Regis Corp (RGS) 2018 Q1 法說會逐字稿

Ladies and gentleman, thank you for standing by. Welcome to the Regis Corporation Fiscal 2018 First Quarter Earnings Call. My name is Tiffany, and I will be your conference facilitator for today. (Operator Instructions) As a reminder, this call is being recorded for playback and will be available by approximately 12 p.m., Eastern time today.

I will now turn the conference over to Paul Dunn, Vice President of Finance and Investor Relations. Please go ahead.

Thank you, Tiffany. Good morning, everyone and thank you, all for joining us. On the call with me today are Hugh Sawyer, our Chief Executive Officer; Andrew Lacko, our Chief Financial Officer; and Eric Bakken, President of our Franchise segment. Before turning the call over to Hugh, there are few housekeeping items. First, today's earnings release and conference call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements are not guarantees of performance and by their nature, are subject to inherent risks and uncertainties that could cause actual results to differ materially from such forward-looking statements. Please refer to today's release and our recent SEC filings, for more information on these risks and uncertainties.

The company takes no obligation to update or revise any of these forward-looking statements to reflect events or circumstances that may arise after the date of the call.

Second, this morning's conference call must be considered in conjunction with both the 10-K filing and earnings release we issued this morning. In today's call, we will be discussing non-GAAP financial results that exclude the impact of certain business events.

These non-GAAP financial measures are provided to facilitate meaningful year-over-year comparisons that should not be considered superior to, or as a substitute for, and should be read in conjunction with GAAP financial measures for the period.

A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures can be found in this morning's earnings release, which is also available on our website at www.regiscorp.com/investor. With that, I will now turn the call over to Hugh.

Thank you, Paul, and good morning, everyone. Thank you for joining us, and thanks as well for your interest in Regis. My comments today will focus on the operational and strategic aspects of the quarter and then my partner Andrew will provide a recap of our financial results for the quarter.

Let's begin with a high-level overview of our actions. A few days ago, I reached 6 months in my tenure as Chief Executive Officer at Regis. And during this time, we have increased the pace of decision-making and as a result, the cadence of management actions at the company, actions that are intended to enhance shareholder value. I thought it might be helpful to our shareholders if I were to take a moment at the beginning of today's call to catalog some of the programming already completed or underway at the company, including the following items. As you know, we published our strategic plan in the August 2017 10-K, only 4 months into my role as CEO. The sale and subsequent refinancing of substantially all of our mall and U.K. salon operations was completed in October. A major reorganization of our field salon operations, aligning our business according to brands was completed since I began my role here at Regis. We've upgraded approximately 1,900 POS terminals in our salons to enhance the guest and stylist experience. We've improved our analytics and the control of variable labor costs in our salons. We executed preliminary steps necessary to reduce nonessential, nonstrategic G&A as part of our 120-day plan. We deployed tablets into our SmartStyle salons to open lines of communication with our stylists and to support our new digital training programs.

Along the way, there have been numerous upgrades in executive and field management, including a new Chief Human Resources Officer, a new Chief Marketing Officer, a new Chief Financial Officer, a new President of our franchises business. And as you may recall, we appointed an Executive to lead and manage our Walmart relationship.

Additionally, our shareholders should expect further upgrades in our leadership as we continue to build an executive team that is able to fully execute our strategic plan.

During this brief journey, we've made a significant commitment to digital advertising and to the growth of our social media presence. We have also replaced our media agency. Regis just has additionally signed an exclusive agreement with Buxton Company to provide sophisticated customer analytics to improve the precision and effectiveness of our advertising dollars.

During the last 6 months, we have increased our emphasis on improved analysis of revenue management, including tactical price increases. This area of the company now reports to our Chief Financial Officer. We recently partnered with Walmart to introduce a new everyday simple pricing strategy in our SmartStyle salons. This pricing strategy includes a greatly simplified service menu and a new service offering, a $12.97 Express Haircut that is intended to attract the typical Walmart shopper who is also pressed for time.

