Regis Corp (RGS) 2011 Q4 法說會逐字稿

Good afternoon. My name is Craig and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Regis Corporation fourth-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 1-800-406-7325, using the access code of 446-2821 followed by the pound sign. 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 made this afternoon 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'd now like to turn the call over to Randy Pearce for his comments. Randy, you may now begin.

Thanks, Craig. Good afternoon, everyone. Thanks for joining. As Craig mentioned, Paul Finkelstein, our Chairman and CEO, joins me today, along with Mark Fosland.

And just as we did last quarter, Mark and I will discuss today's results, and Paul will be available to answer any questions you may have of him during the Q&A portion of the call. Also with us today are several members of the Regis senior management team, including Brent Moen, our CFO, and Dave Bortnem, our corporate Chief Operating Officer.

Today we reported fourth-quarter operational earnings of $0.37 a share, which I'm very pleased to say exceeded our plan and was $0.03 stronger than the operational results we reported last year in the same period. Our results also included a few nonoperational charges, which we mentioned last quarter. Today's press release provides additional detail regarding these write-offs. Mark will go into our fourth-quarter performance in greater detail in just a few moments.

It's now been just over six months since I assumed my new role as President of Regis. Although we have a great Company, we still have work to do to accelerate our growth and our success. However, we have accomplished a number of exciting milestones and we're making great progress on executing our business plan.

Let me share with you some specifics. As you've heard me say before, the status quo is not an option. Regis's dedicated management team is focused on driving increases in consumer traffic in our salons. It's that straightforward.

To do this, our strategies are focused on what is best for our consumers. We consistently strive to deliver an experience to our salon customers that meet or exceed their expectations so that when they leave our salons they look good, they feel good, and they want to return to us. We are intensely focused on the consumer. We are hitting it hard.

During each of the first three quarters of fiscal 2011, we saw our same-store customer visits decline by an average of about 4%. Although consumer visits still declined during the fourth quarter, the trend has improved. Visits were off 2.5% during the fourth quarter. We estimate that only a small piece of this sequential quarterly improvement, about 30 basis points, was due to the seasonal Easter holiday shift.

Make no mistake about it, the overall economic environment remains tough. We all know that. In fact, in recent weeks we've all seen national and worldwide events further impact the markets and consumer confidence in a negative way.

Recent consumer visitation trends in our salon business have been choppy as well. Through the first seven weeks of our current quarter, customer visits are off 2.5% and comps are off a bit more than that at negative 3.6% due to implementing our recent promotional strategies designed to increase customer trial and retention.

We know that nothing ever goes up in a straight line. However, we are focused on the right things, and I believe our early efforts are having a positive impact on our results.

Last quarter, I expressed our commitment to deliver improved financial performance to shareholders during our current 2012 fiscal year and beyond. We discussed the four strategic areas that we're focusing on in order to accomplish this goal, all of which are supported by various business initiatives.

Let me provide you with updates on the progress we have made in each of these areas. The first area we're focusing on is increasing our customer-centricity. This certainly encompasses our salon clients, but starts with our all-important stylist community.

To supplement our own analysis, we have engaged a proven third-party provider to profile some of our most successful stylists and identify the ways they excel in customer service and teamwork. To ensure that our employees have the attributes necessary to succeed, we are now using this information during our stylist and manager hiring process in over 1,000 of our salons. We plan on adding an additional 2,000 salons to this program by the end of September.

It is largely the Company's obligation to bring new customers into our salons and it's our stylists' responsibility to bring them back by delivering an exceptional customer experience. Accordingly, during our preceding fourth quarter, we tested an aggressive discount pricing strategy in select markets in an effort to drive new customer trial to our salons.

Results were successful, and we quickly expanded this strategy. This month, we have nearly 1,000 salons across dozens of markets driving this new trial, just in time for the back-to-school haircut season. This is just one example of our commitment to test new tactics, measure and learn from the results, and to quickly expand based on their success.

In the past, we have highlighted the importance of understanding who our individual customers are in order to track their visitation patterns and to effectively communicate with them. Knowing our customers will help drive retention, as well as increase our share of salon visits and average ticket. For this reason, we continue to focus a significant part of our effort on implementing our new CRM program.

Let me give you a brief update on the progress we've made since the time we last spoke. As you know, capturing customer contact information, including e-mail addresses, is the starting point of CRM. Today, we have 4,500 salons that are in the process of building their customer databases, and to date we have contact information on approximately 2.5 million of our customers.

