Regis Corporation (RGS) Q4 2017 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Regis Corporation Fiscal 2017 Fourth Quarter Earnings Call. My name is Don, and I will be your conference facilitator today. At this time, all participants are in a listen-only mode. Following the management’s presentation, we will conduct a question-and-answer session [Operator Instructions]. As a reminder, this call is being recorded for playback and will be available by approximately 3 PM Eastern Time today. I’ll now turn the conference over to Paul Dunn, Vice President of Finance and Investor Relations. Please go ahead.

Thank you, Don. Good morning everyone, and thank you for joining us. On the call with me today are Hugh Sawyer, our Chief Executive Officer; Andrew Lacko, our new Chief Financial Officer; Eric Bakken, President of our Franchise Segment; Mark Fosland, our Senior Vice President of Finance. Before turning the call over to Hugh, there are few housekeeping items to address. First, today’s earnings release and conference call includes 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 SEC filings, including the 10-K we filed this morning for information on these risks and uncertainness. 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 conference call must be considered in conjunction with both the 10-K filings 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 is a substitute for, and should be ready in conjunction with GAAP financial measures for the period. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in this morning's earnings release, which is available on our Web site at www.regiscorp.com. I will now turn the call over to Hugh.

Thanks Paul and good day everyone. Thank you for joining us and thanks as well for your interest in Regis. I have three topics to share with you today. First, a brief overview of our fourth quarter performance and progress against our initiatives, including our 120 day plan, which we initiated in the quarter; a few insights into the shift of our culture and focus, and thoughts regarding the renewal of our Company, including the key elements of our strategy. So let's begin with the results of our fourth quarter. You may recall during my first call with you that I stated that Regis is a great company, but our financial results were not great. You may also remember that we were in the process of implementing a number of new initiatives, including a 120-day plan, a plan intended to stabilize financial performance and establish a platform for longer-term revenue and earnings growth in our company owned salons in North America. The basic design of a 120-day plan is focused on the following key components: aligning variable salon labor costs and other resources based on forecasted demand; improving the quality of our revenue through price increase in our North American salons; and just investing in salon programs that were not delivering improvements in our financial performance. The Company's fourth quarter results improved over the preceding three quarters and prior year fourth quarter due in part to the preliminary benefits associated with the 120-day plan. In the fourth quarter, we generated revenues of $424 million, same-store revenues increased 40 basis points and adjusted EBITDA increased nearly $4 million to $31 million. Although, I was certainly encouraged by the results of the quarter, I also recognize that we have more work to do before we can report that an operational turnaround in our company owned salons has been fully realized, and that we have optimized our growth opportunities and franchise. For example, guest traffic in comparable company owned salons was down for the quarter and the year, and we still have too many underperforming salons in our portfolio, particularly in our mall locations. As we have previously disclosed, we are considering strategic alternative for our mall based salons. This process is not yet complete. But we are making progress and we will keep you informed as we determine the best option for our mall operations and the dedicated stylists and employees who are part of this business. As to our non-mall portfolio of company owned salons and value-brands, I am convinced based on an analytical assessment of these salons that an operational turnaround can in fact be executed as we continue to also drive the organic growth of our franchise business. We took an important step to operationalize our turnaround strategy when we reorganized our field leadership and aligned our non-mall value salons according to brand and concept. We believe this change will simplify our operations and enable improved execution and a focus on differentiated brand service delivery and of course the guest experience. Regarding my second topic, I thought it would be helpful to provide