enterprise

Edited Transcript of RGS earnings conference call or presentation 30-Apr-19 2:00pm GMT – Yahoo Finance


EDINA May 1, 2019 (Thomson StreetEvents) — Edited Transcript of Regis Corp earnings conference call or presentation Tuesday, April 30, 2019 at 2:00:00pm GMT

* Andrew H. Lacko

* Eric A. Bakken

* Hugh E. Sawyer

Ladies and gentlemen, thank you for standing by. Welcome to the Regis Corporation Fiscal 2019 Third Quarter Earnings Call. My name is Olivia, 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 12:00 p.m. Eastern Time today.

I’ll now turn the conference over to Kersten Zupfer, Senior Vice President of Finance. Please go ahead.

Thank you, Olivia. Good morning, everyone, and thank you all for joining us. On the call with me today, we have Hugh Sawyer, our Chief Executive Officer; Andrew Lacko, our Executive Vice President and 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 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 the company’s current earnings release and recent SEC filings, including our most recent 10-Q and June 30, 2018, 10-K 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 the earnings release we issued this morning and our previous SEC filings, including our most recent 10-K. On today’s call, we will be discussing non-GAAP as adjusted financial results that exclude the impact of certain business events and other discrete items.

These non-GAAP financial measures are provided to facilitate meaningful year-over-year comparisons but should not be considered superior to, 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 release, which is available on our website at www.regiscorp.com/investor-relations (sic) [https://www.regiscorp.com/investor-relations.html].

And lastly, I would like to remind everyone of the accounting changes related to revenue recognition that we adopted in the first quarter of this year. All of the periods presented this morning have been adjusted for the change, and we have provided revised historical financial statements on our website for your reference.

With that, I will now turn the call over to Hugh.

——————————————————————————–

Hugh E. Sawyer, Regis Corporation – President, CEO & Director [3]

——————————————————————————–

Thanks, Kersten, and good morning, everyone. Thank you for joining us, and of course thanks as well for your interest in our company. I’ll touch briefly on the status of our ongoing strategic transformation and then Andrew will provide a recap of our financial results for the quarter.

Consistent with our prior commitment to you, we remain intensely focused on the ongoing transformation of our business and maximizing shareholder value. And I can report today that we continue to make progress.

At this stage of the transformation, our key areas of focus include self-funding our strategic investments in strategically important areas like technology, marketing and advertising, the acquisition of new real estate sites and to support organic growth.

We have a focus that continues to evolve and is related to the evolution of our merchandising capabilities by adding fashion-forward products for a new generation of consumer. We have efforts underway to improve critical analytical capabilities that enable the use of data science to improve our interaction with customers and recruitment of stylists in both our franchise and company-owned salons.

We are making further investments, substantially self-funded, to drive process improvements to establish frictionless relationships and support we provide our franchisees. And we are intensely focused on addressing the historical traffic declines that have occurred at Regis by aggressively reengineering our competitive capabilities.

Our initiatives related to traffic include, but are not limited to, engaging Bain Consulting to perform a diagnostic review of our 3 major brands: Supercuts, SmartStyle and Cost Cutters.

This diagnostic process is now complete and we believe will help inform our approach to the marketplace and the differentiation of our brands and services. The retention of 2 new advertising agencies, ChiatDay at Supercuts and Barkley at SmartStyle and Cost Cutters. Both are disruptive firms who we believe will bring a new approach to advertising content at Regis.

We believe our conversion to local market franchisees will certainly serve to improve our competitive capabilities, given our historical performance in our Franchise business. Eric Bakken, who leads our Franchise business, has opened up lines of communications with our major franchise councils regarding traffic and growth. This may seem like a small thing, but it is a big thing because these entrepreneurs are close to the customer and provide real-time feedback regarding our approach to the markets. And we are highly collaborative with our franchisees. James Townsend, a highly skilled executive who joined us from 72andSunny a few days ago, now leads our marketing and advertising efforts. And I’m confident that James will have a meaningful impact on our results. James will actually office in New York City, arguably the fashion and beauty capital of the world and where we enjoy an important relationship with Major League Baseball.

