Regis Corp (RGS) 2017 Q1 法說會逐字稿

[This recording begins about 10 minutes into the conference call]

-- simplifying our business, allowing our operators to be more effective and simultaneously providing the best opportunity for our salons to meet and exceed the expectations of our stylists and our guests. I'll now turn the call over to Eric.

Thanks, Dan, and good morning. Dan has done a nice job of recapping our performance in the quarter, and our press release and 10-Q include detailed explanations for our major P&L line times. As a result, I'll limit my comments to financial housekeeping items and liquidity.

On the housekeeping side, first I want to remind you that the valuation allowance in place against most of our deferred tax assets makes it very difficult to compare after-tax results to prior periods.

In the quarter, we booked tax expense of $2.7 million at an effective tax rate of 45.5%. However, $2 million of this expense was noncash and related to tax benefits we claim for goodwill amortization but cannot currently recognize for GAAP purposes.

The noncash tax expense related to this issue will approach $8 million for the full fiscal year and will continue annually in decreasing amounts as long as we have the deferred tax asset valuation allowance in place.

As we have discussed in the past, this noncash charge could fluctuate significantly on a quarterly basis due to how the effective tax rate is determined at interim periods.

And finally, our fourth quarter G&A of $40.3 million is not indicative of our annual run rate. During the quarter, timing and one-time benefits reduced G&A expense by approximately $3.5 million. Therefore, I want to clarify that nothing has changed in our thinking from last quarter, when we referenced a $177 million annual run rate for G&A.

On the liquidity side, our business generated $12.3 million of operating cash flow during the quarter despite the top-line headwinds Dan mentioned earlier. This was largely offset by a $9.6 million use of cash for investing activities; a $1.1 million use for financing activities; and $0.5 million impact from exchange rates on our cash balances. Net-net, our cash balance increased by roughly $1.2 million as compared to the end of last fiscal year, which was in line with our expectations.

On the capital allocation front, we followed our plan and did not repurchase any shares in the first quarter. Let me provide you with a little more clarity on this topic. Due to some timing items, we had planned for the growth in our cash balances to be relatively flat in the first quarter. With the expectation of minimal excess cash generation in the quarter, we were not planning on the repurchase of our shares in the quarter.

Going forward, we'll continue to adhere to our capital allocation policy and we will remain disciplined with the use of our capital. At the end of the first quarter, $60 million remained outstanding under the approved stock repurchase program.

Finally, we finished the quarter with $149 million of cash, $123 million of debt, and no outstanding borrowings under our $200 million revolving credit facility.

In closing, we remain focused on funding investments and managing inflation through disciplined cost management and rigorous review of all spending to ensure we continue to protect our strong balance sheet and maximize our results.

This concludes our financial portion of the call. We would now like to answer any questions you may have. So Lisa, if you could please provide the instructions for the Q&A portion of the call.

Absolutely; thank you, Dan and Eric. (Operator Instructions) Jeff Stein, Northcoast Research.

Good morning, guys. A couple of questions for you, first with regard to franchising. Can you talk about just in terms of what your thinking is in terms of the number of locations that you might look to sell this year?

And also, how many new locations we might expect to be opened due to franchising activity.

Sure, Jeff. Let me start with that and Eric is very involved in our franchise business, so I'll have Eric jump in. We have been opening in the neighborhood of 200 to 230 new franchise locations a year. And that pace is one that we would like to accelerate quite a bit. I can't give you an exact number on that. But those are all really greenfield-type operations.

We haven't been aggressive about selling other opportunities, and one of the ones that we are going to open up to our franchise team is our SmartStyle salons in Wal-Mart. And we believe that when we do that, we will get a lot of interest from both our existing franchisees and potentially new franchisees to partner with us in Wal-Mart and run SmartStyle salons for us. So I can't give you an exact number at that point. That's one of the things that Huron is going to help us with, to model that process. But we do know that our entire franchise team is excited about the Wal-Mart opportunity, so we see that number growing pretty substantially.

Are there any restrictions in your franchise agreement with Wal-Mart that gives them the right of first refusal to turn down a potential franchisee or anything else that might cause an issue to execute that strategy?

Hi, this is Eric. No, there are not. Wal-Mart is a good partner of ours and we'll work with them closely, but there are no restrictions that would limit our ability to bring new franchisees and operate stores, and they're very receptive to what we're doing here.

Jeff, one of the things -- and I'll pile on a little bit -- one of the things that Eric said that is absolutely right is Wal-Mart is a terrific partner. In fact, they named us as supplier of the year this past year. So we work very well with them. And both Wal-Mart and we are excited about the opportunity to take on more new stores as well as move some of the stores that we have struggled with with our operators to get healthy and bring franchisees in to run them.

The 200-plus that I referred to earlier are a good example of the work that we've been doing over the past couple of years to understand how selling salons to franchisees works. All those salons were cash flow-negative salons so we obviously get the benefit of cash flow-negative going off our books. We get franchise fees and then we get royalties.

