Regis Corp (RGS) 2010 Q3 法說會逐字稿

Good morning. My name is Marissa and I will be your conference facilitator today. At this time I would like to welcome everyone to the Regis Corporation third 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 1-800-406-7325 using the access code 426-9750-pound. 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 the non-GAAP financial measures mentioned in the following presentation can be followed on their Web site at www.regiscorp.com.

With us today are Paul Finkelstein, Chairman, President and Chief Executive Officer, and Randy Pearce, Senior Executive Vice President and Chief Financial and Administrative Officer. After management has completed its review of the quarter, we will open the call for questions. (Operator Instructions)

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

Thank you very much. And good morning, everyone, thank you for joining us. Sales in the quarter remain challenging but improved significantly over recent quarters. I am very pleased to report third quarter operational earnings, up $0.37 a share, $0.08 ahead of plan, up from $0.36 a share last year. After adjusting for our equity and convert offering. The results in the third quarter mirrored the previous two quarters with a focus on expense control and improving gross margins. Our gross margins continue to benefit from the changes we have implemented to our service and retail commission plans. However, offsetting much of this improvement was an increase in payroll taxes of 30 basis points, primarily the result of significant increases in state unemployment taxes.

Our retail product sales performance was strong. Retail comps for the third quarter were flat. A significant improvement from last year. Service counts were down 2.2%. Also much improved from a year ago, when they declined 3.9%. March North American comps were essentially flat. In fact they were the best results in 20 months. These results were not positively affected by Easter. Our price increases continue to show that demand for our services is inelastic. Average ticket was up 3.6% in the quarter. Our average value customer spends less than $140 per year on hair services. These hair services are obviously an affordable necessity not an affordable luxury, thus the reason behind the fact that demand has proven to be quite inelastic. Ours is the quintessential replenishment business, both in product and service. Obviously not all retailers are recovering equally from the recession. I think that a significant reason relates to simple mathematics.

Our accounts for the year ended June 30, 2009 were negative 3.1%. Many other retailers had comps in the double digit range. Thus, simple math will dictate that their recent bounce-back would be expected to be greater than ours. Our comps for this year will be likely be around negative 2.5% to negative 3%. We continue to strongly believe that we are not losing market share. Although visits continue to be down the business is definitely stabilizing. At the present time, we're projecting that the industry and Regis in particular will experience a three-year decline in service comps and recover thereafter. Thus, we're forecasting comps for fiscal 2011 to be in the range of minus 1% to plus 2%. And we fully expect positive comps in the latter part of fiscal 2011. As you've seen in the press release and the accompanied exhibits, Regis took a non-cash goodwill impairment charge of $33 million. The Regis division has been hardest hit by the present economic conditions. Higher end retailers have worn the brunt of this recession through greater degree than value retailers. Our revenue in the Regis division has fallen from $514 million in fiscal 2008 to an estimated $450 million in fiscal 2010. However, the corresponding reduction in profits from the Regis division has already been reflected in our operating results and stock price.

Our Regis division business is stabilizing and we will make the necessary investments to improve the Regis business. The financial model still works. Regis still generates significant EBITDA in the low to mid $30 million range. The Regis division is not in any way, shape or form in the same position that Trade Secret was. It continues to generate positive cash flow and we see a significant turn-around during the next year or two. The primary issue with the Regis division is customer visits. This issue can be broken into two categories. The first category is just the overall delay in visits relating to the economic environment. We discussed this issue with you over the last year, and we believe that this is beginning to and definitely will anniversary. The second issue relates to mall traffic and walk-in customers. Historically, we have relied on the mall to help us attract the initial walk-in customer. Our job was to then convert the walk-in customer into a loyal Regis customer. With traffic in the malls down, we must find new ways to attract and maintain customers. With this in mind, we're proposing at our Board meeting tomorrow, of spending of approximately $7.5 million over the next 12 months to reinvigorate the Regis brand and develop new programs to drive business.

Investments in bricks and mortar are not the only investments that should be made in retailing. The Regis concept has plenty of room to grow. Many salons that have emulated Regis' price points have closed their doors, forcing their customers and stylists to go elsewhere and our Regis salons are extremely well located. A major area of emphasis will be on marketing in the mall arena which can be done extremely efficiently. Direct mail will also be utilized. There is a significant opportunity to turn existing low customers into Regis clients. We're working with our mall partners to be extremely aggressive with respect to marketing spend. We feel that the mall developers will be very receptive to these efforts and certainly our existing staff will welcome these initiatives with respect to the new Regis concept. While the initiative is at first focused on 100 of the 1,000 Regis salons our intentions are to eventually expand our efforts to the remaining doors. We're implementing other initiatives as well. Including but not limited to increasing by nearly 30% the money spent on national media for Supercuts advertising, including increased online focus.

Additionally, we have been producing The Hair Book which is a quarterly custom publication exclusively distributed in all Regis salons that features articles on celebrity hair stylists and has celebrities on the cover. It is a great tool for our stylists to use in their client consultations and featuring it in our store front is a great way to attract new customers. We will also beginning to offer new services in some of our salons. In the Supercuts for example we added Paul Mitchell's Gray Blending For Men. Additionally we're offering brow shaping services and skin care treatments as part of a new Beauty Bar in tests in several Minneapolis Regis salons. The tests have been highly successful and we're expanding this service to other doors in the Minneapolis market. On the retail side there are a couple of new product lines which we've very excited about. It's a 10, which we began selling last year in April has been enormously successful with over $4 million of sales in the quarter. Our Regis division is the only chain carrying hot line calling Moroccanoil. We're also trying out new cosmetic lines and Regis will be featured on PBS for 34 months with Pure Mineral Cosmetics.