Our tech center in Silicon Valley under Chad Kapadia’s leadership is hard at work, developing new technologies to establish frictionless relationships with our customers. We write the code, we patent the code, we own the code and we trademark our technology products. For example, we recently launched open salon, which enables customers to connect with our salons both in opco and franchise directly from Facebook Messenger.

And finally, as I mentioned, Eric and our team is working with our merchandise business and our franchisees to introduce fashion-forward products that we believe are relevant to a new generation of consumers. All with the backdrop of continuing our portfolio transformation through the profitable sale and conversion of company-owned salons to our asset-light franchise portfolio. Given our success to date in finding highly skilled and capable franchise business partners, we expect to consider additional opportunities through franchise company-owned salons in circumstances where we believe we’ll add to shareholder value and support an evolving strategy for our business.

In closing, our performance this quarter and year-to-date has been achieved through a significant team effort that required discipline, cross-functional coordination. And I’m proud of the professionalism and confidence that has been demonstrated by our associates and our highly capable franchisees. Of course, all of us at Regis are grateful for the support of our shareholders as we continue our journey to higher performance and shareholder value.

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

——————————————————————————–

Andrew H. Lacko, Regis Corporation – Executive VP & CFO [4]

——————————————————————————–

Thanks, Hugh, and good morning. Before turning to third quarter results, I thought it might be helpful to give you additional color around the restructuring charge you likely saw in this morning’s press release in 10-Q related to The Beautiful Group, an affiliate of Regis.

As we have previously discussed, over the past 18 months we have worked closely with The Beautiful Group to help them navigate a number of headwinds faced by retailers and mall-based businesses. This assistance has included several initiatives to help improve their operating cash flow, including financing of approximately $11.7 million in working capital receivables in the form of a 2-year note, which we fully reserved against last year. The financing of approximately $8 million in outstanding accounts receivables in the form of a 2-year note and the extension of payment terms for certain inventory shipments.

Despite these best efforts, and in light of The Beautiful Group’s inability to remain current on amounts due to us, we have made the determination to record a $20.7 million noncash charge to fully reserve against all outstanding invoices due from The Beautiful Group to us as of the end of the third fiscal quarter.

It’s important to remember that the value created in the transaction with The Beautiful Group has always been through the risk transfer of our mall-based lease exposure. And since the execution of this transaction in October 2017, the company’s mall-based lease exposure has been materially reduced. Additionally, in order to provide additional transparency and insight into the performance of the franchise business, beginning with this morning’s disclosures and going forward, we will break out and present separately all costs associated with The Beautiful Group on its own line on our income statement.

Turning now to the results. On a consolidated basis, third quarter revenue decreased $47.4 million or 15.5% versus the prior year to $258.3 million. The year-over-year revenue decline was driven primarily by the conversion of 635 company-owned salons to company’s franchise portfolio over the past 12 months; the closure of a net 117 salons, a majority of which were cash flow negative and not essential to our future plans; and a 250 basis point decline in company-owned same-store sales. These headwinds were partially offset by an increase in franchise revenues, consisting primarily of royalties and fees.

The company-owned same-store sales decline was driven by a 6.1% decline in year-over-year transactions, or what we have historically referred to as traffic, partially offset by a 3.6% increase in ticket. I’d like to point out that the third quarter revenues and traffic were unfavorably impacted by the shift in the lead up to the Easter holiday from the third quarter last year into the fourth quarter this year, and we estimate that this shift negatively impacted third quarter traffic and same-store sales by approximately 90 basis points.

In addition, prior year’s same-store sales included approximately 70 basis points of one-time discontinued closeout product sales as part of the closure of 597 nonperforming SmartStyle salons in February of last year. Excluding both the Easter holiday shift and the one-time SmartStyle impact in the prior year, we estimate consolidated same-store sales declined approximately 90 basis points.

