Regis Corp (RGS) 2010 Q4 法說會逐字稿

Good morning. My name is Josh, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Regis Corporation fourth quarter and fiscal year 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 and use the access code of 4330671. 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 the website 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 Officer 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, Josh and good morning, everyone and thank you for joining us. At the end of my presentation, I'll make a short statement regarding the announcement that we made earlier this month that our Board has authorized the exploration of strategic alternatives to enhance shareholder value. On July 9, we reported our fourth quarter revenue. In reality, that was our earnings release. On an operational basis, our fourth quarter sales decreased 2.5% compared to last year. Same-store sales decreased 2.7%. Fourth quarter operational earnings per share were $0.34 compared to $0.41 last year after adjusting for our equity and convert offering. Average ticket increased 2.9%, margins continue to be strong. We continue to have success with our expense control initiatives. Our retail comps are improving primarily due to several new hot product lines, fourth quarter retail comps were minus 0.7% compared to 5% negative last year.

Our balance sheet is exceptionally strong with our cash position of $152 million and no borrowings on our $300 million line of credit. Fiscal year results follow. Operational earnings were $1.30 per share compared to $1.32 per share last year after adjusting for our equity and convert offering. By reducing CapEx and acquisition spend, controlling expenses and improving gross margins, we were able to generate nearly $150 million in excess cash. EBITDA for the year was $252 million. Our total debt at the end of June was $440 million, down $194 million from the $634 million was recorded one year ago. We successfully raised $336 million in July 2009 by issuing 13.2 million shares of stock and selling 172.5 million of convertible senior notes. We amended our financial covenants to provide plenty of cushion, including the reduction of the required minimum on our fixed charge coverage ratio covenant.

Anecdotally, let me also say that our total debt of $440 million includes our recently issued convertible notes which have generally been trading above the strike price. Assuming these notes are all converted today to equity, our debt would actually be less than $290 million. Our affiliates Empire and Provo had excellent years. Empire's EBITDA was $27 million, up from $16 million in the prior year, and Provo's results were slightly ahead of plan.

Our United Kingdom operational results were excellent, having generated $8.9 million of operating income compared to a loss last year. In the UK, we closed 42 stores, obtained significant rent relief in many others and rebranded a significant number of our locations. We also opened our first salon in Tesco in the UK. Tesco is the world's third largest retailer behind Wal-Mart and Carrefour . We plan to open ten new Tesco salons this year. In North America, we increased the average service ticket by 3.2% through price increases and additional services. We raised prices on 4,500 Company owned locations and as in past years, our customer count performance was virtually identical in those salons where we raised prices compared to those where we did not raise prices.

Our challenge, as is the challenge of the entire beauty industry, is customer visits. There continues to be a lengthening of time between visits which should result in an industry contraction of approximately 10%. We are obviously disappointed that customer traffic has not already improved. We believe that business will eventually improve, but we can't be precise in terms of when stabilization will occur.

There is no empirical evidence to support that we are losing market share as there was a minimal amount of industry data available, in part due to the fact that a significant portion of the industry operates underground. However, even if we are not losing share, we will be acting as if we are. We have many initiatives underway, some are short-term and others are long-term. Our primary focus is to improve the overall customer experience and do a much better job of communicating with our customer. The best form of marketing in our industry is word of mouth, and we plan to spend significant incremental dollars on training our employees to improve the customer experience. This is our main objective which we will need to repeat over and over again and will result in a customer experience that we believe should lead to most of our customers returning again and recommending us to others. The marketing programs announced in the last conference call will give added support to our salons where our staffs are well trained. We have a huge opportunity to increase the customer experience, especially in the first-time customers.

I would like to segue and discuss a competitor of ours. The fastest growing franchise company in our industry is Sports Clips with approximately 700 units. Sports Clips does an excellent job at making first-time customers feel good. Once the Sports Clips salon knows that a customer is a first timer, it put that customer into a MVP category, which makes both the customer and the stylist feel good.

