Regis Corp (RGS) 2013 Q3 法說會逐字稿

Good morning. My name is Kev and I will be your conference facilitator today. At this time I would like to welcome everyone to the Regis Corporation third-quarter 2013 conference call. All lines have been placed on mute to prevent any background noise.

There is a webcast presentation for the call today. If you would like to view the live webcast, please log onto the third-quarter 2013 results webcast link on the RegisCorp.com in the investor relations section of the website. If anyone has not received a copy of today's press release, please call Regis Corporation at 952-806-2154 and a copy will be faxed to you immediately.

If you wish to access the replay for this call, you may do so by dialing 800-406-7325 using the access code 461-5164 followed by the hash key. The replay will be available 60 minutes after the conclusion of today's call.

I would like to remind you that today the extent of the Company's statements or comments this morning represent forward-looking statements. I refer to you 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 Dan Hanrahan, Chief Executive Officer, and Steve Spiegel, Chief Financial Officer. After management has completed its review of the quarter we will open the call for questions. (Operator Instructions).

I would now like to turn the call over to Dan Hanrahan for his comments. Dan, you may begin.

Good morning and thanks for joining us everyone. After I make my remarks with respect to our third quarter, I will turn the call over to Steve Spiegel, our Executive Vice President and Chief Financial Officer, who will provide additional details behind our third-quarter financial results.

Also with us today are Eric Bakken, recently named Chief Administrative Officer, and Mark Fosland, our Senior Vice President of Finance.

As I said in the past, Regis remains a work in progress. Our primary focus has been to halt the downward spiral on service traffic which is the engine of our business and accounts for over 75% of our revenue. We are starting to slow the revenue declines and are seeing sequential improvement in our service business.

Third-quarter consolidated same-store service sales declined 30 basis points which improved 120 basis points from the second quarter and 270 basis points from the first quarter. We made the decision to strategically invest in salon hours focusing mainly on our SmartStyle salons located in Wal-Mart and our Supercuts salons. Both groups posted positive same-store service sales with SmartStyle up 2.6% and Supercuts up 1.3%.

Although traffic improved, trends in the quarter were varied and we've benefited from an early Easter. We made the decision to invest in stylist hours knowing it would hurt margins to begin to bring guests back to our brands. We did make progress with scheduling optimization which helped us narrow the gap between staffing and guest traffic and improved third-quarter cost of service by 50 basis points when compared to second quarter.

We are energized here at Regis as we have been making strategic investments in our business that began to build the foundation to enable us to turn around our business performance and position the Company for long-term growth.

On this call I want to make sure that our shareholders understand the nature of these investments and how they help us to achieve our mission to create guests for life.

There is nothing more important in a repeat business than creating loyal customers and consumers. Guests for life means delivering an outstanding guest experience in each of our salons so that our guests return. I have now been with Regis for about nine months and I have spent much of that time working in the field with outstanding Regis operators, top performing franchisees and talented leaders. We have been fortunate to retain over the years from high-performing businesses that Regis previously acquired. I refer to this group as our best in class.

Most of my focus with our best in class was on what works. I have seen leading practices in action and we are applying those learnings and taking necessary steps to lay the foundations that will transition Regis into a best in class operator.

First, let's review what we have learned. The following two slides compare our best in class attributes to those of historical Regis. I am not going to spend much time comparing to where Regis has been. Instead my focus is on the changes we need to make in order for Regis to become a best in class operator.

We have divided our learnings into five categories, guests, organization, technology, stylists and marketing. Our best in class are obsessed with providing a great guest experience characterized by quality, convenience, affordability, a friendly salon staff, an inviting salon appearance and atmosphere and minimal wait times.

Organizationally our best in class epitomize ownership behaviors with a constant focus on stylist productivity and salon profits, few management layers, and leadership and mentoring on the salon floor.

Attraction, development and retention of stylists are critical components of best in class success. Top performers invest in both technical and guest service training. They communicate openly and frequently with stylists and of course they have easy to understand pay plans that incent and reward performance. These attributes come together to create a family environment characterized by loyal stylists and low turnover. Happy stylists make for delighted guests.

