Regis Corp (RGS) 2012 Q1 法說會逐字稿

Good morning. My name is Kirsten and I will be your conference facilitator today. At this time I would like to welcome everyone to the Regis Corporation first-quarter 2012 conference call. All lines have been placed on mute to prevent any background noise. (Operator Instructions).

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. After management has completed its review of the quarter we will open the call for questions. (Operator Instructions). I would now like to hand the conference over to Randy Pearce for his comments. Randy, you may begin.

Thank you. Good afternoon, everyone. Thanks for joining us. As Kirsten mentioned, with me today are Paul Finkelstein, our Chairman and CEO, and once again Mark Fosland joins me as well. Just as we did last quarter, Mark and I plan to 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 me today are several members of the Regis senior management team including our CFO, Brent Moen; Eric Bakken, our Executive Vice President of Legal and Development; and Dave Bortnem, our Corporate Chief Operating Officer.

I'll begin by making a few comments on our first-quarter results. I'll then provide an update on our strategic plan including the great progress we're making on our various business initiatives and conclude with a brief update regarding our proxy contest with Starboard.

Today we reported first-quarter operational earnings of $0.26 a share. As you know, we continue to be focused on driving increased customer visits. Although visits declined during the first quarter, our visitation results improved 30 basis points over the preceding quarter. But despite this modest improvement in our service visitation we're not satisfied.

As we highlighted last quarter, our first-quarter results included a few non-operational charges, the largest of which related to the write-off of our salon level POS software. You can find additional information regarding these one-off items in our press release that we issued today. Mark will go into greater detail regarding our first-quarter performance in just a few moments.

Let me share some thoughts with you regarding our plans to refine our operational strategy in order to further increase the effectiveness and efficiency of our performance. Today our entire effort is on strengthening and growing our existing salon operations with a major focus on increasing customer visits.

In order to compete more effectively in the marketplace Regis is evolving into a much more consumer centric organization. Over the years Regis has acquired a large number of salon brands. Our family of brands includes some wonderful banners, one of the largest and most recognized of which is Supercuts, a value-based salon. We also have a number of regional brands which have local brand equity.

However, according to fact-based diagnostics that we recently performed, consumers perceive that many of our banners serve a comparable consumer segment which provides a similar overall salon experience. In addition, our internal operating models across these banners can be strengthened and simplified in order to take full advantage of our scale.

As a result our focus on the customer has led us to begin developing a customer segmentation strategy. Our plan is to refocus our operating model to execute against a focused number of unique consumer driven positions. We believe that aligning our resources around three core market segments, value, affordable full-service, and mass premium, will make us more effective and more efficient.

We'll also continue to operate select growth concepts such as kid's, men's and high-end premium which includes Vidal Sassoon for example. As you've heard me say before, we leverage the power of our strong salon brands by accelerating growth of our best corporate and franchise brands in markets where we are strong.

This customer segmentation strategy will fundamentally change how we are organized by enabling our entire company to align around key customer segments rather than around numerous salon banners. A focused strategy of this kind will give us a louder, clearer and more effective voice when marketing to our target customers.

In addition, we will develop common operating models within each of these three core segments, allowing us to deliver an improved customer experience and drive additional cost efficiencies. This new structure will allow us to further leverage our scale.

We're currently in the process of refining our strategic plan which will include appropriate milestone dates. We look forward to updating you about this important initiative in the near future. In the meantime, we continue to be laser focused on driving improved financial performance through increased customer trial and retention as well as aggressive cost saving initiatives.

Sales growth must come by driving increased customer traffic into our salons. This is a two-step process that begins by generating new trial and then continues by retaining these customers through the delivery of an exceptional salon experience. In short, we at Regis refer to it as trial and retention.

In August we ran our first ever cross divisional multi-brand haircut sale during the important back-to-school season. Multi-brand events allow us to leverage the fact that we have more salons than any competitor in most major markets by spreading marketing costs across more stores.