Most of this contact information has only recently been obtained, so it remains too early to provide results. However, we continue to be encouraged by high e-mail open rates, which are a key indicator of customer engagement with us.

We've always been interested in receiving feedback from our customers on the performance we provide them and on ways to improve the salon experience we deliver. We are now formalizing this feedback process. After a customer leaves our salon, we want to measure their satisfaction by using a proven tool called the Net Promoter Score. This tool reinforces with our clients, as well as our staff, the importance of an exceptional salon experience.

Last quarter, we had implemented a test of 500 of our salons across most of our divisions. This test, which is designed to last six months, will establish baseline scores for the salons and provide additional information on dealing with promoter and detractor clients. We believe that for every one percentage-point increase in our underlying NPS score, there will be an incremental same-store sales lift of 50 basis points or more.

A second strategy we're focusing on this year is leveraging the power of our existing salon brands by accelerating growth of our best corporate and franchise brands, such as Supercuts, in markets where we are strong.

Let me update you on four related items. First, during the first quarter of fiscal 2012, we anticipate constructing about 50 new corporate salons and we're confident in achieving our annual goal of 200 new locations. Most of these will be Supercuts, as well as SmartStyle salons in Walmart.

Second, we are on our way to achieving our goal of increasing growth in new franchise units. We anticipate franchisees to open 30 to 35 new salons during our first quarter, our current quarter. These new salons will be a great start to achieving our annual goal of at least 100 new units, two times that of the prior year.

Third, we have now engaged a highly recognized third-party provider to help us add more science to the art of our real estate site selection. This new approach will help us strategically locate new corporate and franchise salons in geographic areas that meet the demographic and psychographic characteristics of our customers, which in turn will help drive traffic and profitability.

The fourth and final real estate-related item I want to update you on is the fact that so far this fiscal year, we have converted 20 non-dominant brand salons that we own in the Las Vegas and California markets to our more dominant Supercuts brand. Early results are encouraging, and 14 additional conversions are scheduled in early September.

Our third strategic area of focus this year is to enhance the use of technology in the field. This past quarter, we equipped all of our field supervisory staff with the latest in portable technology in order to enhance their access to information and to increase their ability to make timely decisions. In addition, we expect to complete the rollout of our salon connectivity and Internet project to all of our salons on schedule by next September of 2012.

Let me share with you one additional piece of news on this front. As I've said before, we are committed to providing our salons with the technology necessary for Regis to be more effective in identifying and communicating with our valued customers. The starting point to accomplish this is our computerized salon point-of-sale software system.

Because of our large size and scale requirements, it has historically been necessary for Regis to internally develop and support our own proprietary POS software system for our salons. However, this is no longer true, which is great news.

As technology has advanced, we have recently identified a third-party POS alternative that not only provides a system that meets our current and enhanced functionality requirements, but will also cost far less for us to implement and to support. Moving to this new technology will allow us to stay current and effectively meet our customers' expectations.

We anticipate that this new technology will be rolled out to our salons over the next 12 months. As a result, we will be taking a nonoperational, non-cash charge in fiscal 2012 related to our old technology, and Mark Fosland will provide more details on that in just a moment.

As we've previously discussed with you, our strategies to increase customer-centricity, to leverage the power of our salon brands, and to enhance connectivity will begin to add value to our operating results this year, in fiscal 2012. These benefits will grow over the next several years as these initiatives evolve and mature.

In the meantime, in order to make the necessary investments in these initiatives, as well as drive increased earnings to shareholders in fiscal 2012, we are well along in addressing our fourth strategic area of focus, and that is to implement bold cost-saving initiatives that will achieve incremental savings in the range of $20 million to $30 million.

In closing, let me emphasize that this management team remains focused on improving our financial performance and driving results for our shareholders. We will be disciplined with our resources and we will continue to aggressively control costs. We will also make the necessary investments in prudent business initiatives in order to deliver increased value to our shareholders.

Change is underway here at Regis. We have accomplished a number of positive initiatives this past quarter and are making great progress on executing our business strategies. With that, let me now pass the call over to Mark.

Thanks, Randy, and good afternoon, everyone. I will begin by discussing our financial and operating performance, followed by an overview of our operating results for each of our business segments.

