Regis Corp (RGS) 2014 Q2 法說會逐字稿

Good morning. My name is George, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Regis Corporation fiscal 2014 second-quarter earnings call. All lines have been placed on mute to prevent any background noise. If anyone has not received a copy of today's press release, please call Regis Corporation at 952-806-2154, and a copy will be faxed to you immediately. If you wish to access the replay for this call, you may do so by dialing 800-406-7325, using the access code of 4662033 followed by the pound sign. The replay will be available 60 minutes after the conclusion of today's call.

I would like to remind everyone 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. Speaking today will be 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 over the call to Mr. Hanrahan for his comments. Dan, you may begin.

Thank you, George. Good morning, everyone, and thank you for joining us. With me today are Steve Spiegel, our Executive Vice President and Chief Financial Officer; Eric Bakken, our Executive Vice President and Chief Administrative Officer; and Mark Fosland, our Senior Vice President of Finance.

Before I get started, let me take a minute to discuss the one-off non-cash charges that impacted our second quarter. While I would normally not address technical accounting matters, it is important for me to comment on the $112 million of non-cash charges we reported during the quarter to impair goodwill and establish a valuation allowance against our deferred tax assets.

I know the investment community understands these charges, but as we have employees and business partners also listening in on the call, I want to make sure they understand these adjustments did not have cash impact on our business. Our business model is sound; our balance sheet is strong; and our business continues to generate positive cash flow. In fact, our business generated $21.6 million in EBITDA as adjusted for the quarter. I am confident in our ability to restore Regis to sustainable growth and improve profitability.

As I have discussed and presented in detail on the past few conference calls, for Regis to improve its long-term financial performance we need to become a best in class operator. On today's call, I won't reiterate all the details of our strategy but I will quickly recap the three initiatives rolled out during the fourth quarter of fiscal 2013 that lay the foundation for us to execute our key strategy and to transition Regis into a best-in-class operator.

For those of you who have been following us for a while, you will note our strategy remains the same. First, we've rolled out SuperSalon, a point-of-sale system in salon workstations to all of our North American salons. When fully utilized, SuperSalon will provide a standardized platform, enabling vastly improved salon management, measurement, and transparency. Second, we reorganized our field leadership. Our new structure reduces span of control; improves geographic proximity of our field leaders to their salons; enables localized management, mentoring, and decision-making; and incents profitable growth.

Third, we standardized plan-o-gram in order to optimize our retail performance and enable efficiencies throughout our supply chain. These initiatives were based on many months of the learnings, working with our best franchisees and operators. And we remain confident these will ultimately deliver our long-term strategy.

While these initiatives impacted our results during the first and second quarters of this fiscal year, they will transform Regis into a best-in-class operator and position the company for long-term success. We continue to be focused on building executional excellence throughout our organization.

My focus for the rest of the call will be to first explain why our business continues to be impacted by these initiatives, and second, the work we are doing to stabilize these impacts and further our progress to becoming a best-in-class operator. Afterwards, I will turn the call over to Steve to review our second-quarter financial results in greater detail.

Now let's turn our focus to why our business continues to be impacted. First, and as I have said in the past, Regis's greatest challenge is to adapting to and executing change. Historically, there was no infrastructure in place to ensure that change was effectively cascaded throughout our organization. We have a new field leadership organization comprised of many leaders taking on new roles and responsibilities. Our good leaders are executing and winning fast. However, expanding the learning curve has been challenging for many. During this period of change employee attraction, retention, and development have proven to be more challenging. Recognizing that stylists are the Company's product offerings, there was a high correlation in net turnover in same-store sales performance.

Second, our retail performance demonstrates we have further work to do to optimize our merchandising tactics and associated promotional strategies. And third, we have made progress in optimizing SuperSalon, but we still have work ahead of us before we begin to realize the benefits of a standardized platform. Our priorities center around improving connectivity speeds, ongoing stylist training, and simplifying user interface. Let's take a look specifically at each one of these and what we are doing.

To reach the full potential of each of our salons, Regis will become an organization that excels in developing our field and salon leaders. In the past few months, we hired Jim Lain, our Chief Operating Officer; and Carmen Thiede, Regis's first-ever Chief Human Resources Officer -- the two most critical roles in helping us to improve our ability to manage change and execute and also develop talent. We have begun to look deeply at the training needs of our regional vice presidents, regional directors, district leaders, and salon managers in order to develop training programs that will help them all improve and be successful.

Because the company historically did not emphasize standardization across salon platforms, we have diverse operating processes and performance metrics which have made training and developing field leadership more cumbersome than necessary. While we have made progress on this front during the past year, we are now developing and enhancing operational tools like salon training and execution guides, salon KPI reporting and leadership standards to assist field leaders in standardizing operating processes across our salons and using consistent performance metrics to diagnose the business more effectively.