And the franchisees have done a nice job with those. They get a salon at a really good price that allows them to get a good return on their capital and we see them growing those things 10%, 15%, 20% annually. So it's a win all around.

And it's consistent with our strategy of making sure that we create jobs and we create good opportunity for stylists.

So would it make sense ultimately to make Regis primarily a royalty company, a franchise company, or is that not your intent? Will this just be selectively where you have underperforming locations?

So we're going to start with the -- excellent question. We're going to start with the underperforming locations because there's immediate impact there for us. And quite honestly, it's a good deal for our franchisees, too, because we will sell those to them at a lower price than if we were going to sell a very expensive one.

But that's some of the work that Huron's going to do with us so we're going to be evaluating that model and see how quickly we move to more of a franchise model. But we are definitely -- and I want to be clear about it -- we are definitely going to move to more of a franchise model and we'll evaluate all our options along the way.

Okay, and final question. In terms of your ability to try to elevate some of your field leaders and try to get them into kind of top-quartile performance, have you considered or tried taking some of your successful field leaders, where they've shown consistent results, and moving them to markets that are underperforming? I know there's probably some risk involved in doing that -- potentially you could see some erosion in the locations they leave. But have you at least tested something like that to try to move the needle on these underperforming locations?

Yes. Excellent question, again. One of our very thoughtful Board members asked a very similar question at our last Board meeting. We have done some of it. People work for people. So when we move one of our best-performing field leaders out of a market that they've been able to get healthy and grow, and move them to one that is underperforming, we're pretty convinced -- and we've seen it -- that they will improve the underperforming market.

The challenge that we have on the other side -- and we have to be very careful of -- is that we don't see a decline in that market. Because this is such a people-related business. It's one of the advantages our franchisees have is that our franchisees are local market folks on the ground. They're operating a fewer number of salons than our regional directors would operate. And they've got skin in the game. So they're very effective.

That's why we want to move much more towards that model and in a much more aggressive way than we have in the past.

Got it. Okay; thanks very much.

Thanks, Jeff.

Stephanie Wissink, Piper Jaffray.

Hi; good morning, guys. I'm wondering if you can talk a little bit more about some of the transactional data within your comps, particularly in the value salons. I know you talked a little bit about the combo improvement, but could we talk a little bit about some of the strategies in marketing?

And then separately, with respect to the franchise opportunity, can you just help us appreciate how your franchise economics compare to some of the competitive opportunities out there and where you think you can start to strengthen some of your messaging around the opportunities that you afford some of your partners? Thank you.

Sure. So if I understand the first question, it's just what is it that we're doing to drive results in the salon? Do I have that right?

Yes, particularly related to the service and product combinations.

A number of things. You heard me refer to the good work our marketing team has done around Supercuts and the mobile app and the web. We've also built those tools out for our premium salons in the malls and for the multiple brands that we have.

We built a very sophisticated website underneath Signature Salons. So if somebody is searching for haircut -- and there's a number of different searches that you can do that will get you to Signature Salons, if we have one of those salons in the market. We're quite proud of those sites; our marketing team did a great job. So those all are driving increased traffic.

We're also doing a lot of work around -- if you've heard us talk -- these combo sales, and I think that's what you're referring to in the service and the product combined to get our stylists to sell more of retail when they're in the store. And that's working. We're seeing our stylists execute against that. We're seeing an increase in the combo rate.

And then, we've got promotions planned through the holidays both in-store and on edge of store to attract people in as well as strong email campaigns and search engine-type work that we're doing. So we're doing an awful lot in the marketing arena to help drive increased traffic.

And then we're working with the stylists and with our field leaders, contests, to help drive conversion once they get to the salon.

And then I'll let Eric start on the franchise and add anything that I think might be helpful.

Yes, from a competitive standpoint, Stephanie, if you look at the fees that are paid to start with, the fees are basically the same between different franchise concepts in our business. That applies to royalties and ad fund contributions and franchise fees.

But some of the differences that we offer, we operate stores today so we're able to share learnings, and that goes both ways; we think that's a big advantage.

We sell a lot of product corporately; we're able to leverage our buying power and we sell product to our franchisees on favorable terms.

Another thing we do is we sign the leases for our franchisees and we think that gives us a competitive advantage in the marketplace.

And something that we've rolled out in the last couple of years, just another example, is we actually offer a service where we construct the stores for our franchisees so they can focus on getting ready to run the business, getting a good marketing plan in place, getting staffed up, while we take the build-out of the store. And we do that on favorable terms for our franchises as well.

So we think when franchisees look at us and then look at our competition, we do very well in that environment.

I would add one other thing, too, and I come back a little bit to the marketing and especially to execution of our franchisees and our best operators. Supercuts brand is consistently rated right up near the top of franchise opportunities in Entrepreneur Magazine; in the past ranking we were No. 3 overall. Obviously No. 1, then, in the hair salon business.

And then, as we open up SmartStyles to franchise opportunities, there are 5,000 people a day that walk through a Wal-Mart Supercenter. And Wal-Mart is a great partner, so we've got a great brand there as well.

