Regis Corp (RGS) 2011 Q1 法說會逐字稿

Good afternoon, my name is Gilbert and I will be your conference facilitator today. At this time I would like to welcome everyone to the Regis Corporation first quarter 2011 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 access code 436-4220 followed by #. 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 statements or comments this afternoon represent forward-looking statements, I refer you to the risk factors and other cautionary factors in today's press release as well as the Company's SEC filings. Reconciliation to non-GAAP financial measures mentioned in the following presentation as well as others can be found on their 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 and Administrative Officer. After management has completed its review of the quarter, 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, Gilbert, and good afternoon, everyone. Thank you for joining us. Business is getting better, as you could see in today's release. We have positive comps thus far in October, and today we reported first-quarter operational earnings of $0.30 a share, equal to last year's. I'm not going to depart from past conference call formats. We have detailed numbers in the press release, and Randy Pearce will go into greater detail during his presentation. I would like to now give some general thoughts on our business.

These have been challenging times for Regis and the entire industry. Prior to the huge recession which commenced in the fall of 2008 Regis and the industry have fought challenging comp years solely due to the extension of time between salon visits due to casual lifestyles. All price points and demographic categories were equally affected. We knew that it was inevitable that visitation patterns would eventually anniversary, and they began to anniversary during the last six months of our 2008 fiscal year. These six months produced our best North American service comps in eight years.

Then came the recession. Each and every one of you on this conference call is our typical salon customer. You go to a salon on a regular basis. It could be once a month or three or four times a year. This is the quintessential, predictable replenishment business. If you, as a male, used to go 12 times a year and, as a female, seven times a year and now, as a male, go 10 times and, as a female, 5.5 times, we don't expect you to return to your previous visitation patterns. We do expect you to eventually morph into a visitation pattern which is pretty consistent year after year.

The demographics are very helpful, as the aging population produces more visits. These five to seven years have been frustrating for our management team, especially for Randy and me. However, I am extremely optimistic about the future. We know what has to be done. We have the biggest and best company in our industry. We have wonderful national regional brands and excellent real estate. We are the industry leader by a factor of 10, and yet we only have a 2% worldwide and fourth American/North American share of a $160 billion worldwide business. Our multiple brands provide us with tremendous growth opportunities, as we can have four salons on four corners of an intersection with four different salon concepts.

We have $3.8 billion in system-wide sales and more than $2.3 billion in revenues. No one has our scale. It's interesting to note that in the 1970s Avon went into our business and opened 10 very profitable Avon beauty salons. They closed them all within a couple of years because they realized it would take 15 years to create a $100 million division. From a practical point of view, there will be no significant competitor that can challenge us with respect to scale. With 157 million customer transactions, we have got to be doing a lot of things right. And we are totally committed to execute even better.

I'd like to now comment on our strategy. We like to moderate risk. We like broad niches, small boxes, low breakeven points. Value is a core competency. Value salons and no-appointment salons where the salons have the power, contrasted to the higher end salons where the stylists have the power, or like strong regional brands in highly trafficked locations. We focus on margin enhancements, and it's totally counterintuitive because in most retailing the high-priced concepts such as Neiman Marcus have the highest margins. It's just the opposite with us. Our value concepts like Supercuts have the highest margins because, as I just mentioned, the shop has the power, not the stylist.

We often pay 50% commission to Regis stylists, and yet a Supercuts stylist can have an effective payroll rate of only 30%.

Since our value brands, which comprise 85% of our worldwide units, are growing faster than our higher and lower margin brands, margins due to mix should continue to be enhanced for years to come. Demand is relatively inelastic, so our strategy is to continue to raise prices. The business model still works. When we build, we generate significant returns. When we buy salon chains, we usually have three to four-year paybacks.

Likewise, retail product is a core competency of ours. We sell at least 10% of all retail products sold in beauty salons and barbershops in North America. There's also no technology risk, no risk of foreign competition. You can't outsource a haircut.

Hair Club has very similar characteristics by being the leading company in the hair restoration business, but only has a 5% share with a 23% EBITDA return on sales. During the past year and a half, our primary focus was re-equitizing the balance sheet, paying down debt and controlling expenses. Our business is improving. Now is the time to aggressively pursue new initiatives to build our top line.