As I said last quarter, we began using a new execution program across all of our salons. This program is designed to develop leaders, teach good executional behaviors at the salon level and throughout our field organization, drive accountability, and provide the foundation for change management.

As a reminder, each week our salon's big one or two commitments to drive improvement in the guest experience and resulting guest traffic. These commitments cascade up to field leadership, our chief operating officer, and ultimately to me. Leveraging an Internet site to monitor weekly project progress on commitment, everyone can see who is and is not delivering. This is the first time in our history we have a common business language from our stylists to me, and we now have a foundation for change management.

In the early stages of training our people in this program, our team can be divided into three categories: early adopters and succeeding, learning and improving, and challenged and struggling. While in the minority early adopters are indicative of the kind of results we can expect as our entire organization develops executional competencies to manage change.

For example, a number of our district leaders are producing positive year-to-date same-store service sales in excess of 3%. While admittedly too few, this is an encouraging sign. Each week I am seeing greater focus on winning throughout our field organization. Changing a culture takes time and patience. We are in the midst of developing performance-based culture which executes and delivers a great guest experience.

We have made significant progress with our regional vice president, and regional directors are in the process of changing our culture in 7000 salons. To accelerate this process, our regional directors are leading efforts to improve underperforming salons. Equipped with operational tools I mentioned previously, early results indicate this work is improving trends in these salons.

Our opportunity is to sustain these improvements with ongoing training and development across all salons.

One of the impacts of our initiatives in changing the culture was increased turnover. Our turnover relative to the second quarter -- we did not keep pace with our staffing. As we create in a culture of accountability, stylist turnover remains skewed towards our lower producers. Our field and human resources teams are laser focused on addressing staffing levels in all our salons and have been given new tools to help identify and capitalize on staffing opportunities.

In addition, Carmen Thiede and her team are analyzing why are our stylists are leaving.

Shifting our focus to retail performance, retail sales trends remain challenged, and we have taken a number of steps to further address these trends. We have begun a search for a new senior vice president of merchandising. In addition, the field execution training we discussed earlier was intentionally focused on driving service guest traffic and delivering a great guest experience. As our teams become more adept at using the platform, we added a retail component to this training to ensure we remain focused and accountable for delivering retail sales.

We also listened feedback from our stylists and have begun to modify monthly retail contests to generate more excitement among our stylist to drive retail sales. Now let's discuss our SuperSalon progress.

Last quarter, we discussed improved help desk call volumes associated with its implementation. Our call levels have returned to pre-SuperSalon days while the larger technical issues have been mitigated, we continue to focus on areas to enhance SuperSalon's performance and to make it easier for our stylists to use and help us realize the full benefits of the tool to manage our business.

I personally lead a steering committee that meets weekly to prioritize the most important enhancements we can make. While we will always be looking for ways to enhance our use of technology, our immediate priorities are focused on consistency of performance, be it across all salons, and ease of use. In order to make SuperSalon easier to use, we are eliminating steps that will reduce time and complexity of transactions. SuperSalon also provides us the opportunity to improve our focus on loss prevention. We are making excellent progress in providing salon-level analytics and support of loss prevention. I believe there is a significant opportunity to improve in this area and expect these enhancements, coupled with the decision to hire a vice president of loss prevention reporting directly to me, will improve our execution of focus and awareness in this area.

Before turning this call over to Steve, I would like to summarize my thoughts. Everything I discussed today comes back to people and execution. For each and every one of our salons to reach its potential, we have to become an organization that excels in developing our field and salon leaders. Our strategies remain the same, but we are increasing our focus on training and development as essential to delivering an ideal guest experience that creates guests for life. In the near term, we will simplify what we ask our salons in field to take on and limit this to areas that add value in our turnkey.

Our financial performance for the quarter is not where I want it to be; however, the performance of our best operators assures me that as we developed a culture focused on talent, development, and execution, we will realize increased growth and profitability across our entire portfolio. I would now like to turn the call over to Steve. Steve.

Thank you, Dan, and good morning. Before discussing our consolidated financial and operating performance for the second quarter, I want to remind everyone of the change we made as a result of our field reorganization. District leaders' labor costs are now reported within cost of service and their travel costs are now reported within site operating expenses. Previously these costs were reported as general and administrative expenses. We include it on our corporate website recasted historical annual and quarterly financial statements to better assist you with your comparisons.

For the second quarter, Regis reported a net loss of $110 million, or $1.95 per diluted share. This included net, discrete, after-tax charges, most of which were non-cash of $107.5 million, or $1.91 per diluted share. Excluding discrete items, second quarter diluted net loss per share as adjusted was $0.04 compared to earnings of $0.03 in the prior year quarter. Adjusted EBITDA for the quarter came in at $21.6 million, compared to $31.1 million in the prior year quarter.

