Regis Corp (RGS) 2018 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Regis Corporation Fiscal 2018 Third Quarter Earnings Call. My name is Ryan, and I'll be your conference facilitator 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'll now turn the conference over to Mr. Paul Dunn, Vice President of Finance and Investor Relations. Please go ahead.

Thank you, Ryan. 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; Eric Bakken, President of our Franchise Segment; and Amanda Rusin, our General Counsel.

Before turning the call over to Hugh, there are a few housekeeping items I need to address. 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 undertakes no obligation to update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this call.

Second, this morning's conference call must be considered in conjunction with both the 10-Q 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, but 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 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. Thanks for joining us and thanks as well for your interest in Regis. I am delighted to report to you that it's finally stopped snowing here in Minneapolis. I'm feeling a little better about the world, as we look into the months ahead. My comments today will focus briefly on the status of our ongoing efforts to build a high-performing company, a journey which began last April. Andrew will then provide a recap of our financial results for the quarter.

When I joined Regis just over a year ago, I outlined, what I believe, was an ambitious vision for the company that included the following elements: a strategic transformation of the business with an emphasis on the growth of our Franchise platform; restructuring of our nonperforming cash flow negative company-owned salon portfolio; the operational turnaround of our underperforming company-owned salons by institutionalizing execution as a core competency; the utilization of technology to transform the business; thoughtful investments to support growth through better advertising content, digital advertising and leveraging broader channels of distribution for improved content through new relationships, our digital advertising programs, and social media; efforts to upgrade stylist recruitment, training and retention; the vigorous elimination of nonessential, non-customer-facing costs; and the revitalization of our guest experience in our local salons.

We believe the initiatives we executed during a busy third quarter will help advance our aspiration to build a high-performing business here at Regis. And as we've reported, we completed the operational restructuring of our company-owned salon portfolio by closing 597 nonperforming cash flow negative SmartStyle salons at the end of January. The SmartStyle restructuring was accomplished in what I believe was an exceptional manner by our cross-functional field and corporate teams, and we have preserved our good relationship with Walmart.

We also signed an industry-exclusive multiyear sponsorship with Major League Baseball to support the growth of both company-owned and franchised Supercut salons. With the start of the 2018 baseball season, Supercuts became the official hair salon, the official hairstylists and a proud partner of Major League Baseball. Major League Baseball's opening week kicked off with a Supercuts presence across all MLB channels and leading sports networks including MLB.com, MLB. TV, MLB social platforms, game of the day sponsorships and advertising content on MLB Network and ESPN.

In addition, Supercuts launched a branded ready-to-go feature that captures the best ready-to-go moments in baseball, including first-time rookie hits and player and team matchups. And as many of you are aware, a few weeks ago, we joined our MLB partners, and we're honored they opened the NYSE and to celebrate the start of a new baseball season. With the Supercuts sponsorship, we now have access to MLB's core marketing platforms, including broadcast, digital, mobile and social as well as a group of tickets we hold to the All-Star game, the playoffs, the World Series and other premier events that we intend to use for customer sweepstakes. I believe this will prove to be a terrific long-term relationship for Supercuts, our franchisees; and for Regis, as I've said previously, I really do think it's a home run for the company.

In previous calls, I've been consistent in saying we would utilize technology to transform the business with an objective to improve the experience for our customers and our stylists, to increase efficiencies to lower cost and to provide cutting-edge capabilities to support our franchisees. We have been taking our first steps toward using technology to transform our business and I thought you might be interested in a brief update.

Some of those steps include: Establishing a capital structure that will allow us to make thoughtful investments in technology; recruiting management and board leadership who not only understand the current technology landscape but are plugged into transformative business technology. We were delighted to welcome Virginia Gambale to our Board of Directors during the quarter. Given her background with technology-driven service and consumer-oriented companies, I'm very confident that she will be an immediate contributor to help shape our technology roadmap and vision.

And during the quarter, we took a number of steps to leverage technology to improve our results. For example, in our SmartStyle brand, we launched education playground, our new interactive, digital training platform where training content is delivered to our stylists through tablets in our salons. Or as I have said, internally, it's really cool. The platform was successfully launched in early February and the results so far have been very encouraging. The feedback we're hearing from our stylists and field leadership teams is that they love education playground. Daily updates keep the stylists engaged and its sequential format requires mastery of one level of training before the next training modules are unlocked, which means stylists can learn at their own pace.

Roughly 80% of all eligible stylists are using the training app on a regular basis and frankly, we expect to continue to improve acceptance as we push new content into our digital training platform. We believe highly trained stylists are clearly better equipped to deliver a superb customer experience and are more likely to work for a company that respects their need and desire for continuing education. So education playground is where it's at today at Regis, particularly in our SmartStyle brand.