As you can see from recent result, our business is starting to stabilize, and it is time for us to get more aggressive with respect to the top-line. We have new initiatives in place with respect to our franchise division to significantly increase our new openings. During the last conference call, we mentioned that we're going to aggressively target cities such as Boston. We're currently in active negotiations for more than 60 potential new sites. And we fully expect to add at least 60 locations over the course of the next two years in Boston. In addition, we have targeted nine other cities where Supercuts has a significant presence and brand recognition and we plan to aggressively sign leases and seek out new franchisees in these markets. Corporate is more than prepared to step in. If we can't get a new franchisee to build a new location in Boston, and the other targeted cities, as our returns in these cities far exceed our average returns. Likewise, we're focusing on field supervisor personnel and being far more aggressive with respect to bringing in new business and providing offerings for existing customers to increase our retention rate.

Of interest and note. That Regis has had a long history and tradition of achieving results when our operating people are really focused. Years ago, we focused on hair coloring and increased our hair coloring business from 3% of our sales in 1990 to 18% of our service sales today. We did the same with product sales. Going from 3% when I joined the Company in 1987 to 22% of our revenues today. Our supervisors will be far more aggressive in the field to capture customers in the malls or shopping outside of our strip center salon, and likewise there will be additional efforts in SmartStyle in Walmart to capture customers passing by our doors every day. Incidentally it is interesting to note that one of our SmartStyle supervisors utilized the program similar to that which is used in cosmetic departments in department stores. She sampled It's a 10 on customers passing by our door on the SmartStyle salon in Walmart and as a result she rang up $280 of incremental sales in one day. Aggressive local gorilla marketing programs like these will be accelerated in the months ahead. Our field people have done an excellent job of controlling expenses and now they're going to be far more entrepreneurial and focused on top-line sales generation.

The performance of our affiliates has been extremely robust. Empire Education Group, in which we have a 55% equity interest, has a spectacular team with EBITDA projected to grow from $16 million to $20 million to $24 million this fiscal year. There are significant growth opportunities for Empire and they're planning to open 16 new schools in the next 12 to 18 months. Likewise, Provalliance which owns Jean Luis David and Provo is currently generating positive comps and is projecting EBITDA to grow approximately to $40 million this calendar year up from $30 million last year. We don't get credit from EBITDA from either of these investments. The results are shown as a one line item based on equity accounting. Our UK business is improving. We've closed 22 unprofitable stores, with another 14 to close by the end of the fourth quarter. And we've renegotiated rent relief on nearly 100 stores and rerented 36 Hair Express to Regis or Supercuts. As a result, we're projecting a 25% increase in EBITDA in the UK division in fiscal 2011. With respect to our 2011 outlook we're budgeting very conservatively.

As I previously mentioned we expect comps to be in the range of minus 1% to plus 2% resulting in EBITDA in the range of $235 million to $270 million. Our CompEx and acquisition spend is budgeted to be $120 million, and we expect to generate excess cash of between $55 million and $80 million. We're planning on building about 160 new locations and we also plan for our franchisees to add 80 locations. We will probably be closing between 150 and 200 salons during the year. This closure rate is typical for us. As I mentioned before, on previous conference calls, one-salon visits are in the negative 1% or 2% range, we plan to resume our growth by ratcheting up both new builds and acquisitions. Some investors have asked whether or not we are going to make significant changes in our capital allocation strategy. With the economy as it is, new job creation being lackluster at best, and stimulus spending probably being reduced, we feel that it is as prudent to continue to strengthen our balance sheet and build cash. We've increased our dividend dollar spend by substantially by 30%, because of a new share issuance.

Other investors have asked whether or not we would repurchase shares and the answer at least for the time being is no. We have been there, we've done that, and it is not in the plans at this point in time. We feel that our future new store and acquisition opportunities and their related return on investment are too great for us to have a major shift in our capital allocation strategy. In addition, our bank covenants which we amended last summer currently restrict our ability to pay dividends and repurchase stock to $20 million per year. Ours is a Company that has no ceiling with respect to growth. All of you that are on this conference call are salon customers. Some of you go once a month. Some of you go three times a year. But your visitation patterns are quite predictable. At the very most, we will have negative comps for three years, although I'm highly confident that at least during the second half of fiscal 2011, we should have positive comps. With our enterprise value being approximately 5.6 times the midpoint of our projected EBITDA, we feel that the risk/reward ratio of owning Regis stock is attractive.

We feel that we're at the tail end of the most difficult period of time that our industry has ever faced. This is still a very large industry. With worldwide sales approximating $160 billion a year. The financial model works extremely well. The balance sheet dynamics are excellent. With Regis being able to grow with negative working capital. As we receive our cash long before we have to pay our bills. Plus, the entire issue really relates to how patient we can be until visits normalize. Based on trends, we're highly confident that this normalization will take place at the end of fiscal 2011 and we will be able to resume our growth thereafter. The strategy makes sense. And we're very much value oriented. And our opportunities are boundless. Randy Pearce will now continue.

