Regis Corp (RGS) 2010 Q1 法說會逐字稿

Good afternoon, my name is Rebecca, and I will be your conference facilitator today. At this time I would like to welcome everyone to the Regis Corporation First Quarter 2010 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 4162580#. 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 statements or comments this morning represent forward-looking statements, I refer you to the risk factors and other cautionary factors in today's news release as well as the Company's SEC filings. Reconciliation to non-GAAP financial measures mentioned in the following presentation can be found on their website at www.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 the call for questions. (Operator Instructions)

I would now like to turn the call over to Paul Finkelstein for his comments. Paul, you may begin.

Thank you, Rebecca, and good afternoon, everyone, and thank you for joining us.

I am pleased to report that first quarter operational earnings were ahead of plan. Operational earnings per share were $0.30, flat with last year, and as I just mentioned, exceeded our internal plan. As you recall, last year in the first quarter we reported operational earnings of $0.39 a share. But if you adjust these results for our recent equity and convertible issuance, our earnings were about $0.30 a share.

The overall macro level conditions continue to impact consumer spending habits. Though our same-store sales results continue to be challenging, we are very pleased with our operating results in the quarter.

Reported first quarter results included non-operational charges for early debt repayment comprised of make-whole premiums and other fees we incurred in connection with the modification of our debt covenants as well as UK lease termination costs.

In addition, we also incurred a $3.6 million charge relating to the pending settlements of two legal claims. One of these claims related to a customer issue, which was completely resolved and should not recur. The other claim related to certain employee matters, which were also satisfactorily resolved. Though the cost of these settlements, approximately $0.03 a share, is appropriately included in our operational EPS of $0.30, one could certain add these back when looking at our first quarter operating performance.

As we expected, the first quarter was a continuation of the customer and business trends we've seen in the last several quarters. We continue to have a major focus relating to cost control and controlling our margins. Controlling expenses and increasing our average ticket are our primary goals during these challenging economic times. We had previously guided the Street to expect a weak first quarter and feel confident that the second half of the year will be much stronger than the first half.

It's too early in the quarter to have a good reading regarding second quarter comps, as December is our most important month in the quarter.

First quarter gross margins improved by 40 basis points versus last year and plan. We continue to see leverage from price increases and positively leveraged pay plans. Service margins were flat compared to last year and while the service payrolls, our largest expense item, improved 20 basis points in the quarter. Offsetting most of this improvement was a planned increase in health insurance costs. Parenthetically, last year's health insurance costs were a bit lower than normal due to a favorable actuarial adjustment to our health insurance reserve.

Our retail product margins continue to improve. We have enhanced our promotional mix by focusing on higher-margin items, and we are benefiting from the shift in sales to our higher-margin private label products. In addition, we achieved some benefits from reducing the commissions paid on retail product sales to new employees from 10% to 8% without any decrease in employee retail productivity.

We continue to execute on our expense control strategy. Consolidated G&A was reduced by $5.2 million compared to Quarter 1 last year and was better than plan by $2.8 million. The major expense categories that were affected included travel, marketing expense, and salaries as a result of headcount reductions.

First quarter same-store sales were negative 4.5%, which was slightly better than our plan. Service counts were negative 4.2% and consolidated retail product comps declined 5.7%. We are pleased that our average service ticket increased 3.1%, however, offsetting this was a decline in same-store customer visits at 7.3% due to a lengthening of customer visitation patterns driven by the economy.

Our core business, which is Value, continues to perform much better than our higher-priced contents with total comps declining 2.8%. Supercuts continues to have our best comps with a positive increase of eight-tenths of 1%. The Regis Division, which includes Vidal Sassoon, continues to be the most challenging with comps down 10.7% and customer visits down 11% in the quarter.

I'd like to add some color with respect to the Regis Division. The Regis Division is still a significant cash flow generator. People have asked, "Well, what can you do about the decline in customer visits?" Our salon business is not marketing-driven. We have tried a myriad of marketing programs to shorten the visitation patterns. They are only marginally effective. There is absolutely no empirical evidence that there is a trading down with respect to Regis and Vidal Sassoon customers. They are just going less often. Eventually visits will anniversary.

The fact of the matter is that our customers are spending less money annually, even though we are raising prices due to the fact that they are going less often. Regis, as in our other divisions, shows no difference in visitation patterns in salons where we raised prices compared to salons where we have not raised prices. We certainly don't want to train our Regis customers to become white sale customers. By doing so, we'll lose our top stylists who do not want to discount their services.