We are very different from other specialty retailers in that we physically touch people, thereby creating a relationship of trust which is quite unique. This unique asset enables us to create new opportunities and initiatives, to turn one customer into two. For example, five years ago we introduced waxing at Wal-Mart. Today, waxing generates 5% of Wal-Mart's salon sales.

I'm going to share with you now some of the major issues we're working on. Some of these initiatives can be implemented very quickly; others will take time. First, the customer experience -- we understand that the customer experience with our salon has to be even better than ever, and we are focusing on the techniques that many leading retailers such as Best Buy have utilized with respect to enhancing and, most importantly, measuring the customer experience through the Net Promoter Score concept, or NTS, created by Fred Reichheld. We're fully committed to enhance and measure the customer experience by stylist. This obviously is a project which has to be owned by operations, and whenever our operations team focuses on a particular issue, such as increasing haircolor sales or increasing our product sales, we win. And we expect to win big with the Net Promoter Score as well.

In the Regis division it's part of a $5 million to $10 million program. As we invigorate the Regis brand we will have a modification of NPS, which is currently being worked on by our own staff and Gallup and will be fully implemented in all 1000 Regis Salons this January. We are in the process of rolling out customer database capabilities to all of our own salons so that we can implement a comprehensive electronic communications, customer communications strategy that will help improve customer retention.

To date we have launched these capabilities and communication plans in 700 locations. An additional 3700 locations are scheduled to launch by the end of fiscal 2011, while up to the balance of our locations will be completed by the end of fiscal 2012. Data we collect includes our customers' names, phone numbers and e-mail addresses. Our system ties this information to the customers' transactions, and our stylists' payroll all identification numbers so that our communications can be personalized, targeted and based on customers' specific purchasing patterns and behaviors. We are utilizing [Olds & Vannelli], an experienced customer relationship management firm, to help us accomplish this work. (inaudible) other concept clients include Best Buy and Toys 'R' Us. Examples of our communications include thank-you e-mails, some short surveys to understand customer satisfaction the day after a service, reminders around the time a client should be returning to us, service and product introductions, special promotions and incentives to clients of stylists to leave us that are designed to encourage those clients to continue to have their services done in our salons by other stylists.

One might ask why the customer database marketing program wasn't implemented earlier. We have looked at the Internet for many years; it was just too expensive. But today's economics are very different. You can implement the Internet in a very cost effective manner even without the benefits of customer database marketing. As I mentioned in our last conference call, we are going to be monitoring our competition far more in the future than we have in the past. Our first-time visitors will be treated better than ever. This is all part of our effort to enhance the customer experience.

We are adding new services and Supercuts. Paul Mitchell's grey blending for men has been added. We are rolling out a beauty bar test in Minneapolis for 20 additional doors. New product introductions have been very successful, including It's a 10, MoroccanOil and Pure Mineral cosmetics.

Our next major initiative is Pro-Cuts. The male category is extremely uncrowded. Witness the strength of Sport Clips. We will be going head to head with Sport Clips with a revitalized Pro-Cuts, and I'm highly confident that we will enjoy superior returns on our invested capital. Within 10 years we plan to have 900 Pro-Cuts stores, half franchised and half company owned. We plan to open six company-owned Pro-Cuts cuts this fiscal year.

The next initiative is increased marketing spend for Promenade. As business became challenging in the last four to five years, we reduced our marketing spend in our strip center division. Historically, strip center salons need more marketing spend than mall-based salons. This is because the strips don't get the traffic that the malls create. This was in response to economic conditions that were changing that strategy as we speak. We did not need this marketing spend for Supercuts, and Supercuts generated positive comps. We are in the process of increasing Promenade marketing spend from 2.5% to 4.5% of sales, which is the Supercuts spend rate. And we fully expect that our strong regional brands will enjoy the same customer account performance as Supercuts. We are confident that this will positively impact EBITDA, but it will take several years for this initiative to pay off. Obviously, years one and two will show a slight loss.

Next we have identified nine highly profitable surge markets, such as Boston where we will accelerate the expansion of our Supercuts business. Last year we opened five salons in Boston, this year we will open at least 20 in Boston. And frankly, I'll be disappointed if we don't open more.