So we think that we'll be able to compete very favorably for good franchise talent. We think we've got a great franchise base today and we believe there will be interest from them in SmartStyle as well.

Thanks, guys. And one follow-up with respect to your fixed cost structure. You had some nice savings in this quarter and the prior quarter. Can you talk a little bit about some of your strategies there to try to tighten up and build in some leverage potential as we look forward over the next 12 to 18 months?

Sure. We have been very, very aggressive with our fixed cost structure. And I think I mentioned on one of the previous calls that in 2011, our G&A ran at $212 million and you heard Eric today talk about it being in the mid $170 millions. And so that's a pretty substantial reduction, and we've absorbed inflation in that.

But more importantly, we added an asset protection organization. We dramatically beefed up our technical education team, which is really important to stylists and being able to retain stylists and also attract as well as have them successful. And we've built out a human resources capability here.

So when you look at that, we've also -- in that $170-some million, we've also absorbed probably another $25 million-ish in G&A costs.

So we have a real focus on this and it's something that we constantly work on. Our entire organization is compensated on cash flow.

So -- just tell you a funny story. When we put up some signs in our windows to make sure that people knew that we were in the hair salon business around here, at an all-employee meeting I had one of our associates, been around the Company for a few years but hadn't been promoted to manager yet, ask me, in an all-employee meeting, how much did those cost and what impact does that have on our cash flow? So we're really gotten that message across, that we need to be real stewards of cash and drive as much cash as possible.

Thank you, guys. I appreciate the story, Dan. Take care.

Thanks, Stephanie.

Jill Nelson, Johnson Rice & Company.

Good morning. Just trying to gather -- you mentioned your existing franchisees have the opportunity to invest more in your business. Maybe if you could just talk about kind of the average number of salons your franchisees operate, and where do you think that number could go, or what that existing base can expand to.

Yes, I'll get it started. We've added close to 500 franchisees in the last several years, and when you look at the now average number of stores, they average about six stores. But that's a little bit understated, given the number of new owners that we've added.

So we like to see that number get up a little bit higher. When a franchise owner has 10 stores, it's easier for them to manage it. And once they cross into that six, seven, eight stores, it's easier for them to get to 10 and then go on to 15 and 20 and beyond. And that's a good model for them and a really good model for us as well.

Okay. And then, if you could just talk about the expense timing. You talked about $3.5 million cost in first quarter. Kind of where would that offset be? Is it mainly second quarter? Or is it kind of closer to year?

It's a mix between future quarters and the following year as well so there's some timing in there. But it's a mix. The majority would be later in the year.

Okay. And then, just quickly on the mall-based salons, particularly Regis and MasterCuts. While you're seeing a bigger hit on the cost side, is that mainly driven by weaker traffic? And just kind of if you could talk about the mix there. Thank you.

Yes, it is. It is driven by weaker traffic. As I said in my scripted comments, mall traffic has been challenging. We still have the stores since we have to operate them, so we're really focused on what we can control. We have been closing mall stores at an increased pace, and working hard when we do that to save stylists so that we can move stylists from one mall salon into potentially another mall salon, or potentially even into a salon that isn't in the mall.

Because when we do that, we can bring guests along with that stylist and we can help another salon be successful. But it is -- a big challenge for us is traffic right now.

Okay. And then if I could just sneak one last one in -- just on franchises now, you're evaluating to accelerate that business. Maybe if you could about just the past couple of years -- what hurdles did you face that kind of delayed your step to accelerate that growth? And that's it for me.

Yes, good question. So a few things. No. 1, when we started here we said that our focus was going to be on making all of our salons successful. And I think that in a large portion of them, we see real success. I would say three quarters of them were positive cash flow, but we've got about a quarter of them that are not positive cash flow.

And we've seen over that time, the continued success of the franchise business. And the real interest, in 2013, when we started to sell much more aggressively the Supercuts brand, the interest in our brand. In my scripted remarks, I talked about how fast we were growing there.

So as we looked at all those things together, we said, there's a real opportunity to accelerate this. We've sold right around 200 of them. But at that time, when we sold 200 of them, we weren't contemplating potentially selling SmartStyle or potentially selling some of the Supercuts. It was more around -- we have sold some of the Supercuts, but very few, and no SmartStyles.

When we started to look at it that way, we saw a real opportunity to accelerate the business. So it was kind of all those things coming together, Jill, that got us to the point that said, we should now take this business that is very profitable, growing very nicely, and accelerate that growth because that'll be good for Regis as a whole.

Thank you.

Thank you.

And this concludes the Q&A portion of the call. I will now turn the conference back to Dan.

Thanks, Lisa. Thanks, everybody, for joining us. If there's specific questions, I know Mark and Paul will be looking forward to talking to you off line. We'll look forward to talking to you at the next call.

Ladies and gentlemen, this concludes our conference call for today. 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 1-888-203-1112, access code 1755995. Thank you all for your participation, and have a nice day. All parties may now disconnect.