Our actual reported results for the fourth quarter were a net loss of $0.29 per share. However, this included after-tax nonoperational charges of $39 million, or $0.66 per share, primarily related to two items.

First, as expected, we incurred additional income tax expense related to the non-cash goodwill impairment charge we recorded last quarter in our Promenade Salon division. Additionally, we elected to fully reserve a Pure Beauty note receivable and put this issue completely behind us. Excluding nonoperational charges, our operational earnings in the fourth quarter came in at $0.37 per share.

With same-store sales declining 1.7% in the quarter, we would've expected operational earnings to be about $0.32 per share, which included an incremental $0.04 of planned improvement due to a wage and hour settlement incurred last year. Therefore, our operational results of $0.37 per share are about $0.05 higher than our comps had indicated. The majority of this upside relates to lower-than-planned income tax expense, which I will address in more detail in a few moments.

As usual, we have included in today's press release, as well as on our corporate website, a concise reconciliation that bridges our reported earnings to our operational earnings for both the current year and the prior year fourth quarters. Also, please feel free to contact Andy Larew or myself here at Regis if you have any additional questions regarding your financial models.

I'll now address our fourth-quarter operating results for each business segment. A breakout of our segment performance can also be found in today's press release. My comments this afternoon are going to focus on our operational performance, and I will begin with our largest segment, our North American salons.

Our total North American salon revenue, which represents 86% of our consolidated fourth-quarter revenue, came in flat during the quarter at $512 million. Total same-store sales declined 160 basis points, but was offset by revenue from salons built or acquired over the past year, net of closures, as well as favorable currency -- the favorable currency impact from our Canadian salon revenue due to a weakening of the U.S. dollar against the Canadian dollar.

Service revenue for the quarter was flat compared to the prior year, coming in at $404 million. Service comps declined in the quarter by 1.7%, but were offset by revenue from new and acquired salons, net of closures, as well as the favorable impact from currency.

As Randy mentioned, driving customer visits continues to be our primary focus, and our total customer count trend improved 150 basis points. North American service customer visitation trends were a major contributor to this improvement. During the quarter, our North American service customer visits trends improved by 200 basis points when compared to the previous nine months and were down 240 basis points in the quarter.

As expected, we saw a modest increase in average ticket of 70 basis points. The increase in ticket was due to the shift in sales mix with hair color and waxing services constituting a larger portion of our business. As we discussed last quarter, we have limited our price increases and we are also becoming more promotional in an attempt to drive increased traffic.

Revenue from our product business came in at $98 million, up slightly from our fourth quarter last year. Product comps declined 130 basis points and were also offset by new salon revenue and currency.

Fourth-quarter royalties and fees from our North American franchise salons were down slightly compared to last year and came in at $9.6 million.

Let's now talk about our gross margins. Our combined gross margin rate for our North American salons came in below plan at 44% and was 50 basis points lower than the rate we recorded last year in the fourth quarter. The majority of this decline was related to our service margins, which I'll now discuss.

Our fourth-quarter service margin rate came in slightly below plan at 42.6%, which was a 50 basis-point decline from the rate we reported in the same quarter last year. As expected, two of our largest expense lines in this category -- salon commissions and health insurance expense -- came in on plan and were comparable to prior years. We had planned for a 30 basis-point decline in service margins due to higher payroll taxes as states continue to increase payroll tax rates to fund their unemployment obligations.

Additionally, we saw an increase in our shop supplies during the quarter. The increase was due to a shift in mix of services and is not related to a cost increase. Color services accounted for a higher portion of our overall sales mix in the quarter, and performing a color service has a higher supply cost component than performing a haircut.

In fiscal 2012, we expect our service margins to improve slightly over the full-year fiscal 2011 rate of 42.1%.

Our retail product margin rate for the fourth quarter of fiscal 2011 came in at 50.1%, which was quite strong and was comparable to last year. We continue to see improvement in our retail commission expense line, which relates to the changes we made in the retail commission structure for new stylists. Offsetting this improvement was a planned decrease in several vendor programs and promotions that benefited the prior-year quarter.

As we look forward to fiscal 2012, we expect product margins for our North American salons to remain strong and should improve as we continue to benefit from our lower retail commission programs.

Let me now address our site operating expense, which includes costs directly incurred by our salons such as advertising, insurance, utilities, and janitorial costs. Our site operating expense in the fourth quarter came in on plan at 8.6% of sales and was 70 basis points better than the operational rate we reported in the same period a year ago.