Best in class use technology in the salon to enhance real-time decision-making and improve the overall guest experience. In fact, the majority of our franchisees have been using the SuperSalon point of sale system for some years. They focus marketing dollars on driving new traffic into their salons. Marketing campaigns are local, consumer facing and designed to generate trial and reward loyalty.

Last quarter I explained the negative impact of the business that results from reducing stylist hours, demand and short-term profitability. To counter the negative impact, we made the decision to invest in salon hours mainly in our two biggest assets, SmartStyle and Supercuts. As illustrated by past SmartStyle experience, the business historically cut hours and raised prices in response to declining traffic.

In the affordable space an outstanding guest experience starts with quality, convenience and value. Long wait times and rising prices incented our guests to visit our competition. By investing in stylist hours, we have seen our SmartStyle traffic trends begin to improve. However, we haven't been able to optimize these hours or drive enough volume to cover them to make them profitable yet.

In just under half of our Supercuts operations, we are starting to see evidence where we've not only stopped the declining trends but we recently have been able to increase revenue at a higher rate than hours we have added. However, this represents only a fraction of our total salon and is an example of the work we have to do in all of our salons to make optimization a core competency.

Strategically investing in stylist hours alone will not fix our business. We need to apply the remaining attributes that our best in class follow. As we considered why some salons were effective and others were not, we realized that it really came down to people. Even without tools like point of sale and guest relationship management, our top performers were able to improve their results in the wake of increased stylist hours.

So let's focus on organization next. One of our challenges in addressing the discrepancy and performance was getting through two layers of corporate management. By spending time in the field, we realized the impediment these layers were to effective change. Last week we announced changes to our field organization. This structure allows us to execute better with fewer layers of management and our leaders working shoulder to shoulder with stylists cutting hair and mentoring.

In the past, we were not organized around geography and this restricted our ability to be local. Our prior focus of organizing around brands and segments made it difficult for operators to spend as much time in the salons as necessary to be effective.

Going forward, field leadership and decision making will be more localized and field leaders will be geographically aligned with their salons in order to promote the in the salon leadership and mentoring. Aligning geographically and reducing travel makes this a very efficient structure.

The field leaders incentives have been redesigned to align their interests with those of shareholders by rewarding ownership behaviors focused on profitable revenue growth. All aspects of this change represent a collaborative effort among many top Regis field employees and members of our salon support team formally referred to as the home office.

In fact, I am pleased to report that the majority of our new regional vice presidents have been sourced from our best in class operators. What excites me most is that our best field people not only helped to develop the structure but are also leading it.

On this slide is an example of what one of our outstanding operators was able to accomplish and we recently promoted him to Regional Vice President. This person doesn't have SuperSalon or guest relationship management tools but he does have excellent operating skills and motivates his team to drive results. While he was able to add hours and grow his business profitably, imagine what could have been if other levers were utilized.

By placing top performers into leadership positions, we not only plan to improve our business performance across the board but we are providing a clear path career path for our people who desire to ascend within our organization.

While we believe our new field organization will go a long way in earning the hearts and minds of our stylists, we need to continue to invest in stylist training programs that educate both technically and experientially.

First, our leaders will be active on the salon floor where they can lead by example and supplement training furnished by the Company. We have recently leveraged our own franchisee training materials to help all levels of field employees navigate the running of the salon. Our moments of truth guest experience program continues to gain traction and we are becoming a much more guest focused organization.

We continue to learn and understand what guests expect from us and we are modifying and enhancing our salon and stylist field training programs to incorporate these learnings.

Moving onto our progress with technology, the Company will complete its rollout of the SuperSalon point of sale system and salon workstations in well over 90% of North American salons. This will significantly improve communications with our salons, facilitate delivery of training to stylists, provide improved real-time salon analytics and guest retention, stylist productivity and salon performance and enhance our guest relationship management capabilities.

Guest relationship management is a strategically important marketing initiative under development. Early reads of our customer data indicate we can do a much better job of guest retention. With the rollout of SuperSalon, our capabilities in this area are improving and today over 50% of our transactions are associated with a unique guest. Having this information allows us to gain insight into guest behavior, communicate with guests and incent return visits. In addition, we can monitor retention and survey our guests to see how we can improve.

Other best in class areas we are working on whose progress and associated impacts are longer term in nature include traffic generating marketing, a guest loyalty program, and plan-o-gram standardization and inventory rationalization.