Our well known brands and excellent locations enable us to generate a significant number of new customer visits each year. Rest assured that we will be treating new customers a lot better. We are at the present time experimenting with a myriad of first-time customer initiatives including a free tweezer or a free shampoo and massage or a free conditioning service along with a bounce back coupon. Our initiatives to attract new and retain existing customers include a new point of sale system, coupled with the installation of the internet in all of our salons. This will support the customer database, which will allow us to efficiently communicate with lapsed and other customers. Over the next three to six months we will be testing communication in 500 to 600 stores. We'll be equipping approximately 1,000 stores per quarter with the new POS system and the internet. Total rollout will be completed within the next two years. We will then be able to increase the use of social media and better measure our customer experience.

Last year, we communicated with 1.8 million customers via e-mail and launched the first of our new customer database communications program. We discussed the reenergizing of our Regis concept during the last conference call. We have engaged the services of Gallup. Gallup is very aggressively analyzing not only how we look, and by the way, we are in the process of engaging a design firm, but most importantly, how the stylists behave. In addition, we are focusing on what new services and products we should be offering and how we can best communicate with our customers, especially those who have lapsed. The training component, which is by far and away the most important component, will be completed in the month of October. We fully expect Regis comps to show a significant improvement during the third and fourth quarters of fiscal 2011.

It is essential to measure customer satisfaction. We will be measuring all of this in the Regis division through disciplines created by Gallop and in all divisions, will be measuring customer satisfaction with a net promoter score, otherwise known as NPS, which is a discipline as defined in Fred Rico's book, The Ultimate Question. It should be of interest to note that we are not pioneers with respect to implementing NPS. As many successful retailers such as Best Buy have been utilizing this discipline for many years. We expect that sport salons generating positive customer experiences would increase marketing spend. We will also be expanding new services such as the beauty bar including brow shaping and skin care treatments, along with new product lines such as instant tan, Moroccan oil and pure mineral cosmetics.

On the franchise front, we opened 63 new franchise operations last year and plan to open at least 80 this year. Last year, we opened six in Boston and fully expect to open at least 25 this year in the Boston metropolitan area. In fiscal 2011, we expect comps to be in the range of minus 1% to plus [3%], and our competence in comps will be positive in the second half of the fiscal year. EBITDA should be in the range of $235 million to $270 million. Our CapEx budget is $95 million, which includes $15 million for the IP initiatives that were discussed earlier. We have also budgeted $25 million for acquisitions.

We expect to generate excess cash of between $55 million to $80 million. While planning to build 160 new corporate locations, add at least 80 franchise locations and close approximately 175 locations. We will resume our growth and visitation patterns normalized. Once customer counts get to be negative 1% or 2%, we should have meaningful positive comps and plan to significantly ramp up new builds and be far more aggressive with acquisitions. We certainly have the capital structure to take advantage of new builds and acquisitions when our comps and the economy stabilizes. We still view building and buying salons as our best use of capital for driving long-term shareholder value.

In our view, our business model continues to work extremely well. There's no ceiling with respect to our growth potential with only a 4% domestic and 2% worldwide share, with our primarily a value based salon company with 85% of our locations in the value mode, and moderate to high end still has the opportunity of becoming far more profitable. We have talked about the Regis division, I would also like to note that Chris Fields has joined our Company as Managing Director of the Vial Sassoon Division. Chris is extremely capable, coming to us from Red Door. Sassoon is a small business generating approximately $60 million in revenues, but still generating a significant amount of EBITDA. We fully expect EBITDA to grow substantially under Chris' direction.

I would also like to briefly comment on some possible confusion concerning Trade Secret. We are the stalking horse bit of Trade Secret which went in for bankruptcy last month. In the event that we are the successful bidder, we will not exercise our right to take ownership. We will hand over the operation of the business back to the present owner/operator, Brian Luborsky, who resides in Toronto. Our goal is to allow a leaner company to emerge from bankruptcy, helping it become more profitable, as well as to protect Regis' secured interest. We are obviously disappointed with our results for fiscal 2010. Please rest assured that our management team is totally engaged and aligned to increase our top line.