With second-quarter same-store sales declines of 6.2% and all other things being equal for the prior year, one would expect diluted earnings per share as adjusted to decline by approximately $0.13 per share. Actual earnings per share as adjusted declined by $0.07 per share. A $0.06 per share improvement is primarily related to cost savings initiatives, cost reductions related to our field reorganization, reduced bonus expense, lower interest expense, and certain tax credits. Partly offsetting these items were higher labor costs due to deleveraging caused by lower sales volumes, increased depreciation expense, continued investment in salon connectivity, increased product and marketing costs due to increased promotional activity, and increased health insurance costs. I will discuss these items in more detail shortly.

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

Moving on to second-quarter operating results, my comments this morning will focus on as adjusted results. References to prior-year numbers will be on a recasted basis for our field reorganization. Revenue in the quarter of $468.4 million declined $37.8 million, or 7.5%, compared to the prior-year quarter. Same-store sales declined 6.2% compared to the prior-year quarter.

Year over year, total Company-owned store counts decreased by 213 locations. During the quarter, we built 49 Company-owned salons, closed or relocated 62 other Company-owned locations and sold a net 2 locations to franchisees.

Service revenues were $361 million, a $27.3 million decline, or 7% from the prior year quarter, mainly driven by declines in North American salons. Compared to the prior-year quarter, same-store service sales declined 5.5%, driven by a decline in guest traffic of 6.6%, partly offset by an increase in average ticket price of 1.1%. The remaining 150 basis point decline in service revenues, compared to the prior-year quarter, was primarily due to a net reduction in store counts, partially offset by last year's impact of Hurricane Sandy.

Product revenues were $97.8 million, a decrease of $10.5 million or 9.7% compared to the prior year quarter. Product same-store sales decline 9.2%, representing 560 basis points of trend improvement since last quarter. Increased promotional activity drove some of this improvement.

Dan outlined earlier the number of key steps we are taking to further improve these trends. Royalties and fees of $9.6 million were flat when compared to the prior-year quarter. Our franchisees posted positive same-store sales during the quarter and added 84 net locations in the last 12 months. In the quarter and the last 12 months, we added 39 and 127 new franchisees to the system, respectively.

Moving on to cost of sales, cost of service to project as a percent of associated revenues increased 50 basis points compared to the prior-year quarter, coming in at 59.9%. I will discuss this increase in greater detail by reviewing service and product components.

Cost of service as a percent of service revenues for the quarter increased 40 basis points versus the prior-year quarter coming in at 62.1%. Negative leverage of stylist hours caused by same-store service sales declines and increased health care costs were part partially offset by cost savings due to our field reorganization and lower levels of bonuses. We also lacked disaster pay last year related to Hurricane Sandy and a full commission coupon event that was not repeated this year.

Cost a product as a percentage percent of product revenues was 51.6%, an increase of 70 basis points compared to the prior-year quarter. This increase was mainly driven by higher promotional activity in the quarter, partly offset by reduced sales commissions from lower product sales.

Site operating expenses of $50.9 million decreased $2.5 million compared to the prior-year quarter. The decrease was primarily driven by cost-savings initiatives due to lower utilities, repairs, and maintenance expenses; and reduced travel expense due to the field reorganization. In addition, lower volumes reduced our freight costs, and we realized the favorable impact from the timing of certain expenses including self insurance.

These were partly offset by increased connectivity costs to support SuperSalon and salon workstations. General and administrative expenses of $42.3 million decreased $4.7 million compared to the prior year quarter. Almost half of this improvement relates to cost-savings initiatives and benefits from the field reorganization. The remaining benefit is primarily driven by reduced bonus expense resulting from lower sales and profits and reduced corporate health insurance costs.

We have done a nice job managing our costs and remain focused on ways to simplify to drive further efficiencies.

Let's shift for a few moments to liquidity. In November, we issued $120 million of 5.75% senior unsecured notes maturing in 2017. These notes strengthen our balance sheet and provide significant covenant-like liquidity for us to execute our turnaround strategy and manage the upcoming maturation of our convertible debt. While no definitive decisions have been made, we intend to use proceeds from the notes, along with existing cash to settle our $172.5 million convertible debt maturing in July of 2014. At December 31, 2013, we have $339 million of cash, total debt of $294 million, and no outstanding borrowings under our $400 million revolving credit facility.

Our business generated $33 million of operating cash flow during the quarter. Next, I want two cover new to non-cash charges that impacted our second-quarter earnings by $112.1 million. First, we recognized an after-tax non-cash goodwill impairment charge of $28.6 million for the Regis salon concept. We normally perform our goodwill assessment during the fourth quarter of each year. We were required to perform this assessment early because we redefined our operating segments during the quarter, and our performance trends are down. As a result of this non-cash charge, we have no further goodwill on our books associated with the Regis salon concept. We remain focused on improving the performance of this business as we stabilize and turn around our overall business.