Let's understand that the majority of business in Regis Salons is appointment-driven. Many customers want the convenience of being able to make an appointment. This will always be a significant segment of the beauty industry, and we are certainly not going to exit this segment.

It's also interesting to note that there is now increasing evidence that we are getting new Regis stylists when we close moderate to high-end salons, and we expect that this trend will continue in the future due to the fact that we have the financial resources to be able to maintain our presence in this market segment.

Our UK business is getting better, and we have improved profitability. We are still negatively comping but at a far reduced rate as each month goes by. Our first month of the September quarter had minus 6% comps. Our second month had minus 5% comps, and our third month had minus 3% comps. We continue to make good progress on the UK store closing rent relief initiative we announced last July. As part of this initiative, we have identified 80 locations, which will either be closed or will require rent relief.

We have now closed 18 salons including 11 in the first quarter. We are in active negotiations with our landlords in our remaining salons, and we expect to close or receive rent reduction in a majority of these stores. In addition to our restructuring efforts, we continue to actively pursue rent reductions for many of our salons, and we have agreements to reduce rent in 54 additional locations.

Hair Club continues to perform well with first quarter EBITDA ahead of plan at $8.6 million. Our 55% investment in Empire Education Group continues to perform extremely well with EBITDA projected to grow at least 25% in fiscal 2010 to over $20 million. Our 30% equity investment in Frank Provost and Jean Louis David salons in Europe had flat comps in the first quarter.

Likewise, Kool Kuts for Kids is performing extremely well, and we are actively pursuing a feasibility study relating to the franchising of Kool Kuts for Kids.

As you know, we have been very aggressive in increasing our prices, and with demand being inelastic, we believe that we will continue to aggressively raise service prices this fiscal year in approximately 5,000 of our company-owned stores. Most of the price increases will anniversary last year's price increases and will be implemented in the winter months. We expect our overall average service ticket to increase 2.5% to 3% in fiscal 2010.

We very much appreciate the support of our shareholder group during these times. Most economists seem to agree that the recession is over. However, unemployment remains systemically and stubbornly high, and there is no question in our mind that the consumer is being more frugal. Very few industries are immune from this condition. Please rest assured that while we appreciate your patience, I, in particular, am an incredibly impatient individual. Our strategy is the appropriate strategy. We will continue to focus on our value concepts. We can't force customers to visit us more often. However, we can make sure that the customer experience is as good as it possibly can be, and that when they return, they return to us.

We continue to be bullish about the long-range prospects of our Company. We believe the industry is at the tail end of a 5% to 7% contraction, and when the contraction is over and visitation patterns normalize, the industry should be able to resume its 2%-plus annual growth.

Hopefully, December, which is the most important month in our second quarter and Quarters 3 and 4, will reflect this bullishness. I'd like to now pass the baton on to Randy.

Thanks, Paul. Good afternoon, everyone. Today we are recording first quarter fiscal 2010 operational earnings of $0.30 a share, identical to our results last year in our first quarter once you adjust that for our recently equity and convert issuance.

For many years, we have talked about the direct correlation of our earnings with our same-store sales performance. With our actual comps coming in at negative 4.5% during the first quarter, we would have expected our operational earnings to be about $0.20 a share, which included an incremental $4 million of planned cost saving initiatives, which we discussed with you in recent quarters.

Therefore, our operational results of $0.30 per share is about $0.10 higher than what our comps would indicate. Much of this unplanned upside related to stronger-than-expected expense control during the quarter. For example, our service the product margins came in $0.02 better than plan overall. In addition, our site operating and G&A expenses were about $0.03 favorable to plan on a net basis despite the unexpected legal settlements totaling $3.6 million that Paul discussed with you.

In addition to these incremental savings from our expense control initiatives, our first quarter rent expense came in nearly $0.02 per share better than plan, largely due to favorable rent review adjustments in the United Kingdom.

Lastly, earnings from our equity investments exceeded plan by $0.03 per share, primarily due to the performance of Empire Education Group. I will address most of these items in more detail a bit later on.

As you are aware, during the quarter we also recorded three non-operational items totaling $0.16 a share on a net basis, which reduced our first quarter actual reported results to $0.14 per share.

The first item related to an $18 million pretax charge associated with make-whole premiums and other fees we incurred in connection with the modification of our debt covenants and the prepayment of debt that took place this past July following our equity and convert transaction. We discussed the nature and amount of this item with you last quarter.