Finally, I want to briefly address the announcement we made earlier this month that our Board has authorized the exploration of strategic alternatives to advance shareholder value. As we said at the time, we are committed to enhancing shareholder value, and we regularly evaluate our options to achieve that goal. The announcement we made earlier in the month reflects the Board's decision to engage financial and legal advisors to help with a full review of our strategic options. We do not know whether this will result in any agreement or transaction, and we do not plan to provide interim updates on developments with respect to the review or with respect to the timing of its completion. We expect to make an announcement once the review is completed and the Board has made a decision. As a result, and I know that you will understand, we won't be in a position to answer specific questions about the review on this call. I am happy, of course, to address questions on our earnings release and the Company's business. Randy Pearce will now

Thanks, Paul and good morning, everyone. Let me reiterate that today we are reporting fourth quarter fiscal 2010 earnings of $0.30 a share. As expected, these results have been reduced by $0.04, largely due to the non-operational income tax expense relating to the goodwill impairment charge that we recorded last quarter within our Regis Salon Division. As we discussed with you last quarter, accounting convention required that a portion of the tax impact associated with the goodwill charge be recorded as expense in our fourth fiscal quarter. Therefore, absent this non-operational charge, we are reporting fourth quarter operational earnings of $0.34 a share today.

As you know, we always try to correlate our earnings with our same-store sales performance and with our actual comps declining 2.7% during the fourth quarter, we would have expected our operational earnings to be about $0.34 a share or essentially right where they came in. Our quarterly expectation included an incremental $2 million, or $0.02 per share of planned cost saving initiatives which we discussed with you in recent quarters. 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 prior year fourth 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 by giving you a bit more detail behind our fourth quarter operating results for each of the business segments,a breakout of our segment performance as found in today's press release. My comments this morning will once again focus on our operational performance, and as usual, let's begin with our largest segment, which is our North America salons. 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 as required by the discontinued operations accounting treatment.

As we discussed in past quarters, Regis had agreed to provide certain transitional support services to Premier salons, the Company that now owns Trade Secret. These services included the sale of certain retail products to Premier 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 am going to make this morning referencing prior year fourth quarter sales and expense ratios will be cleansed of all sales to Premier.

Our total North American salon revenue, which represented 87% of our consolidated fourth quarter revenue, declined 2% during the quarter. This revenue decrease was the result of a decline in total same-store sales of 290 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 during the quarter to $404 million. This reduction was largely the result of a decline in service comps during the quarter of 3.4%, partially offset by the favorable currency impact that I just mentioned. Our same-store sales for service continues to be -- to benefit during the quarter by a planned increase in average ticket of 2.4%. Three-quarters of this increase was due to price increases that we implemented during the quarter, and the remaining 25% was due to mix, primarily the result of continued increases in our hair color business. However, more than offsetting the increase in average ticket was a 5.8% decline in same-store customer visits during the quarter.

Sequentially, we did see an improvement in our visitation patterns with the month of June down 4.9% compared to a decline of 6.9% in the month of April. Our retail product business continues to stabilize with product comps down slightly, coming in at negative 50 basis points. Our total retail product revenue grew 1% in the quarter, primarily due to the currency impact from a strengthening Canadian dollar. Fourth quarter royalty and fees from our North American franchise salons were $9.7 million, just slightly higher than the same period last year. During the past 12 months, the number of new franchise units that we added to the system were comparable to the number of units lost through franchise buybacks, closures and relocations.

I am now going to speak about our gross margin. Our combined gross margin rate for North American salons came in better than planned at 44.5%, but 50 basis points below that -- the rate that we reported last year in the fourth quarter. As I will discuss in a moment, we planned for this decline in overall margin, primarily due to increases in salon payroll taxes and health care costs at the salon level. Our fourth quarter service margin rate came in slightly better than we had planned at 43.1% and improved over the preceding third quarter rate, but was 50 basis points below the rate we reported in the same period a year ago. As we discussed with you last quarter, much of the planned decline in service margin rate related to higher salon payroll taxes, the result of many states increasing their unemployment payroll tax revenues during these tough economic times. In addition, we also planned for a slight increase in salon health insurance costs due to continued cost escalation in the medical industry. I am pleased to report, however, that our salon level salary and commission expense, which is the largest expense category we have, came in on plan for the quarter. Our operational teams continued to do an outstanding job of controlling salon labor costs.