There are two major factors that helped account for this improvement. First, we deployed a new scanning technology which allowed us to reduce our cost to conduct our semiannual inventory counts. We also had lower legal claims in the quarter compared to the same quarter last year because last year's expense was unfavorably impacted by a large wage and hour claims settlement.

Next, I'll address our North American general and administrative expense. These costs include salaries, benefits, and travel for our direct salon support staff, which includes dedicated home office employees, field supervisors, and training staff, and also includes salon advertising and promotional expense. This category came in slightly better than planned at 5.7% of fourth-quarter revenue.

Shifting now to rent expense, this fixed-cost category came in slightly better than planned during the fourth quarter at 14.2% of sales. This rate was 10 basis points lower than the same period a year ago. We did see a slight benefit in our common area expense category, which was the result of lower charges from landlords.

Depreciation and amortization came in slightly better than planned at 3.3% of sales and was lower than last year's fourth-quarter rate by 50 basis points. Last year's fourth-quarter expense was higher than our typical run rate, the result of an increase in reserves for salon asset impairments.

The net effect of all these items drove an improvement in operating income to 13.2% of sales, up from the rate of 12.5% 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. I will comment on 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. Andy Larew can work with those of you who build segment models off-line following the call.

Total revenue from our international segment represents 7% of our consolidated fourth-quarter revenue, and the UK is not a big contributor to our overall total profitability. As is the case with most retailers, the UK retail environment remains particularly challenging. Revenue for the fourth quarter came in at $43 million, an improvement from the same period a year ago. Our same-store sales declined 5.5%, but this decline was offset by the favorable impact of currency.

Let me now address our international service and retail product margins. Our service margin rate came in better than planned at 48.6%, but was 30 basis points below the rate we reported last year in the fourth quarter. Most of the planned decline relates to our Sassoon school business, which has been impacted by the challenging economic conditions in the UK. Student populations and tuition revenue are down, and we have a fixed-cost payroll.

Our retail product margins came in at 45.2% in the fourth quarter, which was 460 basis points below the rate we reported last year in the same period and was also 180 basis points below our plan. We planned for a decline in rate because last year's fourth quarter benefited from a favorable book to physical adjustment.

Additionally, we saw a decline in product margins from a shift in sales mix to slightly lower-margin products. For example, our sale of curling irons, hair dryers, and flatirons, which have a slightly lower margin, continued to become a larger part of our overall sales mix.

Our general and administrative expense category, which is primarily comprised of salaries, benefits, and travel related to our home office, our field supervisory staff, and our distribution center in the UK, came in at 8.2% in the fourth quarter. This was 100 basis points better than the rate we reported last year in the fourth quarter. This improvement in our general and administrative expense was primarily related to cost savings.

Our rent expense category came in at 27.8% in the fourth quarter, an increase of 230 basis points over the same period in the prior year. The increase is primarily related to favorable rent reviews and real estate tax settlements in the prior year.

Next, I will provide a couple of comments on our Hair Club business. Fourth-quarter revenue from our hair restoration centers came in at $38 million, up 3% from the same period a year ago, and represented 6% of our consolidated fourth-quarter sales. These results included a fourth-quarter same-store sales increase of 130 basis points.

Hair Club's operating profit of $4.1 million, or 11% of sales, was down from the 15.7% we reported in the same period a year ago. Product margins were the largest factor in this decline.

As we discussed with you last quarter, Hair Club has seen an increase in the cost of hair systems due to wage pressure on the Chinese manufacturing companies where these systems are produced. Our management team continues to look for alternative lower-cost areas to source hair systems, and we've already begun to enter low-cost countries. Hair Club's EBITDA margin for the quarter came in at 20%.

Let me now transition into a discussion of our corporate G&A expense. First, let me remind you that a major component of our corporate G&A continues to be salaries and related benefits for the more than 700 dedicated employees working here in Minneapolis and the 440 associates working 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 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 fourth quarter came in at $34 million. Quarterly fluctuations in our corporate G&A expense usually relate to the timing of when certain expenses are incurred. This expense area remains 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. I will now move on 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 result of our investments in businesses such as Empire Education Group and Provalliance.

Our share of the earnings from equity investments in Empire and Provalliance came in at $3.5 million in the fourth quarter, and we remain quite happy with the performance of both businesses. We increased our investment in Provalliance at the end of March, and we continue to expect that transaction to add $0.06 per share on an annual basis.