This specific haircut sale was a program that offered flat rate, reduced price haircuts in a select group of our salons utilizing targeted multi-brand marketing support from radio and print ads. Each salon supported the sale with in-store events. In the markets where we ran the program we enjoyed strong increases in customer traffic ranging from 20% to 40% with a large portion of these increases representing first-time salon customers.

The short-term impact on revenue was slightly negative as our dollars per transaction ratio was much lower during the sale week due to the discounted pricing. When coupled with related marketing costs this program had a nominal negative impact on our short-term quarterly earnings.

We've learned from this experience by fine-tuning the media buys and in-store activities to drive improved ROI on future events. We believe that as we attract new customers to our salons with promotion and ensure that they have a wonderful experience at a great value, we can ultimately convert them to loyal returning customers who will come back to our salons and recommend us to their friends.

We are just now reaching the time period when customers from the sale week would typically return for their next haircut. For our strategy to be successful we must retain these customers and build on a quality experience which will result in long-term customer relationships.

Going forward, our marketing strategy to drive new trial will focus on aggressive promotions that leverage our scale. Regis is the only public company in the salon industry with a number of competitors in the value segment. As such we are not going to get into specific detail and you can appreciate why, but the overall strategy will include two key elements.

First is implementing a multi-brand program encompassing most of our value brands. As we discussed, a multi-brand execution enables efficiency through economies of scale.

And second, we plan to encompass a larger store base than the back-to-school sale efforts and offer an aggressive price point supported by appropriate media in certain markets.

I'd now like to address our expense control and cost-cutting initiatives. We're very proud here at Regis of our successful efforts to reduce cost, having achieved $43 million of cost savings in the last three fiscal years. As you know, we extended these efforts for our current 2012 fiscal year and originally committed to cost saving initiatives in the range of $20 million to $30 million this fiscal year.

As we look over this year and into next we expect savings for the two-year period to reach the $40 million to $50 million level. Regis will continue reducing expenses while efficiently managing working capital and capital expenditures to further control cost.

We're also committed to ensuring Regis has the necessary resources to make the important investments in prudent business initiatives in order to grow the business and deliver increased value to shareholders. Any such investment or initiative will certainly need to meet a high financial standard before approval.

Transformation strategies and many exciting initiatives are clearly underway here at Regis. As you've all heard me say before, the status quo is not an option. We're aggressively moving forward on consumer focused strategies that will deliver improved financial performance over the long run.

As promised, I'd like to take a moment now to address results from the Regis annual shareholder meeting which took place at our corporate offices earlier today. As I'm sure you can appreciate, the process we just went through with Starboard has been a significant distraction and I personally now look forward to refocusing my entire effort and the entire effort of our management team back on running the business.

I personally appreciate the support and the feedback that we had received from many of our shareholders throughout this process. This new management team found the frequent face-to-face meetings with our shareholders to be constructive and productive and we took away a lot from those meetings. Having the ability to speak about all of the change that's underway at Regis was gratifying. In addition, our current operational strategies were validated by you.

One thing the Board, the management team and shareholders all have in common is the desire to grow our business and enhance value for all of our stakeholders. This includes the need to grow the top-line, reduce expenses, create even more operating efficiencies in the future and maintain our customer driven service model.

I'm confident that our returning Board members and our new Board members will find common ground to continue building shareholder value and will work together to ensure Regis's success going forward. In fact I believe the various views and skill sets held by our directors will be accretive to the future direction of our Company and what we're trying to achieve. So while the composition of the Board will change the commitment to growing our business will remain strong.

Before moving on I'd like to thank Rolf Bjelland, Van Zandt Hawn, Susan Hoyt and David Kunin for their outstanding service to Regis and to our shareholders as Board members over the years. I'd also like to welcome four new members to our Board -- Michael Merriman, James Fogarty, David Williams and Jeffrey Smith. I look forward to working with the new Regis Board and to the future of our great Company. With that let me turn this over to Mark Fosland.

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 first quarter were net income of $0.15 per share. However, this included after-tax non-operational charges of $7 million, or $0.11 per share which was primarily related to the accelerated depreciation of our current point-of-sale system which we previously discussed with you. Excluding non-operational charges, our operational earnings in the first quarter came in at $0.26 per share.