Historically Regis focused most of its efforts on upselling services and products to existing guests rather than generating trial among new guests. We are developing plans to repurpose our marketing efforts and investments to become more localized and guest facing by shifting emphasis from marketing within the four walls of our salons to marketing to guests outside of the salons.

In our recent past, about 50% of our marketing spend was directed toward generating traffic. In the last half of fiscal 2013, about 75% of our spend will be consumer facing. Next year we expect that number to approach 85% to 90%.

We are also in the planning stage of a guest loyalty program that will be introduced in 2014. While most of our time has been focused on service, we have recently begun to address plan-o-gram standardization and product rationalization in an effort to simplify and manage the ongoing inventory investment. Doing so will make it easier for guests to shop and stylists to sell retail products, improve our salon appearance, reduce inventory management time and enable distribution efficiencies.

I am sure we will have more to say on this topic next quarter as our plans begin to take shape.

As I said earlier, our mission is to create guests for life. Everything we are working on is about creating loyal guests and loyal motivated stylists. Our vision is to be the salon of choice, the employer of choice and the partner of choice. As we accomplish this, we will become the investment of choice.

Today our business is too complex. To improve our execution and financial performance we need to simplify. We are committed to creating an ideal guest experience that drives loyal and repeat business one guest at a time. We are focused on earning the hearts and minds of our stylists so we can retain and attract the best. We must enhance our guest traffic capability.

We are focused on simplifying the business and are on our way toward building a winning organization with a performance-based culture that fosters ownership effectiveness and efficiency. This approach is the foundation for improved and sustainable financial performance.

I am confident in our ability to improve Regis's performance and the entire organization shares my sense of urgency. We have the right strategy. I am encouraged that we have seen pockets of improvement taking place without having pulled all the necessary levers yet.

Changing the strategic direction of any established business requires investment, execution and most certainly time. We continue to do a lot of testing. We continue to learn and we continue to improve our execution.

I will now hand the call over to Steve. Steve?

Thank you, Dan, and good morning. Today I will begin by discussing our consolidated financial and operating performance followed by a review of the major items impacting each of our business segments.

Before I begin, I want to remind everyone of terminology we began using last quarter. We now refer to nonoperational items as discrete items and to operational earnings as adjusted earnings.

For the third quarter we just reported diluted net income per share of $0.04. This included net discrete after-tax income of $1.7 million or $0.03 per share primarily related to earnings from our discontinued Hair Club operations and Work Opportunity Tax Credits partly offset by accelerated depreciation and senior management restructuring costs. Excluding discrete items, third-quarter diluted net earnings per share as adjusted were $0.01 compared to $0.29 in the same period last year.

Last year's diluted net earnings per share as adjusted of $0.29 included after-tax earnings of $0.03 per share mainly due to earnings from our equity investment in a Provalliance which was sold in the first quarter of this fiscal year and last year's effective tax rate benefiting from the release of tax reserves related to resolving income tax audits.

Diluted net earnings per share as adjusted for the current quarter were negatively impacted by approximately $0.05 per share attributed to two fewer sales days in the third quarter of this year when compared to last year which are not reflected in our same store sales trends. Considering this coupled with third-quarter same-store sales declines of 1.4% and all other things being equal to the prior year, one would expect diluted earnings per share as adjusted to approximate $0.18 per share.

Actual diluted earnings per share as adjusted of $0.01 per share are $0.17 per share lower than this expectation. Increased salon labor costs, higher connectivity costs for new point of sale and salon workstations, increased salon repairs and maintenance expenses, and the impact of clearance sales on product costs comprised the majority of the decline. I will discuss these items in more detail shortly.

We have included in today's press release as well as on our corporate website a reconciliation that bridges reported results to earnings as adjusted for the impact of discrete items for the third quarter of the current and prior years.

Moving onto third-quarter operating results, my comments this morning will focus on as adjusted results. Starting with revenues, revenues for the quarter declined $31 million or 5.8% compared to the prior year quarter. Service revenues during the quarter were $392.1 million, a decrease of $20.8 million or 5% from the prior year quarter mainly driven by declines in North American salons.

