Regis Corp (RGS) 2011 Q3 法說會逐字稿

Good morning. My name is Luke, and I will be your conference facilitator today. At this time I would like to welcome everyone to the Regis Corp. third-quarter 2011 conference call. (Operator Instructions). 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 the access code 442-5788#. 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, as well as others, can be found on their website at www.regiscorp.com.

With us today are Paul Finkelstein, Chairman and Chief Executive Officer; Randy Pearce, President; and Mark Fosland, Senior Vice President of Finance and Investor Relations. 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 conference over to Randy Pearce for his comments. Randy, you may begin.

Luke, thanks, and good afternoon, everyone. Thanks for joining us. As Luke mentioned, Paul Finkelstein, our Chairman and CEO, is here today with Mark Fosland and me, and as always, Paul will be available should you have any questions of him. But I would like to say that Paul and I felt it was important for me to essentially handle today's call, and Paul, I do thank you for the trust you have placed in me and for the continued support that you have given me throughout this transition period.

Also with us today are several members of the Regis senior management team including Brent Moen, our Chief Financial Officer, as well as David Bortnem, our Corporate Chief Operating Officer.

Well, look, if I could have written the perfect script for my first investor conference call as my new role of President, this would not be it. I would have loved to have been able to report today positive growth in same-store sales, as well as growth in quarterly earnings. Rather, I'm going to say that I'm clearly disappointed with our underlying operational results in the third quarter, and we have a laser focus on correcting this. Same-store customer visitation trends continue to reflect the same challenging market conditions we have experienced in past quarters.

Our reported results today include several non-cash, non-operational items that we are getting behind us. Today's press release provides more detail regarding these one-off items.

However, perhaps more importantly, our underlying operational results fell short of plan and were down from the same period last year, largely due to the decline in third-quarter comps of negative 2.3%. As a result, we are reporting third-quarter operational earnings of $0.25 a share today compared to $0.37 last year in the same period. Mark Fosland will go into our third-quarter performance with you in greater detail in a few moments.

Let me share with you our performance expectations for our fourth fiscal quarter, the quarter that we are currently in. Based on recent sales trends, as well as headwinds that many employers are experiencing in certain expense items such as state unemployment taxes, we now believe operational earnings for the quarter will be in the range of $0.30 to $0.33 a share. Based on the midpoint, this translates into operational earnings for the full 2011 fiscal year of about $1.11 per share and EBITDA in the range of $225 million.

It has now been 11 weeks since I assumed my new leadership role at Regis, and although I believe we have accomplished a number of positive things, we still have a great deal of work to do, and I want to share with you some specifics. The status quo is not an option, and everyone on this senior management team knows it.

This management team firmly believes opportunities exist to improve our salon level performance by growing sales and profits. In fact, we have developed a plan to achieve double-digit earnings per share growth next fiscal year. We have changed the makeup of our senior management team and have reassigned reporting responsibilities in order to enhance our organizational alignment, as well as our speed of execution.

The management team's focus is to drive increases in customer traffic in our salons. It is that straightforward; it is that simple. We are intensely focused on this objective. We are hitting it hard. The initiatives we are deploying to accomplish this objective have been shaped by consumer and stylist research that we have performed and by what we have learned about our business through the recent strategic alternative process.

I know we have addressed several of these major initiatives with you in the past, including CRM, the Net Promoter Score and the like, and I'm confident we have identified the right strategies. However, I also believe we need to increase the speed and the effectiveness of our execution. As a result, over the past 11 weeks, we have enhanced and refined our business plans; we have strengthened alignment throughout our organization in order to enhance accountability.

In order to minimize the learning curve, we have also looked for the assistance of outside subject matter experts to help with plan design, guide us with our implementation, and help shape our expectations regarding results. As a team, we plan to move faster in the future and be more effective in our execution.

Our immediate goal is to deliver improved financial performance to shareholders in our upcoming 2012 fiscal year that begins this July 1. To accomplish this, we have identified four strategic areas of focus, all supported by various business initiatives, which I would like to now share with you.

First, we are going to increase our customer centricity. This encompasses not only our salon clients, but as well it includes our all-important stylist community. We will attract and entice new customers to visit our salons, we will enhance the overall experience of our clients when they visit our stores in order that they not only return to us, but will also refer us to their family and friends. We will specifically know our salon clients, measure their satisfaction and be able to effectively communicate with them in the future. We will also adopt tools to enhance our process of selecting and hiring new stylists that possess the requisite customer service attributes.

Let me update you on the progress we have made on two of our larger customer centricity initiatives and specifically CRM and the Net Promoter Score. With CRM, our objective is to build an ongoing communication relationship with clients in order to drive retention, as well as increase our share of salon visits and average ticket, capturing customer contact information, including e-mails addresses and starting point. Today we have 2200 salons that are in the process of building their customer databases, and to date we have contact information on 1.7 million of our customers.