Third quarter consolidated adjusted EBITDA of $37.2 million was $18 million or 93.7% favorable to the same period last year. It was driven primarily by $27.4 million gain, excluding noncash goodwill derecognition related to the sale and conversion of 245 company-owned salons to the franchise portfolio during the quarter. Excluding this one-time gain, adjusted EBITDA totaled $9.7 million, which was $8 million unfavorable year-over-year. The year-over-year unfavorable variance was driven almost entirely by the elimination of the EBITDA that had been generated in the prior year period from the company-owned salons that we have sold and converted to the company’s franchise platform over the past 12 months. Third quarter adjusted EBITDA was also unfavorably impacted by the decline in company-owned same-store sales, which included the impact of the shift in the timing of the lead up of the Easter holiday, minimum wage increases and strategic investments in technology, marketing and the company’s franchisers’ capabilities. These were partially offset by lower year-over-year incentive compensation expense.

As Hugh mentioned earlier, the strategic investments we are making around technology and marketing are being funded by the continued removal of noncontributory, nonstrategic G&A costs. On a year-to-date basis, consolidated adjusted EBITDA of $82.9 million was $24.8 million or 42.7% favorable versus the same period last year. Year-over-year favorability was driven primary by a $43.9 million gain, excluding noncash goodwill derecognition related to the year-to-date sale and conversion of 502 company-owned salons to the franchise portfolio. Excluding the one-time gain, third quarter year-to-date adjusted EBITDA totaled $39 million, which was $17.1 million unfavorable year-over-year. And like the third quarter results, this unfavorable year-to-date variance is driven largely by the elimination of the EBITDA related to the salons that we have sold and transferred into the franchise portfolio over the past 12 months.

Looking at the segment-specific performance, and starting with our company-owned salons, third quarter revenue decreased $50.8 million or 18.7% versus the prior year to $221.2 million. This year-over-year decline is driven by the decrease of approximately 752 company-owned salons over past 12 months, which can be bucketed into 2 main categories. First, the profitable conversion of 635 company-owned salons to our asset-light franchise platform over the course of the past 12 months, of which 245 were sold and transferred during the third quarter of this year. And second, the closure of approximately 117 company-owned salons, with — most of which were unprofitable over the course of the 12 months.

As I mentioned earlier, the third quarter revenue decline was also impacted by a 250 basis point decline in company-owned same-store sales, which included an approximately 90 basis points unfavorable impact due to the shift in timing of lead up to the Easter holiday this year and an approximately 70 basis point unfavorable impact due to the one-time discounted close-out product sales as part of the closure of 597 nonperforming SmartStyle salons during the third quarter last year.

Third quarter company-owned salon segment adjusted EBITDA decreased $11.6 million year-over-year to $17.2 million.

Consistent with the total company consolidated results, the unfavorable year-over-year variance was driven almost entirely by the elimination of the adjusted EBITDA that have been generated in the prior year period from the company-owned salons that were sold and converted into the franchise platform over the past 12 months. The quarter was also unfavorably impacted year-over-year by increases in stylist minimum wage and commissions and strategic digital marketing investments.

On a year-to-date basis, company-owned salon consolidated adjusted EBITDA of $66.1 million was $22.6 million or 25.5% unfavorable versus the same period last year. The unfavorable year-over-year variance was driven almost entirely by the elimination of EBITDA related to the sold and transferred salons over the past 12 months.

In the franchise segment, third quarter revenue increased $3.3 million or 9.8% versus the prior year to $37.1 million. Royalties and fees of $22.8 million increased $3.9 million or 20.8% versus the same period last year, driven primarily by increased franchise salon comps.

Product sales to franchisees decreased $600,000 year-over-year to $14.3 million, driven primarily by a $2.8 million decrease in product sold to The Beautiful Group, partially offset by increased franchise salon comps.

Total franchise same-store sales declined 220 basis points, and franchise same-store sales, excluding The Beautiful Group salons, declined 130 basis points during the third quarter. Like the company-owned salon portfolio, we believe franchise traffic and same-store sales were negatively impacted by the shift in the lead up of the Easter traffic into the fourth quarter this year.

I would also like to point out that franchise same-store sales comps is a new disclosure this quarter that we believe will assist investors in evaluating the overall performance of our business as we continue to transition to a more heavily franchise portfolio of salons. As a reminder, franchise same-store sales are calculated in a manner that is consistent with how we calculate same-store sales in our company-owned salon portfolio and represents the total year-over-year change in sales for salons that have been opened as a franchise location for more than 12 months.

