how the turnover within your hairstylist pool, so to speak, would affect your ability to continue to succeed in driving that payroll percentage down. In other words, what percent of your hairstylists turn over on an annualized basis?

No, I get it. Look, industry turn is about 60%. The average new hire is a 21-year-old female, a very mobile part of the population. Our return is 40%, and that's overstated because, if somebody goes from downtown to Beachwood in Cleveland, then I assume there is still a Cleveland --

Yes.

-- that's a turn for us because we closed him or her out of payroll. If somebody leaves us and has a kid and comes back three years later -- I mean comes back a month, a year later, that's a turn for us. So our turnover has been well under the industry turn, because they can develop business far more quickly with us than going with a mom-and-pop. Especially given the fact that most of our concepts are value-driven concepts rather than appointment-driven concepts, the power really rests with the store rather than the stylist. So our turn should not be affected. Demand has proven to be very inelastic and we make sure that our people can earn more money because we raise prices. So we have happy campers.

Okay, thank you.

Erika Maschmeyer, Robert W. Baird.

Good morning. Nice job in a tough environment.

Could you give some additional detail on the aspects of your cost-saving initiatives that you expect to continue to benefit in 2010, which ones you think won't repeat, and then maybe talk a little bit about expectations for full-year, full-company operating expenses and G&A in 2010?

Erika, that was a mouthful!

Sorry!

Let me take a little bit of a stab at it, unless Paul wants to but, all right. The cost-saving initiatives, we achieved about $32 million in this current fiscal year that just ended, 2009. About $25 million was incremental to '08.

We are expecting, and we've said it before, you can only save a dollar once. We expect, though, that incremental cost savings could be close to $10 million in our current 2010 fiscal year.

We continue to have this Regis Grow Smart initiative that we implemented a couple of years ago. We have people from all levels and all departments within the corporate organization that continue to get together and look at ways to save dollars. We've had a lot of ideas that we are continuing to work on. But I would say that we would have about $10 million of incremental cost savings that we should be able to achieve -- and hopefully more -- in our current fiscal year.

Now, Erika, you are then talking about corporate G&A going forward?

Yes.

Our corporate G&A -- and again, I'm going from memory here -- is about $120 million a year. That includes our corporate office as well as our two distribution centers. It has been running about $30 million a quarter and coming down.

We're going to see that there's two countervailing factors. One was that the largest expense item made up within our corporate G&A are going to be the salaries for the 1300 people that we have here in Minneapolis and in our distribution centers. So if you assume normal inflationary salary increases, that would cause the G&A to go up. Having said that, we will see G&A come down by other initiatives, other cost-saving initiatives. I would expect that our corporate G&A shouldn't move much in our fiscal year. It may be up slightly, but not materially.

Okay, great. Then how do you think about marketing expense for next year?

Well, overall, there was some give-and-take. We are continuing to -- marketing is not going to be -- at this point in time, nothing is being contemplated to reduce marketing expenses even further. We continue to work with Gordon Nelson and Mary Kiley in our marketing group as to how to best redeploy existing dollars. So no, I think we are going to see more stability in our marketing spend in 2010.

Great. Then could you talk about I guess any updates on your expected price increases for 2010 and benefit on ticket?

Yes, we have traditionally, over the last few years, taken a more aggressive, hard look at price increases to be implemented during the January-February-March timeframe. So when we look at beginning of calendar 2010, we will likely be looking at price increases. We are anticipating that the overall impact in 2010 to average ticket would be in that perhaps 2% to 3% range.

Okay, great. Then any update on trends to date in Q1 and back to school for comps?

(inaudible) comps as you know on a quarterly basis. It's really business as usual at this point in time. We sort of mirror our fourth quarter of fiscal 2009 as we are in the middle of August. We contemplate the comps being week for the first quarter, and then they should start to strengthening significantly during the Christmas quarter.

Great, thank you.

Daniel Hofkin, William Blair & Co.

Just a question, clarification -- have you indicated that you felt last year's June quarter or perhaps the first part of your fiscal 2009 first quarter benefited from the stimulus checks last year? I am just wondering if that's part of maybe what you think you are seeing quarter-to-date, why that hasn't necessarily picked up. If so, where did you see that most significantly across your concepts?

Then second, can you just sort of tie together what, given the comp sales range that you've provided on an EPS-diluted basis using the new share count, where you think that would come out, top end and bottom end for the quarter and the year?

Yes, we will go the last question first. We are not giving EPS guidance. I think you can -- we are sort of giving EBITDA guidance of $200 million to $240 million. As Randy pointed out, we expect our results to be at the high end of that guidance.

With respect to the stimulus checks, you know, it is interesting. Obviously, they affected us. One of our big divisions is SmartStyle in Wal-Mart, and as you know, Wal-Mart had 1% or 2% negative comps in large part it was stimulus checks last year in June and July. We had the same effect with respect to stimulus checks last June and July, I think, contrasted to this year. So I think the effect on us is pretty similar to most retailers.

As you know, the last six months of last fiscal, which ended June '09, we had the strongest service calls in North America in, what, eight years? So stimulus checks definitely helped.

That ended June '08.

Yes.

Yes, June '08.

June 08, I'm sorry.