Thanks, Paul. And good morning, everyone. As Paul mentioned, we're reporting break-even earnings today for our third quarter, that includes the goodwill impairment charge, but absent this, our operational earnings for the quarter grew to $0.37 a share, up slightly from the $0.36 a share we reported last year on a pro forma basis. We always try to correlate our earnings and our same store sales performance. And with actual comps declining 1.8% during the third quarter, we would have expected our operational earnings to be about $0.29 a share. And that included an incremental $2.5 million, or $0.025 per share of planned cost saving initiatives that we discussed with you in recent quarters. Therefore, our operational results of $0.37 are about $0.08 high than what our comps would indicate. This $0.08 of upside came from several areas, the largest of which pertains to income taxes. Our effective income tax rate for the quarter came in favorable to plan contributing $0.03 per share of upside to our earnings due to statutory expiration of certain tax reserves we created in the past. A second factor contributing to the earnings upside related to continuation of stronger-than-expected expense control in North America, including gross margin enhancement, which increased our earnings by an additional $0.03. Lastly, increased earning contributions from our international salon business in the UK, as well as our equity investments, each exceeded plan by about a $0.01 a share. I will now address each of these items with you in more detail a bit later on.

We once again 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 for both the current year and the prior year third quarters. Also, feel free to contact Mark Fosland or Alex Forliti here at Regis should you have any additional questions regarding your financial models. I will now transition my comments and give you a bit more detail behind our third quarter results for each of our business segments and you will find a breakout of our segment performance in today's press release. My comments this morning will once again as always focus on our operational performance and I'm going to begin now with our North American salon segment. Please remember that our former Trade Secret results have been removed from the prior year individual revenue and expense line items on the North American segment P&L. And that's been as required by our discontinued operations accounting treatment. As we discussed in past quarters, Regis had agreed to provide certain transitional support services to Premiere Salons. The company that now owns Trade Secrets. These services included the sale of certain retail products to Premiere at Regis' cost for a limited period of time which ended last September 30, the end of our first fiscal quarter. Therefore any comments that I make today referencing prior year third quarter sales and expense ratios will be cleansed of all sales to Premiere.

Our North American salon revenue, which represented 88% of our consolidated third quarter revenue decreased 1% in the quarter to $517 million. This revenue decrease was the result of a decline in total same store sales of 180 basis points, partially offset by a favorable currency impact from our Canadian salon revenue due to a weakening of the US dollar against the Canadian dollar. Service revenue declined 150 basis points during the quarter, to $406 million. This reduction was largely the result of a decline in service comps during the quarter of 2.3%. Partially offset once again by the favorable impact from currency which I just mentioned. Our same store service sales continued to benefit during the third quarter by an increase in average ticket of 3.4%. In large part due to price increases that we implemented during our third fiscal quarter this year. However, more than offsetting the increase in average ticket was a 5.7% decline in same store customer visits during the quarter. We did see improvement in our visitation patterns. In the month of March, for example, our customer visits showed signs of improvement, and were down 3.6%. We're very pleased to report that we had positive retail product comps in the quarter of 50 basis points. Again, another sign of improvement.

Our total retail product revenue grew 2% in the quarter, due to our positive comps, as well as the currency impact from a strengthening Canadian dollar. The third quarter royalties and revenues, fees from our North American franchise salons were $9.1 million. Just slightly higher than the same period a year ago. During the past 12 months, the number of new franchise units added to the system were comparable to the number of units that we lost through franchise buy-backs, closures and relocations. And let me now talk a bit about our gross margin. And I'm pleased to say that our combined gross margin rate for North American salons came in better than plan at 43.9%. Which was 20 basis points better than the rate we reported last year in our third quarter. As I will discuss in a moment, the growth in overall margin was primarily the result of service margin improvement. Our third quarter service margin rate came in better than plan at 42.5% or 30 basis points better than the rate we reported in the same quarter last year.

As we discussed with you over the last several quarters, a major reason for this improvement was reduced salon labor costs. Salary and commissions paid to our salon stylists represent our single largest expense category and our operational control over salon payrolls continues to be outstanding. We continue to realize benefit from the new leverage pay plans that we implemented this past year in many of our salons. In addition, we continue to experience slightly lower supply costs, the result of several savings initiatives. Partially offsetting this improvement was an increase in salon payroll taxes which Paul mentioned. We are seeing many states increase their unemployment payroll tax rates and the related caps on these taxes. Looking forward to our fourth quarter of this year, we expect that our service gross margin rate should be slightly better than the rate we reported in our third quarter. Our retail product margin rate for the third quarter of fiscal 2010 came in at 49.3%. Although this rate was still quite strong, it was 50 basis points lower than our initial plan, and 50 basis points below the rate we reported last year in our third quarter.

And there were three factors that contributed to this temporary decline in rate. The first factor was a timing issue related to product donations that we make. Every year, we donate a certain amount of slow-moving inventory and the timing of these donations varies each year. This year, in the third quarter, we donated a disproportionate amount of our annual plan and accounts for about 30 basis points of our margin decline. A second factor related to a larger than planned clearance of discontinued product and the clearance of certain items that were specially packaged and merchandised for the holiday season this past Christmas that we could not return to our regular merchandise assortment. These clearances are now behind us. And the third and final factor pertain to a small shift in sales mix during the quarter, the slightly lower margin items. In large part, the result of our promotional calendar. Partially offsetting the impact from these three items was continued improvement in our retail commissions.