Third quarter franchise adjusted EBITDA of $9.8 million improved $1.2 million or 13.5% year-over-year, driven by growth in the franchise salon portfolio, partially offset by planned strategic G&A investments to further enhance our franchiser abilities and to support the increased volume and cadence of transactions into the franchise portfolio. Year-to-date, franchise adjusted EBITDA of $28.1 million improved approximately $2.4 million or 9.2%, year-over-year.

Turning now to corporate overhead. Third quarter corporate-related adjusted expenses of $10.1 million decreased $28.4 million year-over-year, driven primarily by the $26 million of net gains, excluding noncash goodwill derecognition, from the sale and conversion of company-owned salons that — the net impact of management initiatives to eliminate noncore, nonessential G&A expenses and lower year-over-year incentive compensation expense, partially offset by investments in technology and marketing capabilities.

Looking now at the balance sheet, we continue to maintain our strong overall liquidity position while providing optimal balance sheet flexibility to fund the elements of the company’s transformational strategy.

On the liquidity front, net-net, quarter-end cash totaled $71.1 million, a $39.3 million decrease since the beginning of the fiscal year, driven entirely by our continued investment in share repurchases. In fact, during the third quarter, we repurchased 2.2 million shares or approximately 5% of total shares outstanding for $40.2 million. And fiscal year-to-date, we have repurchased 6 million shares for $105.4 million, representing approximately 13% of the company’s total shares outstanding.

Year-to-date share repurchases have been funded substantially by the monetization of several noncore assets in the prior quarters, such as the company-owned life insurance policies in Q1, the sale leaseback of our Salt Lake City distribution center in Q2 and the cash proceeds generated from the sale and conversion of company-owned stores into the franchise platform. As of March 31, we have $129 million of remaining capacity under our approved stock repurchase program, and we had $90 million of outstanding borrowings under our existing credit facility.

The last balance sheet item you likely noticed this morning was that inventory balances have increased by approximately $11.5 million fiscal year-to-date. This growth, which we believe to be temporary in nature, is driven primarily by several factors, including, first, with the shift of the run up of the Easter holiday into the fourth quarter this year, our third quarter ending inventory balances were elevated in anticipation of a strong retail demand in April. Second, we had introduced a number of new innovative and forward leaning lines of product that we believe will help drive incremental value to the company owned and franchised retail businesses. Third, we’ve experienced the continued overall growth in our franchise business. And lastly, we carried significantly higher levels of inventory for The Beautiful Group during the quarter that we believe we will be able to effectively redeploy throughout our network during the fourth quarter and the remaining months of the calendar year.

Lastly, before I turn the call back to Olivia, given the continued acceleration of our profitable sale and conversion of the company-owned salons in the franchise portfolio, I thought it would be helpful to remind you once again about how we think about the unit economics of these transactions. In evaluating these transactions, we consider that in addition to the upfront purchase price or cash received, we also typically expect to recapture a meaningful percentage of the sold cash flow through items such as a predictable, ongoing royalty fees stream, the potential additional cash generated on incremental product sales to new franchisees, likely lower ongoing capital requirement — requirements for items such as salon maintenance and refurbishment and anticipated reductions in our field and corporate overhead G&A expenses.

Additionally, we also believe that the growth in the franchise portfolio should provide us a stable platform for future sustainable organic growth and an effective vehicle for potential future brand consolidation in a highly efficient and capital-light manner. Also, as we have disclosed in the past, substantially all of our transactions to date have, and any potential transactions in the future likely will,involve cash flow positive salons.

This is critical to note because that will likely make period-over-period revenue and adjusted comparisons in your models difficult to estimate with a high degree of precision for a few reasons, including, first, any comparison would need to be normalized for the likely one-time gains related to the sales proceeds received from the sales of salons net of noncash goodwill derecognition. Second, all prior year periods would need to be normalized for the impact of [sold] EBITDA that would be eliminated due to the transaction. And third, as we transition salons to our franchise portfolio, one must consider the fact that we’re converting from a higher margin model in our company-owned salons to a wholesale model in the franchise portfolio

Of course, when designing our strategy, we planned for and modeled this change in product sale margins and expect to generate greater overall economic value for our shareholders in those circumstances where we convert to an asset-light franchise model.