With same-store sales declining 3.1% in the quarter we would have expected our operational earnings to be about $0.23 per share. Therefore how operational results of $0.26 per share are about $0.03 higher than our comp would indicate. The majority of this upside relates to aggressive and responsible cost cutting net of investment to fund the execution of our important revenue initiatives.

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

I'll now address our first-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 will focus on our operational performance and I will begin with our largest segment, our North American salons.

Our total North American salon revenue, which represented 88% of our consolidated first-quarter revenue, decreased 1.8% during the quarter to $498 million. Total same-store sales declined 300 basis points but were offset by revenue from salons built or acquired over the past year net of closures. There was also favorable currency impact from our Canadian salon revenue due to the weakening of the US dollar against the Canadian dollar.

Our service revenue for the quarter was down 1.8% compared to the prior year period coming in at $390 million. Service comps declined in the quarter by 3% but were offset also by revenue from new and acquired salons net of closures and as well as favorable impact from currency. Our first-quarter North American service customer visitation trends improved by 180 basis points when compared to the previous 12 months and were down 210 basis points.

As Randy discussed with you, during the quarter we started to execute on a more comprehensive promotional strategy and, along with the improved traffic trend, we did see a modest decline in average ticket of 90 basis points. Revenue from our product business came in at $98 million, down 200 basis points from our first quarter last year.

Product comps declined 310 basis points but were also offset by new salon revenue and currency. Product comps were unfavorably impacted in July and August as we had two vendor lines which were repackaged and the availability of certain product lines were tight. In September this issue was resolved and product comps were flat. First-quarter royalties and fees from our North American franchise salons were up slightly when compared to the prior year and came in at $9.6 million.

Let's now talk about our gross margins. We're pleased to report that our combined gross margin rate for our North American salons came in on plan at 44.4% and this was 10 basis points higher than the rate we reported in our first quarter of 2011.

Let me now provide you some details on our service margins. Our first-quarter service margin rate came in on plan at 42.8% and was flat to the rate we reported in the same quarter last year. As we had planned for, we saw a 30 basis point improvement in our salon commissions.

As part of our cost-saving initiative our operating group committed to further improve our labor cost. Much of this improvement related to the implementation of leveraged pay plans for new stylists. This favorability was offset by a planned decline of 30 basis points due to higher state mandated payroll taxes. As we have discussed with you over the last year states continue to increase payroll taxes to fund their unemployment obligations.

As we look forward to the remainder of the year we continue to expect improvement in our North American service margins of 20 to 30 basis points. The expected improvement is primarily the result of cost savings initiatives to further leverage our labor cost which I just discussed with you.

We are also pleased to report that our retail product margin rate for the first quarter of fiscal 2012 came in quite strong at 50.6% and was 30 basis points favorable to last year. We continue to see savings in our retail commission expense line which relates to the changes we made in retail commission structure for new stylists.

As we look forward to the remainder of fiscal 2012 we expect product margins for our North American salons to remain strong and should continue to 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 salons such as advertising, insurance, utilities and janitorial costs. Our site operating expense in the first quarter came in on plan at 9.7% of sales which was an increase of 60 basis points compared to the operational rate we reported in the same period a year ago. The largest contributor to the planned increase in site operating expense was an increase in advertising spend related to our promotional activity which did successfully drive new trial.

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. Total expenses were down $150,000 from last year and came in on plan at 6% of first-quarter revenue.

Shifting on to rent expense, this fixed cost category came in on plan during the quarter at 14.7% of sales, but in terms of dollars our rent expense was $400,000 lower than last year. However, our rate was 20 basis points higher than the same period year ago. This increase in rate was a result of deleveraging due to negative same-store sales.

