RGS
#Thanks, Greg.
Good morning, everyone, and thank you for joining us today.
With me are <UNK> <UNK>, our Interim Chief Financial Officer and a professional at Huron Business Advisory; Eric Bakken, our Executive Vice President and Chief Administrative Officer; and Mark Fosland, our Senior Vice President of Finance.
Our strength of our franchise business was demonstrated in a challenging second quarter retail environment as our franchisees once again posted positive same-store sales results.
Our franchisees have now posted positive annual same-store sales growth for 10 consecutive fiscal years and our royalty revenue increased 4.3% in the quarter.
We have made a serious commitment to transform our business operationally and strategically to drive improved shareholder value.
We intend to operate our salons successfully, sell certain salons to franchisee and continue to close underperforming salons.
As I mentioned on our last call, we are committed to a thoughtful well-planned strategic transformation that increases the scale of our franchise business.
To accelerate our goal of improved performance across the broader base of our salons, we announced last quarter we had formally engaged Huron Business Advisory to assist in the analysis and development of the best means of delivering an accelerated and expanded franchise business model.
While still in the early stages, we are pleased by our progress to date working in collaboration with Huron.
We expect our initial focus will be on franchising our underperformed Company-owned SmartStyle Salons located in Wal-Mart.
We believe this represents an opportunity for our existing and new franchisees as these locations have built-in Wal-Mart guest traffic, which can be coupled with franchise operators who have proven capabilities to react nimbly to local conditions and the market knowledge to implement necessary changes to operations, stylist labor, wages and pricing to improve front line salon performance.
In December, we issued our franchise disclosure document for SmartStyle Salons in Wal-Mart.
This enables us to actively market and franchise this concept, and the initial response from our franchisees and new perspective franchisees for this concept has been positive.
After adjusting for the Christmas calendar shift, same-store sales for our Company-owned salons declined 2.4% in the second quarter.
Adjusted same-store sales for our non-mall brands were down 1.2% and continued to outperform our mall business, which posted adjusted same-store sales declines of 5.8% in the second quarter.
Despite these volume challenges, second quarter adjusted EBITDA of $17.4 million increased slightly over last year.
On a year-to-date basis adjusted EBITDA increased to $41.5 million versus the $40.3 million reported for the first six months of FY16.
We believe these results demonstrate our organization's focus and commitment to controlling operating costs and non-essential G&A expense.
Many of our Company-owned salons continue to perform well.
In fact, their results are being driven by the investments we have made in strong field leaders who execute in a manner similar to our most successful franchise operators and are driving improvement by using the tools, processes and metrics we provide.
That said, consolidated results are not yet meeting our expectations and further support our evolving strategy to accelerate and expand our franchise model, close our non-performing salons and maximize operating performance.
Before I discuss second-quarter business updates, let me share some additional thoughts related to our retail business and our franchise revenue growth.
I'll start with our retail product business.
For the quarter, same-store sales declined 6.7%, or on an adjusted basis 5.5%.
Much of this is driven by performance of both value and premium brand salons that are located in malls, which on an adjusted basis were down 10.7% during the second quarter.
We continue to execute on our combo sales initiative and year-to-date combos are now at 9.6%.
SmartStyle, as a division, has topped a 10% combo rate for the year, which is great to see and a result of the focus on stylist execution.
Our franchise revenues in the second quarter declined slightly verses last year.
We do not believe this decline is indicative of the positive momentum we are gaining in our franchise business.
Instead it is simply a shift in the timing of new franchise salon openings.
Last year franchise growth and the associated beat with new franchisee openings was skewed to the first half of the year.
This year, we added 41 new franchise locations in the quarter, compared to 67 last year.
We are expecting new franchise openings to be strong in the second half and unit growth for the year should ultimately be similar to last year.
The best indicator of our franchise progress is royalty revenues.
As I mentioned at the outset of the call royalty revenues increased 4.3% in the quarter and our franchisees have produced 10 consecutive years of positive same-store sale increases.
Now let me shift our discussion to second quarter business updates.
We continue to drive guest engagement with innovation in our digital environment, online check-ins through Supercuts.com and the Supercuts app have doubled in the last year.
Over 2.3 million check-ins occurred across the system in calendar 2016.
This is significant because digital check-in guests have stronger repeat visit rates than their walk-in counterparts.
Our marketing and operation teams have collaborated to drive these results and will continue to partner to develop new tools to elevate guest awareness of online check-in and the overall quality of the guest experience.
It is important to note this good work benefits our franchise and corporate Supercuts salons.
In the second quarter, we delivered on our investment and leadership and stylist development due to the completion of several development conferences and interactive in-salon training.