Second, the Company incurred a non-cash charge of $83.5 million to establish a valuation allowance against our US deferred tax assets. These assets are mostly comprised of items that expire many years into the future or have no definite expiration periods. As Dan noted earlier, this is a highly technical accounting matter that does not reflect the underlying economics of our business model. Our business model is sound; our balance sheet is wrong; and our business generates positive cash flow. In fact, the business is cash flow positive through the first six months of this fiscal year and generated $21.6 million in EBITDA as adjusted for the second quarter.

We are in the early stages of our turnaround strategy and our focus on restoring Regis to sustainable growth and profitability. When this occurs, accounting rules permit us to reverse this allowance. Until the valuation allowance is reversed, our GAAP tax rate will likely fluctuate from quarter to quarter. In the meantime, this is a non-cash charge, and the allowance has no impact on our ability to claim or eventually utilize underlying tax deductions and credits.

It is also noted that legislation authorizing various federal employment tax credits expired as of December 31, 2013. Absent legislation retroactively reinstating these employment tax credits, our tax rate could be further impacted.

Finally, as we look towards our third-quarter call, I want to remind everyone that in last year's third fiscal quarter we benefited from an early Easter. As we reported, this shift impacted same-store sales comps by approximately 70 basis points. This is important to remember because this year Easter will fall in our fourth fiscal quarter, complicating year-over-year comparisons. This concludes the financial portion of the call. We would now like to answer any questions you may have.

Operator, can you please provide the instructions for the Q&A portion of the call?

Thank you, Dan and Steve. (Operator Instructions)

Lorraine Hutchinson, Bank of America Merrill Lynch.

Hi, it's Paul Alexander for Lorraine. Thank you. Dan, you spoke about why there continued to be operational issues during the turnaround. But can you talk a little bit about why there was a sequential deceleration in service costs this quarter? If it is about the turnover and field management issues, why do you think these issues got worse now when you have already been working on your key strategies for a couple of quarters? And do you think the sequential slow down -- was it all about the external environment, or cold weather? Thank you.

Thanks, Paul. In terms of deceleration as you put it in our service comp, I think it was driven primarily by the turnover that we talked about. I mentioned and Steve mentioned. We did not do as good a job keeping up with the turnover as I think we normally would. Fourth quarter is a little bit tougher time to higher than other quarters. One of the things that we did see was that as we put this business platform in that allows us to manage people's productivity and ask them to make commitments and holds the much more accountable, we did see an increase in turnover in our lower-performing people. I don't think there's ever been a good turnover, but if we are going to have turnover, I would rather have it in our lowest performers.

And then in regards to the external, we as a company have tried to stay away from blaming the weather for anything that is going on. I mean, we are going to have weather every year. It seems like it is probably particularly bad this year in the upper Midwest, but we are going to have what the challenges ongoing. I think that probably had an impact, but I can't quantify, Paul, exactly what the weather impact was. I would say it's more that we just have to continue to train and upgrade our people. Where we have good people operating the strategies, we are doing extremely well, as I noted. We just need to continue to focus on training and developing our people. And I remain very confident that as we do that we will get the kind of results that we want going forward.

All right. Thank you very much.

Jeff Stein, Northcoast Research.

Hey, Dan. Couple things. You identified the three buckets of performers and indicated that a minority are early adapters. I just kind of curious roughly what percent you would place on that in terms of how many are kind of in the lower end of the bucket, the middle range of the bucket, and then the upper end. And wondering if you could talk a little bit about what you are doing and what you think are some issues on the product side that you've been able to identify and how you are planning to correct those issues.

Sure. Let me start with what you asked about on the three buckets of performers on our business platform. Without getting into exact numbers -- we won't give exact numbers -- but think of it as a bell-shaped curve with the majority in the middle, Jeff. Most of the people are pretty good people here, and they are really focused on understanding what it is that they need to do to be successful. They adapted well -- we have some that adapted extremely well, just hit the ground running with it and are getting -- we talked about 3% comps within that bucket, but we've got a range. We've got people that are in the 10% to 15% to 25% range. So what it shows is that the strategy work, and we need to train and develop our people to get them there.

The last thing I would say on that, Jeff, is that that bucket of good performers that is really nailing it is larger than that bucket on the other end that are really struggling and not getting it. Most of the people sit right in the middle; very focused on trying to understand what it is that they need to do with these performance tools that we have given them at the -- mainly at the district leader and the salon manager level. What we need to do is just make sure we give them the training that they need to develop. And we are very, very focused on that.

On the product side, there's a number of things that we are doing that we think can impact the product positively. We talked about this platform, and I think that is fundamental to change there. We need to get our people in the field selling retail and selling it effectively. Again, I talked about those three buckets. Those three buckets are not dissimilar on the product side as they were on the service side. A lot of this is driven by how well we execute in the field, and that platform is a really strong tool that our best leaders are off and running with.

