Regis Corp (RGS) 2016 Q4 法說會逐字稿

Good morning. My name is Katherine and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Regis Corporation FY16 fourth-quarter earnings call.

(Operator Instructions)

I would like to remind everyone that the extent of 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 our website at www.regiscorp.com.

Speaking today will be Dan Hanrahan, Chief Financial Officer, and Steve Spiegel, Chief Financial Officer. I'm sorry, Dan Hanrahan, Chief Executive 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 Mr. Hanrahan for his comments. Dan, you may begin.

Thanks, Katherine. Good morning, everyone, and thank you for joining us today. With me 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.

I want to start by saying I'm proud of the work our organization has put forth to deliver our first positive full-year sales comp since FY07. This could not have been achieved without improved execution in the organization around our key strategies focused on leadership development, technical education and asset protection.

I am also pleased we expanded our EBITDA by $3.8 million and $3 million for the full year and the fourth quarter respectively. This reflects our continued efforts to contain our of cost structure while we are fixing our business.

During the year, we aggressively grew our franchising business, strengthened our balance sheet and returned $101 million to shareholders in the form of share repurchases. That said, I end the year with a bit of mixed emotions. We still need to reverse guest traffic declines that have persisted for many years and fourth-quarter same-store sales declined by 1.4%. This demonstrates the opportunity we have to continue to improve our execution capabilities and a key reason why I've said over the past three years our improvement would not be linear.

Improving field leadership talent and capabilities continues to be our top priority. Our ability to drive more consistent improvement fluctuates from quarter to quarter as we are still developing execution capabilities and upgrading talent at the field leadership level.

Today, we have three tiers of leaders. The top tier represents our strong field leaders who consistently execute against all of our initiatives and are driving sustainable improvement in revenues and profits by using tools, processes and metrics we provide to drive growth in their districts and salons quarter after quarter. The middle tier is comprised of leaders whose results fluctuate as their execution success varies from quarter to quarter. The bottom tier represents those leaders who have yet to deliver growth.

As a result of talent upgrades, many of the leaders in the bottom group are relatively new to the organization and have taken over some of our biggest challenges. We expect them to create momentum over time as their leadership solidifies and helps drive results. In all cases, we remain committed to providing additional training and development or upgrading talent as necessary.

While we are not where we need to be, we are progressing and we are working with a high sense of urgency focused on accelerating our progress and our results. Our key strategies in the investments we are making will enable us to fulfill our vision and make Regis a place where stylists have successful and satisfying careers. We have work ahead of us to accomplish this goal. Transforming a culture comprised of 45,000 stylists, 1,000 field leaders, and 7,000 salons requires strong execution and an ongoing commitment in time. Before discussing our same-store sales performance in greater detail, I want to provide a little more color on some of the execution opportunities that impacted our fourth-quarter same-store sales performance.

We continue to move the organization forward by implementing new tools to assist our field leaders with business planning and improving salon performance and stylist productivity. As we've seen in the past, our operating footprint makes it challenging to implement positive change, sometimes leading to disruption in field execution. In addition, a good portion of our field leaders have been upgraded throughout the year and we are operating in a more challenging retail environment. Our top performers executed these initiatives well and used them to improve the business. But a portion of our leaders did not maintain the previous momentum they achieved in key areas, including recruiting stylists to understaffed salons and retaining stylists.

Those in the middle had varied results and our lower performers struggled. We continue to focus on developing and upgrading our leaders and I'm confident they will improve the momentum of their regions, territories, districts, and salons as they mature in their roles. I also want to clarify the shift in Easter from the fourth quarter of FY15 to the third quarter of FY16, which reduced current year's fourth-quarter same-store sales by approximately 40 basis points.