As we look forward to fiscal 2011, we continue to expect that our service gross margin rate should remain consistent with or perhaps show slight improvement over the rate of 42.7% that we reported for all of fiscal 2010. Our retail product margin rate for the fourth quarter of fiscal 2010 came in 10 basis points better than planned at 50.2%. Remember that in our preceding third quarter, we recorded a gross margin rate of 49.3%, and we commented at that time that we expect that our rate to improve to over 50% in our fourth quarter, and it did. Although this rate was quite strong, it was 80 basis points lower than the rate we reported last year. The planned decrease was related to two items. First, we had a change in our promotional offerings and as a result, we had planned for a slight increase in discounting this quarter. Second, last year's rate was higher than normal due to a favorable book to physical adjustment in the quarter. Partially offsetting the impact of these two items was continued improvement in our retail product commissions. As you remember, a year ago last May, we implemented a new payroll plan to pay new stylists an 8% commission rate on their products sales rather than the historical rate of 10%. As we look forward to fiscal 2011, we expect product margins for our North American salons should remain consistent or slightly improved from our full year rate of 49.7% that we recorded in fiscal 2010.

Let me now address our site operating expense. And as you remember, this includes costs directly incurred by our salons such as advertising, insurance, utilities and janitorial costs. Our site operating expense in the fourth quarter came in above plan at 9.3% of sales and was 100 basis points above the operational rate we reported in the same period a year ago. We had planned for a slight increase in this category, primarily due to negative sales leverage. However, two distinct one-time items caused our rate to come in even higher than planned. The first item that impacted site operating expense by about 40 basis points in the fourth quarter, and it related to an item that we discussed with you in our first fiscal quarter.

During the quarter, we finalized the settlement of a legal claim that we had accrued for back in the first quarter of the current year. The finalization of this claim came in higher than our original estimate by about $2.3 million. The second item which had an impact of about 60 basis points related to a quarter-over-quarter increase in our workers compensation expense. But this all relates to last year. If you will remember, last year in our fourth quarter, our site operating expense was artificially low due to favorable actuarial adjustments made during the quarter to our workers compensation reserves. Additionally, our fourth 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, we will talk about the North American general and administrative expense which came in at 5.6% of fourth quarter revenue and was essentially on plan, but was unfavorable to last year's rate by 30 basis points. We had planned for slight increase in this category during the fourth quarter due to negative sales leverage as well as the timing of certain advertising expenditures. As we discussed with you last quarter, our third quarter benefited from a reduced level of marketing expense which was timing related. The result of a year-over-year shift in spend from our third fiscal quarter into our fourth fiscal quarter.

Rent expense, which is primarily fixed costs, came in at 14.3% of total fourth quarter sales, and that was 40 basis points above the rate we reported last year in comparable quarter. This increase was primarily due to negative sales leverage as well as planned increases in minimum rents in our Smart Styles salons which are located within Wal-Mart. Depreciation and amortization came in at 3.8% of sales, which exceeded our plan, as well as last year's fourth quarter rate by 40 basis points. A portion of the increase in rate was the result of the negative sales leverage, but in addition, during the fourth quarter, we increased our reserves for potential salon asset impairments due to recent sales performance. The net effect of all of the items that I just discussed caused our operational -- operating income to come in at 12.5% of sales in the quarter.

I am now going to move on to international salon segment, which includes our Company-owned salons located primarily in the United Kingdom. Same-store sales from our international business declined 4% in the fourth quarter, which represented an improvement of 260 basis points over the same period a year ago. We continue to remain quite focused on improving our overall profitability and once again, we are pleased with the results. Fourth quarter operating profit from this segment was well above plan and exceeded results from the same period a year ago by $4.4 million. Our related operating margin improved in the fourth quarter to a rate of 6.2% of sales, up from a loss of 4% of sales in the same period a year ago.

As you may recall, last year in the fourth quarter, our depreciation and amortization expense was abnormally high due to writeoffs of various salon assets. In addition to this factor, the quarter-over-quarter 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 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 deviated significantly from plan 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 further.

Total revenue from our international segment represented 7% of our consolidated fourth quarter revenue, and came in at $41 million in the fourth quarter, a reduction of nearly 10% from the same period a year ago. This drop in sales quarter-over-quarter was due to a decline in same-store sales of 4%, as well as a reduction in revenue following the closure of 42 underperforming salons in the UK over the past year as part of our UK store closure initiative. In addition, currency had an unfavorable impact of about 300 basis points on our fourth quarter revenue.