And then as I mentioned, we do have a search out for a new chief merchandising officer, and we think that will also help us. I am meeting regularly with the team now and helping guide us through this as we look for a new chief merchandising officer. So, we think that the combination of those two things and just a better understanding as we go forward of our promotional activity will be the things that get us going in the right direction on product again.

And, Dan, with respect to your mall-based salons, you've got roughly 25% of your revenues that come out of your Regis and MasterCuts divisions. Weather has been an issue for everybody, but the other issue is just ongoing going secular drop that we are seeing in mall traffic. I am wondering what strategies you have in place to combat the general weakness we are seeing in mall traffic, because that is something that is likely to continue, good weather or bad weather.

Yes, I want to reiterate that we don't want to use whether as an excuse. The weather is going to be what the weather is going to be, and we have to figure out how to manage our business regardless of what the weather is. On the mall-based business, we are seeing the same thing as we see with this business platform that we have put in place. Our good mall-based operators can take this thing and run with it and can grow their business. We haven't seen as many, Jeff, on the success side as we have on our value-based business, but the bell-shaped curve is still pretty similar to what we see in our business in general. We need to execute well on those salons regardless of where they are placed, whether they are in a mall or a strip center or a power center. We believe that with good execution we can make our Regis and our MasterCuts business work as well. There's enough traffic in those malls walking by every day for us to get that business right. That's how we are looking at it. It's all about execution and delivering the great guest experience. Very similar program that we are executing in terms of training and development in our value-based business.

Okay. And store closings -- that's my final question. Any thoughts in terms of the back half of the year how many locations you might close and what the annualized losses of those locations might be?

We don't typically give guidance on store closings, but we have continued to opportunistically look at locations that are underperforming and that are ripe for closure. I would anticipate the pace will be very similar to what you have seen in the last 12 months.

Got it. Thank you.

Bill Armstrong, CL King & Associates.

Good morning, gentlemen. You talked about a steep learning curve with these -- with the field organizational changes. I was wondering if maybe you could describe for the typical stylist in one of your salons, what sort of learning curve he or she may be undergoing and what the timeline might be for an individual getting up that learning curve?

I wouldn't say it was the stylist. I think our stylists are good stylists. We've got a good group of stylists across our portfolio of brands that do a very, very good job cutting hair, delivering a good guest experience. It's more around leadership. What we have learned in the past six months is that leadership is an extremely important part of this equation. And just like any business, if the teams are positively motivated and feeling good about themselves, they do a better job. Where we have put people in new roles, some of them are struggling. Some of them are struggling to understand the different operating procedures within the different brands. Some of them are struggling to be good leaders. And that is where our training and development work is primarily focused is around leadership.

That's what I talk about when I am talking about the steeper learning curve. It's not at the stylist level; it's at the district leader level and at the salon manager level in some respects. So, we have good people in place and strong salon managers, strong district leader. We deliver very good results. And it's incumbent upon us to do a good job training them so that they can be successful. But I don't want to leave you with the impression that the stylist are on a learning curve because of the organizational change we made.

Thanks for that clarification. So what do you think is causing the increased turnover in the stylists then? And on a related point, why do you think you are struggling to replace them?

Let me start with the struggling to replace. I think that is a combination of being in the fourth quarter during the holiday season and, again, training and development of our newest leaders. We've got to make sure that they're well focused on training and developing our people. And if we get new stylist in and we are not doing a good job training and developing them, that's when we see them move off to another location. What we will become over time is we will become a company where stylists want to come because of the training and development that we give them. We are not there yet today, and that is an opportunity area for us -- to make sure that we deliver the kind of training and development at the stylist level that they need.

And then again it gets back to this idea of leadership. If we've got strong leaders focused on creating a good work environment, we can keep people. So we can track through the organization, and we can see where we've got turnover. And it pretty much equates to a leadership development opportunity. And I mentioned in my work that we have done a lot of digging into training and development and the work is needed so that we can have the kind of leaders that can not only attract good people but retain them and deliver the kind of results our best operators are giving us.

Okay. One final question, probably for Steve and that just concerns royalties, the franchise royalties. Your franchisees had positive comps, and it looks like you had an approximate 4% increase in the number of franchise salons opened during the quarter compared to a year ago. But franchise royalties were flat. Are the rates lower? How do you reconcile that?

Actually our franchise revenue for the quarter was up about 150 bps, year over year. It's hard to see this when you look at the face of our financial statements because the prior-year line item also includes income from booth rental that is less significant in the current year.

And this is Eric. I would add to that. There is a lower royalty fee in the first year. So when our franchisees come on, generally, the royalty rate is 4% in the first year and 6% thereafter. So as we are adding more and more new franchisees and new store openings, you get that 4% royalty in the first year, and that is really half -- for a half year. So, you will continue to see that build over time, but it takes a little while to ramp it up.