North American service revenues for the quarter were $370.7 million, a decrease of $19.5 million or 5% compared to the same period last year. Compared to the prior year quarter, North American same-store service sales declined 0.4% comprised of a [one point cent] decrease in guest counts and a 1.3% increase in average ticket price reflecting continued management of promotional spending in a more efficient manner.

Two fewer sales days and the net decrease in store counts drove the remaining 4.6% decrease in North American service sales compared to the prior year quarter.

North American Company-owned store counts decreased by 203 locations during the trailing 12 months ended March 31, 2013. During the quarter, we built 38 Company-owned salons and closed or relocated 96 other Company-owned locations.

Product revenues for the quarter were $103.2 million, a decrease of $9.9 million or 8.8% compared to the same period last year. Product same-store sales declined 5.2%. While our focus has mainly been on service, we are beginning to address this part of our business. As Dan mentioned earlier, the Company is considering simplifying and standardizing its plan-o-grams and rationalizing its retail product line.

We anticipate that this streamlined approach will lead to an improved guest experience and in turn improved retail sales.

Royalties and fees for the quarter of $9.6 million decreased $0.2 million or 2.1% versus the prior year quarter. Our franchisees posted positive same-store sales during the quarter and added 45 net locations over the last 12 months. We continued to see a great deal of new franchisees joining the system.

Shifting our focus to cost of sales, cost of service and product as a percent of associated revenues for the third quarter increased 180 basis points to 58.1% compared to the prior year quarter. Cost of service as a percent of service revenues for the quarter was 59.8%, an increase of 180 basis points compared to be prior year quarter primarily related to increased salon labor costs in North American salons and increased holiday pay due to an early Easter.

We continue to invest in stylists or hours in order to stabilize same-store service sales. During the current quarter, hours increased by approximately 2.6% compared to the prior year quarter mainly in SmartStyle and Supercuts solons. These salons reported positive same-store sales of 2.6% and 1.3% respectively which improved sequentially from the prior quarter.

Improvement in our optimization initiative contributed to a 50 basis point reduction in cost of service as a percent of service revenues compared to the previous quarter.

Cost of product as a percent of product revenues for the quarter was 51.6%, an increase of 130 basis points compared to the prior year quarter mainly driven by increased clearance sales. We made the decision to mark down salon inventories in advance of plans to standardize and simplify retail plan-o-grams and rationalize products next fiscal year.

While this activity increased our cost of product as a percent of product revenues, marking down inventories generates higher cash returns than the past practice of repackaging and returning these products to our distribution centers for restocking, disposal or return to vendors.

Site operating expenses for the quarter increased $3 million or 5.8% compared to the same quarter last year. This increase was primarily driven by increased connectivity costs to support the Company's new point of sale system and salon workstations, advertising costs and higher salon repairs and maintenance expense.

General and administrative expenses for the quarter increased $1.3 million or 2.3% compared to the same quarter last year representing a 90 basis point increase as a percent of revenues. The current quarter has begun to lap significant cost reductions made in the prior year quarter when the Company restructured its senior management and corporate organizations. While general and administrative expenses during the third quarter were consistent with the first half of our fiscal year, we continue to focus on ways to simplify to drive further cost efficiencies.

Moving on to a discussion on our liquidity -- I'm sorry -- before moving on to a discussion on our liquidity, I would like to provide a brief update on the Hair Club transaction.

On April 9, 2013, we announced that we completed the sale of Hair Club and received $162.8 million which was the purchase price of $163.5 million adjusted for a preliminary working capital closing provision. After closing adjustments, transaction fees, and removal of current and long-term assets and liabilities held for sale, the Company anticipates recognizing an after-tax gain during the fourth quarter.

Focusing for a few moments on liquidity, our March 31, 2013 balance sheet is strong. Before considering the impact of the recent Hair Club sale, we have over $250 million of working capital including cash of $180 million and our business generated over $80 million of operating cash flow for the nine months ended March 31, 2013.

In addition, total debt was $269 million and we had no outstanding borrowings under our $400 million revolving credit facility. Based on current conditions, we believe our liquidity is sufficient to enable the Company to invest in all of the areas earlier noted, to turn around our business, to service our debt, and to manage the upcoming maturation of our convertible debt in July of 2014.

