Regis Corp (RGS) 2011 Q2 法說會逐字稿

Good morning. My name is Jeremy and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Regis Corporation second-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 800-406-7325, using access code 439-3525, followed by the pound key. The replay will be available 60 minutes after the conclusion of today's call.

I would now like to remind you that the extent of 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. Reconciliations and 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 up 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, Jeremy, and good morning, everybody. We had a challenging quarter and are obviously disappointed with our results.

The good news is that even though business is weak, we are showing significant improvement over past trends. Our second-quarter reported results this year included $0.01 of non-operational expense related to the strategic alternative of this project. Whereas in last year's results, as you recall, it included $0.02 of non-operational benefit related to an adjustment to prior year worker's comp and insurance claim reserved. Therefore, absent these items, we are today reporting operational earnings of $0.25 a share for the quarter compared to $0.28 a year ago. We have detailed numbers in the press release and Randy Pearce will go into greater depth during his presentation.

Several investors and analysts have asked me about the strategic alternative process. The common question asked was, what did the private equity guys know that we didn't know?

I would like to spend some time in giving you our observations with respect to the strategic alternative initiative. The initiative was extremely thorough and robust. Peter J. Solomon did an excellent job, our management team did very well. The players liked our industry, our Company, our management, and our strategy.

At the end of the day, the sole issue was price. Let me give you our interpretation of the issues that we focused on.

First, we are a one of a kind company. There are no comparables to measure us against. Randy and I have been going to investor conferences and meeting with investors for almost 20 years. Our major challenge throughout the 20-year period of time was the fact that you could not shoehorn us into a particular category since we are a one of a kind company. There are no comparables that are public, that is.

There were three risk factors that were identified by many of the private equity firms. First, Walmart. The senior manager at Walmart was unbelievably supportive of us and I believe that, based on the conversations with Walmart, that the Walmart risk factor was virtually eliminated.

The second risk factor was Obamacare and I do believe that we were able to parry that potential issue as well, since most of the cost will be borne by the consumer and the hairstylers as is presently being done in Puerto Rico and in Hawaii. So I don't think that was an issue.

The major issue that was of concern to investors was customer visit. We still believe that it is inevitable that visits will eventually end normalize as they were close to doing during the second half of fiscal 2008. You cannot outsource a haircut.

As we look forward, our strategy to maximize shareholder value has not changed. Our business model is still very efficient and profitable. There is no ceiling with respect to our growth. With only a 2% worldwide share and 4% domestic share, there is too much growth potential ahead of us to sell the Company at a price that would not reflect an appropriate valuation. The aging population is a very favorable factor contributing to the normalization of customer visits.

We also have excellent national and original brands and excellent real estate, which give us even more confidence that visits will eventually anniversary and normalize. However, as we have said before, we cannot be precise in terms of putting an exact date on when this will happen. It is going to happen the last half of fiscal '11 or it might take a quarter or two of fiscal '12.

Once visits stabilized, we will begin growing more aggressively. In the meantime, we are focused on improving the business through many topline initiatives that we discussed with you over the last several quarters.

We also remain focused on expense control. Over the last couple of years, we have made significant cuts in our cost structure, but you can only cut a dollar once. Nevertheless we remain committed to managing the expense side of the business as efficiently as possible.

With our stock price trotting at current levels, many of you have asked about a significant share repurchase. While buying back stock at our current price levels is certainly attractive, it was only 18 months ago that we issued equity to resolve a covenant issue. We, as many other companies, believe it is appropriate to be conservative with our balance sheet and the current economic environment is not conducive to add significant leverage.

To summarize, we plan to strengthen our balance sheet by building cash and paying down debt. We are focused on initiatives to improve sales and increase market share and we remain committed to managing expenses.

Finally, we plan to resume aggressive unit growth once customer visits have stabilized. During the last conference call, I talked about several of our initiatives designed to increase revenue, and I would like to comment further on these initiatives now.

The most important initiative is bettering the customer experience. 1,000 of our Regis division salon managers met in Las Vegas in early December with the Gallup organization for a two-day training session, introducing them to a process whereby it will be able to measure both employee and client engagement levels for each individual salon. This was extremely well received by our salon managers and we are starting to see positive results. However, as we mentioned before, this project will take time to produce the desired results.

The remaining divisions will be measuring the customer experience to then promote a score concept created by Fred Reichheld. In this regard, we have engaged Satmetrix to administer the net promoters' score initiative in a test group encompassing all of our salon divisions. Satmetrix has helped many other companies, such as Sony, implement NPS and we are very bullish with respect to the results we will obtain from them.