Let me now speak to our international service and retail product margins. Our service margin rate came in better than planned at 48.9% and was 80 basis points better than the rate we reported last year in the fourth quarter. The improvement in our service margin rate was primarily the result of strong salon payroll management. In addition, our service margin rate benefited from the closure of underperforming salons. Retail product margins also exceeded plan, primarily the result of the new retail commission plan that we implemented for new stylists that we hire. When comparing to the prior year rate, remember that in the fourth quarter of last year, our product margin benefited from a one time book to physical inventory adjustment. One other item worth noting is the depreciation and amortization line item where we saw a 900 basis point improvement quarter-over-quarter. As I just mentioned a moment ago, last year in the fourth quarter, our D&A expense was abnormally high due to writeoffs of various salon assets, something that did not occur in fiscal 2010.

Let me now discuss Hair Club for Men and Women. And our Hair Club business performed quite well with same-store sales exceeding plan in the fourth quarter, coming in at positive 2.1%. Fourth quarter revenue from our hair restoration centers came in at $37 million, up nearly 2% from are the same period a year ago and represented 6% of our consolidated fourth quarter sales. A couple of items to mention pertaining to Hair Club. During the fourth quarter, Hair Club increased its marketing efforts and its sales incentive programs in order to drive increased customer traffic. It appears successful as Hair Club recorded an increase in number of new customers during the quarter. Revenue from these customers will be recognized in future periods as services are performed. However, the related marketing and incentive costs were all recognized in the fourth quarter. As a result, Hair Club's G&A costs and service margins were temporarily impacted in the quarter. Fourth quarter operating margin rate for Hair Club came in at 15.7%, and Hair Club's EBITDA margin was up just over 24% in the quarter.

I will switch gears and make a couple of comments regarding our corporate G&A expense. First, let me remind you that 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 home office headcount. Despite this leverage, we continue to be very aggressive with expense control during these challenging times of slow sales growth.

As we discussed with you over the last couple of quarters, we expect that our corporate G&A expense to generally be in the range of $31 million to $33 million each quarter throughout fiscal 2010. The fourth quarter rate was no exception as we are reporting corporate G&A expense of just under $33 million. Generally speaking, quarterly fluctuations in this expense category usually relate to the timing of when certain expenses are incurred, such as professional fees. This expense area continues to be a primary focus, and we continue to aggressively manage our G&A expenses, and we've been pleased with the results of our efforts. Let me make one reminder type comment regarding our corporate G&A. This expense category in the fourth quarter included $900,000 of distribution center costs related to providing warehousing services to our former Trade Secret salons. 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 our G&A expense.

Now really, that concludes the comments that I have concerning our individual business segments, but I would like to move on to our investments, which is are included on the P&L line item labeled Equity and Income of Affiliated Companies. This line includes the after tax results of our investments in businesses such as Empire Education Group and Provalliance on the continent of Europe. Let me quickly say that we are pleased to report that our share of the fourth quarter earnings in these equity investments grew to $3.5 million. This was about $600,000 above our plan and was about $900,000 more than we recorded in our preceding third fiscal quarter. Most of the increase related to Empire Education Group, which had an outstanding year due to increased student enrollments. We continue to be extremely happy with the performance of both Empire and the Provo businesses.

Let me now comment on our effective tax rate. Our reported tax rate for the fourth quarter appears high due to impact of our goodwill charge that we recorded in our preceding third quarter, which I have already discussed. Absent this, our underlying operational tax rate came in at nearly 39% for the quarter. And as we look ahead to our current 2011 fiscal year, we continue to expect our tax rate to be in the range of 39% to 40% for the full year. Paul mentioned our balance sheet continues to be in great shape. We once again have no borrowing 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 June 30, total cash grew to $152 million, and total debt declined during the year to $440 million. That completes my prepared remarks. Paul and I would now be happy to answer any questions you have. Josh, if you can step in and provide some instructions, we'd appreciate that.

Thank you, Paul and Randy. The question-and-answer session will begin at this time. (Operator Instructions) And our first question comes from the line of Lorraine Hutchinson with Bank of America Merrill Lynch. Please go ahead, ma'am.

Thank you. Good morning.