We have also embarked upon a renewed relationship with Tesco in the UK, the world's third-largest retailer behind Wal-Mart and Carrefour. We recently opened the Brow & Nail bar in Tesco and expect to generate GBP150,000, or $225,000, of sales with GBP50,000 to GBP60,000 annual return in only 100 square feet of space with virtually no brick and mortar investment. We plan to open 40 of these this year in Tesco with 10 new Nail & Brow bars opening shortly.

We also plan to open 10 full-service salons in Tesco and our first Supercuts salon in Sainsbury, also in the UK, prior to Christmas. As we have previously announced, we are currently conducting a review of our strategic alternatives, including the possible sale of a company. The initiatives I described will take time to produce value. The net promoter score initiatives, coupled with customer database marketing, is a two-year project to be fully implemented, though we expect to get modest returns starting the last half of this fiscal. These two projects have the potential to significantly expand our earnings. If we receive an offer for Regis that our Board believes satisfactorily reflects the value and potential of our Company now, we are open to a sale of the Company to provide shareholders with that value today. If the board determines that the prices offered are too low or that the bids are otherwise unattractive, then we will continue focusing on our business and implementing the initiatives that I've described, which we believe will create value for our investors over time.

Our primary issue is customer counts. We strongly believe that business will anniversary and normalize. The aging population is a significant positive factor. More importantly, our focused initiatives should help immeasurably. This is a fantastic company and an industry that will be around forever. The issue for us in our review of strategic alternatives will be the timing of realizing value for shareholders and whether we receive bids that our board believes are adequate and reflect our value. Regardless of which path the Company takes, rest assured we are exerting every effort to increase shareholder value.

Randy Pearce will now continue.

Thanks, Paul, good afternoon, everyone. Today we are reporting first-quarter fiscal 2011 earnings of $0.30 a share, which is identical to the operational results we reported last year in the same quarter. As you may recall, our actually earnings a year ago were reduced to $0.14 a share due to some nonoperational charges. I believe you will find our first quarter results to be pretty straightforward, so let me jump in and I'll give you a bit more detail behind the operational performance for each of our business segments, and once again, a breakout of our segment performance is found in today's press release

I'm going to start, as always, with our North American salon segment. Let me begin by making two reminder type comments. First, 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.

Second, as we discussed with you in past quarters, Regis has agreed to provide certain transitional support services to Premier Salons. That's the company that now owns Trade Secret. These services included the sale of certain retail products to premiere at Regis' cost for a limited period of time, which ended a year ago on September 30, 2009, the end of the first quarter of our prior fiscal year. Therefore, any comments that I would make today referencing prior-year first quarter sales and expense ratios will be cleansed of all sales to Premier.

Our total North American salon revenue, which represented 88% of our consolidated first-quarter revenue, decreased 1% during the quarter to $507 million. This revenue decrease was the result of a decline in total same-store sales of 170 basis points, partially offset by a favorable currency impact from our Canadian salon revenue due to the weakening of the US dollar against the Canadian dollar. Service revenue declined during the quarter to $397 million. The reduction was largely the result of a decline in service comps during the quarter of 2.6%, partially offset by the favorable currency impact that I just mentioned a moment ago.

Our same-store service sales continued to benefit during the first quarter by an increase in average ticket of 2%. Two thirds of this increase was due to price increases, and the remaining third was due to sales mix, primarily the result of continued increases in our hair color and our waxing services. More than offsetting the increase in average ticket, however, was a 4.6% decline in same-store customer visits during the quarter. Since the third quarter of last fiscal year we have seen improvements in customer visitation patterns, and this quarter we did see a sequential improvement in our visitation patterns with the month of July down 5.2% compared to a decline of 4% in September.

We are very pleased with the performance of our retail product business, which was up 3% during the quarter. Our product comps were up 200 basis points during the quarter, our best quarterly comp result in 19 quarters? We are very encouraged with the improved results, and all of our operating concepts reported positive product comps in the quarter with MasterCuts leading the way with an increase in product same-store sales of over 11%.

First-quarter royalties and fees from our North American franchise salons were flat to last year and came in at $9.5 million. During the past 12 months the number of new franchise units added to the system were slightly less than the number of units lost through franchise buybacks, closures and relocations.