Let's talk about depreciation and amortization which came in at 3.4% of sales and was flat to last year's first-quarter rate. Similar to rent expense, our depreciation expense dollars were reduced by nearly $500,000 when compared to last year. This was primarily the result of reduced levels of CapEx over the last several years. The net effect of these items drove a planned decline of our operating income to 11.7% of sales, down from the rate of 12.4% 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 changes 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 represented 6% of our consolidated first-quarter revenue and is not a big contributor to our overall profitability. As is the case with most retailers, the UK retail environment remains particularly challenging. Revenue for the first quarter came in at $33 million which was a decline of 4.5% from the same period a year ago. Our same-store sales declined 9.4%, but this was partially offset by the favorable impact of currency.

Let me now address our international service and retail product margins. Our service margin rate came in below plan at 48.9% and was 90 basis points below the rate we reported last year in the first quarter. This decline relates to higher-than-expected labor costs which were the result of lower salon productivity due to the challenging comp environment in the UK.

Our retail product margins came in at 47% in the first quarter which was a 110 basis point improvement over the rate we reported in the same period last year. We had planned for an improvement in rate because last year's rate was unfavorably impacted by a promotion which was not repeated this year.

In terms of expense dollars, all of our other fixed cost categories came in relatively flat to last year with one exception. Due primarily to timing our site operating expense category was about $500,000 more than the amount we reported last year.

Once a year our Sassoon salons have a marketing event which was conducted in the first quarter this year. Last year the expense from the event impacted our second quarter and as a result our upcoming second quarter will receive a year-over-year benefit of a similar amount. The net effect of these items caused our international operating income to decrease to 2.1% of sales compared to the 6.2% we reported one year ago.

Next I will provide a couple comments on our Hair Club business. First-quarter revenue from our hair restoration centers came in at $37 million, up 3% from the same period a year ago and represented 6% of our consolidated first-quarter sales. These results included a first-quarter same-store sales increase of 130 basis points.

Hair Club's operating profit of $4.1 million, or 10.9% of sales, was down from the 17.1% we reported in the same period a year ago. There are three primary reasons for this decline.

First, last year's operating profit benefited from a $900,000 favorable resolution of a sales tax audit. Next, we have seen a drop in service margins as revenue from higher-margin hair transplant business was down in the quarter. Lastly, product margins have been contracted due to inflation pressure.

As we discussed with you over the last several quarters, 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 low cost areas to source our hair systems and we have begun to enter these countries. Hair Club's EBITDA margin for the quarter came in at 20%.

Let's now transition into a discussion of our corporate G&A expense. As you know, 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 450 associates working in our two distribution centers. These centralized back-office support functions provide leverage to our operating model.

Quarterly fluctuations in our corporate G&A expense usually relate to the timing of when certain expenses are incurred. As we have discussed with you in previous quarters, we generally have expected our corporate G&A expense to be in the range of $32 million to $34 million each quarter and our first quarter came in in this range at $34 million.

As we look to the remainder of the year we would expect to see a similar amount of expense in the second quarter as our first and then we will see costs coming down in the third and fourth quarters due to expense control and the timing of professional fees. 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 results of our investments in businesses such as Empire Education Group and Provalliance.

Our share of earnings from our equity investments in Empire and Provalliance came in at $4 million in the first 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 the transaction to add $0.06 per share to our earnings on an annual basis. Empire continues to perform well; however, student populations are lower as a result of changes in the regulatory environment as well as the challenging economy.

Let me now comment on our effective tax rate. Our operational tax rate came in essentially on plan at 37.6%. 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. 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 covenant cushion. At September 30, total cash was $76 million and total debt was $304 million.

Due to the holiday season we did see a buildup in inventories to $174 million, but we continue to expect our inventory levels to be in the $155 million range by the end of fiscal 2012.

Next I will provide a quick update on our salon development. During the quarter we built 50 company-owned salons and closed or relocated 53 others. We also converted 23 corporate salons, 18 to Supercuts and five to Cost Cutters. Our franchisees built 29 salons and closed or relocated eight locations. We are encouraged by the increased level of franchise growth during the quarter.

We are also in the process of conducting a complete review of our under-performing locations. We currently have less than 300 salons with lease terms of greater than 12 months that are negative cash flowing. We are now aggressively pursuing rent reductions or lease buyouts on many of these locations and we will provide you an update next quarter as to our progress on this very important initiative.