Last quarter, I also mentioned the upcoming launch of our new social media programming. And during the quarter, as promised, we did deploy elements of an integrated social media platform targeted at 3 key constituents: our customers; our current employees; and new stylists that we're recruiting to support our growth and a better customer experience. For example, we launched a new #MySmartStyle social media campaign, to showcase the artistry and professionalism of our stylists. Since the launch, the campaign has generated over 1 million impressions. And our goal is to continue to build the SmartStyle brand through our social media platforms.

We also launched a new capability to recruit new stylists through digital and social media platforms that they use on a regular basis. The tools we are using leverage strategic algorithms and have resulted, thus far, in a higher volume of applicants, which has allowed for instant interactions between the stylist applicant and Regis, which has significantly reduced applicant turnaround time. It's still early, but we're encouraged by the results we're seeing and we are going to continue to use social media for recruiting.

Third quarter also saw the launch of an e-commerce initiative to sell our DesignLine brand of hair products in both North America and in International markets through Amazon and eBay. While we are in the early days of this initiative, we are encouraged by the results that support our hypothesis that online product sales of DesignLine will supplement existing in-salon sales and raise overall brand awareness. And I finally keep the promise I made to my wife to begin to sell DesignLine on Amazon.

And in our SmartStyle and Supercuts brands, we have deployed over 140 digital pricing and wait time boards, designed to improve the customer experience and enable us to adjust pricing in our salons on nearly a real-time basis. These digital boards also establish a more modern look in our salons, and we expect to continue the deployment as we gather additional performance data.

And of course, transforming our technology wasn't our only area of focus during the busy quarter. I'm pleased to report that Andrew Lacko and our finance team solidified our capital structure by securing a new 5-year unsecured revolving line of credit that runs to March of 2023. Our initial update to our shareholders reported that the new credit facility was closed at $260 million. But since that time, another bank joined the syndicate and the committed line now stands at $295 million. Andrew and the team also retired our higher yield notes, which will improve cash flow by decreasing interest expense. Andrew is going to give you more information on these changes during his comments.

As promised, we also continue to make progress on our commitment to remove nonproductive G&A cost. Although it may not be readily apparent by comparing current year cost to prior year cost, Andrew is going to give you some insight on that during his report.

My last update today is on our franchise business. As you know, we have been focused on growing this segment of our company under Eric Bakken's leadership where it supports our transformational strategy and improves shareholder value. In order to provide a better understanding of the progress underway in our franchise business, I'll separate my comments between The Beautiful Group and our core franchise business.

You will remember that we sold our underperforming mall locations and U.K. business to The Beautiful Group in October of last year. Thus far, The Beautiful Group is not yet performing to the levels we had hoped when we sold the salons to them. But, as you know, it takes time and investment to improve operational performance, particularly in the business that is substantially mall-based. We recognize that this portfolio has historically been challenged and it has historically been an underperforming business and that TBG, The Beautiful Group, must navigate a number of headwinds that are faced by other retailers in a mall-based environment. Nevertheless, despite the challenges they face, we continue to believe performance will improve due to their intense focus and a number of efforts underway by The Beautiful Group management team.

In the meantime, we're taking prudent steps to support The Beautiful Group team because we believe it is in the best interest of our shareholders to do so. Our primary objective continues to remove Regis from the ongoing lease exposure associated with The Beautiful Group portfolio of salons. Each time The Beautiful Group closes a salon or removes a lease, we are removed from any future lease obligation. By the end of fiscal year of 2018, we expect that roughly 40% of the mall-based lease obligation we had, at the time of the transaction in October of 2017, will be removed. And by the second anniversary of the transaction in October of 2019, approximately 67% of those lease obligations will have been retired or transferred.

Given the scale of The Beautiful Group and the terms of the purchase agreement we entered to divest of this business, particularly the terms related to product sales, The Beautiful Group's results are distorting the true performance of our franchise segment. Therefore, we took steps this quarter to clarify the impact of The Beautiful Group product sales in this morning's press release and our Form 10-Q reporting, so that the underlying strength of our franchise business will be clear to our shareholders.

In our franchise business, Eric Bakken and his team continue to take advantage of opportunities presented to us to convert company-owned salons to the franchise model, and to grow our franchise platform, organically. In the past 12 months, we have added 469 salons to our franchise portfolio, of which, 376 salons were converted from our company-owned portfolio and 93 were organic openings. We saw royalties and fees grow roughly 20% and saw a segment EBITDA growth of $1.7 million or 19%, both versus the third quarter of last year.

We are also considering potential options to further expand our franchise concept within our Supercuts portfolio of approximately 900 company-owned salons where, we believe, it may support our strategy and improve shareholder value. As I said previously, I do believe in the value of high-performing company-owned salons. For example, as you know, we've made a number of decisions to improve the performance of our company-owned SmartStyle portfolio, which we operate in Walmart.