We have also engaged the services of PeopleAnswers, which is a highly respected company that will help us immeasurably with respect to screening new employees and potential managers. We will initially implement PeopleAnswers in 3,000 of our salons.

We turn over 40,000 people a year and most of that turn relates to people with us less than a year. And a better screening device will help us significantly reduce our turnover. In fact we know that PeopleAnswers reduced the turnover of one of our significant competitors by over 40%. We believe that there will be a material short-term payback with respect to these efforts.

During the last conference call, I went into great depth talking about customer -- database marketing and a customer relationship management program for all of our brands. These programs are designed to increase our share of customers' annual visits and their salon visits and, in turn, improve our customer accounts.

Communications are e-mail based, so we can deploy our communications quickly and frequently. This initiative will take some time to implement but offers us tremendous opportunity to increase profitability.

We have also engaged the services of [Black], a leading design firm to help us redesign the front of store. Black did a spectacular job with respect to designing our new Pro-Cuts concept and has created a very exciting physical format in new Regis salons and Regis remodeling. We will expand Black services to incorporate the Promenade division as well and it is in our intent to budget in fiscal '12 1,500 to 2,000 of our salons have significant front of store enhancements which will attract new customers and, just as importantly, positively motivate existing and new stylists as the salon environment will be improved.

We are talking about and incremental capital expenditure of about $10 million which will certainly be quite affordable.

Last year has been a year of significant change at Regis. Through our many initiatives, we are solidifying our platform to ensure that we get a larger percentage of the customer's hair care budget. These initiatives will take time and we expect much of the benefit to be derived in fiscal '12 and beyond. We are highly confident that our strategy is the right strategy and our patient investors will reap significant rewards.

Randy Pearce will now continue our presentation.

Thank you, Paul. Good morning, everyone. As Paul mentioned, we are recording second-quarter fiscal '11 operational earnings of $0.25 a share, compared to $0.28 in the same period a year ago.

With same-store sales declining 1.3% in the quarter, we would have expected our operational earnings to be about $0.24 a share rather than the $0.25 that we are reporting today.

As I will highlight for you in a moment, we recorded a few income and expense items in the second quarter that caused fluctuations in certain individual line items on our P&A out. But on an overall basis, these items essentially offset.

I am going to now jump in and give you a bit more detail behind our operational performance for each of our business segments. Once again, in our press release today, you'll find a breakout of our segment performance.

I am going to start out with North American salons. Our total North American salons revenue, which represented 87% of our consolidated second-quarter revenue, grew 30 basis points quarter over quarter to $501 million. This revenue growth came primarily from salons built or acquired over the past year, net of closures, as well as a favorable currency impact caused by a weakening of the US dollar against the Canadian dollar. Partially offsetting these factors was a decline in total North American same-store sales of 140 basis points.

Service revenue declined slightly during the quarter to $389 million. This reduction was largely the result of a decline in service comps of 2.1% in the quarter, partially offset by the two factors I just mentioned -- revenue from new and acquired salons, net of closures as well as the favorable impact from currency.

Our same-store service sales continued to benefit during the second quarter by an increase in average ticket of 2.3%. 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 waxing services.

More than offsetting the increase in average ticket was a 4.4% decline in same-store customer visits during the quarter. Although we have seen sequential improvement in customer visitation patterns since the third quarter of last fiscal year, we were disappointed with the second-quarter results.

On the flipside, we were pleased once again with the performance of our retail product business, which was up 3% during the second quarter and this included growth in product comps as of 140 basis points. Our holiday product assortments and promotional deals performed quite well within regional malls, within Walmart and within strip center salons.

Second-quarter royalties and fees from our North American franchise salons were flat to last year and came in at $9 million. During the past 12 months, the number of new franchise units added to the system were less than the number of units lost through franchise buybacks, closures and relocations.

Let me now talk about our gross margins. And our combined gross margin rate for North American salons came in slightly below plan at 43.5% and that was 30 basis points lower than the rate we reported last year in our second quarter. The entire decline related to service margins, which I will now discuss.

Our second-quarter service margin rate came in at 41.7%. That was down 70 basis points from the rate we reported in the same quarter last year. We had planned for a slight decrease in service margin during the quarter of about 20 basis points and that was due to higher payroll taxes, the result of states increasing unemployment tax rates to all employers.