I'm now going to speak about our gross margins. Our combined gross margin rate for North America solons came in better than planned at 44.3% and was 30 basis points better than the rate we reported last year in our first quarter. We saw improvement in both our service and our retail product margins during the quarter. Our first-quarter service margin rate came in at 42.8%, a slight improvement of 20 basis points over the rate we reported in the same quarter last year. The largest factor behind the improvement in service margin rate was a reduction in our salon supply costs. Last year we favorably renegotiated our hair color contracts, and we are now seeing the benefits.

I'm once again pleased to report that our salon level salary and commission expense, which is our largest expense category, came in essentially 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 continued to expect that our service gross margin rates should remain consistent with or perhaps show slight improvement over the 42.7% rate we reported for all of fiscal 2010.

Our retail product margin rate for the first quarter of fiscal 2011 came in at 50.3%, which was 40 basis points better than the same period last year. The majority of the year-over-year improvement is related to the changes we made in the retail commission structure for new hires. As you recall, a year ago last May 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 the remainder of fiscal 2011, we expect product margins for our North American salons should remain consistent or perhaps slightly improved from our full-year fiscal 2010 rate of 49.7%.

I'm now going to go down to cite operating expense, and this category includes costs directly incurred by our solons, such as advertising, insurance, utilities and janitorial costs. Our site operating expense in the first quarter came in better than planned at 9.1% of sales and was 40 basis points better than the operational rate we reported in the same period a year ago. Offsetting negative leverage from declining sales and inflation, we had a planned improvement in our professional fee expense. Please remember that in our first quarter a year ago, our site operating expense was artificially high as a result of an accrual we made for a legal claim which was ultimately finalized in our fourth quarter of last fiscal year.

Next, let's talk about our North American general and administrative expense, which came in on plan at 5.9% of first-quarter revenue but was unfavorable to last year by 50 basis points. We had planned for an increase in this category, primarily due to the timing of certain advertising expenditures, including $700,000 spent on the Regis reimaging project.

Rent expense, which is primarily a fixed cost, came in at 14.5% of first-quarter sales, which was up just 10 basis points from the rate we reported in the last year comparable period. On a year-over-year basis our rent dollars were basically flat in the quarter. Therefore, the increase in rate was primarily due to slight negative sales leverage. Depreciation and amortization came in at 3.4% of sales, slightly better than planned, and was better than last year's first-quarter rate by 10 basis points.

The initiatives we have implemented to more efficiently use the dollars we spend on salon remodeling projects as well as the reduced level of new store construction has helped drive the improvement in depreciation expense and helped offset the increase in rate resulting from any negative sales leverage. The net effect of all the items I just discussed caused our operating income to improve to 12.4% of sales, up from an operational rate of 12.2% that we reported one year ago.

I will now move on to our international salon segment, concludes our company-owned salons located primarily in the United Kingdom. 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 built segment models may want to give Mark Fosland or Alex Forliti a call here at Regis, and they can certainly help you out more.

Total revenue from our international segment represented 6% of our consolidated first-quarter revenue and came in at $35 million in the quarter, a reduction of nearly 10% over the same period a year ago. This drop in sales quarter over quarter was due to a decline in same-store sales of 1.9% as well as reduction in revenue following the closure of the 42 underperforming salons in the UK last year as part of our UK store closure initiative. In addition, currency had an unfavorable impact of about 600 basis points in the quarter.

And now let me speak to our international service and retail product margins. Our service margin rate came in better than plan at 49.8% and was 140 basis points better than the rate we reported last year in the first quarter. The improvement in our service margin rate was in large part due to strong salon payroll management in the UK as well as the benefit from the closure of underperforming salons. Our retail product margin came in at 45.9% in the first quarter, which was 310 basis points below the rate we reported last year in our first quarter. More than offsetting the margin enhancement from reduced retail commissions paid to new stylists was a planned decline in product margins due to a shift in sales mix to slightly lower-margin products.

For example, our sales of curling irons, of hairdryers and flat irons, which have slightly lower margins continue to become a larger part of our overall sales mix in the UK. The site operating expense category came in at 6.2% of first-quarter sales, which was favorable to last year by 70 basis points. The majority of this improvement relates to a new, lower-cost utility contract we put in place for our UK salons last year in our second fiscal quarter.