As to Supercuts, if we were to find highly capable and interested buyers, and the purchase terms made sense for our shareholders, we would consider converting a different -- additional elements of our Supercuts company-owned salon portfolio to our franchise model to facilitate our transformational strategy. We believe that by continuing to rebalance the Supercuts portfolio, we may have an opportunity to further derisk the business, reduce our future capital requirements and organically grow the Supercuts business, creating additional contributions to our Supercuts add fund and thereby, allowing us to maximize the opportunity we have created with our sponsorship of Major League Baseball.

However, as we consider potential opportunities to add to our Supercuts franchise platform, we will be thoughtful and make certain any proposed transaction supports our strategy and enhances shareholder value.

As to the results of the third quarter, this morning we posted -- we reported positive same-store sales comps and year-over-year growth in adjusted EBITDA. I believe this marks the fourth consecutive quarter of year-over-year EBITDA growth, and 3 out of 4 quarters with positive same-store sales comps. These results were achieved despite the extensive challenges and extraordinary complexity of the transformational activities we've also undertaken. And while I am encouraged with our quarter and year-to-date results, especially in light of the pace and complexity of the activity since last April, all of us here at Regis recognize that we have much more work to do before we can report to you that an operational turnaround of our company-owned salons has been fully realized, and that we have optimized our opportunities for growth in our Franchise segment.

In closing, I want to thank our associates in the U.S. and Canada, and our franchise partners for the efforts that have been made to accelerate the strategic transformation and operational turnaround of our company during my first year as Chief Executive Officer. And of course, all of us at Regis are also grateful for the support of our shareholders as we continue our journey to higher performance.

My partner Andrew is now going to provide the details of the financial results of the quarter. Andrew?

Thanks, Hugh, and good morning, everyone. As Hugh mentioned in his opening remarks, not only did we accomplished a number of key initiatives in support of our strategic transformation at Regis during the quarter; at the same time, we continue to stabilize and improve the financial performance and trajectory of the business. On this morning's call, I'd like to provide you with some additional color on both the third quarter and year-to-date financial results, along with the balance sheet and liquidity update that highlights the progress we have made in enhancing the company's overall capital structure and flexibility.

Turning to the results, on a consolidated basis, third quarter revenue totaled $301 million, a $13 million or a 4% year-over-year decrease. The revenue decline was driven primarily by the closure of 597 nonperforming SmartStyle salons and the conversion of 376 company-owned salons to franchise locations over the past 12 months. This was partially offset by revenue growth in our franchise segment and positive same-store comps of 1.6%. I'd like to point out that our reported revenue includes approximately $2.1 million of deeply discounted closeout product sales as part of the closure of the 597 nonperforming SmartStyle salons. Excluding this onetime sales benefit, adjusted sales were $299 million and related same-store sales comps were 0.9%.

Additionally, we estimate that the shift of the Easter holiday sales traffic into the third quarter this year versus the fourth quarter last year benefited third quarter same-store sales comps by approximately 90 basis points.

Third quarter adjusted EBITDA of $20.8 million was $3 million or 16% favorable year-over-year. And third quarter adjusted EBITDA as a percent of adjusted sales, or adjusted EBITDA margin, increased 130 basis points year-over-year to 7%. The improvement in adjusted EBITDA was driven primarily by our operational initiatives, which delivered between $8 million to $10 million of benefit during the quarter. We also saw a favorability from the closure of sales -- closure or sale of salons to franchisees, profitable growth in our franchise segment and positive same-store sales performance.

These benefits were partly offset by minimum wage inflation, healthcare cost increases that were substantially in our stylist community, a significant year-over-year increase in the company's short-term incentive compensation accruals based on stronger financial performance, strategic investments made in digital advertising during the quarter in support of our SmartStyle brand, and the launch of our MLB partnership.

It's also important to note that, as we end the year, we'll begin to lap the benefits realized from the early transformation and G&A cost reduction work that was -- that we started during the second half of last year. On a year-to-date basis, consolidated adjusted EBITDA of $63 million was $5 million or 8.8% favorable year-over-year. And year-to-date, adjusted EBITDA margin increased 80 basis points to 6.9%.

Year-to-date net income from continuing operations of $54.9 million was a $60 million increase year-over-year and includes the onetime noncash benefit of the federal tax reform legislation, passed earlier this year.

Turning now to segment-specific performance and starting with our company-owned salons. Third quarter adjusted revenue totaled $270 million, a $25 million or 8.3% decline versus the prior year. The year-over-year decline in revenue is driven primarily by a decrease of approximately 1,100 salons, which can be bucketed into 3 primary categories.