The second non-operational item, which we also discussed with you last quarter, related to $3.6 million of lease termination fees incurred in connection with our efforts to close or achieve rent relief in certain underperforming salons in the United Kingdom prior to the end of the current least term.

The third item was $3.2 million non-operational benefit that we recorded in the first quarter primarily related to an additional tax benefit associated with our sale of the Trade Secret business.

We have 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. Also, feel free to contact Mark Bosland or Alex Forliti here at Regis should you have additional questions regarding your financial models.

I'll now transition my comments by giving you a bit more detail behind our first quarter operating results for each of our business segments. A breakout of our segment performance is found in today's press release, and my comments this afternoon are going to focus on our operational performance, and I'll begin with our largest revenue segment, which is our North American salon business.

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 discontinued operations accounting treatment.

I would also like to point out that the financial statements in our press release today once again include two line items related to the sale of retail product by Regis to Premier Salons, who now owns Trade Secret. As we discussed in past quarters, Regis has agreed to provide certain transitional support services to Premier including the supply of certain retail products at Regis's cost. In order to separate these results from our ongoing operations, we have added a revenue line called "Products Sold to Premier," and a related expense line item labeled "Cost of Products Sold to Premier." These two items exactly offset each other and have no impact on our profitability here at Regis. Therefore, I am going to exclude these two line items when calculating percentages and quarter-over-quarter changes.

So let me get started. Our total North American salon revenue, which represented 87% of our consolidated first quarter revenue decreased 3% during the quarter to $512 million. This revenue decrease was the result of a decline in total same-store sales of 470 basis points, partially offset by revenue from company-owned salons that were built or acquired over the past year.

Service revenue, which represents 79% of our North American revenues declined 300 basis points during the quarter to $405 million. This reduction was due to a decline in service comps during the quarter of 4.2%, partially offset by revenues from new and acquired salons over the last 12 months.

Our same-store service sales continued to benefit during the first quarter by an increase in average ticket of 3.1%, in large part due to price increases we implemented during our third fiscal quarter of fiscal 2009. However, more than offsetting the increase in average ticket was a 7.3% decline in same-store customer visits during the quarter as many consumers have lengthened their visitation patterns due to the economy.

Product revenue fell 5.4% in the quarter to $97 million due to a decline in product same-store sales of 6.8%. Royalties and fees from our North American franchise salons were down 2% in the first quarter to $9.5 million. New franchise units that were added to the system over the last 12 months were more than offset by franchise buybacks, franchise unit closures, and relocations. In addition, our franchise salons are experiencing the same general weakness in consumer visitation patterns and same-store sales trends as our company-owned concepts are experiencing.

Let's now talk about gross margin, and I'm pleased to report that our combined gross margin rate for North American salons came in better than plan at exactly 44%. This rate was 20 basis points better than the rate we reported last year in our first quarter, and as I'll discuss in moment, the improvement in overall margins was largely the result of product margin improvement.

Our first quarter service margin rate came in slightly better than plan at 42.6% and was identical to the rate we reported in the same quarter last year. We continued to see a slight reduction in our overall salon labor costs. However, offsetting this improvement was a planned increase in salon health insurance costs. You may recall that last year we discussed with you our expectations for health insurance costs to increase slightly during this current 2010 fiscal year.

Our retail product margin rate for the first quarter of fiscal 2010 improved to 49.9%, a 140 basis-point increase over the same period a year ago. There were several reasons for the improvement in rate, much of which we had planned for and should continue to be realized in the future.

Some of the reasons behind this improvement included a recent focus on working with product vendors to improve our gross margins on those products we choose to promote. As we discussed with you last quarter, product margins are also benefiting from our recent initiative to hire new employees at an 8% commission rate per-product sales rather than the historical 10% rate.

Product margins have also increased from a shift in sales to our higher-margin private label brands. As we look forward to the balance of the current fiscal year, we expect product margins for our North American salons should approximate the rate we reported here in the first quarter.

Let me now address our site operating expenses, which includes costs directly incurred by our salons such as advertising, insurance, utilities, and janitorial costs. Our site operating expense in the first quarter came in exactly on plan at 9.5% of sales, up 110 basis points from the same period a year ago. 90 basis points, which was the lion's share of this planned increase was due to the P&L reclassification we've discussed with you during each of the last three quarters.

Certain expense items, which had previously been categorized a year ago within our rent expense have now been appropriately reclassified into our 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.