a few insights into our shift in culture and focus here at Regis. As you know, the CEOs typically define the culture of their business, and in my brief time at Regis, I believe we have made rapid progress in establishing a more competitive and winning spirit throughout the organization. A new transformational leadership team is in place and we are driving a companywide shift to a guest-focused accountable growth oriented culture. The changes in our leadership team since my arrival include the following: the appointment of a President to lead the continued growth of our franchise business; the selection of a New Chief Marketing Officer; the recruitment of a New CFO; the recruitment of a New Chief Human Resources Officer; the redeployment of an experienced executive to manage variable salon labor and the staffing of our salons based on demand; the promotion of a talented executive as Vice President of Wal-Mart Relations where our SmartStyle salons are located; the decision to invest in a new role, Vice President of Creative to ensure that we remain an industry leader in new trends, service offerings and the technical education of our styles. This represents eight key changes to the leadership team of the Company, since April, including of course the new CEO. As a result of these changes, we have a new leadership paradigm at Regis with an emphasis of velocity of decision making and accountability for the financial results. Now, a few brief thoughts on our strategy for the renewal of our business. I hope you will all find that the information in our 10-K is helpful; we have taken care to describe our new reporting segments, improved insight into our franchise business and discussed our plans to upgrade the guest and stylist experience through our new SmartStyle mobile app, POS upgrades and the deployment of tablets in our salons to open a direct channel of communications with our stylist, including as a platform for technical education. In our 10-K, we have also disclosed the key elements of our strategy. These elements or clarity are not sequential, they are concurrent activities supported by underlying programming and task specific action plans at the executive officer level. Our strategy to drive improved performance at Regis is to do the following: restructure the portfolio and focus on the core; open lines of communication and create operational urgency; create alignment in the Company at every level around the clear vision and strategy; establish execution as a core competency; eliminate non-essential costs and then reinvest for growth; upgrade stylist recruitment, training and retention; transform the business and the guest experience with technology; revitalize in-salon service and the guest experience to build revenue and accelerate the growth of our franchise business. When I accepted the CEO’s role in Regis, I asked our employees and our franchise owners this question. What would you do if you were the new CEO of Regis? And you may be surprised to learn that I received well over 1,000 email responses, and I in turn, responded personally to each one of those emails. While reading the emails from our constituents, I learned that Regis has a passionate and committed group of employees and franchise owners who want to win. Business after all is a competitive sport and we should play to win. My commitment to our stakeholders is to make the decisions and take the actions necessary to build the Company that we can all be proud of. I recognize that a lasting transformation of Regis may take some time, particularly in the current retail environment; however, I believe there are reasons to feel more optimistic about the road ahead at Regis; the 120 day plan is executed and it’s working at targeted levels; we are making progress in our analysis of options for our mall locations; we have great brands. We have a solid balance sheet; a growing franchise business; company owned salons that generate cash and where results can be improved. We are in fact blessed with talented stylist, capable field management who are now aligned with our brands and a dedicated team of technical and administrative personnel who support our salons. We have a successful and highly supportive group of franchise partners who have been ready, willing and able to provide ideas to new CEOs; ideas that I have acted upon, based on their advice; a highly experienced executive leadership team with the necessary skills in place to lead the transformation and perhaps most importantly, we all know where we want to go and we know how to get there. So I thank you for your continued patience and support. And I look forward to serving you in the years ahead. And now my partner and our CFO, Andrew Lacko, will provide the details of the quarter, and the 2017 fiscal year. Andrew?