Additionally, last year second-quarter results included a slight benefit from a favorable book to physical inventory adjustment in our Sassoon salons. However, the largest factor behind the decline from plan was an unexpected increase in our salon payroll cost. With the encouraging comp trends that we witnessed in October, as well as the improvement in business we have seen over the preceding five months, effective in November, all of our operating groups appropriately increased the scheduled hours for salon staff in advance of the upcoming holiday season.

However with business being softer than planned in November, payrolls came in higher than planned. In addition, sales and payrolls in December were then unfavorably impacted by the unusually bad weather, especially in the second half of the month.

We are very proud of our ability to manage store level payrolls. You have seen that in the past. Payroll control has been a core competency of Regis for many years.

We believe the higher-than-planned salon labor costs incurred in the second quarter is temporary. And going forward, we expect our service margins to be down just slightly from the rates we reported in the comparable period a year ago, once again largely due to some higher payroll taxes.

Our retail product margin rate for the second quarter of fiscal '11 came in at 50.3%. That was 80 basis points better than the same period last year. The majority of this improvement related to the changes we made in the retail commission structure for new stylists that are hired.

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%. In addition, we have seen a shift in mix to higher-margin categories such as our private label brands.

As we look forward to the remainder of fiscal '11, we expect product margins for our North American salons to remain strong and should approximate the rate we are reporting today in our second quarter.

Let me now address our site operating expenses, and this category includes costs directly incurred by our salons such as advertising, insurance, utilities, and janitorial costs. Our site operating expense in the second quarter came in a bit higher than planned at 9.3% of sales, and that was 50 basis points higher than the operational rate we reported in the same period a year ago.

We had planned for a slight increase of about 15 basis points in this expense category in the second quarter due to increased advertising expense -- this was simply timing -- as well as our current year marketing campaigns to increase a portion of our Promenade, that we are spending in a portion of our Promenade slot which we previously discussed with you. However, in addition to the planned increase, our site operating expense grew during the quarter by two unplanned items.

The first related to an actuarially determined increase in our self-insurance reserve accrual. Our insurance reserves are adjusted based on our claim history. As you recall, last year in the fourth quarter, we settled a large wage and hour claim, which caused our actuaries to increase our current year insurance reserves by about $500,000.

The second and final item to point out related to an increase in our salon level telecommunication expense. We have made significant progress with our Internet in the salon initiative and we now have approximately 2,000 salons with DSL connectivity. However, there were a couple of unexpected start-up costs as part of this initiative which caused our second-quarter costs to be about 15 basis points higher than planned and higher than last year. These issues have since been resolved and should not affect future quarters.

Next, we will talk about our North American general and administrative expense which came in at 6.5% of second-quarter revenue and was unfavorable to last year by 50 basis points. Virtually all of this increase in this expense category was due to expenses incurred in connection with our Regis reimaging project. We spent about $1.5 million on this project during the second quarter.

Let me now shift to our rent expense and there is not much to talk about this fixed cost category, as it came in essentially on plan during the second quarter at 14.6% of sales. This rate was identical to the same period a year ago both in terms of percentage of sales as well as dollars.

Depreciation and amortization also came in on plan at 3.5% of sales and was better than last year's second-quarter rate by 10 basis points. As we discussed with you last quarter, despite some negative sales leverage, the initiatives we implemented can more efficiently use the dollars we spend on salon remodeling projects, as well as our reduced level of new store construction has helped drive the improvement in our depreciation expense. And the overall net effect of all of the items I just discussed caused our operating income to come in at 10.6% of sales, down from an operational rate of 11.8% we recorded a year ago. This decline is primarily due to the one-time items which I discussed with you.

Let's now move on to our International salon segment which includes our company on salons located primarily in the United Kingdom. Today, I again plan to provide only some brief commentary behind the quarterly change in revenue and also give you some high-level comments on any expense categories that make have deviated significantly from plan during the quarter.

For those of you who build segment models, once again, always feel free to call Mark Fosland here at Regis, and he will certainly help you.

Total revenue from our International segment represented 6% of our consolidated second-quarter revenue and came in at $37 million in the second quarter, down 8% from the same period a year ago. The drop in sales quarter over quarter was due to a decline in same-store sales of 3.1%, as well as a reduction in revenue following the closure of underperforming salons in the UK which happened last fiscal year as part of our UK store closure initiative. In addition, currency had an unfavorable impact of about 360 basis points.

Similar to what we are experiencing in North America, our UK business posted a nice increase in retail product comps during the quarter of 3.3%. Let me now speak to our international service and retail product margins.

Our service margin rate came in on plan, improving to 48.1% which was 50 basis points better than the rate we reported last year in the second quarter. The improvement in our service margin rate was in large part due to strong payroll management as well as the benefit from the closure of underperforming salons.