I see. And when you say booth rental, you are talking about in your Company-owned stores?

On booth rental in Company-owned stores, yes.

Okay. Are you phasing that out or what is causing the reduction there?

It is not a strategic emphasis for us.

Okay. Thanks.

Daniel Hofkin, William Blair.

Good morning. Just going back to the comment about your early adopters. Obviously, you haven't called that out specifically in prior calls, but I would be interested in what you are seeing in terms of the sequential trend for them and also the share of the total pie that they are representing. Let's say this quarter versus the fiscal first quarter. That is my first question.

All right, Daniel, so in terms of the early adopters, I am not going to get into the what share it is or what percentage of our business it is.

Or whether it got bigger (multiple speakers)

I can't talk about that. What I can tell you is that that group improved. Not only are they growing, but they did improve over the first quarter and that first quarter of the year was an improvement over the last six months of the prior year. That is what gives us confidence about the strategy that we have in place is because the people that are our best operators are showing improvement in the business consistently quarter on quarter on quarter. I think that's what your question was. Are they able to sustain it? And are they able to maintain it? And the answer to that is, yes. We have actually seen the improvements increase. So it's not like it's a steady state, steady percentage up, but over that time period we have seen these good operators improve it.

Can you put any just rough number on it? Like you said in some cases well in excess of 3% positive in the fiscal second-quarter. Was that flat in the first quarter? Just some --

Sure. I understand question. We had -- these operators in the first quarter were -- and I can get down to individuals but I don't think that will be helpful to you. What we have seen is we have seen people getting as high as 25% comps that are executing against the strategy. Those people are pretty consistent first quarter to second-quarter, but that is substantially above what they were in the last six months of the prior year, those best operators. What we are doing is our field leaders are spending a lot of time with those folks understanding how they have been able to adapt to the strategies so easily and comfortably. And that is how we are developing the training program for the rest of our people. For example, we had all of our regional directors and regional VPs in last week, helping to develop the training program for the field. And then, that is the work that they will go back out, and then they will train their district leaders. I am talking about districts, people with 5 to 8 salons, that are able to get that kind of traction.

Okay. Is there anything -- have you been able to identify anything about the leadership in these salons because you are basically putting it on the leadership more than the individual stylist. In terms of what it is about them that is making them perform better so far -- be early adopters. And how you can kind of hire people, what to look for in terms of hiring?

That is an excellent question. Now we have a chief human resources operator for the first time. She is spending a lot of her time understanding what is the similar makeup of our best leaders and what are those skill sets that they have. So if we need to have to go outside to hire, what will that look like? What it really all boils down to, Daniel, is good leadership. We have technical training here at Regis. We haven't ever really done any work around leadership training. That is the work we did last week with our folks. We looked at what we need to do for each of our district leaders to train them and help them be more successful than they are today. So, we have a training program all the way down to the individual district leader. As we get them trained, we will cascade that down further, down all the way to the salon manager. But these good ones, what they are doing is they are keeping their salons fully staffed with well-motivated stylists and they are creating the kind of environment in the salon where people want to be. And they are showing their people how to deliver a great guest experience. Those are the common themes that we are seeing across these folks.

Okay. And then, I guess my last question is just back to in earlier question about the mall-based concepts. Is there -- it's obviously a minority of the total Company, but would you think in terms of the possibility of closing or relocating a material number of those over time?

We evaluate every salon as it comes up, but we are not thinking today about closing or relocating a large number of them. A lot of the malls especially we have a relationship with a landlord that has a lot of malls. It is something that we would work on with landlord by landlord, but what we haven't found is relocating them outside the mall to be a great solution. We just need to execute better inside those malls, Daniel. Even in the B and C malls, we've got salons that are performing extremely well. And they execute well; they work the lease line as potential guests walked past the lease line. And they are growing their business. It is a little bit like weather. I want to be hesitant to blame anything on the weather or blame anything on mall traffic. Because I think that when we get our act together and we execute well, we can move the dial inside the mall as well as in strip centers and power centers.

Jill Nelson, Johnson Rice & Company.

My first question relates to both service and product margins. It appears that you have had some stabilization in the first quarter, but entering the second quarter you faced some additional pressures on both those margin lines. I know you are seeing some deleverage on the weaker comp, but could you talk about maybe some other issues that are playing into that number?

I think the largest impact that affected our service comps sequentially was the fact that we didn't get the leverage out of stylist hours that we got in the first quarter based on our sales declines. On the product side as we mentioned, we were a bit more promotional in the quarter in order to start to turn around the performance of our retail comps. And that directly impacted our margins.

And are these factors if we continue to see these similar comps for a couple of quarters out, do we think these margin levels are kind of the current run rate that we should see? Or is it something you could fix in the near term?

In our business I think that the way to improve our margins is to leverage growing comps. So, we believe as we begin to see the business turnaround and our comps improve we will start to see improvement in that percentage.