Thanks Hugh and good morning everyone. Having joined Regis recently, I wanted to start by saying how excited I am to be here today and I look forward to working with you going forward. On this morning's call, I would like to provide with some additional color on our fourth quarter and full year financial results along with our quarter and in liquidity. But before I review the results of the fourth quarter, let me take a moment to discuss the couple of items. First, in conjunction with our previously announced plans to focus on a strong portfolio company owned and franchise locations along with a newly created role of president of franchise, we have made a change to our reportable segments. We believe that the new reportable segment structure, which reflects the shared importance of both franchise and company owned operations, will provide increased transparency to the key drivers of our business, including the focus on growing our franchise business along with the operational turnaround underway in our company owned salons. The new reporting segments that you seen in today's press release and file 10-K are North American Value, North American Franchise, North American Premium and International Salons. One example of this increased transparency with the new reporting segment is the visibility now to the strength of the North American Value segment. This is demonstrated by one’s ability to now see the segment’s $3 million or 8.6% increase in fourth quarter adjusted EBITDA year-over-year on a 1.6% increase in comparable store sales. In fact, for the full year, Supercuts, one of our key brands in the North American Value segment, recorded its fourth consecutive year of positive year-over-year comparable store sales growth. In addition to the change in our reportable segments, as in quarters past, I would like to remind you that the valuation allowance in place against most of our deferred tax assets makes it very difficult to compare after tax results to prior periods. As we have 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. With those items aside, I would like now give you some additional detail on the fourth quarter and full year results. On a consolidated basis, fourth quarter revenue decreased $24 million or 5.3% versus the prior year to $424 million. The year-over-year decline in revenue was driven primarily by the closure or refranchising of 133 unprofitable salons and the unfavorable act of foreign currency, partly offset by 40 basis point improvement in same store sales. The positive same store sales performance was a result of 3.7% increase in ticket, partially offset by 3.3% decline in year-over-year traffic. We estimate that the shift of Easter, from March of last year to April of this year, positively impacted fourth quarter consolidated same store sales by approximately 50 basis points during the quarter. Fourth quarter consolidated adjusted EBITDA of $31 million was $3 million or 11.7% favorable to the same period last year. The year-over-year growth was driven by positive revenue comps in our non-mall salons, the closure of unprofitable salons and the continued focus and growth of our franchise segment. These benefits were partly offset by negative revenue comps in our mall based salons, the loss of one sales day in the quarter, variable labor cost increases, and increased marketing investments. During the quarter, we also saw good momentum around our 120 day plan initiatives, as Hugh had mentioned. The core components of the 120 day plan focused on improving upon our performance by better aligning company resources to demand, while continuing to provide an exceptional guest experience. Additionally, simplification of our business to grow revenues and disinvestment of certain programs that do not create value is centered to what we are doing. Today, the initial returns on the Company's 120 day plan have been favorable and we estimate that the reported fourth quarter results were favorably impacted by approximately $3.1 million due to these initiatives. It is important to note, however, that we decided to strategically reinvest a portion of these savings back into focused digital marketing campaigns that we believe will help drive traffic in the upcoming months. For the full year, consolidated revenues decreased $99 million or 5.5% to $1.7 billion. The year-over-year decline was the result of salon closures and a 180 basis point decline in same-store sales driven by 5.2% decrease in year-over-year traffic, partially offset by 3.4% increase in ticket. For the year, adjusted EBITDA totaled to $87 million, a $4 million or 4% decline year-over-year. Turning to the North American Value segments, which is comprised of Smartstyle, Supercuts, MasterCuts and our signatures Style concepts. Fourth quarter revenue decreased $9 million or 2.6% versus the prior year to $320 million. The closure or refranchising of 371 unprofitable salons and the unfavorable impact of foreign currency was partly offset by positive same-store sales increases of 1.6%. Fourth quarter gross profit of the $134 million decreased $2 million or 1.8% year-over-year. The margin impact of sales volume declines of roughly $4 million were partly offset by margin rate improvement of 40 basis points, which primarily was the result of favorable inventory shrink and usage rates. As I mentioned earlier, fourth quarter North American Value adjusted EBITDA totaled $41 million, which is $3 million or 8.6% increase versus the same period last year. The year-over-year favorability was driven by operating cost reductions, primarily