Good morning, Lorraine.

I was encouraged to hear about some of the initiatives you have in place to start driving more traffic to the stores and just curious, any thoughts on timing of how some of those initiatives will progress and what we should expect to look for in the comp to see if they're working?

Quarters three and four, we fully expect to have positive comps. That's our plan. The -- obviously, the internet and the new POS will -- it is going to be rolled out over a two year period of time. It doesn't mean that we are going to be waiting two years to implement some of the social marketing we talked about. We'll do that on a roll out basis because we are adding 1,000 stores a quarter. But the -- this will --obviously, that initiative will take time. The initiatives with respect to incenting first time customers to come back and to have a better experience, that -- those initiatives will be implemented within the next 90 days. Rest assured that will happen.

And then what's your outlook on pricing in the salons for 2011?

The average customer coming seven or eight times a year, if you average men and women, and the average service ticket being $20 a little bit of change. And given the fact that for the last four years, demand has proved to be remarkably inelastic, we can raise prices $1 for basic services a year, we believe at least for the next two or three years. We have shown that customer counts have been virtually identical in the stores where we raised prices compared to those where we haven't raised prices. So, we think that's a very important part of the top line strategy.

Which, Paul, should equate maybe 2% to 3% increase in average ticket from pricing.

Correct.

Okay. Thanks a lot.

You're welcome.

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

Paul, a couple of questions, and also for Randy. In your guidance of $235 million to $270 million of EBITDA, have you assumed any specific number for professional fees? And also, can you talk about your assumption on potential expense cuts that have been baked into that forecast as well?

I will let Randy handle that.

Well, as it relates to professional fees, Jeff, I don't know if you are referring to the correct transaction of seeking strategic alternatives, and the answer is no.

Yes, okay.

In addition to that, we will have normal professional fees for accounting and legal. But not anticipating any change year-over-year. Then as it relates to cost saving initiatives, we are probably, Jeff, looking at $5 million of incremental cost saving opportunities that have been baked into our fiscal 2011 budget over that of fiscal 2010.

Okay, any estimate on professional fees from the strategic study that's being undertaken?

No, it depends whether or not our transaction will occur, Jeff.

Okay, so if no transaction occurs, no fees?

Of course there will be fees. I will give you (inaudible) numbers, you give him a buzz.

Just a little push back on the price increases, your customer traffic has been down. So, how do you measure the fact that you haven't seen any effect from price increases if, in fact, your customer traffic is down? How do you isolate that, just the normal delays.

Because we track salons -- customer counts in salons that have had price increases and customer counts in salons that have not had price increases, and the results were identical. That's how we do it.

And Jeff, to supplement that ,we also are pricing -- we are very conscious about prices in the markets that we are raising prices in. We don't want to be significantly ahead of the competition. We do find that most of the time, if we raise prices and we're ahead of the competition, competition generally follows. We also have been pretty aggressive lately doing customer surveys about only existing customers within our concepts, but also non-customers and trying to ascertain what impact price has on the customer experience, and we are finding that it has very little in most of our value concepts.

Randy, what was the EBITDA for Provalliance for the latest 12 months?

About EUR30 million.

US. Euros.

EUR30 million.

EUR30 million, okay. And going back to some of your initiatives to drive customer traffic, can you talk about what your new POS system is going to enable you to do with regard to customer engagements that you can't -- you cannot do right now.

Eventually, we will be able to speak to Mrs. Stein if she has not been in -- if eight weeks has lapsed between -- since her last hair cut, as a for instance, we will be able to, we will be able to know exactly what she has purchased in any of our stores. There are huge amounts of initiatives relating to the use of the internet in POS. Having said that, the most important thing is how she is treated. So, if she's not treated well, she is still not going to come back no matter what offerings we give her, and I think that's our primary focus, to make sure she is treated better than ever.

And Jeff, what's implied in Paul's comment there is we will know in the future specifically who our customer is, the name, the address, we will know who our customer is. Today we have a very sophisticated POS system that gives us plenty of information on consumer buying habits and time of day, et but it does not -- we don't have the ability today to know specifically that your wife visits our Regis salon and what she buys and as Paul says, we will know that in future.

Do you currently have the ability to remind a customer that they haven't been in for the last eight weeks?