As you recall, about a year ago, we implemented a new payroll plan to pay new stylists an 8% commission rate on their product sales rather than the historical rate of 10%. As we look forward to our fourth quarter, we expect product margins for our North American salons should approximate 50%. I will now address our site operating expense which includes costs directly incurred by our salons, such as advertising, insurance, utilities, and janitorial costs. Our site operating expense in the third quarter came in on plan at 8.7% of sales, and that was 20 basis points better than the rate we reported last year in our third quarter. Most of the planned improvement was related to a reduction in current year worker's comp costs, including premiums and claim reserves. These lower costs are a continuation of our cost reduction initiatives in this area. As you're aware over the past several years we have seen significant benefits from reductions to our worker's comp insurance reserves due to the effectiveness of our aggressive salon safety and Return To Work programs. In addition, our third quarter site operating expense continued to benefit from certain cost saving initiatives in other areas such as utilities and salon repairs. These cost savings essentially mitigated any negative leverage from declining sales and inflation.

Next, I will talk about our North American general and administrative expense which came in better than plan at 5.4% of third quarter revenue, and was identical to the rate we reported in the comparable period last year. We had planned for a slight increase in this category during the third quarter, largely due to negative sales leverage, as well as the timing of certain salon manager meetings. However, offsetting this rate increase were unplanned reductions and other expense categories such as marketing and field supervisory travel costs. The reduced marketing expenditures were really timing related. A shift from our third fiscal quarter to our fourth. And the reduction in supervisory travel costs as a result of our continued focus on cost savings. As a result of all of these factors, we are able to keep our third quarter North American G&A expense flat as a percentage of sales with the same period last year.

Rent expense which you know is primarily a fixed cost, came in at 14.4% of total third quarter sales, and that was 30 basis points above the rate we reported last year. This increase was essentially due to negative sales leverage, as well as some lease termination fees paid to close a few unprofitable stores. Depreciation and amortization came in on plan at 3.4% of sales, 20 basis points better than the rate we reported last year in our third quarter. Our reduced level of capital and acquisition expenditures during the last 12 months is serving to reduce our D&A expense, which in turn is helping to offset the negative leverage caused from a decline in same store sales. The net effect of all of the items we just discussed caused our operational operating income to come in at 13.1% of sales, up 40 basis points. From the rate of 12.7 we reported last year in our third quarter.

I am now going to move on to our international salon segment, which includes our company-owned salons located primarily in the United Kingdom. Although same store sales from our international business declined 4.8% in the third quarter, it reflected a substantial improvement of 330 basis points over the same period a year ago. Despite the decline in sales, we remain very focused on improving our overall profitability and we're pleased with the results. Third quarter operating profit from this segment of our business was well above plan and exceeded results from the same period a year ago by $1.2 million. Our related operating margin improved in the third quarter to a rate of 5.9% of sales up from 2.5% in the same period a year ago. This overall improvement in profitability was accomplished in large part from aggressive expense control, and through the closure or obtaining lease concessions for unprofitable salons. Today, I once again plan to 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 built 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 6% of our consolidated third quarter sales and came in at $35 million in the quarter. A reduction of 1% from the same period a year ago. This slight drop in sales quarter over quarter was due to a decline in same store sales of 4.8%, as well as a reduction in revenue following the closure of 40 underperforming salons in the UK over the past year, as part of our UK Store Closure initiative. Significantly offsetting these declines was a favorable foreign currency impact.

Now, let me address our international service and product margins. Service margin rate came in on plan at 48.8%, but declined 100 basis points over last year. Last year's rate was artificially high, as we benefited from a reduction to our vacation accrual due to a change in the vacation plan. Retail product margins also met plan, as we previously discussed with you, our expectations going into our current 2010 fiscal year was for international product margin to improve to the mid to high 40% range, due to a number of recent initiatives. Our third quarter rate came in at 48.2%, meeting our plan. We continue to expect our international product margins for the full year to be around 49%. Let me now address Hair Club For Men and Women. Our Hair Club same store sales performance exceeded plan in the third quarter coming in at a positive 1.4%. This business continues to perform well despite a difficult economy. Third quarter revenue from our Hair Restoration Centers came in at $35 million, up just over 1% from the same period a year ago, and represented 6% of our consolidated third quarter sales. Let me note that during the quarter, Hair Club settled an old outstanding vendor dispute which reduced pre-tax earnings by about $600,000, so as a result, third quarter operating margin rate for Hair Club came in at 10.9%, which was down from the rate of 13.8% we reported last year in our third quarter. Hair Club's third quarter EBITDA margin came in at just under 20%.

I am now going to switch gears a bit 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 more than 700 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 office head count. Despite this leverage, we continue to be very aggressive with expense control during these challenging times and slow sales growth. As we discussed last quarter with you, we generally expect our Corporate G&A to be in the range of $31 million to $33 million each quarter for this year. This quarter was no exception. As we're reporting Corporate G&A expense of $31.6 million. This expense area continues to be a primary focus and we continue to aggressively manage our G&A expenses and we're 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 third quarter did include home office and distribution center costs related to providing transitional back office support to our former Trade Secret salons. And that amounted to about $1 million dollars. Premiere salons who now owns Trade Secret is fully reimbursing Regis for all costs that we're incurring on their behalf. However accounting convention requires that this expense reimbursement be included on our P&L as other income rather than being able to net it against the G&A expense. Now, that's it regarding business segments.