It's too early to determine the results of the new pricing strategy at Walmart, but we've been pleased with the increased traffic we've seen so far.

We launched our new SmartStyle app and guest downloads and check-ins are increasing as our customer gain comfort with this new capability.

So in summary, your management team has been busy. This represents some but not all of the initiatives underway at Regis as we move forward to build the company that we can all be proud of.

As to the results of the first quarter. This morning, we reported year-over-year growth in our first quarter adjusted EBITDA. These results were driven by same-store sales growth. The closure of unprofitable salons, the continued benefits of the 120-day plan being implemented in May; and the ongoing growth in our franchise segment. We believe these results demonstrate that our turnaround strategy is gaining some traction.

Our first quarter performance is particularly encouraging in light of the extraordinary weather challenges, the complex restructuring of our mall in U.K. salons and the operational initiatives management executed during the quarter.

Key events during the quarter included working through the operational impact of 3 hurricanes that closed a total of 768 salons and negatively impacted EBITDA on the quarter by $1.5 million. These storms also impacted our associates. And as a company, we went the extra mile to mitigate the potential harm to each one of them, including funding their payroll during the period our salons were closed. A significant investment of executive time and effort was dedicated to the successful transaction to sell and then subsequently franchise, substantially all of our North American mall-based salons and our U.K. business that closed in October.

Historically, changes like this at Regis may have distracted the management team. But in this case, they did not, illustrating a more disciplined approach to our business. We undertook the initiatives with a commitment to execute better than we have in the past and I believe the results for the quarter show that we were indeed successful in this endeavor.

We continue to be pleased with the benefits of the 120-day plan. You may recall that the basic design of the plan was focused on the following items: improving the quality of our revenue through price increases in our North American salons, aligning variable salon labor costs and other resources based on forecasted demand, and disinvesting in programs that were not delivering in our financial performance. Particularly programs with a high G&A burden.

Our first quarter results with positive same-store sales, year-over-year increase in gross margin rate and adjusted EBITDA growth versus last year demonstrates that the 120-day plan is, in fact, delivering the benefits we outlined when the program was initially introduced.

Now, while I am encouraged with the results for the quarter, especially in light of the pace and complexity of the activities in the quarter, I certainly, do recognize we have more work to do before we can report that our operational turnaround in our company-owned salons has been fully realized and that we have optimized our growth opportunities in franchise.

Finally, I want to conclude today with a brief strategic update. In the 10-K, we filed in August, I disclosed the key elements of our strategy. These elements are not sequential. They are concurrent activities, supported by underlying programming and past specific action plans at the executive officer level. As a reminder, our strategy to drive improved performance at Regis is as follows: to restructure the portfolio and focus on the core value brands in our company-owned salons and the continued growth of our franchise business.

For additional clarity, I intend for our restructuring initiatives to be substantially complete during the current 2018 fiscal year. Once complete, we should have clear sailing to grow our franchise business and accelerate the operational turnaround of our company-owned salons. Additionally, as promised, we are opening lines of communication and creating operational urgency at the front lines of our business. We're creating alignment in the company at every level around a clear vision and strategy. We are establishing execution as a core competency; unessential cost and then reinvesting for growth; upgrading stylists (inaudible) training and retention; transferring the business and the guest experience with technology; revitalizing in-salon service and the guest experience to build revenue and accelerating the growth of our franchise business.

The full transformation of Regis will take some time, thoughtful investment and on-going improvement and execution and an increased pace of decision-making, particularly in the current retail environment. Winning is a learned behavior.

However, I believe there are reasons to conclude that we have a thoughtful, well-designed roadmap for the road ahead. The 120-day plan is fully executed and working at targeted levels. We restructured our portfolio and grew our franchise business with the sale and refinancing of all our mall-based locations in our U.K. business. And although, I am only 6 months into my tenure, I can see a time, a time in the not-too-distant future when our franchise salon portfolio will be nearly equal in number to our company-owned salon portfolio. If we are able to achieve this goal, it would represent a significant milestone on the company's strategic trajectory.