Our international G&A expense category came in at 8.4% of first-quarter sales. Although actual dollars were up only slightly quarter over quarter, the rate grew 110 basis points, largely due to the impact of negative sales leverage, which I just addressed.

Rent expense in the first quarter also grew 50 basis points to 24.7%. The increasing rate was due to negative leverage from declining comps, offset by savings achieved from our recent UK store closure initiative. So overall, the net effect of the items I just discussed caused our international operating income to come in at 6.2% of sales, a rate identical to the operational rate we reported a year ago.

Hair Club -- our Hair Club business performed well with same-store sales coming in at a positive 1.5%. First-quarter revenue from our hair restoration centers came in at $36 million, up nearly 4% from the same period a year ago and represented 6% of our consolidated first-quarter sales.

I have just a couple of items to mention pertaining to Hair Club. Hair Club results exceeded plan as well as our prior-year first-quarter results. We received a favorable ruling on state sales tax issue, and as a result we were able to reduce an accrual that we had established for this item. Absent that item, Hair Club's operating profit was nearly identical to the $5.6 million that we reported last year. The first quarter operating margin rate for Hair Club came in at 17.1%, and Hair Club's EBITDA margin was a healthy 26%.

Let me now 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 the salaries and related benefits for the more than 700 employees working here in our corporate offices in Minneapolis as well as for 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 that we support have continued to increase over the past five to six years at a greater rate than our corporate home office headcount. But despite his leverage, we continue to be very aggressive with expense control during these times of slower sales growth. We expect our corporate G&A expense to be in the range of $32 million to $34 million in each quarter throughout fiscal 2011, and our first quarter met this expectation, coming in near the midpoint at $32.7 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 of ours, and we continue to aggressively manage our G&A expenses, and we are pleased with our results thus far.

And let me also remind you that our corporate G&A expense in the first quarter included about $700,000 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 the 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 being able to net it against our G&A expense.

Now, that really wraps up any comments I have regarding our business segments. But let me move on to a couple of other items, and let me start first with our investments, which are reported 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.

We remain quite happy with a performance of both Empire and Provo businesses, with our share of the earnings from these equity investments coming in at $2.7 million in the first quarter on an after-tax basis. And let me also make a comment regarding our effective income tax rate. Our reported rate for the first quarter was 38.1%, which was slightly better than plan. Looking ahead to the current 2011 fiscal year, we continue to expect our tax rate to be in the range of 39% to 40% for the remainder of the fiscal year.

I'm really pleased to say that our balance sheet continues to be in great shape. We once again 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. As of September 30, total cash grew to $195 million, and total debt declined just slightly during the quarter, now standing at $440 million.

That said, that completes my prepared remarks. So Paul and I would be happy to answer any calls or any questions you may have. So Gilbert, can you step in and provide some instructions? We'd appreciate that.

(Operator instructions) Lorraine Hutchinson, Banc of America Merrill Lynch.

I was just hoping to get a little bit of a sense of near-term trends. When you talk about October comping positively, can you give us a little color on how visitation has been trending and also what you think caused the sequential improvement in visitation throughout the quarter?

For two years we have been talking about the inevitability of visits anniversarying and normalizing, and frankly it's taken longer than we expected it to. But it's happening as we speak. It's slow, it's glacial, but it's happening. And it's interesting; it's happening with respect to all price points, and pretty much equally, and the malls as well as the strips, even Wal-Mart. As you know, Wal-Mart had five consecutive quarters -- this is the stores themselves -- of negative North American comps -- and we are even slightly positively comping there as well. So it's not any specific trend, it's just the inevitable anniversarying of visits.

And customer counts are still slightly down, but average ticket is up because of mix as well as pricing. But October is trending just fine, but there's no particular trend, per se. And retail continues to outperform service, but service is basically breakeven.

Great, and then it looks like you are on track to generate some pretty nice free cash flow this year. Can you just talk a little bit about how you expect to use that cash?

I think we've mentioned it before. We are very comfortable, in the long run, going back to building 500, buying 500 franchisees adding 100 or 200, closing a couple hundred. But we are not there yet. We will do that when comps are approaching 2%; we'll really be accelerating our investments in salons because they produce very high returns, as you know. No, we're not going to buy back a bunch of stock. And one month does not make a trend, although, as Randy pointed out, sequentially we are getting better and better and better. But we don't know how the economy is going, and a lot depends on psychology, as you know. So we'll continue to generate cash, and we're not going to do anything bullish.