Okay. Last question, a follow-up on the incremental turnover you saw in the stylists this quarter. Was it more of kind of management's control of trying to improve the workforce? Or do you feel like it was the stylist's choice wanting to leave?

Let me take that one. I think, Jill, I think it was more stylist's choice wanting to leave, but at the end of the day, that's really what we need to control. So it wasn't that we fired a large number of stylists by any stretch of the imagination, it's more that, as I mentioned earlier, we need to do a better job of providing the kind of leadership that will help our stylists be successful. And that's what drove the increased turnover is the combination of that. I think we are asking them at the salon level to be part of the solution, and we did put that management performance program in place and that's a platform for accountability. And we think that, given that the more lower-producing stylists left us to higher-producing stylists, we think that some of it is driven by the fact that we are holding them accountable for their performance. We were not out firing stylists. This was more self-selection.

I appreciate it. Thank you.

[Jeremy Cahan, Bostreet.]

Can you give us any indication if quarter-to-date trends have started to stabilize? And then second, can you just give us an update on how we should think about normalized CapEx levels?

I will take the first one, and then I will let Steve talk about CapEx, Jeremy. You can imagine we are part way through the first month of the first quarter, so I won't comment on where we are in the quarter. What I can tell you is that we continue to see the same kind of thing that we saw with our strong performers, that our strong performers continue to perform very well, the kind of results we would like to see. That middle band is still struggling. It has been a crazy weather month so that would make it even more confusing for me to respond to it, but I can tell you we are seeing on that bell-shaped curve we are seeing similar things. I remain encouraged by how our best operators are performing. As I mentioned earlier, we had all of our regional directors and regional VPs in this week for further training. It's a motivated group. They know what they need to do to be successful, and they know how to train their district leaders and their salon managers to be successful as well.

Just as a follow-up on that, was there any degradation throughout the quarter or was it pretty consistent over the last three months?

You are talking about this quarter we just finished?

Correct.

The results were pretty consistent over the three months. And you want -- Steve, I'll give it to you for the second part of that.

Normalized capital spending is between $50 million and $60 million a year.

Bill Armstrong, CL King.

Just a follow-up. You mentioned that a lot of the stylists who left were sort of in the lower tiers of productivity. You mentioned creating a culture of accountability. How do you measure productivity of stylists? If I am a stylist, how would I go about increasing my productivity?

Sure. We measure it in terms of dollars you generate per hour on the service side. And then the total amount of retail you sell. With this platform that we put together we have given them a number of what we call lead measures that can help drive productivity at the salon level. Depending on the format that you are in or the banner that you are in, that can range from working the lease line and engaging potential guests come in for a free consultation and get a service to passing out referral cards, collecting emails. What we have seen is -- this is admittedly a one-off example, but I think it's an important one that is indicative of how quickly we can turn the business if we focus on it the right way.

In one of our Supercuts, one of our salon managers decided that she liked this idea of something that we call fishing -- going out and if you happen to be in a mall, you go out and work with all the other retailers in the mall. If you happen to be in one of our salons like in a Wal-Mart, it's being on the lease line and as people walk by, welcoming them into Wal-Mart and asking them if they would be interested in a consultation. This particular Supercuts manager went to a close by office building, working in a strip center, office building was about a mile down the road. And literally over the course of a quarter had her business up 70%.

This was a fairly strong performing salon to begin with and had the business up 70% in that quarter, just by going into that particular business -- into that business building and passing out cards. So they can, in fact, impact their business. They just don't have to wait to walk in and get traffic. That's what we have been focused on. Training all the way through our system is to have them understand that they can be accountable for driving traffic as well as delivering a great guest experience inside the salon.

Great. Thanks very much for that illustration.

[Ravi Dobsetty, Nitty Capital]

Good morning, gentlemen. I have a few questions, three questions. And I know gave a -- [turnarounds] are always tough. And my question is what kind of benchmark we should evaluate you guys from looking at, other than same-store sales and revenues? What other milestones you have? Can you go over the timelines we should see those for evaluating you guys?

Well, Ravi, I can tell you we won't give a timeline, but I can tell you how we look at ourselves and how we look at our business. And hopefully, that will give you some idea of what it is that we are doing. Clearly, as you pointed out is comps, but even more importantly than that is we look at all salons. We look at where they fit in the geography. We look at the population. And we have an understanding of what the potential is, just based on the kind of work we have done in our marketing department to understand which guests are most interested in which of our different service offerings. So if you look at our Supercuts or are SmartStyle business and you look at our Regis or all others, we have a pretty good understanding of what that should be. So, we hold ourselves accountable to that.

We look at guest retention. We are at the point now where we have a pretty good handle on about 60% of guests that come in. We are able to identify them. And we continue to build on that month after month after month. And so, we look at guest retention. And we evaluate ourselves on how well we are retaining guests.