Absent this reclassification, however, our first quarter site operating expenses included the unplanned settlement of two legal claims totaling $3.6 million, which Paul discussed with you. The costs of these settlements were essentially offset by greater-than-expected expense reductions in other areas such as salon advertising rate and utilities.

Next we'll talk about our North American general and administrative expense, which came in at 5.4% of revenue during the fourth quarter. This rate came in 40 basis points better than plan and 60 basis points better than the same quarter last year. This improvement is a continuation of the results we've seen over the last three quarters and related to the numerous cost-cutting initiatives we implemented last fall.

As you recall, we reduced our field supervisory staff by about 10%, and we reduced the budget for certain marketing expenses. As we discussed with you last quarter, we continue to see significant reductions in our overall field supervisor travel cost as well as reduced expenditures for salon manager and staff meetings. In fact, these reductions are more than we had expected. Much of this improvement related to the implementation of further expense control initiatives put in place by our operating management team, which I think is a testimony as to how our entire organization continues to focus on ways to reduce expenses during this difficult sales environment.

Rent expense, which is primarily a fixed expense, came in at 14.4% of total first quarter sales, which 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 expenses that we just discussed, favorably reduced our first quarter rent rate by 90 basis points. However, partially offsetting this rate improvement was negative leverage in this fixed cost category caused from reduced sales volume.

Depreciation and amortization came in virtually on plan at 3.5% of sales, up only 10 basis points from last year in our first quarter. Our reduced level of capital and acquisition expenditures during the last nine months is serving to slightly reduce our D&A expense dollars, which, in turn, is helping to offset the negative leverage from reduced same-store sales.

The net effect of all these items I've just discussed caused our operating results to come in at 12.2% of sales comparable to the 12.4% operating margin rate we reported last year in our first quarter.

Let's now review the first quarter performance of our international salon segment, which includes our company-owned salons located primarily in the United Kingdom. Despite the fact that the UK continues to be a difficult place for retailers to operate, we remain focused on improving profitability through a strong payroll management, aggressive expense control, and through the act of closing or obtaining lease concessions for unprofitable salons.

These efforts appear to be paying dividends as we have improved our UK operational profitability with first quarter operating margin coming in at 6.2% of sales, up significantly from a margin rate of 3.5% in the same quarter last year.

Today, I plan to, once again, provide some brief commentary behind the quarterly change in 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 segment models may want to give Mark or Alex a call here at Regis, and they can help you.

Total revenue from our international segment represented 7% of our consolidated first quarter revenue and came in at $39 million in the first quarter, a reduction of $10 million from the same period a year ago. This quarter-over-quarter sales decline was largely due to three factors. The first related to foreign currency, as just over $6 million of the overall revenue decrease was 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 declined related to the closure of 37 salons over the past year. And the final factor impacting sales was negative comps, as our UK salons experienced a 4.6% decline in overall first quarter same-store sales.

Both service and product margins improved and exceeded plan during the first quarter contributing to an increase in combined gross margin rate of 170 basis points. Service margin improved 140 basis points, largely the result of improved operational payroll control.

As expected, we also saw an improvement in our retail product margin rate. First quarter product margins grew to exactly 49%, an improvement of 280 basis points over the first quarter last year. As we've discussed in past conference calls with you, our UK product margins are benefiting from a reduction in product cost as a result of having products shipped directly to them from our Regis distribution center in Chattanooga, Tennessee, rather than buying the product directly through distributors.

In addition, our retail sales mix has shifted a bit towards higher-margin products, and our shrink rate continues to improve. We expect our product margins in the UK should remain in the mid to high 40% range throughout our current 2010 fiscal year.

Let me now discuss Hair Club for Men and Women. Our Hair Club business continues to perform above plan, but the economy is having a bit of an impact with first quarter comps declining slightly by 1.8%. And let me highlight a couple of items.

First quarter revenue from our hair restoration centers came in at $35 million, which was essentially flat to the same period a year ago and represented 6% of our consolidated first quarter sales.

First quarter operating margin rate for Hair Club came in at 16%, which, as we expected, was down slightly from the rate of 16.8% we reported last year in our first quarter. This plan decrease was due to negative leverage from a slight decline in comps during the first quarter.

Hair Club's first quarter EBITDA margin came in at 25%, slightly better than the rate we reported last year in the comparable quarter. Again, we remain pleased with the performance of this segment of our business.

I'm going to switch gears now 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 nearly 800 employees working here in Minneapolis and the 500 associates that work in our two distribution centers.