Our North American value business represents approximately 80% of our total fleet and reported same-store sales of 1.3% for all of FY16, representing 100 basis point improvement over the prior year. In the fourth quarter, this business was down 40 basis points. Supercuts and SmartStyle, our two largest brands, representing more than 50% of our overall salon portfolio, continue to be our strongest performers. Combined, they posted same-store sales of 2.9% and 1% for the full year and fourth quarter respectively. These two brands continued to benefit from brand positioning work our marketing team developed and from stylists executing the brand experience and increasing guest satisfaction.

Our franchise business had another strong year and quarter, reporting revenue growth of 6.5% and 1.4% respectively. The growth in the fourth quarter reflects the fact that the timing of franchise salon openings in FY16 was weighted towards the first nine months of the year, while FY15's timing was evenly spread. We have a strong pipeline going into FY17 and expect this positive momentum to continue.

To a lesser extent, franchise sales comps are also lapping in a very strong fourth quarter last year. Our franchise team and our franchisees are doing an outstanding job and continue to set the bar for strong field execution. Our aggressive expansion of the Supercuts' footprint is contributing to revenue, cash flow, and the Supercuts' advertising fund. The growing Supercuts' advertising fund has and will continue to allow us to run national TV advertising, which is having a positive impact on our Supercuts' system-wide salons. In FY17, we will continue to capitalize upon the big opportunity franchising represents for us, with even more focus on expansion.

Turning to the performance of our mall business, mainly comprised of our North American premium and MasterCuts' salons, challenges I discussed last quarter persisted. We reported combined same-store sales declines of 4% and 5.6% for the full year and fourth quarter respectively. The mall business has unique challenges with many malls facing traffic declines and we are working to weather these challenges as best we can by addressing what we can control.

Improving operations through field leadership and execution remains our top focus. To help with this, we've begun recruiting for a Vice President of Operations to provide full-time support to this business. We also continue to develop and upgrade talent at both regional and district levels, recognizing salon leaders and stylists have a difficult time dealing with change, these changes will create variations to performance before we see it begin to improve over time.

I will now update you on our retail business. Retail comps improved 130 basis points for the full year, but declined 80 during the fourth quarter. As expected, we did see benefit in the quarter as we had a more effective promotional calendar when compared to the third quarter. We launched a new promotion which made it easier and more fun for stylists to engage guests to buy retail products and included a great incentive for service guests to buy products.

We continue to convert a higher percentage of our service-only guest to a combo guest. We call this our combo percentage and it has increased by 120 and 90 basis points for the full year and fourth quarter respectively. Offsetting these improvements were declines in guest traffic during the quarter. While we are converting at a higher percentage, those declines impact us as we have fewer guests to convert.

Now let me shift our discussion to fourth-quarter business updates. Our digital integration initiatives focused on guest satisfaction, mobile and web check-in and guest data capture, continue to gain momentum. In just over one year, over 1 million guests have downloaded our Supercuts' mobile app. Supercuts.com and smartstyle.com combined saw 56% increase in traffic in the quarter. Digital check-in continues to grow, driving repeat guest visits.

We exceeded our goal of 2 million digital check-ins during the fourth quarter and are confident digital check-ins will more than double next year. Our path to a strong digital presence across our brand portfolio is complete. In April, we launched our new regissalons.com and in May, we launched signaturestyle.com, representing the collection of our other brands within our value business portfolio.

These new websites showcase enhanced functionality on a unified platform and include focus areas such as fashionable and upscale imaging, a social media gallery that invites guests to share selfies, the latest how-tos and style advice. Our guest feedback tool reported a 200 basis point year-over-year improvement in guest satisfaction across our brands.

We know haircut quality and positive stylist interactions represent our greatest opportunity to satisfy guests and are using this information to inform our technical education curriculum. Through this tool, our field leaders and stylists are also receiving more guest feedback than ever.

In the beginning of August, we launched our first SmartStyle advertisement, highlighting the brand benefits and showcasing how our stylists make a difference in the lives of SmartStyle guests. It is a really impactful piece of work that aired on internet channels and recruiting and social media websites and I encourage you to you view it by going to smartstyle.com, where you'll see the ad prominently displayed.