First, as we have previously disclosed, we closed 597 nonperforming SmartStyle salons as part of our portfolio restructuring efforts during the quarter; second, we sold our vendition to 376 company-owned salons to franchisees over the past 12 months; and third, we closed approximately 140 unprofitable company-owned salons over that same 12-month period. Partially offsetting the impact of the salon closures was a 90 basis point improvement in same-store sales comps, favorable foreign currency impacts and the opening of 4 new locations over the past 12 months.

Third quarter company-owned salon adjusted EBITDA totaled $28.7 million, a $1 million increase year-over-year, and adjusted EBITDA margin increased 120 basis points to 10.6%. The adjusted EBITDA increase was driven primarily by management's operational initiatives; the closure of roughly 740 unprofitable salons, which include the 597 SmartStyle salons; and the positive same-store sales performance. This was partly offset by minimum wage inflation; health care cost increases, primarily, in our stylist community; strategic investments made during the quarter, related to our SmartStyle and Supercuts marketing investments; and lapping a favorable self-insurance reserve adjustment recorded last year.

On a year-to-date basis, company-owned adjusted EBITDA of $88.5 million was approximately $1 million or 1% favorable to the same period last year. Year-to-date, adjusted EBITDA margin increased 80 basis points to 10.6%. In the franchise segment, total revenue of $28.9 million increased $9.8 million or 51%, year-over-year. Royalties and fees of $14 million increased $2.4 million or 20.2% versus the same period last year. Royalties increased 11%, driven primarily by positive same-store sales revenue growth in the quarter and increased franchise salon counts. Additional franchise fees increased $1.4 million or 199%, as the company opened or converted a net 144 franchise locations in the quarter as compared to 46 in the prior year quarter.

Product sales to franchisees were $14.9 million, an increase of $7.4 million or 99%. Of this increase, $6.5 million was related to product sales to The Beautiful Group. This was meaningful because these product sales are currently at lower margin rates than our normal franchise business. And as Hugh briefly mentioned earlier, these lower rates are consistent with the sales agreement between Regis and The Beautiful Group and should rise to normal franchise rates over time.

Third quarter franchise adjusted EBITDA of $10.3 million improved $1.7 million or 19.4% year-over-year, driven primarily by the revenue increase, partly offset by cost of goods sold on product sales to franchisees, higher warehouse expenses related to increased product sales volumes and higher incentive cost paid as part of opening 144 new franchise salons in the quarter. The third quarter franchise EBITDA margin of 35.5% was negatively impacted by roughly 960 basis points due to the low margin rate nature of the product sales to The Beautiful Group. Removing the dilutive impact of these sales, EBITDA margin rates in the franchise segment improved approximately 20 basis points, year-over-year.

On a year-to-date basis, franchise adjusted EBITDA of $29.9 million was approximately $4.6 million or 17.9% favorable year-over-year. The resulting franchise EBITDA margin rate of 38% was negatively impacted by roughly 600 basis points due to the low margin rate nature of the product sales to The Beautiful Group.

Turning now to corporate unallocated expenses, third quarter adjusted EBITDA loss of $18.2 million was $200,000 or 1.1% favorable year-over-year, driven primary by the gains on sales of company-owned salons to franchisees, partially offset by an increase in the company's year-over-year short-term incentive compensation expense. During the quarter, we continued to make progress on our commitment to remove nonproductive cost, although it may not be readily apparent in the face of our reported results, given 2 key items that make it hard to compare adjusted G&A year-over-year.

The first of these items is the realignment of our field leadership team. In last year's numbers, the expenses associated with these leaders were in the cost of goods sold and site operating line items. This year, our field leader costs earned G&A and while there is no impact to our overall P&L, this change increased G&A year-over-year by approximately $8.5 million in the quarter.

The second item is related to the short-term incentive compensation expense. Due to underperformance last year, the company recorded a year-to-date reversal that created a onetime favorable item. This year, based on our performance to date, we are accruing a bonus expense to reward our high-performing associates for their hard work in the transformation that has taken place to-date. We believe in paying for performance at Regis and in this competitive market for talent, it is important for us to be able to pay for outstanding performance. As a result, the net year-over-year impact of the onetime favorable item last year, and this year's short-term incentive accrual was a $4.2 million headwind in the quarter.

Taking into account these 2 items and normalizing last year's total adjusted G&A of $35.5 million by approximately $12.7 million results in a pro forma 3Q '17 G&A in the range of $48.2 million, which, we feel, is a more apples-to-apples comparison. Comparing that to this year's third quarter adjusted G&A of $44.4 million, means that we have reduced total G&A by approximately $3.8 million or 7.9% during the quarter versus what we should have otherwise been expecting.