Given these factors, and when thinking about your forward-looking models, it is reasonable to expect that as we profitably sell and convert company-owned salons into the franchise portfolio, Regis’ consolidated revenue and adjusted EBITDA, excluding proceeds, would likely decline over the short term. However, over the longer term, we would expect to see growth in the franchise segment’s adjusted EBITDA, reductions in company-wide G&A expenses, returns on investment made both in technology and marketing and longer-term growth of our merchandise business. The net result would likely be an increase in the company’s adjusted EBITDA margin rate over the longer term.

Lastly, as Hugh mentioned, given the success to date with the sale and conversion of salons into our franchise portfolio, we will continue to consider and evaluate opportunities to franchise our company-owned salons across all of our brands in those circumstances where we are convinced that it will add to shareholder value and support our evolving strategy for the business.

With that, I would like to thank you for your continued support and interest in Regis and will now turn the back — turn the call back to Olivia for questions. Go ahead, Olivia.

================================================================================

Questions and Answers

——————————————————————————–

Operator [1]

——————————————————————————–

(Operator Instructions) And our first question is coming from Steph Wissink with Jefferies.

——————————————————————————–

Stephanie Marie Schiller Wissink, Jefferies LLC, Research Division – Equity Analyst [2]

——————————————————————————–

I have a few questions. I mean, Andrew, I think maybe these first two are for you, just points of clarification. I want to make sure we heard you correctly.

So the EBITDA change reported year-over-year, you said a couple of times it was entirely driven by the venditioning process. I wanted to just make sure that as we kind of cycle through EBITDA over the next few quarters, is that a framework we should continue to expect? Is that you will cost cut at the corporate level to offset investment, and we really should model just the EBITDA change from the conversions?

——————————————————————————–

Andrew H. Lacko, Regis Corporation – Executive VP & CFO [3]

——————————————————————————–

Yes. Steph, thanks. That’s entirely consistent, and I hope that — I think I stated that maybe five or six times in my prepared remarks. That’s exactly what we would anticipate that as we continue to vendition ourselves, the company-owned salons, into the franchise portfolio. When you execute that transaction, as I mentioned, there’s the history or the EBITDA in the prior year that makes comparisons difficult.

So when doing a true apples-to-apples year-over-year comparison, you have to eliminate that EBITDA that has been sold. And for this quarter, substantially all of the unfavorable variance that when you take the reported EBITDA less the gains in the transaction, that remaining unfavorable variance is almost entirely related to that sold EBITDA in the prior year.

You’re correct. All the investments that we’re making in marketing, digital marketing or technology transformation are being funded by the continued management initiatives that we’re flowing through the portfolio.

——————————————————————————–

Hugh E. Sawyer, Regis Corporation – President, CEO & Director [4]

——————————————————————————–

And Steph, you know that — it’s Hugh, good morning. Sometimes in these circumstances companies will touch their balance sheet, take on debt to drive these kind of conversions. So far we’ve been very fortunate that we’re generating enough free cash flow. We don’t need to that. We’re self-funding the initiatives, including the technology initiatives in Silicon Valley.

And as to Andrew’s commentary, we’re not suggesting that the EBITDA of the business isn’t being impacted by a range of factors. Companies are always impacted by lots of different things. But Andrew is right — exactly right that the substantial component of the year-to-year change in EBITDA is a byproduct of an evolving strategy to move operating salons to franchise and to sell-off that EBITDA. That, Andrew, is right. And it is substantially all of the change. But other factors impact the business on a normal course just like any other company.

——————————————————————————–

Stephanie Marie Schiller Wissink, Jefferies LLC, Research Division – Equity Analyst [5]

——————————————————————————–

Okay. That’s helpful. Second question is just on the cadence of the venditions, of the conversions. If we look at your year-to-date, you’re right around 635, you did 245 in the quarter. It seems like there is a bit of an acceleration.