Empire continues to perform well. However, student populations are lower as the result of changes in the regulatory environment, as well as a challenging economy.

Let me now comment on our effective income tax rate. Our reported tax rate for the fourth quarter is not very meaningful as a result of our reporting a net loss. However, what is more important is our underlying tax rate, which came in better than planned at 28.8%. This unplanned benefit was largely due to the expiration of certain open tax-year items. Looking ahead, we continue to anticipate that the underlying tax rate for our 2012 fiscal year should be in the range of 37% to 38%.

Our balance sheet remains strong. At the end of June, we entered into a new five-year credit agreement, which increased our revolving credit facility from $300 million to $400 million. At the same time, we paid off our $85 million term loan. We have no borrowings under our $400 million revolving credit facility and no liquidity issues. We remain in good standing with all of our financial debt covenants and we have plenty of cushion.

At June 30, total cash was $96 million and total debt was $313 million. Despite operating in a challenging comp environment, Regis's financial model continues to be a strong producer of significant cash flow, as evidenced by the $170 million of free cash flow we generated and the $71 million reduction of net debt in fiscal 2011.

Looking forward to fiscal-year 2012, our outlook has not changed. We still expect same-store sales to be in a range of negative 1% to positive 1%, and at these comp levels, operational EBITDA should be in a range of $222 million to $242 million and operational EPS should be in a range of $1.16 to $1.32 per share.

As Randy mentioned, we are very excited about the new POS technology that we will be deploying in our salons over the next year. We are confident that our decision to move to a new platform will provide us with enhanced functionality at a reduced cost of ownership. This system will also allow our CRM program to be even more effective.

As a result of this strategic decision, we will be required to write off approximately $20 million for our current internally-developed [alter] POS software. We expect this non-cash, nonoperational expense will incur in the first half of fiscal 2012.

Finally, as you know, earlier this month Regis received a letter from Starboard Value and Opportunity Master Fund, stating their intent to nominate a slate of three director candidates to stand for election at the Company's 2011 annual shareholder meeting. We will continue to engage constructively with Starboard, as we do with all of our shareholders.

Our Board and management team remain firmly committed to creating value for all shareholders through the successful execution of the Company's strategy. With that said, the purpose of today's call is to discuss the results of the fourth quarter. We will not be making comments or taking questions regarding Starboard.

So that completes my prepared remarks. Paul, Randy, and I would now like to answer any questions you may have. Craig, can you please step in and provide some instructions for -- so people can ask some questions?

(Operator Instructions). Erika Maschmeyer, Robert W. Baird.

You're doing a lot of exciting stuff on the execution front, but you've acknowledged it will take some time to move the needle. Given the current business trends and the fact that you will have less of a benefit from price increases and more headwinds from the early stages of these promotional initiatives, what gives you confidence in your 2012 comp guidance? And, I guess, when should we really expect to see the initiatives kicking in and benefiting your comp?

Erika, let me take a shot at that. None of this is new. We went into the fiscal year with a very strong strategic direction of what we wanted to accomplish, what initiatives we wanted to embark on. We have business plans associated with them, and we budgeted for the costs of those initiatives and the anticipated benefited results.

We knew going into the year that fiscal 2012 would see slight benefit from these initiatives, but the confidence we have relates to, as we bridge the gap to deliver strong, improved bottom-line performance in terms of earnings and cash flow, the cost-saving initiatives. Very bold, $20 million to $30 million, as we've articulated before.

So, as of right now, look, we thank you for saying that. We're very excited about a lot of these initiatives. We know we're doing the right thing. We're on the right track. We know that it is going to take some time before we start seeing the benefit really materialize, and it will take a year or two, but we are going to deliver improved performance through continued efforts to look at our cost structure.

Could you talk a little bit about the last seven weeks? Have you seen a shift in consumer behavior or is more of this just sort of noise around recent adjustments you're making?

No, I don't think that there's been -- as we know, changes in our industry are generally glacial, and some of the things that we continue to do -- change, as we've said, is well underway here.

We continue to look at new things. We have the luxury of having 8,000 Company-owned stores. That gives us the ability to test a variety of different things on different consumer segments across different geographies. We then measure that performance and then quickly expand, and that's one of the things that we have been doing of late is looking at certain strategies that are focused on certain promotional strategies, the increased customer trial and retention, and so far we've been very satisfied with the results.