Turning now to the balance sheet, we executed on several key transactions during the quarter that has helped strengthen our overall liquidity position, while providing optimal balance sheet flexibility for the company's continued strategic transformation work. First, in late March, the company closed on a new unsecured $260 million 5-year revolving credit facility that expires in March of 2023. The new revolver replaces the company's previous $200 million unsecured 5-year credit facility that was set to expire this June. Subsequent to closing the facility in late March, we exercised a portion of the accordion feature of the credit facility to welcome an additional bank into the syndicate, thereby raising the overall capacity of the unsecured credit facility available to Regis to $295 million.

Concurrent with this credit facility closing, the company also redeemed its outstanding 5.5% senior term notes that were due in December of 2019. The redemption was funded with $90 million of lower cost borrowings from the new credit facility and $34 million of cash. And lastly, during the third quarter, the company repurchased $585,000 or roughly 1.2% of its common shares for a total of $9.6 million. As a reminder, at the end of third quarter, we have approximately $50 million of share repurchase capacity remaining under our existing board-approved share repurchase program.

So turning to the quarter-end balance sheet. We had $90 million of outstanding borrowings under the new credit facility, and we ended the quarter with a cash balance of $105 million. The quarter-over-quarter decrease in cash is driven primarily by $34 million we used to fund the retirement of our senior term notes, $11 million for CapEx in the [light boxing] of the 597 nonperforming SmartStyle salons we exited; and $9.6 million used to repurchase shares during the quarter.

Before I turn the call back to Ryan for questions, let me remind you of a couple of items that impacted year-over-year comparability of the results we just reported. First, due to the sale in subsequent franchise in substantially all of our mall-based salons and U.K. businesses back in October, these operations are now shown as discontinued operations in the P&L. The financial statements provided in our press release and 10-Q for both current and prior periods have been recast to reflect the discontinued operations. However, prior year press releases and disclosures would not reflect this change and are not comparable to our current operations.

The second item involves the field reorganization's change that I described earlier, which created an $8.5 million decrease in cost of goods sold and site expense, with the corresponding $8.5 million increase in G&A when compared to the third quarter of last year. I point this out because the prior year results provided in today's press release and 10-Q do not reflect this reclassification. However, to assist you with your financial modeling, we have provided a pro forma P&L on our website with recast financial statements to help you with your comparisons.

And with that, I'd like to thank you for your continued support as we make progress in our strategic transformation here at Regis.

And I'd like to now turn the call back to Ryan for questions. Go ahead, Ryan.

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

So two questions: the first, I wanted to unpack the comp rate a little, if we could. I know there were some moving parts in the quarter with Easter and some accelerated product sales related to those closures and transfers. But could you just talk a little bit about how you see the progression of your comp? And within the quarter and over the course of the next few months, should we start to see the residual base of stores delivering a slightly improved rate of comp, kind of above that flattish range? Or are you feeling like this is kind of the level we should use to project out in the model, kind of a flattish comp over the course of the year?

Yes, Steph, this is Andrew. As you pointed out, there were a number of moving pieces in the quarter. Specifically, the increased product sales as a result of the SmartStyle closures that we -- the 597 and the Easter shift, so on a net-net basis, we feel that the quarter was roughly a flat comp on a consolidated basis. Certainly, we're going to have the Easter headwinds as we look into the fourth quarter. But we do think that we're starting to see some benefit from investments that we're making around strategic digital investments, the MLB relationship and some of the overall productivity initiatives that we're -- we are -- have made over the past 9 months.

Okay, that's very helpful. And then Hugh, you rattled off a number of different technology initiatives, Andrew just mentioned digital. But can you talk to us a little bit about how we should see the progression of those benefits? Particularly related to some of the site-level technology investments you're making, how should we could track and monitor those? How would you suggest we look for the improvements over the course of the next several quarters?

Thanks, Steph, for the question and thanks as well for your thoughtful comments as we started our discussion. I think -- when I think about the opportunity for the technology transformation at Regis, we're still in very early days. And we have initiated a number of, what I view as, straightforward and largely customer and employee-focused initiatives that are designed to attract and retain stylists, particularly with the digital education platform, which will result in, we believe, a better customer experience. Better-trained stylists typically do a better job in cutting hair. And so one of the initial investments that we targeted was to bring our training capabilities into the 21st century, as many service industries have already done -- particularly the airlines and hospitality industries -- so that our stylists can continue their education long after they join Regis.

The education playground platform is robust, Steph, and has well over 200 training videos on the site already, which were produced by Jamie Suarez, who leads our creative team here in Minneapolis and we've been really pleased with the results. So initially, focused on employee training to deliver a better guest experience, focused on using social media to recruit new stylists as we are all engaged in a war for talent in the service industries throughout North America. We want to make certain that our recruiting capabilities are best-in-class. And Jacob Kramer, who joined our company earlier this year -- Shawn Moren brought him in -- Jacob and Shawn are doing great work in upgrading our recruiting capabilities through the utilization of technology.