In fact, we completed a leadership training class for our regional directors this week, focused on stylist retention and optimizing stylist performance.
In support of our efforts to improve stylist recruiting and to provide upgraded tools for our team, a significant priority for us this quarter was preparing for the implementation of our new hiring and on-boarding system.
Our new system will improve the overall candidate and leader experience by shortening the application process, providing mobile and social media capabilities and a one-stop dash board for our leaders.
On the stylist development side, we continue to experience strong enrollment in our on-boarding program for stylists with over 6,300 new stylists enrolled in the second quarter.
Through this new system, we also have the opportunity to capture immediate feedback from our new stylists.
These learnings support our commitment to the development of our stylists show the importance of creating a strong Regis culture and a positive work environment are key components of stylist attraction or retention.
This concludes my business update.
Before I turn the call over to <UNK>, let me close with a few additional comments regarding the evolution of our Company.
We have made a serious commitment to transform our business operationally and strategically in an attempt to improve shareholder value.
Regarding the transformation of our operations, we are continuing to increase our expectations for satisfactory salon operating performance and we will take ongoing steps to properly control our expenses to ensure that we remain highly competitive in our Company-owned salon business.
As to the strategic transformation already underway, our team remains committed to closing non-performing, non-strategic salon locations where we have determined we cannot generate an acceptable return for our shareholders.
In fact, since the start of FY12 we have exited nearly 1,900 underperforming salons.
During this time, we have also grown our franchise business successfully by adding over 500 salons.
As I discussed earlier, this program will continue as we take steps to franchise certain underperforming SmartStyle locations.
We are committed to a thoughtful well-planned strategic transformation that increases the scales of our franchise operations, while at the same time exiting underperforming Company-owned salons.
Further as we previously discussed, we have made careful investments in the technology, stylist education and the overall experience of our guest.
We continue to act with a sense of urgency to accelerate our progress and improve our results.
The plan is to continue an aggressive expansion of our franchise model and going forward this will be a significant component of Regis' future unit growth.
Over time, expanding our franchise models should enable improved capital efficiency by focusing and simplifying our business, allowing our best operators to manage fewer salons more effectively, and simultaneously providing the opportunity for our salons to meet and exceed the expectations of our stylists and our guests.
Although we are in the early stages of our work with Huron, we are moving forward with a sense of urgency.
At this point it is not yet possible to provide further details on the pace of franchise conversions or the potential financial impact on our results.
in future quarters as our plans are solidified and we gain greater visibility, we expect to provide additional clarity as to the pace and potential impact of our franchise expansion along with enhanced disclosures on the overall profitability and performance of our franchise business.
Thank you and I will now turn the call over to <UNK>.
Thank you, <UNK>, and good morning.
I will limit my comments today since I just began my roles as the Regis Interim CFO and <UNK> has already recapped our unaudited performance for the quarter, including the highlights of the Company's year-to-date results, further our press release and 10-Q include detailed explanations for our major P&L items.
As a result, my update relates to financial housekeeping items and the Company's current view of liquidity.
There are three financial housekeeping items of which I would like to share.
First, included in today's press release as well as on our corporation website, is Management's reconciliation bridging reported results to earnings as adjusted for the impact of discrete items for the second quarter of the current and prior years.
Second, I want to remind you that the valuation allowance in place against most of our deferred tax assets makes it very difficult to compare after-tax results to prior periods.
For the six months ended December 31, 2016, we recorded tax expense of $3.5 million.
However $3.3 million of that was non-cash and related to tax benefits we claimed for goodwill amortization, but cannot currently recognize for GAAP purposes.
The non-cash tax expense related to this issue will approach $7.8 million for the full year and we expect that this will continue on an annual basis going forward in decreasing amounts, as long as we have the deferred tax asset evaluation in place.
As Management has discussed in the past, this non-cash charge or benefit could fluctuate significantly from quarter to quarter as a result of how the effective tax rate is determined at interim periods.
Third, during last quarter's call, Management mentioned that our first quarter G&A expense was impacted by timing and certain one-time benefits, but that we are still estimating G&A for the full year to be around $177 million.
With half of the year complete, we are now estimating G&A expense for the full year to be in the range of $170 million due to additional timing, one-time benefits as well as purposeful efforts to reduce Company's G&A cost.
The one-time benefits were driven by lower warehouse labor, field travel and compensation expense, primarily resulting from lower sales volumes in the quarter.
Additionally in the quarter, we saw a timing benefit related to professional fees in our annual franchise convention.
While we are experiencing some non-occurring favorability with G&A, we continue to take a very disciplined approach managing our overall G&A.