It's all about bringing people to the stores. We know that once we do that, we have a very good chance of delivering them an outstanding experience in order for them to come back.

Great, and then just one more. You've done a great job paying down debt and you're starting to get into the stage where you have kind of a good problem with uses of cash. Do you have any updated thoughts on repurchases?

We continue to discuss this at the Board level, and it's something that I think we will be able to talk further about in the months ahead.

Look, we still have a share repurchase authorization. We have cash on the balance sheet. Mark continues to say that, that we're growing free cash on the balance sheet. We continue to look at how to increase shareholder value in the best ways. We know that our debt levels are relatively low. And Erika, I don't have anything to report yet from the Board, but return of capital policy is something that we continue to focus on.

Jeff Stein, Ticonderoga Securities.

Randy, just a couple of questions. First of all, on your pricing test that you're running. Based on the comps you're reporting so far, it would almost suggest that your -- the elasticity in pricing just might not be there. In other words, it doesn't seem like -- it seems like your price realization has been negative, and yet your traffic is still pretty -- modestly negative. Any thoughts there in terms of how the tests are working where you have become more promotional?

Yes. Mark, I know you had a comment there. And Jeff, I'm going to weigh in in a second, but Mark, go ahead.

Jeff, I think in terms of the areas where we've seen -- where we've done some promotional activity, we're definitely seeing a lift in customer traffic, significant lift.

You may be comparing our overall results between fourth quarter and first quarter, but when we look at and isolate where we've seen -- where we're promotional, we're definitely seeing that it's driving increased traffic.

Yes, Jeff, and again, not to -- we're only seven weeks into this quarter, but August was -- started out to be tougher, but as -- but, look, we've got some, I think, pretty exciting strategies to drive new trial, and I agree with Mark. We've seen some pretty significant lift. We've seen average ticket increase as a result of that, so we're encouraged.

The $20 million charge that you are going to take, is that baked into that $1.16 to $1.32 guidance? Or are you excluding that?

We are excluding it. The $1.16 to $1.32, as Mark said, was operational results in the EBITDA figures, and we are all operational. So this is a nonoperational, non-cash charge we'd be taking.

And Jeff, that will run through our D&A line.

It'll run through D&A. Okay, great. And what percent of your hairstylists now are on the lower commission rate, and where do you see that going over the next 12 months? This would be on product sales.

On product.

Yes, we've got about 60% on the old plan and we're actually looking at, with some new stylists now, even a different plan where we'll get some benefit, so we continue to see that it -- it evolves, right? It's been in place for a couple of years. So it'll continue to evolve. It depends on our turnover. But it will be -- by the end of the year, it will be 75% or 80% or so.

Okay. And final question relating to the new POS software, do you have any thoughts in terms of what kind of payback you're going to get on this and is -- how is that going to run through the balance sheet or profit and loss statement? Are you capitalizing any of these expenses or is it going to be part of the P&L?

Lease expense. So it's going to run -- primarily run through the P&L.

Now, in connection with that, what we're really talking about is a software system, Jeff. Instead of internally developing it, capitalizing it, putting it on the balance sheet, and depreciating it, we're now going to be leasing it through a third-party provider, which provides us -- boy, I just can't tell you -- it really gives us a lot of enhanced functionality and does not require us to have to invest in a lot of infrastructure to continue to support that as years go on.

But we are looking at, as a result of this, not only giving our stores the best technology to be successful in the future, but it's also going to be going to drive costs down for us overall at Regis. Mark, but the software would be an operating lease expense.

And Jeff, really, as we look forward, it's the cost of ownership comparing our existing ultra system compared to the new system, and the cost of ownership we expect to be cheaper. It's not really a payback equation. It's more a cost of ownership.

Got it. And is this something that you, I guess, have been studying for a while, or this just kind of came up and wasn't on the radar screen six, 12 months ago?

It's more recent, but I will say this. It's probably since 1987, I believe, is when we introduced our first computerized POS software system, and we continued to update that over the years.

And as we looked at updating that technology, we continued to find that there wasn't any third-party providers out there, until recently, that had systems capable enough to provide the functionality we're looking for and the breadth of the number of stores that we have. And it wasn't until very recent that we came across a provider that could do that, a proven provider, and we're excited about moving in that direction.