Looking forward to fiscal 2012 our outlook has not changed. We still expects same-store sales to be in a range of minus 1% to positive 1%. At these same-store sales levels operational EBITDA should be in a range of $222 million to $242 million and operational EPS should be in the range of $1.16 to $1.32 per share. At these earnings levels we expect to generate approximately $65 million to $70 million of free cash flow.

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

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

Thanks, good afternoon, everybody. I just wanted to follow up on the expected progression of your same-store sales numbers. The minus 3.1% is a ways away from your guidance for the year and I was just wondering what gives you the confidence that you can see that steady progression to hit your targets this year?

Yes, let me take a shot at that. Look, we're always going to be up front with people. It's not easy to turn this around, although we continue to see improvement. The fundamental driver is going to be more customer visits, putting more people in the chair and ultimately putting them back in the chair.

So we're only three months into it. I know that publicly we felt the guidance for our overall comps was going to be down 1 to up 1. But we also realize that a lot of the initiatives that we're undertaking will have long-term value but not short-term value to the revenue line. So we were going to be committed to grow earnings and cash flow through some thoughtful cost reductions.

Mark and I continue to talk about this and -- as we do with the entire senior management team. We know we're a bit in the whole as it relates to where our comps are, but we still remain very, very confident that the bottom-line performance of earnings and cash flow will still be achieved.

Thanks. And then just to touch on product comps, you decelerated a little bit this quarter. Is there anything product wise going on or do you think that's just your customers pulling back a bit on their spending?

No, I think, as Mark pointed out, there was some rebranding, some repackaging that took place. I will say this, that as we look at our business going forward in retail, we've got business plans, new product, new initiatives that we're pretty excited about. So I think we'll see an improvement in our product sales as the year progresses.

Thanks a lot.

Erika Maschmeyer, Robert W. Baird.

Thanks, good afternoon. I know you said that you saw comp trends improve or product comps improve in September. I was wondering if you could give us any sense of how things looked for you in October.

Erika, look, as much as I would like to, I don't want to go down that path yet and don't read anything into it. What we're trying to do is be a little more disciplined in terms of giving current month guidance only because people would want to jump to conclusions, good or bad, regarding the quarter.

We know that the quarter that we're in, the December quarter, is an important -- the importance of the business really happens between the last five to six weeks of the quarter right before Thanksgiving up through New Year's. So I would rather not comment any further on that. For good reasons, not because we're hiding anything.

That makes sense. And then I guess could you talk a little bit about your new product pipeline for the quarter? I know this is an important quarter for that, so I guess maybe talk about sort of new products you have coming in, the improved distribution you have and kind of how you feel about that for the period before -- around the holidays.

Sure, and a couple things. We did have a couple of lines that repackaged, Matrix and TG. So we did see as we were filtering through old inventory and rolling out new inventory in July and August, that did hurt our business. So now that we've got those product lines in we're pretty optimistic about how they'll perform under the new packaging.

But as we get into the holiday season, I think what you'll see is our focus -- last year we had a lot of gift type of items that were bundled together. And the problem with that becomes if they don't sell as well as you wanted you end up discounting those because you can't break them up in January and February. So that did hurt our margins.

So this year our philosophy is a little bit more to provide offers where you -- where rather than having bundling you're providing value through buy one get one at a discount. And Norma, is there anything you'd like to add in terms of our mix and holiday?

Well, obviously we are rolling out our (inaudible) which is a (inaudible) (technical difficulty) private label which is up double-digits. We've been launched our Enchanted which is the new product in our design line and doing very well; it's already moved into our top 10 SKUs. (Inaudible) continues to be strong and we have some really great offers coming in.

Erika, I don't know, did you hear that or not?

I heard [robes] and Enchanted. It was a little choppy.

Yes, Norma, you were also speaking about in addition to the robes and the Enchanted --.