Centralized back office support functions provide leverage to our operating model. As I've said before, our company-owned salon counts have continued to increase over the past five to six years at a much greater rate than our corporate home office headcount. Despite this leverage, we continue to be very aggressive with expense control, especially during these times of slow sales growth.

Our first quarter corporate G&A expense came in about $500,000 better than plan at $33.5 million, but was nearly $200,000 more than the same period a year ago. Our first quarter fiscal 2010 expense included about $1.2 million in planned professional fees related primarily to the tax restructuring project we discussed with you last quarter. This project, which is now complete, provides us the ability to repatriate nearly $90 million of excess international cash balances with very little tax cost in fiscal 2010.

Absent these professional fees, our G&A cost declined year-over-year due to our ongoing expense control initiatives. We are obviously pleased with the results of these efforts. And let me make one reminder-type comment to you regarding our corporate G&A -- this expense category in the first 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 have discussed with you in the past, Premier Salons, who now owns Trade Secret, is fully reimbursing Regis for all of these 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 the G&A expense.

Now, that concludes my comments regarding the individual business segments, and let me move on to a couple of other items, and I'm going to start with our investments, which are reported on the P&L line item labeled "equity and income of affiliated companies." This line includes the aftertax results of our investments in businesses such as Empire Education and Provalliance.

We are pleased to report that or share of the first quarter earnings in these equity investments totaled $3.1 million in the first quarter, up significantly from last year's first quarter results. These first quarter results did include one-time benefits totaling $950,000 that favorably impacted the quarterly performance by about a penny a share. But absent these benefits, the remaining underlying results for both Empire and Provalliance were profitable and exceeded our plan.

Let me now speak to income taxes -- our first quarter underlying effective tax rate came in at 41%. This rate was just slightly higher than normal, as our tax expense included a small, $350,000 adjustment we recorded to true up certain deferred tax items. At this time, we still anticipate that the underlying tax rate for our entire 2010 fiscal year should be in the range of 38% to 40%.

I just have two more comments before we open it up for Q&A. First, total debt at September 30th was reduced to $478 million. Now, that's down $157 million over the past three months, and it's down $330 million from just one year ago. This significant reduction in debt was the result of our expense reduction efforts, our cash flow enhancement initiatives, as well as our recent equity convert transaction. We are obviously quite pleased with what we've accomplished over a very short period of time.

And, anecdotally, let me also say that our total debt at September 30th, the $478 million, includes our recently issued convertible notes, which are already trading above the strike price. So assuming these notes were all converted today to equity, our debt is actually less than $340 million.

Once again, our balance sheet is in great shape. Today we have no borrowings under our $300 million revolving credit facility. We have no liquidity issues. We continue to be in good standing with all of our financial debt covenants, and we have plenty of covenant cushion.

One last item -- as we look forward to the remainder of the current fiscal year, our outlook really hasn't changed much. We still expect same-store sales in the second half of fiscal 2010 to be better than the first half. And for the entire fiscal year, we expect our comps could be in the range of negative 3% deposit of 1%. At these levels, EBITDA should be in the range of $200 million to $240 million, and we should generate excess cash of $50 million or more during the fiscal year.

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

(Operator Instructions) Lorraine Hutchinson, Bank of America.

Hi, guys, this is Paul Alexander standing in for Lorraine. Can you comment on whether you saw sequential improvement in the business near the close of the quarter, or if you've seen stabilization in October? And can you give us an idea of the rate of comp deterioration last year by month around this time?

Yes, let me just tell you sequentially over the quarter -- I think Paul made some comments relative to the UK, but we saw a similar trend here in North America. But consolidated comps in the month of July were off 5.7% overall. About 5.3% the following month in August, and in September it was off 2.2%. So we saw some improvement. And when you compare that to the same period a year ago, total comps were up 1.6% in July of 2008, down 30 basis points the following month in August, and down 1.7% in September.

Great, and is there anything of note -- any difference between service and product on that?

Product is slightly worse.

Paul Ridgeway, Credit Suisse.

It's Tracy Kogan filling in for Paul. I had two questions. The first was -- I was wondering if you could talk about private label -- how big is that right now as a percent of your total? And then how big do you think that can get? And then on the rent side, you mentioned all the rent reductions you got in the UK, and I was just wondering what you're seeing in the US in terms of negotiations. Thanks.