We have great brands, we have a solid balance sheet, we are blessed with talented stylists, capable field management that are now aligned with our brands and a dedicated team of technical and administrative personnel that support our salons. We have successful and supportive franchise partners. And perhaps most importantly, we know where we want to go and know how to get there. I thank you for your continued support, and I look forward to building a company that we can all be proud of.

Andrew will now provide details on the financial results of the quarter. Andrew?

Thanks Hugh, and good morning, everyone. This morning, I'd like to provide an overview of our results for the first quarter, including updates on several key financial items in liquidity. I'd like to remind you that our first quarter 10-Q and press release, along with our website, all contain more detailed explanations of our financial results and that our comments today should be considered within the context of these and other publicly disclosed documents.

Additionally, Paul will be available to answer any questions after this call. Before getting into the details, I'd like to highlight a few issues that occurred during the quarter that impact year-over-year comparability.

The first involves our strategic restructuring activity. Due to the previously announced sale and subsequent franchising of the mall-based salons in U.K. business, these units are now shown as discontinued operations on the P&L. The financial statements provided in our press release and 10-Q for both current and prior year periods have been recast to reflect the impact of this transaction. However, earlier releases of financial results for prior years would not reflect this change, and my comments both today and going forward will focus on the continuing operations of our remaining company-owned salon and franchise segments. Additionally, as a result of these transactions, we have redefined the reportable segments to be company-owned salons and franchise, with the company-owned salon segment comprised of our SmartStyle, Supercuts and Signature Style concepts.

The second item involves the field reorganization change we announced in August, which aligned the field leadership team by brand. An outcome of this reorganization is that senior district leaders will no longer be in the salons. As a result, the cost will be moved out of cost of goods sold, inside operating expense where they have historically been recorded and into G&A. This change does not impact the overall consolidated results, but does cause a $5.5 million decrease in cost of goods sold inside expense and a corresponding $5.5 million increase to G&A this quarter, when compared to the first quarter of last year.

I point this out, because the prior year results provided in today's press release and 10-Q do not (inaudible). However, to help with your modeling, we have provided a performance (inaudible) with the recast historical financial statements to better assist you with your comparisons.

Third, as Hugh mentioned, like many other companies, our results were adversely impacted by the 3 named hurricanes during the quarter. We estimate first quarter 2018 sales and adjusted EBITDA were reduced by $2.4 million and $1.5 million, respectively, due to the closure for at least 1 day of 768 salons in our portfolio.

In total, we lost 3,418 salon days during the quarter. I am happy to say it though, that although a handful of the salons impacted by the storm remained closed, for the most part, the economic impact of the hurricanes is now substantially behind us.

Lastly, as in quarters past, I'd like 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.

For the first quarter of fiscal 2018, the company recognized income tax expense of $4.8 million, on $9.5 million of adjusted income from continuing operations before taxes. The effective tax rate of 50.6% for the first quarter is different than what would normally be expected, primarily due to the impact of the valuation allowance against the majority of our deferred tax assets.

As management has discussed in the past, this noncash charge or benefit could fluctuate significantly from quarter-to-quarter as a result of how the effective tax rate is determined at interim periods.

Turning now to the results for the first quarter. On a consolidated basis, first quarter revenue decreased $9 million or 2.8% versus the prior year to $310 million. The year-over-year decline in revenue was driven primarily by the closure or refranchising of 372 unprofitable salons and the hurricane activity during the quarter, partially offset by a 40 basis points improvement in same-store sales. The positive sales performance was a result of a 3.5% increase in ticket, partially offset by a 3.1% decrease in year-over-year traffic.

First quarter consolidated adjusted EBITDA of $24 million was $1.2 million or 5.2% favorable to the same period last year. Excluding the $1.5 million unfavorable impact related to hurricane activity, first quarter adjusted EBITDA of $25.4 million was $2.7 million or 11.8% favorable year-over-year. The year-over-year growth was driven by the closure of unprofitable salons, benefits from the 120-day plan initiative and continued focus on the growth of our franchise group. These benefits were partly offset by strategic digital advertising investments we made during the quarter.