Paul Alexander, Bank of America Merrill Lynch.

I know it's early and you probably don't want to get into first quarter too much, but just to get a little bit more understanding around what you're seeing, do you think the deceleration is only about those promotions and giving back a little ticket? Did the promotions kick in just with the new quarter or are they accelerating through the quarter?

And then, as we think about comparisons to last year and the cadence through 1Q, do you have easier comparisons or any events later on in the quarter that might lead you to think that trends are going to improve as we move through September?

Yes, the comparisons are pretty similar throughout the -- from last year to this year throughout the three months. So, nothing to that effect.

No. And I think when you use the term deceleration that we've seen largely occurring in August and, I think, in large part because of the promotional strategy that we just embarked upon right before the back-to-school holiday.

What specifically are those promotions like, if you don't mind sharing?

Let me just say this. And I'm going to be intentionally vague, Paul, because we all know this. We're the only public company in the salon industry and we're the industry leader.

We also -- and I know you can appreciate this, that we can't provide -- we're not going to provide a lot of specificity into our tactics and the results because it can only hurt us. We've got a lot of competitors listening and wanting to gain some knowledge and insight into their own businesses.

But we do know that promotional activity is an effective way of bringing new consumers to us. We talk about trial and retention. We know that we've got a very good shot at -- when we do that, to bring customers to us and then deliver an exceptional client experience so that they come back and recommend us to friends.

So, that's something that we were testing in -- it may have been -- don't hold me to it -- it may have been in late June, early July, but we -- actually, it was in our fourth quarter. So we ended up testing it in a number of stores. We were encouraged by the results, and we quickly not only measured it but by expanded it here in the month of August in a larger fashion.

Great, thanks. And then, lastly, what's happening with product comps? They had been a bright spot for you last year, but you seem to have lost some momentum there. What do you think's going on?

We're going to get that momentum back.

Look, there is always a lot of things going on here. One thing that hurt us over many years, as we know, is product diversion. That seems to have not only stabilized, but maybe even getting slightly better.

Clearly, it is always a function of new product introductions. If you remember a year ago, a new product line was introduced called It's a 10. There was also a product line that was very successful for us called Moroccan Oil, and we've anniversaried that, so sometimes the freshness of the product lines are -- we're just going to be the recipient of what happens with vendors as they introduce new lines.

Having said that, we've got some wonderful locations and some great marketing material, and I'm working closely with Norma Knudsen and her team, who is our merchandise manager, one of our EVPs here, and we're looking at driving product comps this year because we have the locations and the depth and breadth of product lines to do so.

Bill Armstrong, CL King & Associates.

So the POS software, how long will it take to roll that out? Is that going to be over the next two quarters or will it take a bit longer?

Yes, it will be over the next year, so by September of 2012.

We're really happy with that pace. That's in 8,000 stores, approximately. We're going to move fast on it, but yes, about a year from now we should have it in all of our stores.

Okay, will that require any modification or replacement to the POS hardware within your salons?

It's no different than our plan to roll out when we have a plan with our ultra system where we replaced systems as we put in ultra, so no incremental expense other than what we had already planned for.

Got it. And who is the vendor? The software vendor?

We're in final negotiations right now and we're looking at a couple of them. So we have not firmly made a selection, so we are not prepared to announce it just yet, Bill.

Okay. Can you say who the (multiple speakers)

No.

Let's just say they're both -- the systems that are out there that we're looking at all meet our requirements.

Bill, we'll be able to talk about it soon, but it's just too premature to do that right now, strategically, for us.

Okay, I understand. The CRM rollout, it's in about 4,500 salons now. I think in the past you've had a target of June of 2012 for a complete rollout to your whole system. Is that still on target?

Yes.

Okay. You have contact info on about 2.5 million customers. How many do you think you can get in total when all is said and done?

We were looking at a 32% to a 40%, in that order of magnitude, e-mail capture rate on all customers coming into our stores. That's the ultimate goal. Something close to 40%. Maybe 32% after about one year, but growing to 40% or just above that.

Jill Caruthers, Johnson Rice.

Good afternoon. You mentioned you have converted 20 stores that were kind of nondominant brands into Supercuts over the quarter. Could you talk about what you're seeing after you convert the store? And then, if you are pleased with it, which it sounds like you are, how quickly could you move to convert more stores?

We can move quicker, but we want to make sure it's the right thing. We believe it's the right thing to do.