And then finally, making certain that we leverage the multiple opportunities to push content through the MLB sponsorship and to take digital advertising to the next level. Regis would never have been able to create the platforms that MLB has created. So the way I think about it, Steph, is we're essentially riding on their train. And by improving our content, we can push that content through their multiple channels of distribution.

So in summary, leveraging social media to recruit great employees; once they are here, using digital apps to better train those employees in the local salons; and raising awareness of our Supercuts brand by leveraging the multiple channels of distribution for content with Supercuts.

It's still early days on the revenue and pricing boards that we deployed. As you know, we have a relatively large fleet of salons, but we are encouraged by the results we're seeing; and Andrew Lacko and John Oldenkamp and our IT group are leading that project on behalf of the company. And if the results hold, we're going to continue to deploy them with a target toward our SmartStyle portfolio and our Supercuts brand, to get them out into the field. So we're actually pretty excited by the things we're doing in technology. And all of that is an appetizer for the main event which will come after we recruit a new Chief Technology Officer, and that search is underway. And as we work with Virginia on the visioning of the future state of technology at Regis, and we -- as you know, I've said for some time now that I think, technology is -- can be a transformative capability. And a capability that can differentiate our business in the years to come and to provide services to our company-owned and franchised salons that will enable us to generate growth in both traffic and a better guest experience and in rising revenues and income.

So I'm -- we're still in the very early stages of that journey, and we're doing some things that we think are commonsensical. But the main event still to come, after we retain the Chief Technology Officer and work with Virginia on visioning. And of course, we've got -- Andrew and the team have done a great job in getting the credit facility in place so that we have the bandwidth to do what we choose to do to invest in technology that will generate an economic return for our shareholders.

And then, Andrew, just one point of clarification. I think you mentioned that you escrowed a pool of dollars for bonuses. Can you just talk a little bit about that? That seems distinct from what we've seen in the past years, just a performance-based pool of dollars. And certainly signals a clarity around the importance of human capital on the field leaders to the models. Maybe just give us a sense of kind of how that process went about?

And then Hugh, would it be fair to start looking at kind of the cost of acquisition for your stylists and your customers and maybe a retention rate over the course of the next few years as measures of productivity in your business?

Yes, Steph, it's Andrew. The bonus accrual or escrow as you called it, is standard practice. I would actually say, think of it in 2 components that are impacting the year-over-year comparability. First, last year was actually more of the anomaly in that due to the poor performance or lack of performance during the year, relative to expectations, there was a very small amount of short-term incentive compensation that was paid out to the team. As a result, the bonus expense line last year was abnormally low, I would call -- or I would say.

Then fast forward to this year, based on the great work the team has done in the trajectory that we are on, the short-term incentive compensation expectations are probably a little higher than what we had initially planned. As a result, the accruals are probably a little higher than what we would have historically accrued to, so when you combine those two, that drives the year-over-year $4.2-ish million of headwinds that I talked about in my script.

But I think -- for anyone that's interested in the details of our comp programs, it's -- Steph, as you know it's in the proxy. And management's worked closely with the company's comp committee to ensure that we have programs that are driven by performance, rather than simply retention. And we have MBOs in place and action plans at a granular level to drive improved execution. And this is an accountability-oriented culture today, and we tend to attract people who like to be a part of high-performing businesses and the comp plans are designed to drive shareholder value.

So all we're doing is accruing in the normal course, consistent with the programming that's in place and the comp plans that have been designed and approved by the comp committee in collaboration with management. And we'll continue to tweak those when we -- in collaboration with the comp committee, to drive ever higher levels of performance when the comp committee, in its discretion, thinks there is an appropriate need to do so.

As to measuring the investment and return on recruitment and of stylists and retention of stylists, you're -- Steph, you're right. And it's actually, I think, it's getting cheaper. I know that's maybe an outrageous statement, but you've heard me say before, Steph, that one of the things I'm most concerned about as a -- not specifically at Regis, but across the service industries, is the ability to attract employees in a virtually a 0 unemployment environment. And our challenge is to find young men and women or more experienced stylists who want to be a part of our team and make their careers at Regis.

And so we are committed to making certain that we leverage technology to enhance our recruiting capabilities, and to -- so that we are the company of choice for folks that hold a license in this profession. And the technology has actually been an enabler and has made recruiting, I think, less expensive than it had been historically.

Back in the old days, you put somebody in a car and send them to a beauty school and they'd stand in a beauty school and try to recruit young stylists coming out of the beauty school, but that model's kind of outdated. And young people today and -- even us, other folks who have been around since the '60s and '70s, we're all living off these apps. And so I think, the acquisition cost of stylists will likely go down. What we need to make sure that we do is to measure the training cost and retention cost in an accurate way.