With respect to private label -- private label historically has been about 5% to 6% of our business. It is now more than 8% of our business and growing. And let's not forget that private label in many of our salons is used at the back bar where people shampoo. So that's a growing part of our business, and private label enjoyed almost double-digit growth last year. So private label is quite strong for us.

With respect to rent relief, we continue to get rent relief. But let's not forget there is still the issue of CAM, Common Area, Maintenance, and Taxes, and that's more problematic. So, overall, our occupancy costs should be about static this year compared to last year.

And back to the private label for a second -- what is, if you can say, the difference in margin on that versus the branded products?

Well, it's hard, really, because you have issues in terms of unfinished goods, really. But the margins are a good 10% better. And that's without factoring significant interest costs for investment.

Jeff Stein, Soleil Securities.

Paul, just a couple of questions. First of all, on the September comp store sales trend -- do you think there might have been some benefit from the later Labor Day this year helping September? And perhaps maybe you can give us a little insight into what's happened in October in terms of weather and how that September trend has -- ?

Labor Day, Jeff, definitely helped us. October, thus far, we're basically showing similar trends that we showed in the first quarter.

Okay. And a question on your Supercuts versus your Promenade salons. When you look at the total revenues you generate from Supercuts, which, I think you would probably admit is your strongest value brand. It's much smaller than the collective revenues you generate from the Promenade Salons. Have you given any consideration to at least converting some of those Promenade Salons, over time, to Supercuts to take advantage of the branding?

Jeff, we have done it from time to time, and the order of magnitude is really very, very small. The Promenade division is composed, as you know, of a multitude of brands, and we are constantly asked "Why don't you convert them into two or three concepts?" In Ohio, Famous Hair is very, very strong and has huge brand equity. It makes no sense to convert; likewise, Holiday Hair in Pennsylvania.

We continuously look at it. We would certainly do it in areas like northern New Jersey or Upstate New York where we are particularly strong. I think there are opportunities there, but you're not talking about a large number of stores, Jeff. You're talking about several handsful.

Okay, and final question -- it seems to me that you get to December, and you might be able to anniversary and begin to see some stabilization in your service comps. But I guess I'm really having trouble seeing what the catalyst is going to be to drive the turnaround or even stabilization in your retail product comps. It seems that you are continuing to see erosion in market share to the mass channel and probably some negative effect from diversion. What is going to stop that and stabilize?

Actually, product comps are starting to stabilize relative to the weakness of service. So, if anything, the lines are going in opposite directions, Jeff. The product comps are still slightly worse but the rate of improvement is better than service in the last month. But we do have -- we are really focusing on a lot of trend items. I'm kind of surprised by this, too, because, intuitively, I would have expected the mass lines to really take increasing share, and that doesn't seem to be happening. So we're more bullish with respect to product than we were maybe three months ago, and I think that's fairly significant. But one month does not make a trend, so we'll talk to you in a few months, and we'll see how it's going. But service product comps relative to the service comps are improving, especially in certain divisions.

By the way, let's not forget Smart Style in terms of a real key value brand with $0.5 billion plus in sales. That's a very, very strong brand for us.

Bill Armstrong, C.L. King & Associates.

In your sales release earlier in the month, you said you expected to see improvement in same-store sales beginning in the second half of the second quarter. What do you think will drive that?

In part, the second half of the second quarter last year was just awful, which reflected having retailing, in general. And our service comps in December were down almost 7%. So I think the comparisons are a lot easier. There is no question, whether the recession is over or not is subject to debate. There is no question that the economy has stabilized, and that was not the case last Christmas. I mean, people were just petrified last Christmas. I don't think that's the case today.

Okay, and do you expect to see that in both product and service?

Yes, absolutely. We have terrific assortments, and it's a great stocking stuffer.

Just a couple of housekeeping questions for Randy, I guess. The legal claims of $3.6 million, was that in site operating expenses or G&A?

That was in site.

Site, okay. And interest expense, going forward, sort of a quarterly run rate. What should we be looking at for modeling purposes?

Well, back out -- in our first quarter we had about $18 million of make-whole and other fees that we had to expense in the quarter as part of interest expense. I think if you pull that out, we're probably looking at -- somewhere in that $9.5 million to $10 million range each quarter.

Daniel Hofkin, William Blair Company.