Our retail product margin came in at 45.2% in the second quarter. That was 380 basis points below the rate we reported last year in the second quarter. More than offsetting the margin enhancement from reduced retail commissions paid to new stylists was the decline in product margins from a shift in sales mix to slightly lower product margins -- to slightly lower products that have lower margins. For example, sales of curling irons, hair dryers and flat irons, which have slightly lower margins, continue to become a larger part of our overall retail sales mix in the UK.

The only other item worth commenting on is our depreciation and amortization expense, which improved 70 basis points in the quarter to 3.1% of sales. Despite negative sales leverage, the improvement in rate in this fixed costs category was due to the benefit from our recent initiative to close certain underperforming salons in the United Kingdom. The net effect of the items I just discussed caused our international operating income to come in at 4.3% of second-quarter sales, down slightly from 4.7% we reported a year ago.

I am going to now move on to a couple of -- make a couple of comments regarding our Hair Club for Men and Women business. Second-quarter revenue from our hair restoration centers came in at $36 million, up 2% from the same period a year ago and represented 6% of our consolidated second-quarter sales. These results included a second-quarter same-store sales increase of 80 basis points.

Hair Club's operating profit of $5.1 million or 14.3% of sales was nearly identical to the same period a year ago. So there's not much really to point out. Hair Club's EBITDA margin remained quite strong, coming in at just over 23% in the quarter.

Let me transition and make just 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 700 or so employees working here in Minneapolis, as well as the 500 associates that work in our two distribution centers. Centralized back office support functions continue to 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 greater rate than our corporate office headcount. Despite this leverage, we continue to be very aggressive with expense control during these times of slower sales growth.

As we discussed with you last quarter, we expect our corporate G&A expense to be in the range of $32 million to $34 million during each quarter throughout our current 2011 fiscal year and our second quarter met this expectation, coming in at $31.8 million. However, we did concur $1.3 million of non-operational professional fees associated with our recent strategic alternatives initiative.

So absent these costs our corporate G&A expense came in about $2 million below plan in the second quarter. The primary reason for the decrease related to lower level of variable expenses at our distribution center, the result of shipping less inventory during the quarter to our corporate salons as well as to Premier salons under our warehouse services agreement.

Generally speaking, quarterly fluctuations in our corporate G&A expense will usually relate to the timing of when certain expenses are incurred such as professional fees. This expense continues to be a primary focus of ours, and we continue to aggressively manage our G&A expenses and we are pleased with the results of our efforts.

Now that concludes my comments relating to our individual business segments. But let me just make a few more comments, and I want to move to 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 and businesses, such as Empire Education Group and Provalliance on the continent of Europe. We remain quite happy with the performance of both Empire and Provailliance businesses with our share of the earnings from these equity investments coming in on plan at $3.1 million in the second quarter.

Let me comment now on our effective income tax rate. Our reported tax rate for the second quarter came in at 31.9%, which was significantly better than the rate we had expected. The majority of the decrease related to recording certain one-time discrete items that benefited our second quarter. More importantly, looking ahead to the remainder of our 2011 fiscal year, we now expect our operational tax rate to be a bit lower than we initially forecasted now coming in, in the range of 37% to 38% for the remainder of the fiscal year due to a shift in income mix to lower tax jurisdictions.

Our balance sheet, as you'll notice, 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.

At December 31, total cash grew to $174 million. That is up about $22 million over the past six months. And total debt was reduced to $404 million, down about $36 million over the first half of the fiscal year. As stated in today's press release, we remain comfortable with the forecasted fiscal 2011 same-store sales and EBITDA ranges that we previously discussed with you. However, based on our performance for the first top of the fiscal year, we now expect to end the year closer to the low end of the same-store sales range of negative 1% to positive 2% and closer to the low end of the EBITDA range of $235 million to $270 million.

So that's it. That completes my prepared remarks. Paul and I would now be happy to answer any questions you may have.

So, Jeremy, can you step in now and provide some instructions? We would appreciate that.

(Operator Instructions). Bill Armstrong with CL King & Associates.

Good morning, Paul and Randy. Just a question on the Regis reimaging program. Could you flesh that out for us a little bit? Remind us what that is. I think, Randy, you said it was $1.5 million in the North American G&A line item.

Yes, that's right. Again, as Paul pointed out, it is multifaceted. We are doing several things to re-energize our flagship brand.