Most of this contact information has only recently been obtained, so it is too early to provide results, but we are very encouraged by a couple of early items. E-mails open rates, which are a key indicator of customer engagement, are very strong. In addition, communications we are sending out to remind customers of upcoming appointments for haircuts and color services appear to be effective.

In terms of Net Promoter Score, our objective is to reinforce with our clients and our staff the importance of an exceptional salon experience. NPS is the tool that many companies use to measure the customer experience. Three weeks ago we implemented a test in 500 of our salons across most of our salon divisions. The test is designed to last for six months with the purpose of establishing baseline scores, as well as to gain other learnings, including how to effectively deal with promoter and detractor clients. We believe that for every 1 percentage point increase in our underlying NPS score, this translates into incremental same-store sales lift of 50 basis points or more.

Let me now speak to our second strategic area of focus in fiscal 2012. We plan to leverage the power of our existing salon brands by accelerating growth in our best corporate and franchise brands such as Supercuts in markets where we are strong. We will also be more scientific in our approach by utilizing the services of the best external site selection resources. During the fiscal 2012 -- during that year, we plan to convert 50 nondominant brand locations to a more dominant brand, and we plan to accelerate store growth by adding 285 new salon locations, of which at least 85 will be franchise.

Our third strategic area of focus in fiscal 2012 will be to enhance our connectivity with our salons and with our field supervisory staff in order to reduce costs and put information in the hands of decision-makers faster. Our strategies to increase customer centricity, to leverage the power of our salon brands and to enhance connectivity will add value to our operating results in fiscal 2012 but as we expect in a modest fashion. These benefits will accelerate over the next several years as these initiatives continue to evolve and mature.

In the meantime, in order to make the necessary investment in these initiatives, as well as deliver increased earnings to shareholders in our upcoming 2012 fiscal year, our fourth strategic area of focus is to undertake some bold cost-cutting initiatives in the range of $20 million to $30 million. We will make due with less, and we will be thoughtful in how we achieve these savings. We will not take a slash and burn approach, nor will we achieve this objective at the expense of our all-important stylist community. We are looking to achieve these savings in areas such as travel, charitable giving, contract renegotiations, reduced interest, as well as incremental benefits from initiatives already put in place over the last several years. These savings will be implemented and begin to be realized this July 1, the beginning of our 2012 fiscal year.

I will make one additional comment regarding what this management team is focusing on. As the dominant leader in the salon industry, the investments we are making in initiatives I just discussed will significantly benefit our business in the years to come. However, we also clearly recognize that our top priority today must be to aggressively focus on increasing sales now. As a result, please know that we are moving fast to develop strategies and implement initiatives to profitably grow sales and gain market share at the expense of our competitors.

Let me try to pull all this together and segue to our financial expectations for our upcoming 2012 fiscal year. First, I will speak to same-store sales. We are forecasting our fiscal 2012 comps to improve to a range of minus 1% to up 1% with an obvious midpoint of being flat. I do want to point out that our plan next year is to raise prices in far fewer salons than what we have done in the past. We believe this is a prudent strategy given the current economic environment. It remains tough for many consumers. Over time we certainly prefer to grow our comps through increased client traffic and not necessarily have to do so through raising prices.

Based on this range of same-store sales, as well as the $20 million to $30 million of cost saving initiatives I just mentioned, I'm very pleased to say that we are forecasting growth in both earnings and cash flow for next year. Our EBITDA next year is forecasted to be in the range of $222 million to $242 million and earnings to be in the range of $1.16 to $1.32 per share. The midpoint of the $1.24 a share represents an annual earnings increase of 12% with additional upside potential from unbudgeted salon acquisitions.

As I previously mentioned, we are planning to ratchet up our salon growth next year. Total capital expenditures are budgeted to be about $120 million, and that includes $25 million that we have earmarked for acquisitions. After dividends and scheduled debt repayments, we are budgeting to generate excess cash next year in the range of $65 million to $75 million. And this is indicative of the strong cash flow characteristics of our Company.

As we look ahead, this management team is focused on improving our financial performance and driving results for our shareholders. We will be disciplined with our resources, but we will also make the necessary investments in initiatives in order to deliver increased earnings to shareholders in fiscal 2012 and beyond. Please know that personally it is a privilege to serve our shareholders and our employees and our customers, and all of us here at Regis are looking forward to improved financial performance that we believe is ahead of us.

Let me now pass the baton over to Mark Fosland.