This concludes the financial portion of this call. We would now like to answer any questions you may have. Can you please provide the instructions for the Q&A portion of this call?

Thank you, sir. (Operator Instructions) Bill Armstrong, CL King & Associates.

Good morning, gentlemen. I guess the first question is on your field reorganization in slide 9; I just want to understand what I am looking at. Your old organization was divided between corporate and field, and it looks like there is nothing in corporate now. Is that how to read this?

So you have gone from four layers to three, but I'm not sure if there is a change in headcount; if you could flesh that out for us?

Sure, Bill, this is Dan. I would be happy to. Yes, what we had in the past is we had a lot more focus at corporate. We had COOs that managed different portions of our business and we had VPs that spent a fair amount of their time in Minneapolis in our offices. And what we have done is we have focused our effort down into the field, so all of our field people will live in their territory. They will be in them every single day, and if we would need them for any reason in corporate, they will have to come here.

But the effort there was really to focus it down into the field. What you are not seeing on the chart is we will have a Chief Operating Officer that those RVPs will report. The old COOs of the business also did. So what we did here is we flattened the organization out quite a bit. And at the bottom of the organization at the district level, we have reduced the scope that the district leaders have so they will have anywhere from five to eight solons. They will be productive. That means they will be cutting hair so they will be in the salons shoulder to shoulder with people every day. They also won't have far to travel which they did in the past because we weren't organized geographically.

So the whole effort here was on getting good operators, spending more time in the salons. We are still in the process. We have made the changes at the top of the organization and we are into now adjusting the regional directors and district leaders and senior district leaders.

Got it. Okay, thanks for that. Turning to use of proceeds from your recent asset sales, your balance sheet is now at a net cash position for the first time in I don't know how long. Could you talk about capital allocation and how are you looking at that, your newly strengthened balance sheet?

Most definitely. I will take that. At this point, we haven't come to any final decisions but we continue to emphasize the deployment of excess cash will definitely be in the best interest of our shareholders. Improving and investing in the turnaround of our business remains our top priority, and as Dan discussed earlier, we are starting to make foundational investments to position the Company for longer-term growth.

We are also still having discussions with our lending banks regarding optimizing our capital structure and capitalizing on favorable credit market conditions. Be assured, all of these activities are focused on maximizing shareholder value and as we gain more clarity from these events, we will be happy to report where we will deploy the cash at that time.

Are there any restrictions or impediments to your redeeming or refinancing the converts before they mature, before they get converted into potentially dilutive shares?

Technically our bank agreements had a covenant that restrict our ability to make restricted payments in the amount in excess of $100 million. So if you were to take a look at the market value of the converts -- call it in excess of $200 million -- we would be restricted from making a cash payment in that amount.

Okay. Lastly on Empire Education Group, can you just maybe update on -- I can see that enrollments are down. What is the outlook there and is this an asset that you are looking to liquidate as well?

We have been keeping a close eye on Empire. We follow up with the team there constantly. And as you mentioned, we are concerned about the unfavorable enrollment trend. I do feel like the team there has a good plan to get that in shape and I think that they will make good progress. It is a good team there. Contractually we can't sell this investment to a third party until the summer of 2014 which would actually be during our 2015 fiscal year.

Okay. Thanks for that clarification.

You're welcome, Bill.

Daniel Hofkin, William Blair & Co.

Good morning, guys. Just see the sequential improvement in the sales trend. I guess just to make sure that the math is right if you were to back out that 70 basis points was strictly for the service sales in North America, correct -- the impact of the Easter shift?

Yes.

Okay, so overall what would be the -- maybe it would be something less than that presumably because --?

90% of our business is US-based so I would say the bulk of it is North America.

Okay, so it is going to be close to that. In terms of maybe sort of a timeframe that you are thinking of to get to the optimized level of payroll in the two biggest divisions that you have really been pressing, what is your current thinking on that?

I anticipated Daniel, that somebody would ask this question along those lines. We have been at this for about nine months now and the approach that Regis has been taking has been a long one. We have been going down the path that we are in of cutting hours back and raising prices for quite a while. So I'm not comfortable at this point drawing a line in the sand and saying I think we are going to be fixed in a certain amount of time. There is a lot of things that we have got under way.