This type of advertising not only allows us to share brand stories and reinforce compelling reason for guests to choose our brands, but they help our field leaders cast a broader net in attracting talent and provide inspiring content for our stylists to emulate. Feedback from our stylists has been quite positive in only a few weeks post launch.

We continued to leverage our guest database to offer promotions to our guests and upsell add-on services or retail sales in a more targeted fashion. We tailor our guest message to drive repeat traffic with service reminders and promotional events and we use our digital knowledge to market directly to guests while in our salon.

We also turn the dial up on flash sale e-mail campaigns that promote, at varying levels, to win back lapsed guests. These might be existing guests who haven't frequented our salons in the last several months, or new guests who have visited us for the first time and have not returned in a normal haircut cycle. Integrating e-mail campaigns with tailored guest promotions and in-salon messaging has proven to drive incremental revenue.

At the risk of being repetitive, I want to share the strong progress we've made in franchising over the past few years before I cover off on our fourth-quarter progress in franchising. Since FY13, we made a conscious decision to concentrate our franchise expansion to growing our Supercuts' brand. Doing so has allowed us to expand in a capital-light fashion in key growth markets while strengthening overall contributions to the Supercuts' advertising fund and enabling national advertising campaigns. The result is the Supercuts' nationwide system has never been stronger.

From the start of FY13 through June 30 of 2016, our Supercuts' nationwide footprint has grown approximately 16% to 2,632 salons. Our franchise footprint has grown over 50% with 1,579 locations. We shifted some of our advertising spend towards national television advertising and have seen strong results in driving traffic to system-wide locations. As I mentioned earlier, our franchise posted 1.4% and 6.5% revenue improvement during the fourth quarter and full-fiscal year.

We added 36 and 90 new franchisees to the system and opened 57 and 229 new franchise salons during the fourth quarter and full year respectively. These new franchisees are helping to expand our Supercuts' footprint and, along with our strong existing franchise base, are contributing to revenue, cash flow and the Supercuts' marketing fund.

Now let's briefly cover our progress against our initiatives focused around leadership development, technical education and asset protection. I'll start with leadership development. Our means to sustainable growth is in the quality of our field leadership. Our top priority will continue to be development of our field leaders and, where necessary, moving forward to upgrade underperformers.

In the fourth quarter, we hosted our Accelerating Success Leadership Conference in Orlando, bringing together our 1,000 field leaders for the first time to provide additional leadership and technical training to roll out new tools to assist our field leaders and improving salon performance and stylist productivity, and to share leading practices throughout the organization.

This vendor-partner sponsored event also featured technical and product education from our vendor partners, combined with leadership development in the areas of coaching and talent scouting. Technical education has significant potential to impact retention of our stylists and their performance because it touches each of our 45,000 stylists who place a high premium on developing their craft.

Since completing the build-out of our technical education team in the first half of the fiscal year, we achieved our goal to provide in-salon technical education to every salon. We are also proud of our online stylist on-boarding program launched in the fourth quarter that helps new recruited stylists acclimate to our processes and provides training on how to optimize their productivity, and in turn, make them successful. We continue to receive positive feedback from leaders and stylists about the impact technical education is having across the field.

Asset protection remains laser-focused on proactively coaching and mentoring stylists to make the right choices and instilling best practices in all salons. Opportunities remain in changing stylist behavior and driving sustained results which will help stylists grow their business and earn higher commissions. During the fourth quarter, we conducted nearly 1,300 awareness training sessions in salon business, bringing our year-to-date total to approximately 4,200.

I started today's discussion with mixed emotions about our performance and I'll end on a similar note. I'm very proud of the work that our organization has put forth to deliver our first positive full-year sales comp since FY07. We've aggressively grown our franchise business to drive expansion and operating income and EBITDA and to deliver against our strategic commitments to solidify the strength of our balance sheet and to return over $100 million to shareholders in the form of share repurchases.