And let me move on to a couple of final comments. Let's talk about our investments which are reported on the P&L line item labeled equity and income of affiliated companies. This includes the after-tax results of our investments in businesses such as Empire Education Group, and Provalliance. I will quickly say that we're pleased to report that our share of the third quarter earnings in these equity investments grew to $2.7 million, identical to the amount we recorded in our preceding second quarter. Both businesses are posting results that are ahead of plan, as well as up from last year. Let me make now a few comments regarding our effective tax rate. Our reported tax rate for the third quarter is not very meaningful as a result of reporting a slight net loss for the quarter due to our impairment charge. However, what is perhaps more important is our underlying tax rate, which came in at about 700 basis points better than plan, in the third quarter, at 32.4%. As I stated during my opening remarks, this unplanned benefit was the result of a statutory expiration of certain tax reserves we had created in the past, and contributed about $0.03 of upside to our third quarter earnings.

Looking ahead we continue to anticipate that the underlying rate for the fourth quarter of our current year should be in the range of 39% to 40%. We are real pleased with our balance sheet. It continues to be in great shape. We continue to 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. At the end of March, total cash has increased to $169 million. And total decline -- I'm sorry, total debt has declined over the past nine months to about $470 million as of March 31. Anecdotally, let me also say that our total debt of $470 million once again includes our recently-issued convertible notes which have generally been trading above the strike price. Assuming these notes were all converted today, the equity our debt is actually less than $325 million.

I have one last item. Paul addressed our outlook for 2011, so I'm not going to be redundant. However, let me speak to the Health Care Legislation that was enacted last month. This legislation is voluminous. It is complex. And it leaves a great deal of work to be done to translate the law into practice once regulations are released in final form. But here is what we know so far. The required implementation dates for various provisions mandated by this legislation are staged over several years. With the bulk of the coverage requirements not going into effect until the year 2014. Some of these early provisions that the legislation requires to be incorporated into the design of all employer plans beginning in our 2011 fiscal year includes coverage of dependents to age 26, the elimination of annual and life-time dollar limits, and pre-existing condition exclusions for children under the age of 19. Based on our research to date, we at this time do not believe these mandated provisions will have a significant incremental financial impact to Regis during our fiscal 2011. However, we continue to study the potential impact that this legislation could have on our business model beyond fiscal 2011, and we're exploring all means to be able to continue offering our employees a cost effective health plan in the future, that meets all regulatory requirements. We'll keep you apprised of our efforts and our findings as time goes on. So, that's it, that concludes, I think, the prepared remarks. Marissa, if you could come in and maybe provide any instructions and how people could ask questions, we'd appreciate that.

Thank you, Paul and Randy. The question and answer session will begin at this time. (Operator Instructions) Our first question comes from the line of Bill Armstrong with CL King and Associates. Please go ahead.

Good morning, Paul and Randy. I was wondering if you could just give us some insight into traffic trends in April. I know that you saw a little bit of improvement in March. I was just wondering how that followed through in April so far.

Bill, look. We always want to be transparent as possible. We have had a lot of dialogue about that but quite frankly we just don't want to comment on current quarter sales trends, don't read anything into it. By doing so we are going to be faced with some FD issues but maybe even more importantly we think that people can jump to some wrong conclusions. Example, last month -- and the month of March was pretty good month for us, with flat comps but one month doesn't constitute a trend. So we mentioned before, we continue to see signs of improvement. But having said that, we still are navigating in some choppy waters. Business will get a better and then get a little worse and get better. But over time we're seeing improvement. And we continue to expect that some of the trends that we saw in our third fiscal quarter in terms of improving customer counts will continue in the fourth quarter and beyond. So I just don't want to talk about just a few days worth of results, Bill.

Okay. Fair enough. In the Regis division, if you do $450 million for the full year, and I back that into the fourth quarter, it looks like you'll do about $120 million in the fourth quarter, which would actually be up from $114 million a year ago. I just wanted to check if my math was right and you're seeing it that way, too. A slight increase in Regis division sales.

Bill, can I get back to you offline on that because quite frankly I don't have the information here. I've got segment information but as it relates to further refinements to the Regis division, I will get back to you on that.

Okay. And my last one was just I guess housekeeping and that is the $600,000 legal settlement in Hair Club division, was that in the G&A line?

Yes, it was in Hair Club's G&A. By the way, I know it is nitpicking, it was really not -- it was not a lawsuit. It was a vendor that even before we had acquired Hair Club, there was a vendor dispute that we were aware of, it's been lingering, we just got it behind us. It was $$600,000.

Got it. Okay, great thanks.

You're welcome.

Thank you. Our next question comes from the line of Jeff Stein with Soleil Securities. Please go ahead.

Good morning, guys. You talked about some top-line initiatives, mainly marketing and I'm kind of curious as to how you're planning your marketing spend for fiscal 2011, because it sounds to me like at the same time, you're not expecting, at least you're not planning for comps to be positive until the back half of fiscal 2011, so should we expect to see marketing spend increase as a percent of sales? And if so, approximately how much?