Thanks, Randy, and good afternoon, everyone. Our actual reported results for the third quarter were a net loss of $0.45 per share. However, this included after-tax non-operational charges of nearly $40 million, which were primary related to goodwill impairment in our Promenade salon division. Excluding non-operational charges, our operational earnings in the third quarter came in at $0.25 per share. With same-store sales declining 2.3% in the quarter, we would have expected our operational earnings to be about $0.29 per share rather than the $0.25 we are reporting today. Reduced service margins and increased marketing costs in our North American salon segment were the primary reasons for the shortfall.

As we discussed with you last quarter, increases in state-mandated payroll taxes have put some pressure on our service margins. Additionally we increased our advertising spend in the quarter as we have kicked off some new initiatives designed to create new trial and improved customer traffic. 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 third quarters. Also, feel free to contact Andy Larew or myself here at Regis if you have any additional comments or questions regarding your financial models.

I will now transition my comments by giving you a bit more detail behind our third-quarter operating results for each of the business segments. A breakout of our segment performance is also found in today's press release, and my comments this afternoon will be focused on our operational performance.

So let's begin with our largest segment, our North American salon segment. Total North American salon revenue, which represented 88% of our consolidated third-quarter revenue, decreased 1% during the quarter to $510 million. This revenue decrease was the result of a decline in total same-store sales of 260 basis points, partially offset by revenue from salons built or acquired over the last year net of closures, as well as favorable currency impact from our Canadian salon revenue due to a weakening of the US dollar against the Canadian dollar. Service revenue declined slightly during the quarter to $399 million. This reduction was largely the result of a decline in service comps of 2.9%, partially offset by the two factors I just mentioned -- revenue from new and acquired salons net of closures, as well as the favorable impact in currency.

In recent years the March quarter has been the primary quarter when we have increased prices. You may recall that we increased prices in over 6000 salons in fiscal 2008, 5500 salons in fiscal 2009, and about 4500 salons last year. This year we backed off on our price increases, and we raised prices in about 1500 locations.

As a result, our average ticket increased 1.3% in the quarter, largely due to sales mix. Again, the continued result of hair color and waxing services that continue to increase as an overall part of our sales mix. More than offsetting the increase in the average ticket was a 4.3% decline in same-store customer visits during the quarter. As with many other retailers, the weather in the month of January was challenging, and the shift in Easter traffic out of March and into April also hurt our third-quarter customer costs counts by about 30 basis points.

Our product business increased slightly during the third quarter to $102 million. Product comps declined 110 basis points, but were offset by new salon revenue and currency. Third-quarter royalties and fees from our North American franchise salons were up slightly compared to last year and came in at $9.2 million.

Let's now talk about our gross margins. Our combined gross margin for North American salons came in below plan at 43.1% and was 80 basis points lower than the rate we reported last year in our third quarter. This entire decline related to our service margins, which I will now discuss.

Our third-quarter service margin rate came in below plan at 41.5%, which was 100 basis point decline from the rate we reported in the same quarter last year. As we discussed with you last quarter, states continue to increase payroll taxes to fund their unemployment obligations. As a result of this, we had planned for a decrease in service margins in the quarter of 40 basis points. However, the majority of the decline in service margins relates to two unplanned items.

First, we saw an increase in our health insurance costs. In the first half of our fiscal year, our health insurance costs were on plan and were flat to last year. During the third quarter, we incurred several unusually large claims which resulted in an increase in health insurance costs of over $1.3 million or about 30 basis points. We do not expect these claims to have an impact on our fourth quarter, and we expect health insurance costs in the fourth quarter to be more consistent with the amounts we saw in the first two quarters of the fiscal year.

The final item impacting our service margins relates to an increase in salon payroll costs. The unusually bad weather in January contributed to this decline as our salons were open and staffed, but customer traffic was down significantly. Nevertheless, we were disappointed in our salon labor costs. Salon labor costs are our largest expense, and we have a proven history of managing these costs extremely well. Our operating people are committed to controlling salon level payrolls.

Looking forward to our fourth quarter, we are planning for continued year-over-year increases in payroll tax expense of approximately 30 basis points, and therefore, we would expect fourth-quarter service margins to be down a similar amount from the rate we reported in the comparable period a year ago.

Our retail product margin rate for the third quarter of fiscal 2011 came in at 49.7%, which was right on plan and was 40 basis points better than the same period last year. All of this improvement relates to the changes we made in the retail commission structure for new stylists that are hired. As you recall, almost two years ago we implemented a new payroll plan to pay new stylists an 8% commission rate on their product sales rather than the historical rate of 10%.

As we look forward to the fourth quarter, we would expect product margins for our North American salons to remain strong and should improve over the rate we reported in our fourth quarter last year.

Let's now move on to cite operating expense, which includes costs directly incurred by our salons such as advertising, insurance, utilities and janitorial costs.

In terms of dollars, our site operating expense in the third quarter came in right on plan, but was 50 basis points higher than the operational rate we reported last year in the same period. We had planned for a 30 basis point increase in this category due to the timing of advertising spend, as well as a price promotion test. The remainder of the rate increase is the result of negative sales leverage and general inflationary increases on fixed cost expenses.