Good afternoon. Following on some of the sales-related questions and the outlook -- if you could just briefly maybe give the monthly cadence, I think you said minus 7 on the service side by December of '08. But you are now starting to come on to a period where you have several quarters with a mid-single-digit decline that you are lapping. So if you could maybe just help us frame how -- if things were to remain stable relative to where they currently are, what you would think of as a comp sales range for the next couple, several quarters? And then maybe specifically for the December quarter? I know you haven't given formal guidance, but if that comp sales range were to hold, what would be a reasonable earnings range for the December quarter? Thank you.

Dan, look, I don't want to be coy -- this is Randy -- but we have articulated a couple of quarters ago, because of the unprecedented times and the extreme challenge, as you can appreciate in trying to predict what the future holds, we have shied away from giving guidance until we start seeing some normalization in sales trends. So I'm going to intentionally duck that question for FD reasons, but let me just say this -- we did say, and we still believe, that our overall comps for the year -- and I know this is a wide range, but we said for the year could be anywhere from negative 3 to positive 1. We do feel pretty strong that as we lap, as we anniversary these tougher comparisons, which started to materialize about this time last year, that we should start seeing some improvement in our comps, and for that reason we feel that our second half of the fiscal year will be stronger than the first half of the fiscal year.

And absent that, you're right -- December is the -- was a tough month for us a year ago with overall comps being off 7%. So that's kind of where we're seeing, perhaps, our inflection for the current year, is the month of December. And I can't and I won't say what our expectations are because nobody really has a crystal ball.

Maybe just with regard to the quarter that just ended -- anything that you would call out aside from adjusting for the one-time items -- anything else that you would call out as unusual or where you would expect a catch-up or true-up in later quarters? Or should the cadence be pretty similar?

Yes, Dan, I think it's more of the latter. We aren't expecting anything unusual or unique to point to as we sit here today. So I think, as you say, the cadence should be pretty much the same, going forward, as we saw this quarter.,

Mimi Noel, Sidoti & Company.

The first question I had was on the agreement with Premier. I think that was guaranteed for six months but to go beyond that -- is there any update to that agreement?

Yes, what we're really trying to do is transition all the back office accounting functions to their offices up in Toronto. We effectively accomplished that right in line with our plan, and that was done October 1st. So Premier now has the reigns over their own back office functions. That's effectively behind this. Having said that, we still help them with a few odds and ends, but the transition is behind us.

I was going to say the other piece of it deals with distribution of product for them. We are no longer selling product to Premier, so those two line items on the P&L that I referred to will go away after the end of this quarter. They are buying their own product. But we are performing the distribution function for them. Their product is being warehoused in our distribution center in Chattanooga. They are paying us their proportionate share of the fixed costs of that DC. So that will be, really, the only relationship, going forward, with Premier.

Okay, you answered that question in its entirety. And, hopefully, I'm not asking the same question in just using different words, but looking at salon traffic on a sequential basis -- and I don't mean year-over-year comps month-to-month but rather your traffic in the September quarter versus the June quarter -- how does that compare?

Hang on, one second. I'll --

Or is there -- I know June is typically a very big month for you -- does that skew the comparison?

It's about the same, not materially different.

Okay, so those numbers are looking flat?

Yes.

Okay, that's good. And then the last question I had is really just a refresher. Your Smart Style concept has attractive margins, as I think you talked about, maybe qualitatively. Can you remind me what's unique about that model?

Huge traffic.

Okay, so it's a matter of scale.

Stores in the system, in the average supercenter has, what, 80,000 people a week coming into those stores -- or 50,000 -- a lot of traffic, and it's totally counterintuitive, but almost one-third of our business is product. Wal-Mart and, you know, poor people don't spend $15 on a bottle of shampoo. So the locations are really very helpful.

The other probably unique aspect is our investment is much lower because Wal-Mart does most of the leasehold. So we're respectively putting in equipment.

Erika Maschmeyer, Robert W. Baird.

Hi, nice quarter.

Thanks, Erika.

Could you give the exact timing of your expected price increases?

They're anniversaried. Most of them, the majority of them, will take place this winter. But there is a significant tranche that takes place in June and July as well.

Okay, so consistent with last year?

Correct.

Great, and then on the Other equity line, you certainly surprised -- and I know that you said that absent the $950,000 one-time item that the rest was due to profitable results. Could you just talk a little bit more about that? I was thinking that Q1 was more of a seasonally weak quarter for you, so I would have expected it to be lower.

It's bifurcated. The school business is very strong but, generally speaking, when unemployment is high, all school businesses, education businesses are strong, and that's the case here as well. And that's the primary reason for Empire being as good as it is, absent the accounting adjustment.