So we have launched our new private label line called Enchanted, it's already moved into our top 10 SKUs. The robe offer we have will be rolling out into our SmartStyle division as well as the other divisions this year which is new for us. And you get the robe three with a $35 purchase of design line products.

Appliances continue to be strong, so we'll be bringing those in. We have several great offers from every one of our vendors out there. So we are really excited about holiday, but we really believe our robe offer is a very strong offer for us this year.

Thanks, Norma.

Great, thanks. And then are you still seeing a mix shift towards the more expensive hair color and waxing services?

No, no. As we've promoted more haircuts -- we've been more promotional on haircuts it's kind of leveled out.

Okay, great. And then could you just talk a little bit more about what you're doing in terms of consolidating among the three core areas and simplifying banners? I guess talk a little bit more about what you have to do to implement the structure -- are you consolidating management? Will there be any charges?

That's the -- what we were trying to say is that as we look to what our strategy needs to be, I always want to come back to the consumer. We've done a lot of fact-based diagnostics. Our vision is clear. We know that the consumer views many of our brands, which are value, to be more similar than not and we know that our operating models to support those brands are more common than not.

So what we want to do ultimately is be able to take the various brands we have and put them into various core segments so that we can have a larger voice when we communicate to our target customers and be able to simplify our operating models as to how we support them.

One of the things that we're doing right now, Erika, is developing that strategic plan. We're going to work with -- we had some good discussions with the Board today and we'll continue to work with them. And over the next few quarters we'll have more specifics as it relates to what some of those economics and other changes may look like.

Fair enough. Thanks so much. Best of luck.

Thanks, Erika.

Jeff Stein, Northcoast Research.

Randy, can you talk a little bit about the number of salons that you're planning to include in kind of the second tranche of your price testing and when that might take place?

What we're really looking to do is with most of our salons, with most of our salons. And Jeff, again, as I tried to dance around specifics because we have a lot of competitors in the value space. We know that we are going to be very successful at bringing new trial in with promotion. We need to deliver an outstanding experience when those new customers are coming in so that they come back to us and perhaps recommend us to a friend.

So as we look to the future months we're going to continue executing on that. And the beauty of this Company, with 8,000 company-owned salons we can test things, we can see what works well, as we saw with the haircut sale in August with almost 700 stores, and then we can look at quickly expanding. So I think you're going to see a much larger number.

Okay. So since it did impact the first quarter, I presume there's probably going to be -- could there potentially be a larger impact in Q2?

Look, I don't believe so because one of the things that impacted us in the first quarter was some unbudgeted marketing expenditures to support that. We are looking at reallocating dollars in future quarters.

Got it. Can you update us on CRM and -- in terms of the number locations and what kind of capture rate you're getting on e-mails?

Sure, Jeff. I'll take a shot at that. As we've talked about, we have 154 million system-wide customer transactions and the issue is we don't know the names of our customers, we don't know how frequently they come into their salons. So as we roll out CRM we're pretty excited about the ability to start measuring as well as promoting to these customers on a one-on-one basis as well as using it as on operational tool to measure retention.

But today we have about 4,500 salons in our CRM program which is up from about 2,100 the last time we talked. Today there's about 3 million customer transactions. And one of the things that is really positive about our program is when a consumer gets an e-mail from us we're seeing open rates at about 30%. And this is about 10% above the industry average.

And so we're very excited and it proves out that our customers are engaged, they want to be communicated to and when we provide them an offer or some type of messaging they're reading them. So as we look forward we're just in the process of rolling out our new POS system. And one of the positive things about the new POS system is that in today's environment at the salon level we capture customer information when the consumer checks out and that makes it very challenging.

In fact, many times when a consumer comes in we get their e-mail and their customer information the first time they come in, but on the second and third visits we haven't been as effective at that follow-up in getting the attachment. So with our new POS system we're going to be -- one of the key components of it is that it has a check-in process.

So every time you enter the salon to get a service the first thing we'll ask you for is your consumer information at the beginning of the service rather than at the end. And that's -- what we've seen so far is that that's going to significantly increase our attachment rate.