We are looking at redesigning some of the storefront displays. We are going to be increasing in-mall marketing. Those are initiatives yet to come, but in the quarter we engaged Gallup and we have had some meetings with all of our salon managers and field supervisors that oversee the Regis brand. We are looking at increasing employee engagement which will translate into increased customer satisfaction, increased customer experience in those stores. And we are starting -- and with the help of Gallup, we are measuring those results. Similar to what we are doing in some of our other brands with the net promoter score. We did spend about $1.5 million on that initiative in the quarter.

Should we see that level of spend on a quarterly basis going forward?

No, absolutely not.

No.

There will be some CapEx with respect to front of store and a lot of those -- a lot of the expenses are behind us.

Okay. And I think you mentioned DSL was in how many salons now?

I think we have it at about 2,000.

Okay. And I think you have a CRM system that you are rolling out, too. And I think you were in about 3,000 salons three months ago. Could you update us on that initiative?

Yes. Hang on one second. I will try to give you a little more color right now.

(inaudible--microphone inaccessible)

2,000 currently. 4,000 by the end of the year.

Great. Thank you.

Jill Caruthers with Johnson Rice.

Could you talk a little bit more about the service margins dip in the quarter? What is the lag time between if you see traffic visits falling off, how quickly can you change the scheduling and what's that lag time there?

There shouldn't be much lag time at all. The -- November was a difficult month for us payroll-wise. And December was slightly better, still not where it should be. But our people do an excellent job of controlling payroll and it should be a variable cost which has historically been controlled extremely well. There shouldn't be any material lag time at all.

Okay, so this past quarter was just a blip, given the way the sales trended throughout the quarter?

And the weather didn't help. We were a little bit more bullish than we should've been.

Okay. And could you just update us on the stores you are testing right now, in Tesco, in the UK? How that's going and --?

They are doing extremely well. They -- I mean, it's a handful. I think we have committed, I think, about 10 brow bars and we should be in 20 or 30 salons within the next year. I mean, it should be a real good growth vehicle for us. And we have an attractive deal from the store's point of view and from our point of view. It should be a nice profit contributor and with a lot of growth potential.

Thank you.

(Operator Instructions). Lorraine Hutchinson with BoA Merrill Lynch.

Hello, it is Paul for Lorraine. Looking at the sales guidance range, to get to the low end of that range you'd still -- you would need a faster sequential acceleration than you guys saw this quarter from first quarter. You know, the reason why you are expecting that faster acceleration, is that just because you don't expect weather to be a problem? Or is it in any way any indication of what you are seeing so far in sales to date this quarter?

We're just -- from a budget setting point of view, we've had easier -- the second half is going to be easier for us. So we're still quite bullish about the second half.

Why will the second half be easier? Is it a comparison thing?

Well, we think comparisons are going to be slightly easier. Mark, do you have any added color?

Yes. I just think, you know, that the trend that we have seen of gradual improvement over time, we expect to continue in terms of customer visits.

Any estimate on how much weather impacted you guys?

Something like 0.5%. (multiple speakers).

Alright and then --.

That's just a guess. You know, we -- (multiple speakers). But it is in that order of magnitude in all likelihood. Largely in the last Of December which was a critical sales time period for us as it is with many retailers.

Understood. And then lastly on the initiatives, most of your initiatives have been topline-focused. But are you guys planning any other initiatives that are more operationally or cost focused that are going to help you guys to get to that EBITDA range, regardless of what you see on the sales line?

No, our focus is topline. I mean, there are some expense control initiatives, but order of magnitude under $5 million on an annual basis. I mean, the real bang for the buck is topline. That's what we're focusing on. That's where we are going to make our investment.

All right. That's great. Thank you, guys.

(multiple speakers). We are calling it investments. In fact, maybe we can even recast the income statement.

(Operator Instructions). [Jacob Zitter] with Robert W. Baird.

This is Jacob in for Erica. Can you talk a little bit more about your product comps, the drivers behind that, if the version is still improving. And it just seems like some of the mall concepts benefited from maybe better holiday mall traffic.

Yes. We had an aggressive holiday program. Our private label went up a couple of digits. On major lines, It's a 10, Pureology, Redken doing very well. Moroccan Oil is expanding. It --. We are doing extremely well. We are being quite aggressive with respect to gift with service programs and we're just --. I mean, it's -- the execution is really quite good.

And do you think you are still benefiting from lower diversions sequentially?

Yes. Absolutely.

Thank you.

And if there are no further questions I will turn the conference back to Paul.

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

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 439-3525, followed by the pound key.

This concludes our conference for today. Thank you all for participating. Have a nice day. All parties may now disconnect.