The $7.5 million Regis initiative that I talked about, there are a lot of moving parts. The marketing spend will probably take -- will probably occur towards the end of the fiscal. Second half of the fiscal. I think there will also be significant amount of front of store spend, which will be more display than investment. We still have to do a bunch of research. And by the way, we have to get Board approval on this. And we assume we will. So the research will be completed sometime during the summer. And so that is -- first quarter. By the second quarter or so we should have some increased marketing spend. But the amounts are not going to be totally material, Jeff. You're talking about an incremental $2 million, $3 million, $4 million and most of that will occur in the second half of the year.

And Paul, I know that you've been talking about the fact that you guys had been really vigilant with regard to expense management, and that in the fiscal 2011 year, at least initially, it seemed that the plan was to add back some, and I presume that marketing, increased marketing spending is a piece of that, but in light of the fact that the visibility on top-line remains highly uncertain, are you -- do you have any expense-cutting programs in place or contingent programs in place to try to maintain a relatively flat cost structure over the next 12 months.

Oh, yes, we're still focusing on gross margin. We're as diligent as ever. With better scheduling and with an uptick of business, with our positively leveraged commission rates where our stylist will get increased dollars, but a lower percentage of incremental sales, we should continue to have gross margin improvement. I mean we will continue to look at expense control, but we should have our field people also be focusing on trying to bring new customers in.

Okay. Thank you.

You're welcome.

Thank you. Our next question comes from the line of Paul Lejuez of Credit Suisse. Please go ahead.

Thanks, it is Tracy Kogan filling in for Paul. First I had a follow-up question on the investments you're making in the Regis division. Besides advertising and some fixturing in the front is, there anything else that that $7.5 million is going towards? And then as you look at your Regis store fleet, do you think you need any large scale closings of the stores? And then if you could talk about whether there has been a difference in performance of those stores, depending on mall type, you know, is it the C stores, the C malls that are doing significantly worse than the A malls, or is there any difference by region? Thanks.

Thanks. The next question. No, I'm only kidding. There has been no material difference between A malls and C malls. With respect to -- and we're only talking about 100 stores.

I think we're talking -- she was also asking, let's address the closing, any large closing initiatives anticipated.

No, most of the large closing initiatives have already been accomplished. The issue with Regis, with the Regis division is $100,000 profitable store is now making $70,000. It is still positively cash flowing. It is still -- it is still fine. We just have to get it back to $100,000. But we don't have a tremendous amount of bleeders. We had a bunch of bleeders with Trade Secrets. That's not the case today. We have some but it is an immaterial amount. With respect to how we're spending our money, with respect to the Regis initiative, once again, only 100 stores are involved. A bunch of money is going to be spent on research. We probably will engage the Gallup organization to do a bunch of consumer research. We will also engage Gallup to do a bunch of in store training with respect to our personnel. We think that they can -- that our stylists can do a better job of interacting with their customers, and we're highly confident that Gallup can help us with respect to this. And of course, we will be bringing in new service categories that I talk about in my conference call speech, such as brow bars and the like. But you're talking about three or four different major categories of expenditure with respect to the Regis initiative. Don't expect anything material until the second half of fiscal 2011 in terms of results.

Got it. And then with respect to the technology enhancements, you referenced in the press release, can you just talk about the timing of those, and what you think you will get out of those?

Yes, the -- quite frankly, the only reason that we would bring this up -- because there is always technology enhancements. And I wouldn't even really characterize these as really strategic, it is more plumbing. But we are going to see an incremental capital spend in fiscal 2011 of about $20 million year-over-year, $15 million of the incremental cost relating to three IT initiatives, one is we're just simply upgrading our POS system, some of the hardware and the software, we do that periodically, the last time we probably made a major investment in that was 10, 12 years ago. We also are putting in some inventory scanners into our salons.

We're using those today but we're leasing them and what we want to do is buy them, because it is creating a lot of efficiencies on cycle counts and the performance of physical inventories giving us more accurate and timely counts, so we're going to be investing in some inventory scanners, and also, we're about ready to kick off an initiative to put Internet in the salons, which will be P&L neutral. We are looking at return on investment. There is a lot of ways to reduce the flow of paperwork by doing things with the Internet in the stores. So all in all, those three IT initiatives are about $15 million of the $20 million increased capital spend. And the remaining $5 million increase is just happens to relate to timing of some increased remodeling projects largely in our Walmart division.

Great. Thanks, guys. Good luck.

Thank you.

Thank you. Our next question comes from the line of Erika Maschmeyer with Robert W Baird. Please go ahead.

Good morning. Thanks for taking my call. In terms of your comp guidance for next year, how much benefit does that include from price increases, higher ticket?

2.5% to 3%, same as last year.

Okay.

Same as this year and last year.

Okay. How long do you expect to continue that cadence? I know the price increases, you had ramped them up slightly I guess last year from what you had done historically. Do you think that is a new run rate?

Yes, the pricing has been -- demand has been extremely inelastic and it has been that way for the last two or three years. The average ticket is about $20.40. And that includes Regis and Sassoon and Carlton. But with respect to our value business, our average ticket is probably in the $15, $16 range and if the average female goes about six times a year, we have plenty of room to increase prices for a long period of time.