As I look toward FY17, I recognize the path to sustainable growth is in the quality of our field leadership and execution capabilities and we still have work cut out for us to improve in these areas. As I stated earlier, transforming a culture comprised of 45,000 stylists, 1,000 field leaders and 7,000 salons requires strong execution and ongoing commitment as well as time. While I'm confident in our strategies to make Regis a place where stylists can have successful and satisfying careers that in turn will deliver sustainable growth and guest traffic and profitability, our progress will not be linear on a quarterly basis.

I'd now like to turn the call over to Steve.

Thank you, Dan, and good morning. Before discussing our performance for the fourth quarter, I want to cover three housekeeping items. First, included in today's press release as well as in our Corporate website is a reconciliation bridging reported results to earnings as adjusted for the impact of discrete items for the fourth quarter of the current and prior years.

Second, the presence of a valuation allowance against most of our deferred tax assets affects comparability of reported and as adjusted results to prior periods, mainly as a result of tax benefits we claimed for goodwill amortization, but do not recognize for GAAP purposes. Income tax expense of $4.1 million in the fourth quarter and $9.1 million for the full year include non-cash tax expense of $4.5 million and $7.9 million respectively related to this matter.

Looking forward, we expect this issue to have a similar impact in FY17. As we've said in the past, the associated quarterly non-cash charge or benefit could fluctuate significantly from quarter to quarter as a result of how the effective tax rate is determined at interim periods.

Third, during the fourth quarter, we issued a press release stating that the new Department of Labor overtime rules effective this coming December could increase our costs within a range of zero to $5 million per year. After considering alternatives to mitigate these cost increases, we believe the annualized impact will be on the lower end of this range.

Our press release and 10-K include detailed explanations for our major P&L line items, so I won't repeat them here. I'll qualify that our fourth-quarter G&A of $43.5 million is not indicative of our annual run rate of $177 million. We benefited in the fourth quarter from lower incentives and timing of certain expenses throughout the year.

I'll focus the rest of my comments on our liquidity and financial position. When we ended FY16, Management and our Board were becoming more confident in our strategy and the direction of our business. Accordingly, we expected to return approximately $100 million to shareholders this year in the form of share repurchases.

As Dan mentioned earlier, we did just that by repurchasing 7.6 million shares of our common stock for $101 million at an average price of $13.19 per share, excluding transaction costs. A combination of our share price, average daily trading volumes and timing of windows when we can repurchase shares in the open market versus purchasing under prearranged plans caused most of these repurchases to occur during the first nine months of the fiscal year.

At June 30, 2016, approximately $60 million remained outstanding under the Company's existing share repurchase authorization. We remain focused on funding investments and managing inflation through disciplined cost management and a rigorous review of all spending to ensure we continue to protect our strong balance sheet.

To that end, we grew our full-year EBITDA as adjusted by $3.8 million or 4.4% in spite of top-line challenges Dan discussed earlier and our business generated approximately $55 million of operating cash flow during the fiscal year. We also finished the year with $147 million of cash, $120 million of total debt, and no outstanding borrowings under our $200 million revolving credit facility.

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

Absolutely.

(Operator Instructions)

We'll go first to Jeff Stein with Northcoast Research.

Hello. Good morning, Dan. Just one question, and that is, you guys have done a really nice job of kind of stabilizing the comp, but what is it going to take for you to get out of this minus 1 to plus 1 range and do you think FY17 is the year that you can accomplish that?

Good morning, Jeff. Excellent question. It really boils down to three things that we focused on in the call, and then there's a number of things that are supportive of that. But the main one is our ability to get our leaders to lead well in the salons. Where we have good leaders leading well, we're getting terrific results and that's across the board -- that's at the RVP level, the regional director level, the district leader level, and, obviously, at the salon level. So we continue to work on that.