Bill Armstrong, CL King & Associates.

On product margins internationally, you mentioned curling irons and the mix shift. I was wondering if you could just maybe flesh that out a little bit more. What's happening with the product? Is that a permanent mix shift, or were there special promotions there?

Yes; it's been largely because of some more recent promotions on that, Bill. Having said that, we continue to be very good merchants of what we call appliances. And again, they are hairdryers and they're curling irons and flat irons, and a higher price point but a little lower margin for us. We have run some promotions. Jackie Lang and her team continued to do a very good job of selling those. I would not say that what we have seen this quarter is a permanent shift, but the trend for increased appliances has been something that we've seen in recent years. But a lot of the impact this quarter was because of a recent promotion.

Randy, in your prepared comments you mentioned at Hair Club a reversal of an accrual, and I did notice that your site operating expenses were way down. Are those two related?

Identical, identical, it was the sales tax potential issue that we accrued for and it was resolved favorably, obviously, to us this past quarter. And that's where it shows up on that line item, yes.

Okay, what was the amount?

Oh, let's me see here if I can find that, Bill. I think it was just under $1 million.

$1 million.

$900,000.

And, finally, I think at the beginning of the fiscal year or the end of the fourth quarter, you guys had talked about you are looking for an EBITDA range of $235 million to $270 million for the fiscal year. Is that still in effect, as far as your expectations go?

Yes; that range was all predicated on a comp range of down 1% to up 2% with comps improving throughout the year. We still hold true to that projection, yes.

Erika Maschmeyer, Robert W. Baird.

Could you talk a little bit more around your NPS initiatives? It sounds like you are starting in Regis Salons. Do you think there's potential to go beyond just Regis? And I guess a little bit of -- what do you mean exactly by modifying NPS? And just any other information there would be helpful.

Randy, why don't you do it.

Sure, let me take a shot. Regis -- we are embarking on two different methods in which to measure customer satisfaction. Our Regis Salons division, which is led by Andy Cohen, our COO of that division, is using Gallup and some of their methods to measure customer satisfaction associated with the experience in our salons. We are also looking at NPS, which is the Net Promoter Score advocated by Fred Reichheld and is utilized today by many Fortune 500 companies. And it really -- and we are going to be testing that in all of our other salon divisions. What we really want to do is make sure that we measure customer satisfaction, that we know -- Reichheld will suggest there really is just two questions you need to ask that will be indicative of the customer satisfaction, of their experience. One is, did you enjoy the service? And number two, would you recommend us to a friend? We are able to measure those responses not only at a corporate level to see if we are performing better over time, but also at the individual salon and individual stylist level. We always want to make sure that when we attract new clients in, we give them the best experience and we hope to bring them back with the quality of our work and the friendliness of the salon atmosphere? If we don't bring them back, we need to identify who is not bringing them back, and we need to fix it.

So yes, we are embarking on that. It's not new territory because many other companies utilize this, but we are going to be doing it across every one of our divisions.

Great. So you haven't started any measurement yet?

No.

We have, in some test areas, but not to a great degree.

Great. And then, could you talk a little bit more about your product comp? That was obviously impressive. How much of that do you think is due to strong sales for some of your new products, like MoroccanOil and It's a 10? Do you have customers walking in just to buy those products? Any other plans for new products?

And related but separately, could you also update us on diversion trends?

Sure. Which question do you want answered first? I'm only kidding.

Whichever you feel like.

The appliance sales are strong. It's a 10 continues to be strong. MoroccanOil and Pureology, quite strong. Norma Knudsen has done a terrific job, looking more and more at trend merchandise. The Redken overall business had been weak; now it's very strong. We have a new core planner guide with Redken. So there are a lot of initiatives being taken place across all divisions, as Randy pointed out.

Diversion --

We've had the lowest diversion numbers we've had in years. I think the L'Oreals and the P&Gs have finally gotten religion, and they should have stopped it or curtailed it long ago. They haven't. You know what our position has been for years, but at least they seem to be doing a much better job, to the tune of double-digit better -- not 2% off or 3% off, I mean double-digit off. So we are proud of them.