And so as -- you're right, Steph, as we blend this all together, we are going to be disciplined and look very carefully about the investments we're making in education to ensure that we're getting the expected return on retention and improved local salon performance. So the answer to your question, that's a long yes, Steph, but the answer is yes.

We will go next to [Rory Hilt] with SR Capital LLC.

Guys -- so there's new disclosure in the 10-Q regarding The Beautiful Group transaction and it's -- at the time of the transaction, I think, in October, Eric had said that Beautiful Group is well capitalized and well suited to invest in the assets that they are taking over. It looks like we're kind of 2 quarters in and they have come back to you to renegotiate some parameters of the transaction. Am I reading this correctly that you've extended them like $20 million of additional sort of working capital and other financing?

Yes, that's correct, we are in discussions. There's nothing finalized.

Do you expect those amounts to grow in future quarters?

We don't have any expectation that the amounts will grow, and -- but I think we're doing what we think is in the best interest of the shareholders. And I wouldn't necessarily suggest that, that doesn't mean that The Beautiful Group is somehow unable to invest. They're -- and Eric's sitting here -- but they are making, I think, Eric, thoughtful investments in the future state of the business, particularly in technology and staffing and -- but you can speak to that. But all we're really doing is helping them build a bridge over the troubled waters that exist inside of mall-based retail. Our support buys them a little cash bandwidth, extends the runway so that they can deploy their precious capital to the future state rather than the -- to us and the current state. And we think that's in the best interest of the shareholders.

And Eric, you can add to that.

I think that's well-put. They are making investments in every aspect of the business from human capital to technology and really trying to enhance execution in the salons and make improvements. To date, that hasn't occurred but they are focused on it and seemingly doing the right things.

If they had to really -- Eric, they had to build a executive team really from the ground up, didn't they?

They did.

And this was not a high-performing business at the time they took it over. But where -- I think, as a shareholder, where this might be misinterpreted is to assume that they're not investing in the future of the business. They are making prudent investments in the future state. We're just providing some financial support in a way that we think where we can be helpful and where we think it's in the best interest of our company and the shareholders.

Okay. So just as we think about the future, so the amounts could potentially grow, what kind of appetite do you think The Beautiful Group has? I mean, the business was sort of EBITDA negative when they took it over. It sounds like they are investing further -- I mean, if this doesn't turn around, what are the potential lease liabilities that could come back to Regis shareholders?

Well, first, let me just correct you. I don't think we said that they could potentially grow. We said the outcome was uncertain. We don't yet know. We think we've taken the appropriate steps for here and today, but we've never -- I didn't suggest in my commentary that the amounts would grow.

As to future lease liabilities, I think that was all disclosed. I think it was. I don't recall the extent of the disclosure at the time of the transaction. But we have disclosed that the lease liabilities come down on a monthly basis. And we're comfortable with where we are today, and we think this -- we continue to believe that we'll get a good outcome.

We do have -- Eric, we do have certain remedies under the terms and conditions of the original transaction, which you can remind him of.

Yes, we do. We do have built-in remedies to take back stores if that's what we would elect to do. There's a guarantee in place that provides some measure of protection and other typical remedies as well.

And I think, in any turn around we just -- all of us need to -- I would suggest respectfully we need to remember there's only 6 months in. It's not as if they've been at this for a few years, and it takes a little time for any turnaround to stabilize and gain a little traction. And we are monitoring it very closely.

We're in constant contact with them, and we're taking steps to support them, wherever we think it makes sense to do so, right, Eric?

That's absolutely right. We're traveling out to see them this week.

Yes. So it's -- we'll play it by ear, see how it goes and if it doesn't go in a direction that we're comfortable with, we'll act to protect our shareholders and the company.

And we'll go next to Dusty Henderson with Eagle Asset.

Was the previous 5.5% bond holding Regis back in some way?

Was the previous 5.5% bond holding us back?

You guys called it -- yes, you called it over a year early to put -- and then put in the revolving credit, right? The $295 million I think I heard?

Yes, it was just an opportunity to exercise some rate arbitrage. We ran the math, and it made financial sense for us to pay the premium and redeem the senior term note and fund a portion of it with the lower rate revolver and used in cash. But it wasn't restricting us and it wasn't holding us back from an optionality perspective.

It served a useful purpose for the time it was in place. And -- but with the new credit facility, we didn't need it anymore. And we saved some money by calling the note.

And the new rated LIBOR plus 1.25% to 1.85%, is that right?

Right. Depends on where we are from a metric perspective, but it's in the range of...

The more leverage that's on it, the more expensive it is, I'm guessing?

Right.

Okay. Regarding the $11 million of CapEx, was that all technology inside the salons?

No. There was a portion of technology in the salons, and then there was a portion as we start to do some refurbishment activity and just general maintenance CapEx.