The next thing is making sure that we keep our salons well staffed and we retain our stylists. Our vision is focused on being the place for stylists to have successful and satisfying careers, so everything that we're doing within the leadership development is to help people understand if they create the right environment for stylists, we hang onto our stylists and we're also a place where stylists want to join. And that's really what those leaders that are doing a good job, Jeff, are doing. They're doing that well. It's what our franchisees do so well. Our franchisees create a great environment for their stylists and when they hang onto their stylists, they do very well and they succeed.

And in regards to 2017, I think we're going to find, in 2017, is that as soon as we can get good leaders in place that we know can deliver consistently, those leaders will be accretive to our success. As to whether or not that happens -- we get all of them done in 2017 -- it's still difficult for me to say that. But I think we're focused on the right areas. We've got a organization that's maniacally focused on creating a good environment for stylists. So that's really the key to our success.

Things that help us is great work by our marketing and merchandising departments that put the right kind of support to help drive traffic and then the right products in the stores. And then the final piece to that is the good work that our asset protection folks are doing to make sure that all the money gets in the register.

Are the issues more with the quality of productivity of the stylists or the leaders that oversee the stylists? And then, second part of that question would be it seems that you do have this three tiers of leaders, the top tier consistently doing well, but issues with kind of the middle and the lower tier.

Do you have a template or have you created a template for selecting leaders that would give you, I guess, a higher level of success in identifying the right people and retaining those people as opposed to -- it seems like you keep spinning your wheels in that middle and lower tier?

So, another good question. If you kind of look across what we're doing, we've got a very strong regional VP team. We've got a very strong regional director team. When you get down to the district leader level where we have 1,000 -- when you think about the fact that we just really started training district leaders a year ago on leadership development. They had never had any leadership development.

It's not unusual in a lot of businesses, the best salesperson becomes the sales manager, right, instead of potentially the best manager becoming the manager. Same thing in our salons in the past. The best stylists became the salon manager, the best salon manager became the district leader, and that's where we've really focused all of our attention in the past year on the leadership development is at that district leader level. Expecting district leaders to be really successful without giving them training, it just isn't fair.

That's why we've invested so much time, effort, and money in the development of that group. So your question is spot on. We need to do a good job with that district leader level. I feel really good about our regional vice president and our regional director group.

We need to continue to support and help that district leader level be good and give them the tools that they need to be successful. And some people grasp it quicker than others, as you heard me mention. And we have a lot of new people in those roles and that creates some disruption when we put new people. But I think our field leadership is focused in the exact right direction to make sure that they give those district leaders all the support they need to be successful.

Right. Thank you.

Thank you, Jeff.

Thank you. We'll go on to Jill Nelson with Johnson Rice.

Good morning. You did post some significant expense cuts in the fourth quarter. I think you did mention that the G&A line was not representative ongoing rate. So if you could just talk about as the year as a whole and kind of looking out, what we expect on kind of the total expense rate to be for the Company.

I think the way we ended the year is pretty representative of what our annual run rate is. So $177 million is sort of where we landed this year and I think that's a good way to think about our ongoing G&A.

And I do think that you called out for rent that there was a one-time landlord credit. Was that significant at all in the fourth quarter or was it pretty immaterial overall?

Moderate.

Okay. And then, traffic in the quarter, down over 5%. I think that's the weakest quarterly trend you've posted in over two years. If you could just talk about some of the metrics behind that weakness and areas that you believe you can improve that.

I'll take that one, Jill. Our biggest challenge was in the mall business. That had an out-weighted impact on our overall business. As I said in my comments, we're focused on what we can control and what we can control is to help our leaders be successful and to make sure that we provide all the necessary technical training for our stylists.

I still continue to believe that, even though mall traffic is down, that we can always do better. There's never a time where we can't do better. And we're working with the mall operators to help get more marketing and support from them to continue to draw traffic into the mall. So we're in partnership with them, trying to figure out what we can do to help boost that traffic.

Okay. Just lastly, if you could give us the update on the stylist retention in the quarter, if you saw that improve or decline.