Well, Paul, and as you've always said, we estimate, with over $500 million of product sales that we sell through our stores annually, we have about a 10% share of all products sold in barbershops and beauty salons in North America. So to the extent diversion is lessening, and we are seeing evidence that it is, clearly that could be a contributing factor to the increase in product comps.

That makes a lot of sense. And then could you just remind us what portion of your stylists are on the new lower commission rates now?

Oh, it's probably 10%, 15%, in that order of magnitude. Don't hold me to it. You can give Mark Fosland a call, but it's not a third of our stylists; that I can tell you.

Okay, perfect, thanks so much.

However, the good news is, every year that number will increase because of our turnover. And we'll continue to see gradual increase in the margin as a result of it.

Jill Caruthers, Johnson Rice & Co.

I've got a question -- I know it's early in the rollout, but with 700 stores now under your belt with the new POS system, could you talk about what are your initial learnings from the process? Are you getting any pushback from customers for giving you data? And just your initial thoughts on it?

Sure. Paul, why don't you take a shot at that.

We've had no negative feedback at all, to speak of. And it is too early, but I think we will give you a better update quarters two and three.

But I am encouraged by this, though it may be -- we are gaining a lot of information -- customer addresses, e-mail addresses, and it's going to bode well. We realized that CRM is the future for us. We have a lot of sophistication in our POS systems. What we don't know today is who our specific customers are. We're starting to learn that. So, as Paul says, we are rolling things out at about 1000 salons a quarter. And within a couple years we will be completed. And I look forward to being able to give you more input regarding some of the results that we are going to start seeing here. It's going to be good. Thank you, Paul.

And then just real quick, on MasterCuts -- I know it's a smaller part of the business, but it had very strong 11.5% retail comps in the quarter. I know you pointed out generally why product comps were up, but maybe if you could just dive a little bit more into that segment, and if any particular factors at MasterCuts, if that (multiple speakers) --

Well, Norma Knudsen is here. Norma, what happened?

You know, they had really strong appliance sales. They introduced a new iron into there with a good price point, and they also received a free mini. It was very successful. It's a 10 has been very successful. We also introduced a less expensive product called Rusk Being Sensible into that division. Price points across that were $7.99, and that was a hit. And then Redken in its division based on the new core planning guide we did, has been double-digit up since we introduced it. So those are the main factors, right there.

So, Norma, you would hope some of these are permanent trends that we should continue seeing in the MasterCuts division?

Oh, yes, yes. We're seeing Redken now for about three months in a row. So -- and with the trend there, they have been very successful with it in that division.

Mike Hamilton, RBC.

Good afternoon and congratulations. Could you take a couple minutes, Randy, giving some color on the equities and affiliates line and your thoughts on what you are seeing in trends there?

Yes. Again, most of that is coming from, both Provo as well as Empire, and we generally expect to see a couple million bucks a quarter. This is our share of the after-tax earnings in those businesses. Both businesses, we feel, are not only very well managed, they are performing very well in this economy. So I would continue to expect to see that it's going to be maybe $2 million, $2.5 million of after-tax earnings on a quarterly basis coming from those two investments.

Justin Maurer, Lord Abbett.

On the comp, what gives you guys, other than time passing, more confidence in October feeling like it's the inflection point you have been waiting for instead of January? I hate to bring it up, but I know it's been a tough couple of years. You guys backed away from it in the spring when things got choppy again, and now we are talking about it again. And let's all hope that we mean it this time. But what makes you feel that way more confidently?

I don't know what you meant about backing off. Look, we described a bunch of initiatives, and the initiatives are starting to work. We are not waiting. Please understand, we are not waiting for customer visits to normalize -- to anniversary. We have a lot of initiatives in place so that they will anniversary that much more quickly. So it's a combination of blocking and tackling. There is no silver bullet. It's just a lot of blocking and tackling and a lot of -- and making sure that the customer experience is better than ever. That's our mantra. That's what we're doing. It's going to take time, but we're starting to see results including trying to make sure that our own employees who are detractors were helped or terminated. So we are being far more aggressive in running the business even better than ever.

If there are no further questions, I will now turn the call back over to Paul.

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

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