If you can just help us think about, is that 245-ish, 250-ish number appropriate on a quarterly basis or is there going to be some variation quarter-to-quarter based on how successful you are in those negotiations? How should we model that out over the next few quarters?

——————————————————————————–

Andrew H. Lacko, Regis Corporation – Executive VP & CFO [6]

——————————————————————————–

Steph, this is Andrew. I just want to clean up one data point. You mentioned 635. 635 is the last 12 months. On a year-to-date basis, we’ve done 502 venditions or the sale of these company-owned salons transferred into the franchise portfolio.

——————————————————————————–

Hugh E. Sawyer, Regis Corporation – President, CEO & Director [7]

——————————————————————————–

And I would add that Eric Bakken and his team have done remarkable work here. We could — Steph, as you well understand, we could drop the price and fire sale these salons and move them from opco to franchise at a much faster pace, but Eric and I haven’t done that. Eric’s been highly disciplined, he and his team. And we set the guardrails in place early as to what we expected from the cash proceeds from these transitions, and we have not deviated from our model. In fact, we’re over exceeding our expectations for cash proceeds.

And Eric, I — you might want to comment on the quality of franchisees we’ve been able to attract. So we’ve — Steph, we could go faster, but we’re getting great cash out of these salons. And Eric’s done — he and his team have done a wonderful job in bringing new partners to the business.

——————————————————————————–

Eric A. Bakken, Regis Corporation – Executive VP & President of Franchise [8]

——————————————————————————–

Thanks, Hugh. Yes, Steph, we continue to recruit in terrific new franchise partners, and we’re very impressed with our efforts in doing that, but mostly with the folks that have wanted to come and join us. So that continues today and we have picked up some momentum as you’ve pointed out from quarter-to-quarter. And we’re confident that we have a healthy group of franchisees that want to grow. We’re still receiving a lot of interest from new folks that we’re getting to know a little bit better and obviously trying to make sure that there’s a good fit between a new potential franchise partner and us. So we take our time to get that right.

But we’re comfortable with the pace that we’re moving on right now. We believe we have a healthy backlog to work from. And as Hugh has always said, where we have a transaction that makes sense for all, for the franchisees, for the company and for the shareholders, we’ll transact, and so far that’s been going pretty well.

——————————————————————————–

Hugh E. Sawyer, Regis Corporation – President, CEO & Director [9]

——————————————————————————–

And Eric I guess it’s true to say that the primary focus this year has been on Supercuts. And we’re very fortunate because we have some highly capable franchisees that have been a historical part of our business. And isn’t it accurate to say that a lot of the growth is coming from our existing franchisees?

——————————————————————————–

Andrew H. Lacko, Regis Corporation – Executive VP & CFO [10]

——————————————————————————–

That is accurate. We’re receiving about a 50-50 split between existing experienced franchisees and new owners that are coming in, so that continues. And we started out that way and that continues to move that way as well. And the majority of the salons that we’ve transferred so far this fiscal year happened in Supercuts, and we’re starting to see that shift a little bit as we move through the quarters.

——————————————————————————–

Hugh E. Sawyer, Regis Corporation – President, CEO & Director [11]

——————————————————————————–

And we’re just now dipping our toes and considering opportunities in some of the other brands in the fleet, including SmartStyle.

——————————————————————————–

Eric A. Bakken, Regis Corporation – Executive VP & President of Franchise [12]

——————————————————————————–

That’s correct. SmartStyle and our portfolio in Signature as well.

——————————————————————————–

Stephanie Marie Schiller Wissink, Jefferies LLC, Research Division – Equity Analyst [13]

——————————————————————————–

Okay. That’s great, you guys. My last one and, Hugh, this is really just a — to compliment you on kind of directly addressing this idea of traffic because I think it’s something you inherited and something we’ve been monitoring, but can you give us any sense of the new CMO onboard, third-party with Bain coming in and doing some diagnostics, 2 new ad agencies.

What are you holding yourself accountable to in terms of seeing that traffic rate improve? What are you incentivizing and motivating the team to do? And what should we be watching for in terms of the progress around that marketing investment and the effectiveness of it?