This has enabled us to reduce overall G&A while funding strategic investments in an attempt to drive revenue.
On the liquidity front, our business generated $27.6 million of operating cash flow during the first half of our fiscal year despite the top line headwinds <UNK> had mentioned earlier.
This was largely offset by $17.3 million use of cash for investing activities, a $1.1 million use for financing activities and $900,000 negative impact from exchange rates.
Overall, our cash balance increased roughly $8.3 million compared to the end of last year, which was in line with our prior expectations.
In keeping with our capital policy we did not repurchase any shares during the quarter.
As a reminder, a core tenet of this policy is to preserve a strong balance sheet.
At the end of the second quarter, $60 million remained outstanding under the approved stock repurchase program.
Going forward, we will continue to adhere to our capital allocation policy and will remain disciplined with the use of our capital.
Finally, we finished the quarter with $156 million of cash, $123 million of total debt and no outstanding borrowings under our $200 million revolving credit facility.
In closing, <UNK> has asked that I focus with the rest of the team on driving improved performance across all aspects of the business.
I am delighted to join the Regis Management Team and really look forward to speaking with you in the days ahead.
This concludes the financial portion of the call and we will open up the call for your questions.
Operator, can you please provide instructions for the Q&A portion of the call.
Sure, I'm happy to expand on that, <UNK>, thank you.
I'm going to go at this in a couple of different ways.
I'll start with Huron and then I'll start with what we're doing to sell our salons into franchise.
So Huron has come in to help us evaluate our business as a whole and look for ways to increase our franchise opportunities and look at different business models that will drive the most shareholder value.
And we have found them to be very helpful.
They are very thoughtful folks.
As you saw, we actually rated Huron and we brought <UNK> in to be a part of our team.
So <UNK> is already adding a lot of value here and I think the fact we've got <UNK> here from Huron and we've got Huron in here, will really help us be very thoughtful about how the Company is structured as a franchise and a corporate salon company going forward in the best possible way.
In terms of selling into franchise, that process is now in full swing.
As I mentioned, we have the finance ---+ the franchise disclosure document is completed, we have that in the hands of our ---+ in our franchise team.
And we went after this in three phases, pretty much concurrently.
The first phase was, we went to some of our biggest franchisees today and we presented it to them.
We showed them what the opportunity is and we got good interest there.
Then we took it out to the rest of our franchise base and we've gotten a very good interest from them.
And then we went to the market in general with our franchise sales team and the interest is ---+ we've been very pleased with the interest that we've had so far.
We actually have our first discovery day, when people come in that would be new to a franchise opportunity with us, at end of February.
Takes a little while to get the message out and recruit these people, but we are very happy.
It will be one of the largest groups we have ever had come in and we are anxious to get in front of them and talk to them about the opportunity.
But I can tell you where it is early, early days, <UNK>, but we are pleased with the interest we have seen so far.
Well, at this point in time it's kind of early.
But it's really just to support the overall team with the franchising initiative.
Simply put, as <UNK> had mentioned, Huron is in helping with that.
My background, while it varies in different industries, can also help out on that front.
You know the business down the road being more franchise heavy will look different.
And so I hope to help <UNK> and his team accomplish that.
So good question.
So when I referred to the mobile app, I'm referring to our Supercuts brand only.
And we saw, you know where we saw our toughest traffic was in the malls, in our premium salons and in MasterCuts.
We saw a challenging ---+ it was a challenging retail environment in the quarter in general, but it's important to note that the mobile app is only in Supercuts.
And Supercuts is performing better than the rest of our brands.
The one thing that ---+ and it's the reason that we made the decision to shift strategically and become more of a franchise company is we've seen what strong operators our franchisees are.
And our franchisees delivered in what is a very tough retail ---+ was a very tough retail environment in the fourth quarter.
They delivered same-store comp sales increases, which made for ten consecutive years.
We have a number of our best performing leaders who also delivered very strong same-store sales and traffic growth.
So I really believe that the focus we have on shifting to franchise and selling our underperforming salons into franchise will help us in a number of ways.
Obviously those salons that aren't performing well will get into the hands of good franchisees.
They will operate them better.
They will also take down the number of salons that our best operators have to manage and that will focus them on salons that are doing well today and they can make them even better.
So we have a holistic approach to improving the company by shifting towards a franchise business.
So obviously it helps within the franchise but we believe it will also help us on the corporate side.
Thank you.
Okay.
And I'll just say, thank you, everybody.
We look forward to talking to you again next quarter and updating you on our progress as we move to become more of a franchise company.
Thank you and have a good weekend.