It was pretty consistent with what we've seen. We'll never be satisfied with stylist retention as long as we lose a single stylist, but it wasn't anything significantly different than what we've seen in the past.

All right. Appreciate it. Thank you.

Thank you.

Thank you. And we'll continue on to Steph Wissink with Piper Jaffray.

Thanks. Good morning, everyone. We have two questions. And I apologize if you mentioned this and we missed it, but could you talk a little bit about the overall menu price increases that you're taking across different salon chains? Tell us a little bit about your plans for the balance of this year and into next year, how you're thinking about overall pricing as a contributor to the comp rate.

Sure. So pricing definitely has an impact on us. There's a number of things that have an impact on our revenue. And pricing is certainly one of them. And I'll come back to it in just a second and explain how we think these price increases. So does mix. We have seen a little bit of a mix change to color and we benefit from that as color is a more expensive service, so that's benefited from it. The other thing that we're seeing is our asset protection group is working. And so they are helping to ensure that we get more money that goes into the register. So we've benefited from that.

In terms of pricing, itself, our pricing team looks at a number of different things before they make a decision to change price. And we do it on a store-by-store basis. We don't necessarily look at it -- in fact, we don't look at it on a chain basis. We look at it on a store basis. We look at what our competitors are doing so we know what our competitors are priced at around us. We look at the trend in the salon, so we know if the trend is a positive trend or a negative trend. We look at how well the salon is staffed. We look at the experience of the stylists and then we make a decision as to whether or not to take price. And we may decide that we'll take price on haircuts but not color, or color and not haircuts, or maybe all of the above.

It's a pretty sophisticated model, but it's done on a store-by-store basis and it's constant. So we don't just say we raised price last January and we're done. If we see the ability to take more price without losing traffic, then we'll do it.

Can you talk a little about the responsiveness of your traffic to pricing changes? Do you tend to see fairly immediate response, either traffic starts to decel and you can course correct or is it something that really happens over time and you have to monitor the response of that consumer base to that potential pricing increase?

So we see a little bit of both in terms of reaction to price. We start monitoring it from the minute that we change the price and watch it all the way through to see what kind of impact it has. But, in general, it takes a little bit more time.

What we do with -- when we do change price, we always have a control group of stores where we haven't changed price and we use that to monitor it, because we want to make sure that we don't chase consumers away. We know that this is -- it is an elastic service that we provide. It's not an inelastic service. So that we know that if we take too much price, we can chase people away. So we watch it all the way through. And it's a really difficult question to give an absolute answer to because it really varies by the salon, varies by the experience of the stylists in the salon and their ability to manage it.

But we've learned, over time, that -- what works, what doesn't work, and I think our marketing team is really good at it and I think we're getting better and better at it. I think our results show that, even with traffic down, we were able to do fairly well on the revenue side, comparatively speaking, to some of the toughness we're seeing on traffic right now.

Okay. Final question for us, and you hinted at this in your response around color, but any trends from your trend forecasting team that seem intriguing in terms of either basket value growing up the menu curve from pricing or any other unique cutting trends that might catalyze some incremental traffic?

Color is definitely there. We have seen a shift to more interest in color. We've seen a shift to bright colors. And so we've taken advantage of that. Our technical training team is out training everybody on those colors. We do like the fact that people like to change the color of their hair with these bright colors fairly often. And so that's the trend that we're seeing right now.

We don't see anything going away. There's some stuff around beach, kind of beach-wavy hair. I'm sure if our technical folks are listening, they're laughing at me right now that I'm talking about this. So we do have a really sharp team that stays on top of stuff. We get the information out to our -- either through video or through direct training, to our folks right away. But I would say that color's the biggest one at this point.

Thank you, guys.

Thank you.

Thank you. And I would like to turn the floor back over to Dan Hanrahan for any additional or closing remarks.

Just a quick thank you to everybody for dialing in this morning. Look forward to talking to you again in October. Thank you.

Thank you. And, ladies and gentlemen, that does conclude today's conference. Thank you all again for your participation.