We know that we've got some powerful brands. We've talked about having -- we have a strategy of having the best brands in the best markets, so we've picked a couple of markets, as you know, and we've converted some nondominant brands to dominant brands.

We have not yet reached a conclusion as to how many we can do, but in order of magnitude, this year it's going to be in more than 50, maybe 50 to 100, and we can move faster, depending on the results.

Early results are -- and look, a lot of this is just anecdotal because it just happened right at the end of our fourth quarter, but early results are is that there was a tremendous -- a positive buzz within the market. A lot of excitement. There was some marketing focus on these conversions. Stylists were excited. We did some promotional activity to bring new customers into our new stores, and so we were seeing increases in customers overall.

So, again, we are happy with the early results and we're going to have every intention of expanding that.

Okay. And then, just last question. If you could talk about Hair Club as a small part of the business, maybe the synergies you see with the core business that you have and maybe some of your original thoughts when you first acquired it years back?

Hair Club is a great business for us. As we all know, Hair Club is an autonomous business headquartered in Boca Raton, Florida. Darryll Porter, who is President of our Hair Club division, and his team do an outstanding job.

And he -- I would just say that it is certainly something that I think this year is generating around $30 million of EBITDA. It's a strong cash flow generator.

There's a lot of similarities in the Hair Club business with our business in terms of a renew -- an annuity-type business. The bigger difference is that they are very marketing-focused because they have to promote heavily for new customers, and they have a call center in Boca to do that. So, Jill, again, we're very happy with -- at this point, with the performance of Hair Club.

We have time for one last question, and it does come from the line of Mike Hamilton, RBC.

Thanks for all the detail on all the hard work being done. A couple of questions, if I may. First one, as you look out, and you've got a lot of moving parts and economy, et cetera, what conclusions, Randy, are you reaching on any changes in the longer-term trends in the business? Obviously, we aren't seeing a lot of lift in the number of times people are getting their hair cut. If anything, continue to see deceleration there. You're getting some nice improvements on mix into other product categories, but how are you thinking about the world as you look forward the next three years?

Look, we're very, very well positioned from a couple standpoints. We have a collection of value brands that fit very nicely with what the consumer is looking for today. We are very well positioned.

I would also say that we are looking at taking share. I'm not counting on the fact that customers are going to spend more on their services or that they're going to come more often, although we've seen over the years that there are times when that does occur. But we are focusing on driving consumers into our salons and bringing them back through an exceptional experience.

So, look, I remain very bullish about this industry. We are in the quintessential replenishment industry where people get their hair cut, their hair colored, and they buy shampoo and conditioner on a regular basis. So I really haven't changed my outlook long term about this industry.

Thanks. Can you comment on a little bit on productivity measurements within your stylists? What you're seeing in terms of trends? What you're working on?

Yes, look, our operating people -- Dave Bortnem and all of the operating people do an outstanding job of managing the single largest expense item in our expense equation here, and that's payroll.

So, we are very good at making sure that we have the right staff on time to meet customer visitation patterns, and the proof is in the numbers and if you look at our service margins. Despite tougher economies or in good economies, our service margins remain very, very strong. So we are always focused on that.

Day in and day out, we're intensely focused on that.

I think that there are opportunities, though. One of the things that we're doing here is focusing not only on the customer in the chair, but the stylist behind the chair, and we are looking at challenging some of our compensation programs. Does it make sense to -- can we incent stylists in a different way, not in a more costly way, but in a different way and a more effective way to bring customers in and to bring them back? If we're focusing on customers, one of the things that we're currently looking at is whether we can reinforce that behavior by having an incentive program at the salon level that really focuses on customer increases.

So, I think there are some things that -- we're not done yet. We've done an outstanding job in the past, and I think there are opportunities to continue fine-tuning it.

Thanks. On your anticipated software charge, Mark, is there anything unusual in tax treatment there?

No, no, it'll be fully tax-deductible. So, Mike, we're likely to see this charge in the first two quarters because it's dependent on the useful life of the asset. So, of the $20 million charge, it's likely to be $10 million in the first quarter and $10 million in the second, and it will be fully tax-deductible, so nothing crazy with the tax rate. Normal tax benefit off of that.

And at this time, I would like to turn the call back over to Randy for any closing comments.

No, I just want to thank everyone for their interest and taking time this afternoon, and have a great afternoon, everyone.

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