And then can you talk a little bit more about the efforts that you've been doing to drive add-on sales and any recent learnings from these initiatives? Also have you seen an increase in your sales of appliances as you've kind of added those to the program?

We've always had appliances.

I mean as you have highlighted them.

Appliance sales are about stable. We have seen an increase in trend merchandise. We have been selling umbrellas in our strip center business. The retail business has come around far, far greater than expected. Norma Knudsen and her team have done a fabulous job. In terms of new services, we've talked about them, brow bars, mini facials and the like, that's about it.

Are you seeing landlords come around at all?

Well, whatever rent relief we're getting is in large part offset by an increase in taxes. So net-net-net, I think we're projecting rent occupancy costs to be about even, maybe slightly up. Maybe -- how many basis points? 10, 20 basis points up for this next [cycle]. Are they coming around? In major cities, I think some of them are still somewhat delusional, but we will just reduce our footprint, reduce our units in those cities such as New York, frankly.

And then in terms of the 160 stores next year, do you have a rough breakout in terms of strip center versus Walmart concepts.

Walmart should be about 50 or 60. Strips, about the same. And the balance will be through our other divisions.

Okay. Do you plan to add any Regis salons?

Net-net, we should have about -- we should be about the same level, the same number of units. We will have a bunch of relocations, maybe 12 or 13 relocations. Maybe one or two additional ones. There will be the usual number of closures. Most of our closures occur at the end of lease terms. We were far more aggressive last year at closing during the lease term. We're not really doing that very much any more. We've got that behind us.

Perfect. Thanks so much.

You're welcome.

Thank you, our next question comes from the line of Jill Caruthers with Johnson Rice. Please go ahead.

Good morning. If you could address your product costs have definitely outperformed service over the past two quarter, are you seeing more walk-in customers that are just purchasing product, or are you actually seeing the number of units, or products than existing customers?

Existing customer, we're not seeing -- as I mentioned in my transcript, we have Pure Minerals, we have Pureology now in a bunch of our stores. It's a 10 has been really good. I think our assortments are far, far better. The trend items are doing well. We're not getting a bunch of walk-in traffic just buying product. We're just executing a lot better. Hello? Are you still there?

It looks like she dropped off from the queue. Our next question comes from the line of Daniel Hofkin with William Blair & Company. Please go ahead.

Good morning, guys. Just a couple of questions. First, maybe if you can give any color on the type of uplift you're seeing to the degree that you've tested some of these incremental marketing initiative, the type of uplift that you're seeing at those locations, so far, what sort of time frame it has been so far, and then I have one additional question.

Well, the brows, we're talking about a dozen stores. It is really too early to make that -- to make sure that is -- to tell you if it is going to be a huge initiative for us. However in those stores -- normal, we've had significant -- we've gone from negative comps, from the negative comps, go to positive comps, so we're delighted and that's why we're expanding it in Minneapolis and I think we will give you better color at the end of August when we have a lot more stores involved. But we've gone, once again, from negative to positive in those stores, in large part due to those add-on services.

And over what time frame is that exactly?

The last couple three months.

Okay.

And by the way, the brow service bar is, if you look in the UK, or in other places in Europe, they are somewhat common place today. I mean it should be a good category for us.

Daniel, we continue to say that we're a pretty boring business, we sell shampoo and we cut hair, and truth be known, that's our bread and butter but we are constantly experimenting with different initiatives to increase service sales as well as product sales and we're very fortunate because we have a number of different salons across all different price points and geographic boundaries that we are able to experiment and we find things that work like this, and then we're able to start rolling it out in larger scale. One of the other items I know Andy Cohen who leads our Regis salon division has recently, probably last February, I believe, started looking at putting in electronic appointment book in some of our stores. And today, we may have 20 stores that have it, and we're seeing pretty nice lift in service comps in those stores. So we're encouraged that those types of initiatives, once we learn from them, we're able to quantify them, we look at return on investment, and if it all makes sense, we start rolling it out.

Okay. That's encouraging to hear. One other question, I guess, it is just a question I've gotten from a couple of people, is obviously you're sort of -- you have this sort have to account for it when you take the charge, but obviously the impairment of goodwill doesn't happen all at once in terms of economic value. Sort of what time frame would you view that having occurred over? Is it just the last two years, during as the economy got really difficult?

The last two or three years.

Okay, all right. Thank you very much.

You're welcome.

Thank you. Our next question comes from the line of Lorraine Hutchison with Banc of America - Merrill Lynch. Please go ahead.

Hi, this is Paul Alexander filling in for Lorraine. Could you guys talk a little bit about how long it would take you to get your expansion acquisition machine moving? If comps were to improve in the next couple of quarters, faster than say back half of 2011, could you potentially speed up the acquisition and expansion plans closer to your ideal 400/400 strategy you've talked about, or you know, if they do turn only in 20 -- in the second half of 2011, would that leave you enough time to accelerate growth for fiscal 2012 to the 400/400?

We just have to mine them. From the fact that we're the only buyer, it is, what, now it is April 28, we can start accelerating I think, May 5. We can do it very rapidly. I mean I'm sort of kidding. But I mean they're there. We just haven't mined them because with comps still being negative, we can buy them more cheaply a year from now. But it would take us very little time to ramp those efforts up. This is the way we have to build any huge amount of G&A structure, I mean we can do it all internally.

Does that apply to the building salons as well?