So our overall e-mail capture rates are slightly below plan. We need to be up 32% in the first year to really be effective. We're below that, but we're confident with the changes that we've made in our new systems that we're going to be successful in hitting our one-year target of 32% and our three-year target of 40%.

Okay, so if you're not successful -- I mean obviously it's going to depend on how good your salon people are in terms of getting the names and not only getting them the first time but they have to get them the second, third and fourth and fifth time. What kind of I guess discipline or checks and balances are you rolling out to the system to ensure that you are getting those names?

Well again, it will be part of the check-in process and certain customers just aren't going to give you the e-mails. But we've seen in a smaller group where we've got this new check-in process the customer attachment rate is over 60%.

So again, just seeing part of that, we need to get some information from you, your name, your phone number, your e-mail if you'll give it to us, that again it's part of the customer service. It is also going to allow the stylist to take some notes what type of -- if you got a haircut, if you used a trimmer, if you had color -- those types of things. So it's going to be core to how our stylists operate day to day.

And look, one of the things that we also have to do is communicate to the customers, the value it is to them to have their information in our database. Things such as in our appointment business the ability to do some online electronic appointment book functionality, to receive text messages of latest fashion or offers.

So again, one of the things we'll do at front of store is make sure that people understand the benefit of having information -- their information in our database. And as Mark pointed out, Jeff, the new system will, I think, force that much better so that our stylists are capturing information every time a customer comes in at the beginning of the transaction rather than at the end.

It's just a lot easier for them, too, under the new process.

Okay. And do you need to get the POS rolled out in order to start engaging the customers through the CRM or are they separate -- separate initiatives?

We've got 4,500 salons today. The remaining salons will go on to CRM as the POS system will be rolled out which is between now and this time next year.

We do not need to wait for the new POS system in order to start engaging with the current 3 million customers that we have in our database today. What that other functionality will do is enhance the effectiveness of always attaching the customer transaction to the database so that we're able to monitor visitation patterns.

Okay. And Randy, when are you going to start I guess marketing to these 3 million people? That would seem to be a pretty good number that you have in place already. What is preventing you from moving ahead on that?

We are doing that as we speak. We're doing it with haircut offers, we're doing it with reminders of visitations when they make appointments in our appointment-based stores. We're marketing to them now.

And any feedback yet?

They like it. We talked about it the last quarter that especially people that receive reminders are more apt to show back up in our store. And Jeff, this is one of the things -- again, I mentioned that last quarter so I'll mention it again. But I don't want to go into a lot of -- we'll be happy to talk off-line with people regarding some of our effectiveness, but I just really don't want to give away a lot of information now so that competitors can leverage that against us.

Got it. Okay, understandable. Okay, thanks Randy.

You're welcome, Jeff. Thanks for your questions.

Jill Caruthers, Johnson Rice.

I guess just a follow-up on Jeff's question. Kind of could you talk about while you're seeing a slight pickup in traffic you're seeing even a greater decline in ticket. Could you talk about how you're trying to balance those in order to lift the overall comp in these kind of test promotion --?

Well a couple things. We need to, as we did during the haircut sale. We saw overall a 33% increase in customer visits during that week. It was huge. Even in locations such as Walmart supercenters where I wasn't sure what that kind of ability would be to drive customers to us, they were up over 20%.

So we were very pleased with driving trial during that period of time. We had a lot of in-store promotions or activities where the stylists knew that we were going to drive new customers to them so they had to deliver that smile, that experience, that quality haircut to bring them back.

So far since then -- so we've always known that there's a short-term impact with average ticket coming down because we're promoting. Long-term it only benefits us if we bring customers back. It's now been nine weeks since we ran that haircut sale and during weeks five through nine we've seen a 350 basis point improvement in visitations compared to the control group.

So we know we're going to be effective at it and we just continue now to refine our offer, to refine the medium in which we market to customers in order to be even more efficient as we go forward.

Okay and then just kind of on the stylist, the retention rates for them as they face a potential lower ticket out the door on promotions as well as lower commissions on products, could you talk about kind of your retention rates and how are you trying to cater to keep the stylists in your salon?