——————————————————————————–

Hugh E. Sawyer, Regis Corporation – President, CEO & Director [14]

——————————————————————————–

Thank you, Steph. And if you think about the hypothetical future state of the business, if Regis were to continue to franchise its portfolio, eventually the company will indeed run out of venditions. And so then we’ll be judged like any other publicly traded company. Can you grow your revenues and grow your salon count and add to your franchisee base? And in order to do that, you have to demonstrate core competencies or establish core competencies in data science and marketing and advertising and how you go about differentiating your brand. It’s the fundamental blocking and tackling of how you compete with national brands in a local market business.

Having said that, the data says that Regis has struggled in that area for 10 years. And not surprising, given that the company grew through roll-up strategy, very successfully implemented a roll-up strategy over many years and the company really didn’t focus intently on the muscle strength it needed to grow organically.

And so as in all things in a transformational process, you sequence your initiatives, and we are sequencing in now, developing the core competencies to grow our business organically, defined as increasing traffic in our existing portfolio of salons. And furthermore, adding new site locations and new franchisees to support organic growth.

And in order to do that, there are foundational things that must be in place, including how do you differentiate your core brands — and in particular, Supercuts, SmartStyle and Cost Cutters? How can we differentiate our advertising content and blowing out the prior agencies and bringing in 2 leading — worldwide-leading advertising agencies like ChiatDay for Supercuts, which we did in collaboration with a franchise counsel and Barkley over at SmartStyle and Cost Cutters.

We are very confident, Steph, that those agencies are going to bring disruptive content to those brands, and we’re getting ready to launch a new campaign at Supercuts in a few weeks to sync up to the Major League Baseball season and the — and on or about the timing of the All-Star Game.

We are — Eric and I and the rest of the management team have been convinced for some time that local market franchisees know how to compete. And if you look at the data and the data that’s in this press release, it’s — they typically outperform, not surprising, given that they’re putting their own capital to work. They’re pretty intensely focused on growing their business and competing and they do a great job.

And as to James, James is — was an incredible find for the company. We got him through a referral. He is a highly skilled executive who was a full partner at 72andSunny. He actually opened their New York City office. He is a little different from the CEO. He’s much taller, much younger and he talks like James Bond whereas I sound like someone from the Dukes of Hazzard. So he is a great addition to the team, and I’m really enthusiastic that he’s going to have a great tenure here and help us not only in differentiating our content advertising but also helping us focus on supporting our franchisees and because he comes from a client-service background and agency work, he’ll do a wonderful job of partnering with franchisees. And also working with Laura Alexander in our merchandise group on how we differentiate our products.

And then finally, Steph, you know I’m committed to the work that Chad Kapadia has underway in Silicon Valley in establishing frictionless technologies for customers, all of which we’re self-funding and open salon is out and in the market today and it allows our — a very large base of potential customers to access our salons through Facebook Messenger. And of course we have several other products that are in the pipeline that are coming out this year, and I’m feeling very enthusiastic about what we’re doing in tech.

So how do we then measure the performance of these new strategies? It’s going to take a little time to play out. You can’t reverse a 10-year trend in 10 months, but we’ll get our arms around this through the initiatives we have underway and we’ll adjust as we go. And — but we’re — I may be a country boy but I’m not a fool. I perfectly understand that the accountability will be around organic growth and traffic in the years ahead. And we are making the, I think, wise choices, put those foundational elements in place. So the company can have a great future.

We’re not running the business for the quarter. We’re running the business for the next few years. And I’m actually feeling optimistic about the road ahead for the company and how we’ll be able to compete in the markets.

——————————————————————————–

Operator [15]

——————————————————————————–

We will now go to our final question from Laura Champine with Loop Capital.

——————————————————————————–

Laura Allyson Champine, Loop Capital Markets LLC, Research Division – MD [16]

——————————————————————————–

I’m obviously pleased to see the shift towards franchises continuing at pace but less excited about the traffic, down 6%. I know some of that was attributable to calendar shift, but how would you frame up your ability to turn that number positive? And how long do you think that it takes? And what were other drivers for that negative traffic comp in company-owned salons in the March quarter?