Looking at the segments specific performance and starting with our company-owned salons. First quarter revenue decreased $10.6 million or 3.5% versus the prior year to $288.8 million. The closure or refranchising of 372 salons, coupled with the adverse impact of the hurricanes drove a revenue decrease of $11.4 million year-over-year.

However, this decrease is partially offset by positive same-store sale increases of 0.4%, the opening of 21 new locations over the past 12 months and favorable foreign currency impacts.

First quarter company-owned salon segment adjusted EBITDA totaled $33.2 million, and increased $0.2 million versus the same period last year. The year-over-year increase was driven primarily by the closing of unprofitable salons and benefits from the company's 120-day plan initiatives, partly offset by the gross profit volume decline and strategic investments made during the quarter related to a SmartStyle digital advertising campaign.

In the franchise segment, revenue of $21.1 million increased $1.7 million or 8.6% compared to the prior year quarter. Royalties and fees of $13.4 million increased $1.4 million or 11.2% versus the same period last year. Royalties increased 4.5%, driven primarily by positive same-store revenue in the quarter, and increased franchise salons counts.

Initial franchise fees increased $0.9 million or 109%, as the Company opened, or converted, a net 118 franchised locations in the quarter as compared to 50 in the prior year quarter.

The remaining balance of the year-over-year revenue growth came from increases in product sales to franchisees.

First quarter franchisee adjusted EBITDA of $9.8 million improved $1.3 million year-over-year, driven primarily by the revenue increase, partly offset by cost of goods sold on products, sales to franchisees and higher incentive costs paid as part of opening 118 franchised salons in the quarter. Corporate related adjusted EBITDA loss of $19.1 million was worse $0.3 million or 1.4% year-over-year. The drivers of the year-over-year unfavorable increase were related to accruals supporting the company's previously disclosed retention program, higher health insurance claims and professional fees, which were mostly offset by gift card breakage and gains from the sale of company-owned salons to franchisees.

Turning now to the balance sheet. The one item I'd like to point out is the increase in the accounts receivable. This year-over-year increase was driven primarily by the timing of the settlement of a life insurance policy in connection with the recent passing of a former executive and an extra day of credit card receivables, as the current year first quarter ended on a Saturday (inaudible) Friday of last year.

And lastly, on the liquidity front, we are pleased with the cash generated by the business as Net-Net quarter end cash increased during the first quarter by (inaudible) to $176 million. This cash build was driven primarily by cash flow from operations of $10.9 million and favorable FX impact. This increase was partially offset by investing activity of $6.1 million, largely related to CapEx during the quarter and financing activity of $1.5 million, which is primarily related to cost for previously issued equity grants.

Quarter end total debt totaled $123 million, and there were no outstanding borrowings under our $200 million revolving credit facility.

And with that, I'd like to now turn the call over to Tiffany for questions. Go ahead, Tiffany.

(Operator Instructions) We'll go first to Steph Wissink with Jefferies.

Just 2 questions to get started. First on the comp, nice to see a positive comp. I'm wondering if you can talk a little bit about the range across your different salon types. So you're seeing coalescence towards the -- a consistent range as you close some of the underperforming or is there still a wide spread? And maybe you can give us some insight into how the field reorganization by brand? How that incentive model will now lead to kind of each brand performing independently, and hopefully positively?

Yes, Steph. I'll take the first part of that question. As we disclosed in this morning's press release, you can see the service comp by our banner brands, Supercuts was a service comp of up 2.6% versus a 1.3% comp last year. SmartStyle is up 70 basis points versus 40 basis points last year, and Signature Style was a comp decline of 30 basis points versus a comp decline of 20 basis points last year. So that's how we get to a 90 basis point service comp result for the quarter this year. And you can see, that's the dispersion of comp performance that we're seeing in the portfolio. Obviously, as we look to continue (inaudible) portfolio, we would be reducing the lower performing salons in the portfolio. And as a result, you could expect to see, we would see -- hope to see an overall improvement in the comp performance. And hopefully, we'll get to a point where that dispersion will tighten up and we will be able to comp positively across all the brands.