We have got to get the stylist hours right and we are making progress with our optimization tool. Getting SuperSalon in place is going to be crucial to our success. We just now are in the midst of the field reorganization. We have got to figure the retail piece out so it is going to take time. And I am not at the point where I am comfortable drawing a line in the sand and giving you a number.

But I can tell you I feel good about the fact that we have got a strategy in place now that we are feeling really good about. The organization has embraced it and the field reorganization that we are doing now I think will also have a big impact on us. But I think we are headed in the right direction but it is still going to take some time.

That direction seems to be starting to work. I guess one maybe just overall big picture question. In your nine months so far maybe just one or two things that you have found to be positive or negative relative to your initial expectations just on a summary level?

Sure. I guess the most positive thing and the thing I'm most excited about is the quality of the people we have in the field. I have spent most of the nine months out in the field working with our best operators and I purposely chased good performance so our financial folks sent me in the right direction and I worked with a lot of good people and I've spent a lot of time working with our franchisees. And I think the thing that I'm most pleasantly surprised about is the quality of the people and when you look at what we had just done to the field reorganization at the top, the majority of those regional vice presidents that we showed on slide nine are people.

So there is a lot of good talent out there and we just need to figure out how to tap into it better than we have.

Okay. Anything you would call out on the other side of the ledger?

We've still got a lot of work to do. Anybody that comes into my role wants to fix things instantly and we are not going to be able to fix it instantly but I think when I came in, the Board did a good job of when they brought me in of helping me have my eyes wide open and so nothing really sticks out dramatically.

I guess one thing that was a little bit of surprise is the amount that we had cut hours out of the field system in the past and that is a part of the business that is going to take time to fix more than anything else I think is getting that right.

But with this new organization that we put in place and a reenergized field team, I think we will definitely get there. It is just a question of doing it in a way that has the least impact on profitability. That is the biggest challenge I think we have going forward.

So when you say -- just to clarify that -- when you say that it will take still some time to kind of zero in on the right level, is it because of that just not wanting to have an overly adverse near-term profit impact or is it because it takes time from a customer awareness standpoint to build the perception back up that the salons are staffed and you can get seen in a relatively short period of time?

Yes, you asked the right question and I think you clarified a good answer there as well, Daniel, because it is more the latter. I think we need to get guests to see that we are staffed and that we have good people coming back for services. And at the same time, we want to be careful that we don't overdo it. It is not good for us to have two or three stylists in a salon not having anything to do. So we need to strike the right balance and we are working hard on that and that is what the optimization tool does for us and elevating these folks from the field into these RVP roles that are really good operators will help us execute against that.

Great. Best of luck.

Thank you, Daniel.

Lorraine Hutchinson, Bank of America Merrill Lynch.

Thank you. Good morning. What would you need to see from the MasterCuts and Supercuts businesses to call this a success and I guess roll the increased stylist hours out to some of the other brands as well?

Good question, Lorraine. What we want to see is sustained service revenue growth and we want to be able to do it in a profitable way. And as we are able to do that, then we believe that we can roll it out more completely. We have rolled it out bits and pieces but our major focus has been on the SmartStyle salons in Wal-Mart and on Supercuts. They are our two biggest businesses. Each of them has a single operating model. So it is the fastest and the easiest to get executed.

And as we see the success there, then we won't hesitate to roll it out. The other thing that is going to help us a lot is having the right structure in place and having quality people running our regions and executing at the salon level.

But as we wait for the optimization to catch up to the extra hours, I guess we should start thinking about 2014 as another year where service margins go down. Is that fair?

We are not ready to call 2014 yet so it is a little early for that. We have got a lot of learning under our belt and still a long ways to go but we are not ready to make a call on 2014 at this point.

Okay. Then I just wanted to ask about the product comps where you are clearing a lot of product to bring in a new format. How long will that take and when should we expect to see the comps stabilize with the new product and hopefully higher-margin product coming through?

We have rolled out our standardized plan-o-gram in approximately 20 salons and we are watching the activity now. Our hope would be to try to get that implemented throughout much of the fourth quarter so that we could begin the fiscal year with a revised plan-o-gram. But it takes a little time after you revise your plan-o-gram especially coming off a period of time where you are clearing inventory in order to be able to see the improvement in comp so I would say sometime toward the middle of the first quarter into next year.