——————————————————————————–

Hugh E. Sawyer, Regis Corporation – President, CEO & Director [17]

——————————————————————————–

I’ll let Andrew start by just pointing out — it’s Hugh, by the way, good morning, pointing out some of the — we’ll break out some of the elements of how we see the traffic declines in the year-over-year quarters, and then I’ll address some of the broader questions.

——————————————————————————–

Andrew H. Lacko, Regis Corporation – Executive VP & CFO [18]

——————————————————————————–

Yes, absolutely. Good morning, Laura. So in addition to some of the tactics that Hugh just talked about of how we’re addressing the long-term traffic composition of the business, technically, this quarter, we saw, like I mentioned, roughly a 90 basis point impact due to the shift of the lead up of Easter traffic last year. Easter actually I believe fell on the 1st of April, so the lead up was all on the first quarter. This year, Easter was later in April, so the high volume lead up days were into the fourth quarter.

We also believe that over the recent past, the impact of competitor new store openings has negatively impacted our store traffic or transactions. As a result, as Hugh mentioned, we’re investing in being more proactive in new store and real estate acquisition strategy.

I also think it’s important to point out that the investments that we’re making in stylist retention, education, productivity and recruitment, we believe that’s going to help offset some of the drivers of recent traffic declines. Because if you think about it, if we’re unable to staff a salon, that’s capacity that can’t [cut pair] and can’t produce revenue. And we think that, that’s had a meaningful impact to our traffic declines over the past several quarters as we’ve continued to try to be proactive and address that stylist recruitment efforts.

And then we don’t like to point to weather, but I think as you look across the industry, both similar industries and across general macroeconomic — first calendar quarter, our third fiscal quarter, this past quarter — weather played a role. There was an unusually heavy snowstorm across the Midwest, the South and the East. Torrential, nearly 100-year flood-type rain activity on the West Coast at various points in the quarter end. While we don’t want to point to a number, I’ll let you and the rest of the investment community draw your own conclusions as to what kind of impact that might have had on our traffic in the quarter.

——————————————————————————–

Hugh E. Sawyer, Regis Corporation – President, CEO & Director [19]

——————————————————————————–

Laura, it’s Hugh. I wouldn’t — as to the overall traffic question, I would say that I’m concerned about it, but I don’t have anything other than a healthy concern, right? We — I am certain that we are doing the right things to address the company’s historical declines in traffic.

We’re also in the midst of what I would define as a disruptive transformation. You can’t do the kinds of things we’re doing in shifting major parts of the portfolio from an operating stance to a franchise stance. At the same time we’re reengineering merchandise and technology and many other areas of the company without having some disruption. But I think we’re not the first company to go down this path.

And I’d point you to McDonald’s earnings this morning, it takes a little time for these things to wash through and for new initiatives to stabilize and take hold. And as to quarterly performance year-over-year, I look at the details and I recognize them. I acknowledge them, but as I said earlier, this is about the next 5 or 10 years, not about the next 5 months.

So it will be what it will be, and if we make the right choices and put the right capabilities in place, it’ll be a platform for long-term shareholder value accretion. And that is what we are playing for, not next quarter.

And we could — we can make the company look enormously better by not making these investments, but the CEO has committed to the marketplace and to his board and to his employees and to his franchisees that we’re in the long game, and we’re making well-considered investments in core initiatives to create a great platform for future growth. And I feel confident that these things are going to work over time.

As to when it will work? As I’ve always defined this as a multiyear transformational process, and we are just clipping 2 years and it’s going to take time for it to play out.

——————————————————————————–

Operator [20]

——————————————————————————–

This concludes the Q&A portion of the call. I will now turn the conference back to Hugh.

——————————————————————————–

Hugh E. Sawyer, Regis Corporation – President, CEO & Director [21]

——————————————————————————–

Well, on behalf of all of us here at Regis, thank you so much for your time this morning. And we look forward to talking to you again very soon. Thank you, everyone.

——————————————————————————–

Operator [22]

——————————————————————————–

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 with access code 6867095.

Thank you all for your participation, and have a nice day. All parties may now disconnect.



READ SOURCE

Leave a Reply