Next, we will talk about North American general and administrative expense, which came in slightly above plan at 6% of third-quarter revenue and was unfavorable to last year by 60 basis points.

Similar to the site operating category, the total expenses in the third quarter in terms of dollars came in essentially on plan. A large portion of the planned increase in this category relates to the timing of marketing expense and another test initiative around improving brand awareness in our Promenade division.

In addition, negative sales leverage and general inflationary increases on fixed cost expenses accounted for about 10 basis points of the rate increase.

Let's shift to rent expense, and there really is not much to talk about as this fixed cost category came in slightly better than plan during the quarter to 14.2% of sales. This was a 20 basis point improvement over the same period a year ago. We did have a slight benefit in our common area expense category, which was the result of an annual true-up which takes place each year in our third quarter.

Depreciation and amortization expense came in better than plan at 3.6% of sales. It was higher than last year's third quarter rate by 20 basis points. Virtually all of this increase was related to the write-off of fixed assets related to the closure of underperforming salons.

So the net effect of all the items I just discussed caused our operating income to come in at 11.1% of sales, down from the operational rate of 13.1% we reported one year ago.

Let's now move on to our international salon segment, which includes our Company-owned salons located primarily in the United Kingdom. Today I will 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. For those of you who build segment models, you may want to give Andy Larew a call here at Regis, and he can help you out.

Total revenue from our International segment represented 6% of our consolidated third-quarter revenue and came in at $36 million, essentially flat for the same period a year ago. Our same-store sales declined 2%, but was offset by favorable impact of currency.

Let's now talk about international service and retail product margins. Our service margin rate came in better than planned, improving to 50.5%, which was 170 basis points better than the rate we reported last year in the third 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 that we did last year. Our retail product margins came in at 46.4% in the third quarter, which was 180 basis points below the rate we reported in our third quarter last year, and more than offsetting the margin enhancement from reduced retail commissions paid to new stylists was a decline in product margins from a shift in sales mix to slightly lower margin products. For example, our sales of curling irons, hair dryers and flat irons, which have slightly lower margins, continue to become a larger part of our overall sales mix.

The only other item worth commenting on is our depreciation and amortization expense, which improved to 80 basis points in the third to 3% of sales. Despite negative leverage from sales, the improvement in rate in this fixed cost category was due to the benefit from the initiative to close certain underperforming salons in the UK, which took place last year. The net effect of the items I just discussed caused our international operating income to improve to 6.4% of sales compared to the 5.9% we reported one year ago.

Next, I will provide a couple of comments on our Hair Club business. Third-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 third-quarter revenues. These results include a third-quarter same-store sales increase of 130 basis points. Hair Club's operating profit of $2.8 million or 7% of sales was down from the 10.9% we reported in the same period a year ago. The largest factor in this decline is product margins. Hair Club has seen an increase in the cost of hair systems. Many of our hair systems are produced in China, and wage pressure there is driving our costs up. Our management team continues to look for alternative lower-cost areas to source our hair systems.

For the quarter, Hair Club's EBITDA margin came in at 17%.

Let's now transition, and I will 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. These centralized back-office support functions provide leverage to our operating model.

As we discussed with you last quarter, we expect corporate G&A expense to be in the range of $32 million to $34 million during each quarter throughout our current fiscal 2011, and our third-quarter actual came in below that at $31.3 million. The primary reason for this decrease related to a lower-level of variable expenses at our distribution center, the result of shipping fewer products during the quarter to both our corporate salons and the salons that we support under our premiere salon 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 area continues to be a primary focus, and we continue to aggressively manage our G&A expenses. We are very pleased with the results of our efforts.

That concludes my comments concerning our individual business segments, and I am going to move on and talk about our investments, which are reported on the P&L line item labeled "Equity and income of affiliated companies."

This line includes after-tax results of our investments in businesses such as Empire Education Group and Provalliance. We remain quite happy with the performance of both the Empire and Provalliance businesses with our share of earnings from these equity investments coming in better than planned at $3.5 million in the third quarter. We did increase our investment in Provalliance at the end of March, and we continue to expect that that transaction will add $0.06 to earnings on an annual basis. And Empire also continues to perform well. But the current regulatory environment is difficult. And like most other for-profit type -- most other for-profit Title IV funded schools, the next year will be challenging.

Let's now move on and talk about our effective income tax rate. Our reported rate for the third quarter is not very meaningful as a result of reporting a net loss. However, what is more important is our underlying tax rate, which came in better than plan at 32.2%. This unplanned benefit was the cumulative impact of higher than anticipated worker opportunity tax credits.