Great, thank you.

Jill Caruthers, Johnson Rice.

Good morning. A bit more clarification on service traffic trends. I know there was some one-time shifts given the Sandy hit last quarter, Easter benefited this quarter. So when I tried to adjust those numbers, it does appear that on a sequential basis traffic transactionally worsened a bit in the quarter. I guess could you just talk through some of those events and the numbers?

We are not seeing that in our numbers. Perhaps maybe we should circle back with you after the call and we can review your numbers and sort of reconcile why we are seeing it differently.

Okay, okay. If you could talk about it -- I know that the big focus now is building a guest for life. If you could talk about the bulk of your salon traffic is not appointment based so if you could talk about kind of that shift given you are still continuing to see greater declines at Regis and MasterCuts which are more of the appointment based versus the more value oriented salons. Kind of that way to transition that customer to more of a repeat?

There is a number of things that we are doing. You know our franchisees are not appointment based either and they do an excellent job of getting their guests to come back again and again. In the walk-in business, we need to provide a good guest experience regardless of stylist so that when somebody comes back, they don't care which stylist they go to, they get a great experience every time.

So that is around -- there is a lot to do there around the actual guest training experience. There is also technical training that we need to do going forward to make sure that the technical experience is as strong.

Also the cutting back of hours was not just in the SmartStyle and the Supercuts business. It was across the board so when you see declines in MasterCuts and Regis, part of that is a result of us cutting back hours historically.

We have stopped cutting back the hours there. We haven't made the investment in hours like we have in Wal-Mart and Supercuts but as we get that done, we think that we have the ability to grow those businesses as well and I can tell you that in both Regis and MasterCuts we didn't get into any of the details today but we do have salons and we have districts that are performing well that have been able through the guest training and a stronger focus on the guest experience start to turn this -- not anywhere near declaring victory yet but we have seen that we've been able to make progress in those businesses as well.

Could you talk about if you did run any price testing this quarter? I know in the second quarter you ran a Wal-Mart receipt tape that was somewhat productive. If you could talk about if you did anything in the third quarter on pricing?

Yes, we have done a fair amount of analysis especially on our Wal-Mart business where we have actually looked at the last of 300 million transactions at Wal-Mart and trying to build out a price elasticity model. We are very, very early stages on that. We have done some testing but very, very early. And we are not ready to say that we are anywhere near a decision on price elasticity but it is something that we are working on to get a better handle.

We do think that it's going to take some time before we can figure that piece out of it. We did see as mentioned in the last quarter that we got some results from a test on the Wal-Mart tape. Didn't drive profitability, drove some traffic so we know that we can drive traffic with price we just need to be able to do it in a profitable way. That is why we are digging deeper into price elasticity and what that looks like.

But again I want to stress that is very, very early stages that work and we won't have anything that we want to hang our hat on for quite some time.

Appreciate it. Thank you.

Thank you.

David Kim, (inaudible) Capital.

So as expected, I guess margins over the last few quarters clearly have been pressured by stylist costs and IT investments and while the latter might be temporary it seems like the former, the increased stylist costs might not be.

And so I guess should we sort of expect to see structurally lower margins to drive positive comps going forward and where do you kind of see all of that shaking out?

On a related note, so with the Wal-Mart and Supercuts concept where it seems like you have been investing pretty heavily in the salon hours, has the revenue growth there so far offset the increased investment in hours or are you seeing sort of margin improvement there on a four-wall basis? Thanks.

So let me start with your first question just about our cost of service. We have just begun to strike a balance between the investment in our stylist hours and guest traffic. While our objective is to make optimization a core competency, we are only six months into this initiative and I think as an organization we still have a lot to learn.

Also continued improvement in cost of service is also highly dependent on our ability to leverage stylist hours against sales comps. So as sales comps improve, we get more productivity out of them and vice versa.

We are not going to return as a Company to the past practice of cutting hours to manage short-term profitability to the detriment of providing that ideal guest experience that Dan referred to.

So with these things noted, I would continue to expect in the short term some margin pressure but we are beginning to anniversary initial investments in stylist hours at Supercuts in the fourth quarter of last year and in SmartStyle toward the end of the first quarter of next fiscal year, which should counter some of those headwinds.