No.

No. Many of our operators do, but we don't have it corporately.

Okay, and will that be part of your new tech -- POS.

Yes.

Okay, great. Thank you.

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

Thanks, good morning.

Good morning.

It was great to hear that Q1 picked up versus last quarter. Can you talk about the factors that is are driving that improvement specifically and discuss what gives you comfort in your projections for positive comps in the back half? I know you have talked around it, but anything more specific would be appreciated.

Our retail business has been very, very strong and even for the two months, we have had positive retail comps. The -- I think that has been the number one factor. And what was the second question?

Just deals with --

Eventually, eventually visitation anniversary. If somebody had cut visited some eight to six, it is unlikely that that customer is going to go to four visits per year. This is a very, very stable industry, and it has grown about 2% compounded per year for the last, I don't know, 50, 60 years. We strongly believe that we are in the tail end of a 10% contraction, but you can't outsource a hair cut. The aging population is very helpful to us. So we are confident with all of the initiatives we have in place and the anniversarying effect that we would be very, very disappointed if we didn't positively comp the second half of the year.

Do you have any sense of the number of small independent salon chains that might be going out of business and whether that might have accelerated?

No, it is a variable cost business. There are 350,000 beauty salons and barber shops in North America. About 80,000 are in people's homes. And in reality, stylists are paid on commission. So, it is a very resilient business. So, even if sales are down 20% at a particular location, as long as they can pay their rent, they can survive. So, we haven't seen a huge amount of closures. That's not the case in this industry. Also, given the fact that half the industry sales are underground, people have an awful lot of cushion.

Just a clarification, do you expect both positive service and product comps in the back half?

Yes.

Okay. And then just, is there an inherent tension between salon payroll management and lower commissions versus improving customer service? Is there less incentive for a stylist to drive that incremental sale?

Not really. Stylists want to make more money and want to be busy. People like to be busy. And if we -- if our volume in a particular store is down 20%, our staff generally is down 20%, so our stylists are going to make just as much money.

Great. Thanks so much.

You're welcome.

Thank you. And our next question comes from the line of Bill Armstrong with CL King and Associates. Please go ahead.

Good morning. Paul, can you talk about the timing of the roll out of the systems that will enable you to identify specific customer buying and visitation patterns?

I will let Randy do that.

Yes, it's twofold. One deals with putting DSL, high speed connectivity into our salon so that we have internet capabilities. We are rolling out about 1,000 stores a quarter, and that started at the beginning of June. And then followed about 90 days later will be the new POS equipment that gives us the ability to have the customer database. And again, it will be close to 750 to 900 salons a quarter on implementing that. So, I would say that we will start having data that we will be collecting on customers at the end of December. We should have maybe 700 to 900 salons and growing by about 1,000 a quarter thereafter.

And then as you gather this information, what might you do? Would it be like -- do you send somebody an e-mail or an IM saying hey, it has been five weeks since your last visit, here is a coupon good for the next five days for $5 off, something like that? Or how do you think you can monetize that or improve your business from that?

No, absolutely. All of the above. We will know what people are buying, how frequently they come into the stores, what kind of services that we provide. And if we don't see them, we will be able to bring them back with an offer. We will be able to communicate with them about upcoming appointments as reminders. We also -- Paul mentioned about social media is becoming ever more present in society. We will be able to reach out to them as well.

And so Bill, I know our marketing people, and our marketing department is led by Mary Kiley. They have got a lot of experience in this. There's a tremendous amount of optimism that by knowing who our customers are, as you will see with many retailers today, that you are able to do a lot of things to not only once you attract them, to retain them and bring them back, and we are excited about that.

Okay, great. Thanks a lot.

You're welcome.

Thank you. And our next question comes from the line of Michael Levitt with Chesapeake Partners. Please go ahead.

Hello. Can you tell me if there were any professional fees incurred in Q4 related to the exploration of strategic alternatives?

No. Nothing material.

Thank you.

You're welcome.

Thank you, and our final question request comes from the line of Steve Wortman with Lord Abbott. Please go ahead.

Morning, guys. It is actually Justin Maurer. Randy, can you go back over the CapEx? I wasn't clear on the IT roll out, if you said 15 or 50, 5-0.