Looking ahead, we continue to anticipate that the underlying rate for the fourth quarter of our current 2011 fiscal year should be in the range of 37% to 38%.

Our balance sheet continues to be in great shape. We have no borrowings under our $300 million revolving credit facility. We have no liquidity issues. We continue to be in good standing with all of our financial debt covenants, and we have plenty of covenant cushion. At March 31 total cash was $145 million, and total debt was $404 million.

That completes my prepared remarks. Paul, Randy and I would now like to answer any questions you may have been, so, Luke, can you please step in and provide some instructions on how people can ask their questions?

(Operator Instructions). Lorraine Hutchinson, Bank of America/Merrill Lynch.

This is Paul Alexander for Lorraine. Randy, could you give us a little bit more background maybe on how you have come to the comp guidance for next year of negative 1 to plus 1? That clearly implies improvement, and I'm sure part of that equation is assuming that visitation patterns stabilize or just the cumulative effect of easier comparisons is a tailwind to you. But how precisely to that range? Why not a little bit more conservative, or why not a little bit more aggressive? Why couldn't it be a little bit more of a tailwind?

And then just as a follow-up, could you comment on, if you care to, on trends you are seeing in April and if you saw a positive Easter shift to this month?

Yes, let me address the comps guidance for next year, Paul. The comp guidance is based on business plans. We have enhanced our business plans around all of the initiatives that we are focusing on. I like your comment regarding tailwinds. We have seen natural improvement and, as we have talked about in the past, the anniversaring effect of customer visits. We have seen improvement. We expect there will continue to be improvement next year.

But the guidance that we have given is based on some level of natural improvement. We are not expecting it to go flat yet, but having said that, we do expect lift from some of our business initiatives. And I will also say we have been careful to point out we benefited in years past because of price increases. We are going to have less price increase built into our forecast for next fiscal year. We just are going to remain a little more cautious on raising prices to consumers in this economic environment. So had we raised prices more aggressively next year, I think we would have had a higher expectation for comps. So, again, it is based on pretty fulsome business plans. Those are our expectations.

As it relates to April, I wish -- look, don't read anything between the lines. We have tried to be consistent in quarters past about not updating people on current trends. And the reason is, just as we saw in this past quarter, certain months are better, certain months are lower. It still remains choppy.

What we did say is that the shift in East hurt us in March by 30 basis points. We expected to have it benefit us in the month of April because of the shift in Easter by a comparable amount and we saw that. So absent that, I'm not going to make any more comments about current trends.

Jeff Stein, Stein Research.

A question for you relating to strategies to drive sales. You did indicate in your comments that your priority is sales now. And with the CRM system seemingly more of kind of a backend loaded strategy, what are the initiatives that you would intend to roll out that would produce sales now?

Well, in terms of -- CRM will have a lift in fiscal 2012, albeit -- you're absolutely right, Jeff -- it is more backend loaded, and fiscals 2013 and 2014 is when we expect to see the lion's share of the benefit in CRM. But there will be benefit in CRM, so we need to focus on that now in order to have benefit certainly in the future.

In addition, we are looking at the net promoter score. We will be rolling that out as well. We do expect lift there. I think what you are really referring to, though, is some more grassroots level immediacy in different programs. And the management team has been working very hard over the last 11 weeks on designing the key areas of strategic focus for next year and delivering a financial plan that is going to show increased earnings and cash flow to shareholders. We have accomplished that. Now we're in the process of not only implementing some of those initiatives, but we are having more fulsome discussions regarding immediate things that we can do to drive sales.

There is a number of things. We are trying to be bold. We're trying to look at things, and I will give you one example, and it is only an example because we have not landed on this one yet. But we know from talking to our stylist community that recognition is important to them, and it is not always monetary, and it does not need to be giving them a flatscreen TV or a glamorous trip. But we are looking at trying to develop some programs to incent stylists, managers, supervisors to increase customer account, not at the expense of profits, but to do so profitably and design a program where it is going to be self-funding so that a portion of some incentive goes back to the stylists. It does not need to be a lot. We have not developed that, but I think recognizing the stylist for their effort and incenting them for the behaviors we are looking for would be important. So we are focusing a lot on different grassroots initiatives.

Got it. And I'm wondering if you could just give us a little insight into where you see your debt position, your net debt position at fiscal year-end?

Yes, and I think Martin is going to try to give us that.

At the end of the fiscal year, we would expect our cash -- again, we are looking at doing some things, but our cash we are going to generate about $80 million of excess cash. So when I look at our net debt at the end of the year, we should have somewhere around $90 million of cash, and our long-term debt should be about -- our total debt should be about $320 million.

Okay. Got it. So about $230 million of net debt?

Yes.

Okay. And I just want to make sure I understand your free cash flow guidance for the year. Does that include the assumption that you're going to be making acquisitions and paying down debt, or is this just cash from operations less the $95 million of capital spending?