Okay, so we're refurbishing some of the company-owned salons?

We are looking at doing that, yes.

Where we think it makes sense. And particularly with inside of Walmart, what -- as you probably -- if you're following Walmart at all or if you have, they are doing a lot of work to remodel and refurbish their own fleet of stores. And as they remodel and refurbish, we're looking at opportunities to do the same because we think it'll help our business and drive traffic. And we don't want some ugly salon sitting in the middle of a modern looking Walmart. So where we have ugly, we go in and remodel it, and make it look beautiful just like the new Walmart store. We're not going to put lipstick on the pig.

I got you. So what -- do we expect CapEx to slow down this year or next? This fiscal year or next? I guess we have one quarter left.

When you say slow down, relative to what?

Relative to year-over-year or quarter-over-quarter.

I would say that last year, as we've talked about on previous calls, was probably an abnormally low rate of CapEx spend. We've discussed that on a steady-state basis, one can expect versus the past several years a slight uptick in CapEx as we invest in technology, as we invest and continue store refurbishment and general other maintenance CapEx. So I wouldn't expect it to slow down. If anything, as Hugh had mentioned earlier in the discussion, as we launch into our technological transformation, there is going to be a need for CapEx to support that as well. We don't know what that number is, because we need to have the new IT leader in place to help us establish the roadmap. Once we get more transparency as to what that potential CapEx spend could be, we'll be in a better spot to give an idea of how much it's going to cost.

But we don't think -- I mean, there's nothing odd occurring here. I mean the investments in salons are blocking and tackling, remodels and refurbs, which is just common sense that you don't want to take your family to a salon that looks like it was built in the 1970s. So we're making investments where it makes sense to do so, particularly in our flagship brands.

And on the technology side, we want to do it because, we believe it will create shareholder value, and it's transformative as it relates to the guest and stylist experience. So with -- and Andrew is right, we just haven't done enough work yet to ring-fence the dollars that will be required, but we're working on it. And we're certain that the investments we make will be well considered and are designed to improve the performance of the company.

Yes, we run the math on every CapEx dollar that is spent; and while the returns might not be immediate, we won't invest CapEx unless there is a financial return or a very strong strategic component to invest the dollars.

Even at lower levels of CapEx.

Right.

Andrew and I approve it all.

Okay, great. And then the franchise fees increased $1.4 million, but what was that -- what was the actual number of franchise fees? And the actual number for royalties? Broken out? I see that the combined number in the Q and in the press release but have you ever broken it out?

We have not provided that level of disclosure.

Good. Is there a put call provision with the agreement with The Beautiful Group?

There is not.

Okay. And then, thinking about the 900 Supercuts that were referenced, that were just called out, possibly to be franchised, is there a big institutional purchaser that has appetite for those domestic stores?

I'll let Eric take that one, he's been leading that effort.

Yes, I mean, it's -- we think that's the best brand in the industry, and there is a lot of interest from a lot of folks, from existing franchisees who are very successful today; to new operators that have had success in business and are well capitalized; to more multiunit type of operators that run big businesses, big franchise businesses and are looking to diversify. So we've had interest from all of those folks in Supercuts.

But Eric and I are -- Eric's very careful, and I am too, about who we choose to do business with. And the cost of the quality of the brand and the quality of these salons, we will -- we are in the luxurious position of being able to pick and choose who we want to do business with and we're in no rush and we're being thoughtful and careful and -- to make sure that we build a great business.

And remember that we're making tremendous progress in franchise under Eric's leadership and he hasn't been at it that long. So he only became President of Franchise on a full-time basis a few months ago. So you look at these results that's -- and I typically am encouraged by franchise because I know we're just getting started. There will be a lot of organic growth.

Yes, I agree. The results in that segment are terrific.

Yes, they really are.

If you keep growing the franchise base, that'll lower the parent company obligation for the MLB advertising, correct? There's like a big pool of advertising funds somewhere that the franchisees are contributing?

Yes, that's true. So we -- the way Supercuts is structured, company-owned stores contribute at the same level as franchise locations. That's a 5% ad fund. So each store contributes the same amount. So you're right, that will be funded more by franchise locations as we go forward to the extent that we add additional franchised units in Supercuts.

But it's also true to say, Eric, isn't it, that as you add organic salons to the mix that the overall size of the ad fund increases?

Absolutely. Yes. As we grow the existing business and add additional organic locations, that will increase the size of the ad fund, yes.

And that concludes today's question-and-answer session. I'd like to turn the conference back over to Mr. Hugh Sawyer for any additional or closing remarks.

Well, thanks so much everyone for the great questions and for your interest and support. And we look forward to talking to you again at the end of the year. Have a great day.

And that does conclude today's conference. Thank you for your participation, you may now disconnect.