15.

15, 1-5,.

Yes, yes.

Okay, all right.

That's (inaudible) 95.

Okay. The Sports Clips name that you threw out, Paul, is that -- how long have they been around or you guys been studying them? And you allude to these anecdotes maybe of some of your salons maybe not treating first-time customers as well as you would like. How do you kind of think about this Sports Clips and maybe what they're doing and maybe what you guys aren't doing in a certain way or what you could be doing better?

I think we're going to learn a lot more from our competitors than we have in past, and we're studying them far more carefully than we ever have. The -- actually, we financed Sports Clips. We bought Gordon Logan's business in Austin maybe 15 years ago, and so they have been around about 15 years. And they've done a (expletive ) of a job.

Okay. Is it somewhat frustrating to you guys, relative to this IT roll out, just wondering, had it been contemplated in years past? Was it just because of the number of stores and complexity of that, it was difficult to do? Comparing it to an average retailer who is now peppering us all with e-mails once week, month, whatever about stuff on sale or new items coming in or whatever that it seems pretty natural for you guys to have this information, and better late than never, I guess. But has there been some road blocks that have been tougher in the past where you have to deal with it, you now just want to plow ahead with it?

We had the capability years ago to capture customer data. The -- and we elected not to, because it is a timing issue. Our busiest day is Saturday, and we book on the hour and on the half hour. So if you have a salon with 10 chairs and they're all full and you have 10 customers waiting to check out. And if you start punching in customer information, name, address, phone number, et cetera, it could take a minute or two per customer. So after someone has been in a chair for an hour, hour and a half, she had hair color service, for her to wait another 15 minutes to check out, we didn't think was a really good thing.

And the most important thing is the experience, because customers will come back, and in our business, they will come back if they're satisfied. If they liked the experience, if they liked the stylist, they will come back. And the social marketing we are talking about and all of these initiatives we are talking about relating to POS and the internet are going to be very important incrementally, but not nearly as important as the customer experience. So, that is really a secondary thrust. This is -- Hair Club is marketing driven.

Yes.

The salon business is not. So, sure. Are we are we frustrated? Yes. Also, the internet didn't really pay in terms of -- have a positive return on investment. Now it does, because of the cost issues. So, being a Monday morning quarterback, maybe we should have done it a year or so earlier, not much. I don't think there's any self flagellation needed here.

Just thinking of, say Chicos, who I am sure you know reasonably well, they have a passport program or whatever, which is because their business too is a very people intensive business, sales person to customer. Those people have call lists and they get on the phone, new products coming in, we are inviting you in for a special look or whatever. Because your business is very much a relationship business, although maybe somewhat tough at first, you would think it would be a huge advantage for your folks to get on the horn, particularly as we have dealt with the lengthening of time between, just to give that potential customer, returning customer a little bit of a push to come back and visit them.

But Chicos doesn't touch people physically as do we. It is different. Service retail is different.

Thanks, guys. Good luck.

Thank you.

Thank you. And we do have an additional question, it is from the line of Jill Caruthers from Johnson Rice & Company. Please go ahead.

Good morning. Just another question on the POS system roll out, how are you rolling that out? Are you doing it per -- across all salon division, or maybe starting at Regis since that's a slightly higher point in the base type of customer?

We did it in an effort to try to remain cost neutral, and we were looking at telecommunication costs. So we wanted to roll it out first to those stores that had higher telecom costs, so it is not really by division. I think we are starting out with Supercuts, and then we are going forward. So, it is really more to try to control costs so that there wasn't going to be any visibility to increase costs on our P&L.

Okay. And then can you just revisit your strategy for the back half? I know you are increasing advertising dollars at the Regis mall locations. If you can just revisit your strategy there and if anything has changed since what you said last call.

Nothing has changed.

Thank you.

You're welcome .

Thank you. And ladies and gentlemen, that does conclude the question-and-answer session for today. I will now turn the conference back to Paul.

Thanks for joining us, everyone. Have a good day.

And ladies and gentlemen, if you wish to access the replay for this call, you may do so by dialing 1-800-406-7325 with an ID number of 4330671 followed by the pound sign. This concludes our conference for today. Thank you all for participating, and have a nice day. All parties may now disconnect.