It is cash from operations less the $95 million, and it also includes $25 million for acquisitions.

Got it. Okay. Very good. Thank you.

Jeff, one other thing if I can just -- when we talk about -- one thing that we have said for many years is that we are not a marketing driven company. Our locations are really what drives consumers to his. And to a large extent, that is true. But we also realize that there is opportunity in front of us to drive increased trial into our stores through effective marketing means, and we are experimenting with a number of things in existing stores to try to drive traffic.

So one of the things that is also built-in to fiscal 2012 in terms of some of our initiatives and into our budget is some increased marketing spend in areas to increase sales of existing stores that may be in strong markets, but are not performing to the level that we think they should. We are experimenting in certain areas. We know that Supercuts has the best brand awareness in the industry, largely because they spend anywhere from 4% to 5% of their sales on promoting the brand. And in other concepts, we spent less than that. So we are experimenting as to whether by increasing the advertising spend, we can drive increased not only trial but repeat customers. So I think you are going to see not only with CRM but other marketing initiatives will play a more prominent role in the future.

Randy, one additional question with regard to CRM. Can you talk a little bit about -- you did mention their customers are responding to reminders. What else are they responding to? And do you have any sense at this point in terms of perhaps what the cost of those promotional initiatives might be that would require somebody to come into a salon but perhaps get a discount on a product or a haircut?

Yes, well, that we can do, but we are not doing that, Jeff. We are really not reaching out with offers. Jeff, everything that I'm saying -- and I have tried to say this in the prepared remarks as well -- we are in our infancy here. We are learning a number of things. But we also expect that because of that special client/stylist relationship that we should be pretty effective in being able to communicate with our clients, and it looks early on that we are. And one of the things that -- again, we are learning -- but we found that simply reaching out to customers that have made an appointment and reminding them, and we are measuring this against the control group where we don't do the reminders, we have seen sales lift. And a lot of benefit is coming simply by those reminders, which do not contain an offer.

Then there's other things that simply are thank yous or birthday reminders, again, not always with an offer. So right now we are experimenting with a number of things, and I would not expect that we're going to see sales at the expense of margin because of increased promotion. That is not what we are doing.

And the rollout of CRM itself, is that still scheduled to be completed by June of 2012?

Yes, pretty close to that, Jeff. And then again, that is exactly right. We are looking to have local and we are eventually going to have centralized customer databases in, but we should have local databases in virtually all of our stores within the next 15 months.

Jill Caruthers, Johnson Rice.

Could you talk about the incremental $20 million to $30 million in cost cuts that you mentioned you see for next fiscal year? Where is the bulk coming from and the timing of those reductions?

Well, the timing -- we will realize that $20 million to $30 million throughout the fiscal year. So we will by the end of June 2012 we will have achieved $20 million to $30 million of savings. We are going to have business plans in place to go after the savings effective July 1, this upcoming July 1, the beginning of the year. And one of the things that we are still working on is we have a lot of specific areas that we have identified. We are in the process of refining and communicating and implementing. One of the sacred things is we are not going to do it at the expense of our stylist community. We are going to look at just spending money a little bit more wisely in areas like travel, contract renegotiations that are coming up. We are looking at reduced interest costs. As you know, over the last couple of years, Paul was very aggressive in cutting expenses, and we had a number of expense reduction initiatives already underway, and we will continue to realize incremental benefit from those areas.

So what we are not doing is -- and I think I used the term slash and burn. We are not doing that. The management team has identified a number of areas across virtually all departments where we are going to do more with less in order to drive increased profitability next fiscal year and still make the investments we need to do in the future.

Okay. And would the cost be more focused on corporate level or salon level or a mixture?

It is going to be a mixture, but more heavily on corporate I would say.

Okay. And then last question. Service margins, I know they were pressured, and you commented on the payroll taxes, but also the payroll ramp that you -- it sounds similar to what you experienced last quarter. What systems do you have in place for this not to occur again given this is the second consecutive quarter this has happened?

Well, I would just like to start off by saying the most important expense element in our business model is salon payrolls. And I think if you look over many, many years, we have done an outstanding job of managing salon payrolls, and the key to it is to ensure that you have the right staff at the salons to match customer visitation patterns. And we generally in most of our stores have automated scheduling systems that help our managers do that. But I will also say that during the holiday season or during periods if we have tougher weather where we are expecting traffic and we are not -- and it is not materializing to the extent we hoped, then we are overstaffed, and that drives up payroll costs.

I'm highly confident. Dave Bortnem and I have talked extensively about this. I think all of the operating people know that it is our job to manage the business, and that includes managing payroll costs, and I'm highly confident that it will return to normal levels here in the very near future, and I hope it will be here in the fourth quarter.

Mike Hamilton, RBC Capital Markets.