And with respect to Provo, you know, they've doubled the size of their company and getting their administration together. And their comps for the quarter were flat contrasted to our comps being negative. And that's helpful as well. And they are also being very aggressive with respect to going at the landlord, rent relief, and the like. So you combine all that -- and both companies, by the way, virtually doubled in size in the last two or three years, with an excellent management team.

We're heartened that our investments -- when our investments are monetized, you're talking about a substantial amount of cash and then [a certain flow] into Regis.

That's good news. And then could you talk about your store expansion plans -- kind of how you think of that for fiscal 2010? And then next year, and, I guess, what would you need to see this year to ramp up growth in the future?

Well, as we've articulated, we're still going to be in a relatively slower growth mode. Our CapEx and acquisition spend that we budgeted for this year is, collectively, about $100 million. About $60 million of that is maintenance CapEx, and $25 million is budgeted for acquisitions, and the remaining would be new stores.

Now, the new stores, we're anticipating constructing about 150 new stores from scratch, maybe 90 or so will be in the Wal-Mart Supercenters. And so, really, that's our CapEx plans. In most years, when you look back not so long ago, we were building 400 to 500 each year. We were acquiring 400 to 500 each year. We had the opportunity to continue doing that in the future. We have the balance sheet to do that, we have the cash flow to do that. What we're waiting for is just the economy to improve or customer visitation patterns to start anniversarying.

And once you start seeing positive comps, you'll see an acceleration of growth.

On total G&A, I think you're starting to cycle some of your major cost-cutting initiatives. Do you think that line can continue to be down year-over-year in Q2 and later in the year? Or should we start to see that flatten out or increase?

Well, we focus a lot -- there's two pieces of the consolidated G&A. Did you say corporate or consolidated?

Consolidated.

Yes, there's two pieces -- you're going to have a lot of the field-related costs, and as we talked about before, we're seeing some unexpected expense reductions in areas like manager meeting and supervisor travel, but I would expect should continue in the foreseeable future.

The corporate piece of the G&A, as well as where we're having other expense cuts -- we cut $32 million or $33 million out of our infrastructure last fiscal year. This year we expect to cut probably closer to $10 million of incremental costs out of the infrastructure.

So we're still aggressively focusing on expense control, on cutting costs. Having said that, you can only cut $1.00 once, and that growth rate of expense cuts is going to start slowing down. But I think we still have another $10 million of cuts this year.

Jill Caruthers, Johnson Rice & Company.

In the last conference call you commented on the 80 possible closings of the UK stores contribute about a $2.5 million operating drag. If you could just kind of address that question again, as well as your earlier comment that said you closed 11 stores this quarter and the other ones you might be reducing for an expense kind of -- where are you at in that program?

Yes, let me take a stab at that. We have closed 18, so far, out of those stores. We've got another 14 that are scheduled to close this quarter, in their second quarter. That gets us a little over 30. We have also had rent relief in an additional 17 stores out of those 80. So we're well along on it. We're not done with it yet. We always said that our plans were to close up to 80. We all knew that we weren't going to be successful in all of those, but I think our batting average is pretty encouraging right now.

It's a work in progress, and the timeline is very difficult to define. You never make money from a closed location long term. And if we can keep well-located places open, and even if it takes an extra month or two to negotiate a different rent package, we'll do that. We expect that everything to be finished, realistically, by the end of the calendar year. It may lag another month or two beyond that.

You posted substantial EBIT improvement in the quarter, as well -- 6.2%. Was the bulk of that, was that due to closing some of these underperforming stores?

That was a piece of it, and I don't know if you stepped in later on the conference call, but we also talked about improvement in salon payroll. Again, our operating people over in the UK are focusing very hard on controlling payroll costs. They did a nice job this quarter.

We are also seeing -- I'm trying to remember -- there were a couple of other factors in addition to closed stores. I'm sorry?

Product margin.

Oh, product margin, yes, right, right, right, from shipping product directly from our Chattanooga, Tennessee, DC, we are seeing product margin enhancement. So now, overall, there were a number of contributing factors to the improvement.

Mike Hamilton, RBC.

Just a follow-on on Premier -- as you cycle out of those sales, do we have any impact, overall, on vendor rebate type stuff, or was that all included in pass through in what we've seen in the last year?

Yes, you won't see any impact.

If there are no further questions, I will now turn the conference back to Paul. Please go ahead.

Thanks for joining us, everyone, have a good evening.

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