Well look, they're making more money under something like this. What they see is that there are so many more customers coming to them and they realize the long-term value that those customers will have if they deliver -- to their pocketbooks if they deliver that experience that brings those customers back.

So that's the education process. We also know that tips are greater with more customers. And you made a comment regarding product commissions. Those are not down under this type of program. We implemented an 8% commission rate a few years ago.

And we've also -- as we've looked at commission rates, there's productivity that as stylists become more productive they can move to different levels of commission rates. But rather than just reward them for ringing up a transaction we want them to earn into those next levels and so there is incentive for them to sell more product.

Okay. And then just last question, if you could talk a bit more about the -- you touched upon 300 leases that were potentially -- I think you set up within a year and were potentially losing money. If you could just talk a little bit more about that, if those leases are concentrated in a certain division and kind of how you're going about that.

We have 300 stores approximately with more than 12 months to go. So what we're looking at doing, and more of them are disproportionate in the mall environment than in the strip centers. So what we're doing is we've reviewed them all and some of them will stay open because we're seeing improvements in operation.

But there are some that are just not likely worth the time and energy to try and fix. The demographic of the area isn't right anymore for our customer. So what we're trying to do right now is if we can get rent reductions and make it profitable and worthwhile to run we're going to, otherwise we're going to try and see if we can exit.

Jill, one of the things that -- we've done this from time to time and we've been successful at doing this. Now is the time to revisit it, especially as this operational management team focuses on driving customer visits, I want to make sure that we are not wasting effort by focusing on stores that really have no chance of improvement and we can improve the bottom line by just simply cutting bait and exiting.

So I was also wanting -- this is a project that can be done simultaneously where our real estate people and others can focus on this and not distract any of our operating people. So it's good thing to do. We'll be effective at it.

I appreciate it. Thank you.

Bill Armstrong, CL King & Associates.

Good afternoon, Randy, Mark and Paul. Have you guys considered using Groupon or some similar type of daily deal in driving traffic? Does that make any sense for a concept like yours?

Yes, and we've been doing that, Bill, and we've seen some pretty good success, especially I think in our Regis division. That will be one of the strategies as we roll forward and we have better consumer information, but definitely Groupon, social media is going to be important to us and it's something that we're just starting to work on. But we've definitely see Groupon and Living Social be effective in many of our salons and primarily Regis.

Well, to echo what Mark was saying, and this is something I said a moment ago. We have the luxury, the ability with 8,000 company-owned stores across all geographies and distribution channels that we're able to experiment with things like that, like Groupon. And where we are effective, as we were in Regis, we'll use that as a leverage point to expand to other divisions as well.

Okay, that's interesting. And a different topic, on Hair Club. I was wondering if you could maybe expand on how you might be able to improve margins on the Hair Club.

Yes, in the short term I probably wouldn't expect much improvement in margins. We've seen, and I think Mark mentioned this in his prepared comments. We've seen two things primarily impact the business. One is because of the economy those men, primarily men that have elected to have surgical hair transplants done, those people have -- those numbers have reduced because of the cost of that procedure.

That will change, it's only a matter of when because once the economy starts picking up and unemployment improves I think we'll see a rebound there. The other piece has been the cost of the hair systems, the mesh hair systems that are manufactured, produced for us on a custom basis overseas. We've seen labor costs in those markets increase.

We're looking at opportunities to shift some of that business to other lower-cost markets. So again, we've got some plans underway that will help us drive costs down or certainly contain them as time goes on. We have not been aggressive at this point in time in raising prices to the customer. So I would say in the short term here we're expecting margins to be more similar than not is what we've seen in the first quarter.

Got it. Okay, thank you and good luck.

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

Kirsten, thank you. And I want to thank all of you that reached out today and took the time and listened to us. We appreciate it. Have a good day, everyone.

Ladies and gentlemen, if you wish to access the replay for this call you may do so by dialing 1-800-406-7325 with an ID of 447-8167 pound. This concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.