Best wishes to all of you. I was wondering if you could attack pricing in a couple of levels. One, in what you are saying, do you foresee any plans for selective price actions in the decreasing area? Would you be willing to do that selectively?

We would -- sure, we would look at it. In fact, we have talked about whether we should experiment to see if pricing could help, a reduction in price in certain areas could help drive increased traffic. But, by the way, as we have talked about, we have raised prices very judiciously in the past, and we did not do it across the board. We did it in select markets based on the competitive environment in those markets. And we also measured stores where we raised prices against performance in stores where we did not. We have not seen a great deal of evidence that price is a key motivator. Most of our -- 85% of our brands -- of our stores is our value brand concepts.

But having said all that, I'm still convinced that we need to be a little more judicious in how we raise prices. The consumer is still being strapped. Consumer confidence in this country is low. We need to be conscious of raising prices, and we're going to focus on other initiatives to build comps, not through price.

Along that line, you may have already answered it in your comments there. Could you give some perspective on what you are seeing in competitive dynamics from 30,000 feet?

Yes, I mean one of the things that we have done over the last nine to 12 months is taken a pretty deep dive into what our competitors are doing. And I would say this, that, again, we have wonderful brands and wonderful locations, and most of our competitors are franchised. We have 8000 Company-owned stores that we can control the business very effectively.

Having said all that, I see that we talk about marketing. I think our competitors have been more aggressive at times in driving new trial into their stores through pretty effective marketing means. Some of that also relates to technology. You know, web apps that go onto smart phones for appointment type businesses and even non-appointment businesses.

So I think what we have learned is that there are some things that competitors are doing that we can also learn from and we are, and so enough said.

But in terms of pricing, no, I think we are very competitive in pricing.

Jayme Wiggins, Intrepid Capital.

I just wanted to build on the last question about competitors. Some of the other questions in the call are focused on your initiatives for sales going forward, but I would like to talk a little bit more about the comparable store sales you have realized over the last year or so. So a while you guys have said that negative comps stemmed from consumers extending the time in between haircuts, and we looked at the latest Professional Beauty Association survey, and that indicates that less than 20% of salons are reporting negative service comps over the last few quarters. And it also seems to indicate that industry traffic has been positive for over a year. So we would appreciate if you could comment to some degree on why you think your overall portfolio is underperforming the industry?

I don't know that we are underperforming. I'm not going to make that leap of faith. And I'm not even going to get defensive at this because, quite frankly, it does not make any difference about what the past has been because I'm focused entirely on the future.

I realize we are the largest salon chain in the world, and I believe we are the best salon chain, and we should be taking share. I'm not happy with our performance; none of us are.

We see that -- what is always hard and we have said this at investor conferences and I know you appreciate this as well -- it is really tough. We are the only salon chain out there that is public. So to get good, reliable industry data is hard. And I'm not going to discount the industry data. I think what you are referring to includes spas, and that's not really us, and it is hard. We have got stores that are up; we have got stores that are down in terms of comps. I think we are going to be much more aggressive going forward in terms of driving traffic and taking share at the expense of competitors.

So, again, I don't want to be flip about this. The past is the past. We are not happy with it, and we are going to become much more aggressive regardless of whether we take the position that we are behaving just like the industry or if we take the position that we are losing market share. And I don't believe we are, but regardless are strategy remains the same going forward.

I appreciate the comments. Let me just press you a little bit more on it. Obviously the comps are still a little bit on the negative side, and if you guys had to sum it up, what you think the main reasons for that are, do you think it's more of a pricing issue, which I guess based on your last response probably not. More of an image issue, or do you think that you're just having more competitors opening up stores in your markets and just eating into your sales?

Well, as with anything, Jayme, one answer is not probably sufficient. I do think that sure, there is more competition, but we have opened stores as well. And so even though competitors would take share from us in certain markets, we have to be taking share from others in certain markets as well.

I think I mentioned about technology. I do see that we are behind the curve regarding certain competitors on technology and communicating with customers. We know that. We are well along on fixing that problem. As I said before, looking at the glass being more than half-full here, I would say we've got great brand, great brand awareness, great locations. I think we have a lot to offer. We just need to step up our game and start focusing on the customer, not only the client that is in the chair, but our stylist as well. We need to attract and retain the best people that is going to deliver an outstanding customer experience so that when that customer leaves our store, they will not only want to come back to us, but they will recommend us to a friend as well.

And one last point. I know that what is also tough is not only the fact that we are the only public chain out there. There are so many mom and pops, and that's just the nature of our industry. It is highly fragmented. I don't know, I think the number is close to 60% of this business is underground; it does not get reported. It is really hard to draw conclusions, and I know Paul and I over the years have said we would love to know what is really going on, and all we have is anecdotal evidence. We are in all 50 states. We are in every Canadian province. We have several thousand franchise locations that report sales to us because they pay us a royalty. 85% of our units are value-based. We don't see discernible differences across brands and geographies. This appears to be very widespread. But having said that, we are not satisfied. We are going to grow customers.