We look at stylist retention. We evaluate ourselves on how well we are retaining stylists. You have heard some questions on margin. We look at margin. A big -- a really important tool for us is making sure that we have the schedules right. Are we properly scheduled on the weekends versus the middle of the week? And are we scheduling to the advantage of the consumer versus the advantage of our stylists? So, number of measures along those lines that are very important to us in terms of service.

And then on the retail side, we look at something we call combination sales. So, what percentage of sales that we get or sold to somebody that is also in for a service? What happens to our retail sales in terms of just walk-ins? What percentage of those walk-in guests can we convert into a service guest? And then, we also look at how well we are selling our promotional materials, what the correlation is between promotional and our full-price sales. All things along those lines, Ravi, is how we are evaluating ourselves.

Just on that question, but from our perspective, we are looking at the numbers and obviously they are really challenging. But we have absolutely no clue how many stores you have made any progress with. I understand you don't want to disclose any numbers in the first pie, second pie, or third pie. We are sitting here. We don't know how many people move from second pie to first pie, how many are there in the first pie or second pie. So, can you give us some visibility? What is going on? So that okay, management has made progress from first quarter to third-quarter, this much progress, and from second quarter to third-quarter. So I don't have any visibility to judge you guys, other than to look at same-store sales and the basic numbers. That's number one.

Number two, a couple more questions I also have is I also notice that your franchisees are doing obviously better comps than your Company stores. Can you compare your comps versus franchisee comps every quarter and see why they are doing a better job versus yours? And number three, a lot of companies that are selling their stores to franchisees. At what point would you decide and say, hey, our strategy is not working, maybe franchisees can do a better job than us? Maybe we should move some of our stores to franchisees.

Let me start with the last one first in terms of selling to franchisees. We have said on previous calls that we have done that. We continue to do that. We have a great relationship with our franchisees. And if there is a store that we can't make a go of it, we have sold it to franchisees. We will continue to take advantage of that opportunity. And to build -- to build on that question a little bit, we have been focused on growing our franchisee store locations. We have not been, with the exception of our Wal-Mart partnership, we have not been growing our own salons. We decided to focus salon growth in two areas -- one is with Wal-Mart and the other is with our franchisees. I think we are doing exactly what you are asking.

We do compare ourselves to our franchisees quarter after quarter after quarter, Ravi. We do know they outperform us, but I can tell you that our good operators are performing at the same kind of levels that are franchisees are and getting the same kind of growth that our franchisees are. I think you probably know from your research that we do about $50,000 less a store than our franchisees do, and it's one of the things that we use to measure the opportunity that we have to close the gaps with our franchisees.

The other two questions I was talking about -- how many people (technical difficulty) or your early adopters. Those numbers would really help us to judge you guys, how much progress you guys are making because other than same-store sales we cannot just judge how you guys are progressing. Do you know what I mean?

I understand the question, Ravi. We are not comfortable getting into that level of detail. I can tell you that that group is bigger. It is not growing as fast as we would like it to, as evidenced by our results. But we are getting more people into that group, quarter by quarter. That is where we are focused, is we are focused on training and developing that organization. But unfortunately, I am not going to be able to get into the individual detail on how many have moved from group A, B, and C.

Fred Graham, Nomura Securities.

Based on your disclosures it doesn't look like you have repurchased any of the convertible notes. Could you please provide more clarity around that?

Sure. The convertible notes mature in July of 2014, which is our fiscal year 2015. As we have said last month, it is our intention to use the proceeds from the $120 million note issuance that we just entered into as well as some of our cash on the balance sheet to settle the converts when they come due. The way they work, mechanically, is they are non-callable and mature -- they're non-callable until they mature. Prior to April 15, the holders can put the debt to Regis, but it's in some very unique instances, one of which is if our stock trades above $19.82 a share for 20 out of 30 consecutive trading days, in addition to other limited instances. Holders can convert at their option to any time after April 15 of 2014. Before April 15, we have the option to settle in cash, stock, or combination of both. While no definitive decisions have been made, like I said, we are going to opt to settle in cash to the extent -- that's our intention at this time. We are required after April 15 of 2014 to select a method and notify holders of that method and then honor that method.

Okay. And with stocks down here, would ever think about tendering for the bonds or mostly just wait until they come due in July and see what happens?

I think we are going to keep our options open.

And I'm showing no further questions. I will turn the call back over to Dan for closing comments.

Thank you for joining us on the call. I know that Mark will be available to answer any questions today and over the next few days. Thank you, operator.

Ladies and gentlemen, if you wish to access the replay for this presentation, you may do so by the visiting Regiscorp.com in the investor relations section of the website or by dialing 800-406-7325 with an ID of 4662033. This concludes our conference for today. Thank you all for participating, and have a nice day. All parties may now disconnect.