Steph, it's Hugh. As to the strategic alignment of field personnel with brands, that was intentional and they are incented to grow revenues and EBITDA in their individual salon locations. As you may know, Supercuts and SmartStyle and our Signature Style brands do offer different services. And the advertising programs that are underway throughout the company today are intended to differentiate the nature of the brands. So I'm actually very comfortable with the reorganization that we executed earlier this year to align field management around their individual brands and I think as with all human beings, it takes a little time for people to coalesce and to become comfortable with our new assignments. But I really just don't see any barrier to our field personnel executing around their individual brands and differentiated services.

And just a follow up, Hugh, on the investment in (inaudible) digital advertising. Can you talk a little bit about that process? When that went into effect? And then if you've seen any more recent uptrend in the sales line that would justify or support some of the early indications on that advertising investment?

Yes. The advertising and the changes (inaudible) around our service menu and pricing are all designed to capture the customers we have inside of a Walmart box. Rather than the hypothetical customer, we would love to go obtain. You know the reality is that we are in fact inside a Walmart location. So our service menu and our pricing should reflect the nature of the Walmart customer. And in my tenure here since April, we have worked pretty aggressively to reorient the advertising to target the Walmart customer, to simplify the service menu and to offer pricing that addresses their value customer. And also Walmart's national advertising campaign where speed is the new currency. So the express haircut was actually created in collaboration with the Walmart management team. So it just seems commonsensical to me that you would target the customers you have inside that Walmart box. Historically, Steph, some of the services and pricing and approach was designed to -- towards the customer that really wasn't inside that Walmart box. It all went in place in the April, May period. The digital advertising is new to Regis. Social media is new to Regis and I'm a apostle for both. I think digital advertising gets a lot of bang for the investment dollars. And we will not step away from digital advertising here at Regis at least during my tenure.

Final question. Andrew, if I could toss one in on the shifting, just as on a reporting basis, shifting from the senior district leaders out of COGS and side expense into G&A. I think you mentioned you have issued on your website. But can you just give us that, for a reference for the next 3 quarters, what the comparison will be? Dollars to $5.5 million at the quarter, do you have it for the 3 quarterly comparisons coming up?

Yes. I don't have the exact amounts by quarter in front of me, Steph. So I would just encourage you to reach out Paul, and he can walk you through the exact details of what's been posted on the website.

And Steph, it's Hugh again. Just re-underscore Andrew's earlier comment on the comps. Obviously, I'm not done weeding the garden. But I will be in 2018.

(Operator Instructions) We'll go next to Dustin Henderson with Eagle Asset.

Is -- the franchise business hit a 46.4% EBITDA margin, which is good year-over-year. Is this what we should use to estimate going forward?

I think that's a reasonable estimate going forward.

Okay. The CapEx was fairly normal during the quarter given, that you sold all those stores the first day of the next quarter. Is this CapEx, what we should be using going forward too?

I would expect CapEx to be slightly above our historical run rates as we continue to make strategic investments throughout the portfolio.

And that's the point of sales terminal, tablets and stuff like cyber trainings?

Yes, store technology, stylist training, et cetera.

Substantially designed to enhance the guest and stylist experience at the salon level.

Okay. And you've completed the divestiture of the mall business now. So what's the earning power of the franchise business going forward?

I don't -- we don't give guidance. It's Hugh. But I've -- as I've said on prior calls, Dustin, it's like asking me which of my 2 children do I love the most, I love them both. I love the company-owned salons, because they throw up a lot of cash when they run well. But I love franchises, it's hard not to love it and it's capital light and I really just don't see any barrier to growing the franchise business.

With no further questions. I would like to turn the call back to Hugh Sawyer for any additional or closing remarks.

Thanks to all for your continued support of Regis, and we will continue to do our best to earn your loyalty and support. Thank you, everyone.

This concludes today's call. Thank you for your participation. You may now disconnect.