Last thing, and it is going to be a quick answer, do you find based on whatever data you collect that customers are not extending their haircut times anymore? Has that leveled off, or do you still believe --?

Yes. (multiple speakers) Yes, we see no data that says that the lengthening of a customer's visit is continuing. Having said that, we always talk about that anniversaring effect, and I know you said this should be a short answer. But we talk about that anniversaring effect. If a customer goes and gets her hair cut every six weeks and is now going every 12 weeks, you're only generally hurt that first year because in year two she is not generally going to go ever every 18 or 24 weeks.

But the problem is not that one customer. It is the fact that not everybody starts lengthening their visits at the same time. And so I would say we have seen no evidence that a consumer who has lengthened their visit is continuing to lengthen their visit. Hopefully that is clear.

(Operator Instructions). Beth Lilly, Gabelli Asset Management.

I have a couple of questions. It is interesting you talk about rationalizing the expense structure by $20 million to $30 million, and if I look at your G&A line, it runs on an annualized basis about $320 million or so. So if we take the midrange of that, that is about 7% expense cuts. And I'm curious about how you arrived at that number, and are you not being specific on the call because you don't want to be specific, or is it that you have not quite identified it or put the numbers to the line items?

No, we have clearly identified it. We have an action plan. One of the things that I'm doing is next week actually we are having a Companywide meeting, and we are going to start talking about this and soliciting input to -- not input, help to implement some of these initiatives.

So I don't want -- we've got a number of people listening on the call, and I don't want people to jump to the conclusions again that we're looking at significant staff reductions. I will be happy to give you more specificity on the August call, but I owe it to people here at Regis to hear it from me first not through a conference call. But, believe me, we have the specific initiatives identified, and we are ready to pull the trigger on them.

Okay, that is helpful. And just to be clear, it is going to all be in the G&A line, correct?

No, not all of it. One of the things I mentioned was the interest expense as well, and I cite operating expense will likely come down a little bit. So it will hit multiple lines. Once we -- you know, I just mentioned on the August call. We would be happy to help then guide people -- if you are modeling, Beth, to help guide you to where those expenses fall on our P&L.

Okay. Great. The second question is, can you go into more detail about the third quarter non-operational items in terms of the charge at Promenade and then MY Style and Premier?

Sure.

Why you took those charges?

Promenade, this is an annual goodwill impairment test that all companies have to go through, and we do it in our third quarter every year. In past years we have said that Promenade is a bit at risk because most of our acquisitions are done in the strip center environment that falls within the Promenade salon division. Most of the purchase price associated with those acquisitions go to goodwill because there is very little that we assigned to tangible assets like salon chairs and shampoo bowls. And, as we have seen over the last several years with the decline in sales and profitability, we test for goodwill based on cash flow, discounted cash flow models, and we knew that we were getting tight in the Promenade division. And, as I said, I just want to get it behind us. We went through the accounting this quarter. We are getting it behind us. We took a big bite out of the Apple, and we have always said that, look, we take it serious. We take it serious because it is a reflection of the fact that that division is not performing at the level that we would have hoped it could be performing.

But having said that, it is not cash; it is already reflected in the earnings of the Company. So it's just an annual exercise that we go through. We took a similar charge a year ago for the Regis salon division. But more importantly, as we look to these divisions in the future, we have got -- we took a big bite of the apple. It is behind us.

In terms of Premier and MY Style, let me hit the MY Style first. After the disaster in Japan, we looked at that business, we received input from our independent accountants, PWC, that all companies have to look at that and say, does it, indeed, require that we are looking at the equity investment -- does it require us to look at it? Is there a write-down?

We conservatively reached the conclusion -- I hate to even use that word -- but, again, we wanted to get it behind us and we did. We took a $9 million write-down associated with that.

And then I would say the last one was Premier. Premier, which is really PureBeauty, this is the company that we sold the Trade Secret investment to for zero because we felt there were systemic problems associated with that business. But we ended up getting a $59 million tax benefit associated with it.

But Premier owes us a little over $31 million, and what we have done is we have always valued the note based on collateral value, and we have seen that their collateral value -- and I'm talking inventories that Premier owns in their distribution center as well in their stores. Their inventory levels have dropped to a point that triggered us to evaluate the note, and we had a $9 million rights offering. I don't know if that is helpful, but if you would like, if you can give us a call, we will get into and do a deeper dive on any of those with you.

Luke, any other questions?

If there are no further questions, I will now turn the conference back to Randy.

Okay. Thanks, everyone, for joining us this late in the day. We appreciate your support.

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