I'm sorry, could you just clarify that last comment? You're saying that through June --?

The last six months of last fiscal. Ending June '08, we had the best service comps we've had in North America in eight years, in part due to the stimulus checks, but that was just a small part.

Okay, so you're talking 12 to 18 months ago?

We're talking 12 to 18 months ago, correct.

Okay, thank you.

Jill Caruthers, Johnson Rice & Company.

Good morning. If you could address the service margins again, I know, on a consolidated basis, they came very strong 44%. I can't really find in the past years where you've posted that strong of a number. I know you've addressed the change in compensation. If you could just talk a little bit more about that and why you expect that to kind of fall from the 44% headed into fiscal '10.

There are two factors. One relates to the fact that we are trying to obviously [as] part of the leverage on our payroll. The second factor relates to the mix because we have better service margins than SmartStyle and Supercuts than we have in Regis. as SmartStyle and Supercuts continue to garner a greater share of the total sales mix, obviously that affects our overall consolidated service margins. So it's really a mix play.

Okay. What do you see that level going out in the future as the SmartStyle becomes a bigger part of your mix and whatnot?

Oh, it is glacial, but there should be marginal improvement for several years.

We continue to tweak --

10, basis points, in that range, Jill.

Paul is absolutely correct. I mean, if you look over a long period of time, the largest expense item in our business model are salon payrolls and the related benefits we pay. That's in our service and our product margin. You'll see both of those line items, in good times and in tough times, be remarkably stable.

Paul has and the operating folks here at Regis have started becoming aggressive with new hires on tweaking some of the new commission arrangements that should give us more positive leverage. Paul talked about that. So that is a positive going forward.

I just -- maybe we are a little cautious but we continue to see some of the benefit side like healthcare costs are continuing to increase. Ours are not out of control, but again, nationally, you just see costs increasing. That's going to dampen some of the service margin, service gross margin rate.

Supply costs, we are holding those down as best we can but some of the supply costs for hair color, for example, indications are they could go up a bit this year, not sure yet.

So we are just tempering expectations a bit right now to say that a lot of good things going on to control payrolls. Some of that that we saw in the fourth quarter may be dampened a bit from some cost increases in the current fiscal year.

But Paul is right. You will see, over a long period of time, more stability but slight increases in margins.

Okay. Then just the last question, kind of broad -- you know we are kind of looking for the fall, October-November to act as sort of an inflection point of just anniversary some of the drops in traffic. If you could talk about maybe the environment out there. Are you seeing price wars right now at other salons, increased marketing, coupon-type deals that might dampen that stabilization in comps.

We don't see greater discounting happening industrywide. I think demand has proven to be quite inelastic with respect to price, and we just don't see it.

Thank you.

Mike Hamilton, RBC.

Paul, if you could give your thoughts on hair trends at this stage as we go into '10.

You must be kidding!

I, I'm --

You're not kidding, obviously. Randy, do you want to take a shot at it? (laughter)

Hair trends are so individualized. It isn't like Dorothy Hamill years ago. I mean, people do their own thing today. We don't really see a trend per se, either male or female.

You guys have a fashion business in terms of trend. Our business is really glacial in terms of change. Most people have their same hairstyles year in, year out. That's what is so good about this business. I mean, I don't know how many retailers could say didn't have a negative comp for 87 years. We will get that back there, whether it's this year or next year. It's a very stable and predictable business, and there should not be a significant trend issue. We just don't see fashion moving that way. Fashion is so individualized.

Thanks. Let me maybe put it a fairer way. In the last couple of years, we have seen a steady trend in expansion of the time between visits. Is it going to be purely a function of economy that changes that?

Now, with our average customer spending about $130 a year on service, we -- and especially those out of work have to look good if they want to get work. Eventually it laps. If the guy got his hair cut every three weeks and now every four weeks, then it is highly unlikely that, on average, they are going to go to the five were six weeks. It laps.

We don't expect it to go back to the prior level. We expect it to lap at the current level and not the prior level. In other words, if someone went every four weeks and now going every five weeks, we have no expectation that individual is going to go back to four weeks. We also don't expect him or her to go to six weeks.

Thanks. A detail question for Randy. To the best you can, could you walk through timing and implications on the repatriation on the tax side?

Yes, effectively, it has been done, Mike, because we have been able to, through the balance of our latter half of our 2009 fiscal year, able to repatriate cash on a more -- I think it was a 90-day basis -- and then we had to send the cash back to our international banks and it comes -- we are able to re-borrow it.

Everything was done on a temporary basis. I think there had been some government legislation that enabled companies like us to do that.

What we've been doing over the last several months is trying to come up with a permanent solution because we've got a lot of cash, largely in Canada, but we've got some cash in the UK and a little bit in Europe as well that is sitting there and we would like to be able to utilize it here in the United States. So we have reached a solution for that, a permanent repatriation, so cash -- you're not going to see debt levels come down incrementally more, Mike, because we've been able to do it on a temporary basis. Now it will be permanent, so we can sleep at night.

We aren't going to see any anything that's going to have an impact on tax rate?

No, not -- this is more of a -- this strategy has virtually no impact to our tax rate.

Okay, yes, thanks for the clarification.

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

Thank you very much for joining us, everyone. Have a good day.

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