Well, building, you have to get leases but we could ratchet that up, that period of time, call it six months, you get a lease and to build it.

And you said that one month does not a trend make. How long of a trend would you like to see before you reaccelerate?

Two or three months.

Great. Thank you.

You're welcome.

Thank you. Our next question is a follow-up from the line of Jeff Stein with Soleil Securities. Please go ahead.

Yes, Randy, I was wondering if you could kind of clarify your capital spending plans. The $125 million number, I presume that is for fiscal 2011, and wondering, is that correct, does that include acquisitions, and what is the number that -- where you expect to finish for fiscal 2010, and then if you can also comment on where you see working capital headed?

Yes, the number for next year, 2011, does include $25 million of budgeted acquisition spend. Same number as this year, $25 million. And Jeff, one thing, and I just want to use this as a point to make a statement that our -- all of our guidance, consistent with many, many years, we do not -- even though we will budget capital to be spent on acquisitions, we don't factor that into any of our EBITDA guidance, because quite frankly we don't know if and when these acquisitions will occur and how large they're going to be. But as it relates to next year, yes, I'm looking at a number, it is going to be $120 million, $125 million in total, which includes $25 million of acquisitions, and $95 million to $100 million of capital on building new stores, on remodeling existing stores and that includes probably close to $75 million, $80 million of maintenance CapEx.

I think Paul already articulating next year's outlook includes about 160 new stores built from scratch and many of them in Walmart which have low investments. As it relates to this year, we've only spent $3 million on acquisitions, and it has been intentional. I don't know that, as I sit here today, are we going to spend the remaining $22 million budget in the remaining two months? Probably not. But once again, we don't know when opportunities present themselves. But we budgeted $25 million, we have only spent $3 million so far through nine months. I think our capital expenditures will probably be $65 million to $70 million for the year.

So incrementally, where does the incremental spend come from next year?

New stores, new remodeling. Slightly, number of new stores, increase in remodeling projects and as I mentioned before, we've got about $20 million give or take of maintenance CapEx increase, for the IT projects that I discussed.

We're spending double the amount of CapEx remodeling Walmart stores contrasted to building them. They're remodeling a bunch of their stores and we're following suit.

Okay, how about in capital and depreciation and amortization?

I'm sorry, what is the question on capital and --

the working capital?

Working capital. Yes, I think through the first nine months we've had a net source of working capital of $9 million. Paul mentioned it on his conference call. We generally collect cash well in advance of paying our bills. We're not looking for much of a source or a use of working capital for next fiscal year, nor for this year.

Okay, and depreciation and amortization?

Probably $105 million to $110 million, both years.

Got it. Okay. Thanks a lot.

You're welcome Jeff.

Thank you. Our next question is a follow-up from the line of Jill Caruthers with Johnson Rice. Please go ahead.

I apologize, I dropped the line earlier.

We thought you got sick by Paul's response, Jill.

I didn't hear most of it. I guess just two quick follow-ups on -- surprised that you had product clearance, you pointed out Christmas carry-over just because it appeared as though those product comps were better than what you had expected and just kind of that factor followed into where it sounds as though you're investing more in products going forward, how are you handling that inventory?

Well, inventory, we're really pleased with inventory levels. We said at the beginning of the year that we expect our total worldwide inventories at the end of our current fiscal year to be comparable to the level that they were a year ago at about 100 -- just under $160 million. You can see over the first nine months inventory levels are down actually $6 million. The issue of clearance is really more -- it was really two things and we talk about lessons learned, and one dealt with some repackaging that a new vendor line -- a vendor came out with new packaging on an existing line. So as always, we try to minimize the effect, but there was a little bit of clearance necessary to move the older packaging because of the new packaging on the shelf. And I think we did a pretty good job on that. But the bigger issue was that we had a lot of merchandise that we acquired from vendors that were trying to curtail diversion, and these were holiday packages that were made up specifically for Regis.

Unfortunately, the individual bottles within the package said not for individual retail sale. And again, that was the vendor's attempt to try to curtail this product from being purchased in bulk by collectors and then selling it on the gray goods market. What it precluded us from doing is to be able to put that stock, or that product back into existing stock. So we had to discount it. Because it had the holiday external packaging. The lesson we learned on that is that going next year, we're not going to do that. It is never a perfect science to predict the demand over the Christmas holiday season. And whatever is left, we want to sell through normal channels, at normal margins. But again, everything that happened in the third quarter is behind us. It is temporary. We are expecting product margins to improve in the fourth quarter and beyond.

Okay. And then just last question, kind of your thoughts around marketing. It sounds as though you're looking to increase that spend. In the past conference calls it has been brought up as a possible initiative to drive traffic, but you kind of said that it is not really a driver of salon visits. So maybe if you could talk about your change of thought process there.

Well the only really market driven concept we have is Hair Club, and we spend over $20 million marketing that -- advertising that business. You're right. The salon business is not marketing-driven. But Regis is primarily in malls, so mall-based marketing, signage in malls, exposure with mall marketing, is kind of different from media marketing. And that is going to be the major focus with respect to the Regis division reinvention, or reinvigoration.

Okay. Thank you.

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

Have a good day. Everybody. Thanks for joining us.

Ladies and gentlemen, if you wish to access the replay for this call you may do so by dialing 1-800-406-7325, with the ID of 426-9750-pound. This concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.