As it relates to are we closing the gap in hours versus traffic? We are seeing signals that the gap is closing but we haven't cracked the code yet. In Supercuts, in the select stores that we showed in Supercuts, we have been able to narrow that gap quite sizably and in SmartStyle, I'd like to say the same. Some months we are seeing where we are in the black and other months in the red.

And I think as we get better at optimization and as we continue to be able to leverage improving guest traffic we will be able to invest in those stylist hours and get the return we are hoping to achieve.

Okay, thanks. Then just a quick one on the hair restoration sale. So after transaction fees and taxes on the gains, what do you expect the net proceeds to be?

It is still subject to a reconciliation of working capital with the buyer. So we don't have a defined estimate at this point in time. We are going to be resolving that during the fourth quarter.

Okay, thanks.

But it will be a gain.

Jeff Stein, Northcoast Research.

A question for Dan and then a couple for Steve. If you look at -- I understand that you want to focus on your biggest and best assets but you still have roughly 3000 salons invested in your Regis division and your Promenade division so how long do you think it will take before you really get around to making those a priority? Or I should say maybe the same priority as the value salons?

And could these continue to be an anchor on your recovery for several years as a result of the scope of what you are up against in trying to turn around so many different salon groups?

Good question, Jeff. When we showed that example of the Regional Vice President that we had recently promoted where we had invested hours in his salons, it was one of the markets that we had taken to invest hours in that he didn't have any Supercuts, had a couple of SmartStyles but the majority of his salons were out of the Promenade Group. So we saw traction, good traction.

And I think it is important to stress that all of the things that we are doing go across all of our different models so the SuperSalon investment which is the POS across all models, guest relationship management tool that we are building out goes across all models. This restructure that we did -- and I am convinced that the most important part of this turnaround is people -- goes across all models. So while we have focused today quite a bit on Supercuts and SmartStyles because that is where we invested the bulk of our hours, all the other things that we are doing including our moments of truth guest program go across the entire portfolio.

So we have got a very strong focus on everything. We have prioritized for hours SmartStyle and Supercuts but that doesn't mean that we haven't invested hours where it makes sense in the Promenade as well as in Regis.

Got it, got it. Okay. Thank you for that. Steve, just a couple of housekeeping questions on the P&L. Depreciation and amortization, it kind of bumped up in Q3. Was there any accelerated asset write-downs in the quarter that would account for that or is that kind of the run rate we should look forward on a go forward basis? Then similar questions with regard to site operating expenses?

There was probably about roughly $800,000 pretax of accelerated depreciation relating to our planned consolidation of office space here in Minneapolis. We are leaving a lease and so some of the fixed assets there are depreciating on an accelerated basis. So I think if you take a look at the back of our release, we provide the information that sits in depreciation expense that is discreet and that would tell you what to take out.

Got it, got it. And how about the site operating expense?

Site operating expenses was largely driven by salon connectivity. And with the rollout of SuperSalon which is largely occurring not only in the third quarter but in the fourth quarter and the support that is going to be required going into next year as we are live on all of our salons, I anticipate we are probably going to be running higher on salon connectivity costs than we have historically.

So the third-quarter run rate would be more representative of what we should expect on a go forward basis?

Hard to say. We are also at the same time we are looking at that, we are looking at ways to mitigate it so I would hope that it would be lower than that. But at this point I am not sure we have determined just how much lower.

Got it. Final question would be on the equity and affiliates line, a little lumpy there. It jumped almost fivefold from where you were in the second quarter. Is that $1 million run rate, is that a run rate or is there a reason why it jumped so much from Q2 to Q3?

Let me get back to you on that one. We will circle back with you after the call.

Okay, thank you.

There appear to be no further questions. I will now turn the conference back to Dan.

Thanks everybody for tuning in today. We appreciate all of the questions and look forward to communicating with you, many of you between now and the next call. And if there are any further questions you can contact Mark Fosland for answers. Thanks very much for your time today.

Ladies and gentlemen, if you wish to access the replay for this presentation, you may do so by visiting RegisCorp.com in the investor relations section of the website or by dialing 1-800-406-7325 with an ID of 461-5164 followed by the hash.

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