related to sight operating and rent savings from the closure of unprofitable salons, partly offset by the gross profit decline. On a full-year basis, North American Value total revenue decreased $36 million or $2.7 billion to $1.28 billion. The year-over-year decline was driven primarily by the closure of 276 salons, the sale of 94 company owned salons to franchises, and an 80 basis point decline in same store sales. For the year, adjusted EBITDA totaled $135 million, a $7 million or 5.4% decline year-over-year. In our North American Franchise segment, total revenue of $21 million was an increase of $1 million or $4.7 million year-over-year. Total royalties and fees totaled $13 million, an $8.6 million increase compared to the same period last year. Royalties increased 5.9%, driven primarily by positive same-store sales by our existing franchise base and increased franchise salon counts. Initial franchise fees increased approximately $1 million or 46% as the company opened or converted a net 111 franchise locations in the quarter as compared to 57 in the prior year quarter. Fourth quarter North American Franchise adjusted EBITDA of $9 million, which was essentially flat year-over-year, was driven by the increase in royalties and fees offset by lower margins on product sales to franchisees and a higher incentive cost paid as part of the opening of the 111 franchise salons during the quarter. On a full-year basis, North American Franchise total revenue was $79 million, a 50 basis point decline year-over-year. The year-over-year decline was driven primarily by a decrease in franchise product sales, partly offset by increased royalty and fees. For the year, adjusted EBITDA totaled $35 million, which was essentially flat on an absolute dollar term or a 90 basis point increase year-over-year. In our North American Premium segment, which is comprised predominantly of our mall based Regis salons brands and Vidal Sassoon North America salons. Fourth quarter revenue of $57 million was an $11 million or 16.3% decrease versus the same period last year. The year-over-year decline was driven primarily by the closure of 135 unprofitable salons, the unfavorable impact of foreign currency and negative same-store sales of 4.1%. Fourth quarter gross profit for the segment decreased $4 million or 18.4%. Lower sales volumes and an 80 basis point decrease in gross profit rate were the primary drivers of the year-over-year decline. The gross margin rate decline was driven primarily by higher year-over-year salon labor cost, which includes minimum wage impacts and lower productivity due to the Easter holiday pay. These headwinds were partly offset by favorable inventory shrink and usage rates. North American Premium fourth quarter adjusted EBITDA loss of $2 million was $1 million unfavorable versus the same period last year, driven primarily by the gross profit decline, partly offset by operating cost reductions and site operating and rents from closing unprofitable salons. On a full-year basis, North American Premium total revenue decreased $42 million or 14.8% at $242 million. The year-over-year decline was driven primarily by the closure of 135 salons and 5.9% decline in same store sales. For the year, adjusted EBITDA loss totaled $10 million, which was $5 million worse year-over-year. In our International segment, which includes both company owned and franchise salons, fourth quarter revenue of $26 million declined $5 million or 15.8% versus the same period last year. Closures of the company owned salons, the unfavorable impact of foreign currency and a negative 5.1% same store sales decline, all contributed to the year-over-year decline. Gross profit for the fourth quarter decreased $3 million or 18.7% year-over-year to $11 million, driven primarily by the decline in sales volume and 140 basis point decrease in gross margin rate. The rate decrease was a result of lower stylist productivity and unfavorable inventory shrink and usage rates. International fourth quarter EBITDA of $400,000 was $300,000 favorable to the same period last year. Operating expense reductions from the closing of unprofitable salons and purposeful cost savings were partly offset by the gross profit decrease. For the year, International segment total revenue decreased $21 million or 18.4% to $92 million. The year-over-year decline was driven primarily by foreign currency impact, a 5.7% decline in same store sales and the closure of 50 company owned salons. For the year, adjusted EBITDA totaled $600,000, a $400,000 decline year-over-year. In the Corporate segment, which is comprised mostly of corporate and administrative expenses, the adjusted EBITDA loss of $18 million improved from last year’s fourth quarter adjusted EBITDA loss of $19 million. General and administrative expenses decreased $1 million or 5.6% compared to the prior year quarter, primarily the result of equity compensation benefit savings due to the changes in the Company’s leadership team, partially offset by increases in rent and lapping in an insurance settlement from last year’s fourth quarter. On the liquidity front, we had another strong quarter in which we generated $4 million of free cash flow. This favorable cash flow generation was driven by $13 million year-over-year increase from operations, partly offset by $8 million of CapEx investments during the quarter. On a full year basis, the Company generated over $60 million of cash from operations, while we invested $34 million largely from CapEx and used $7 million in franchising activities, mostly for cost related to previously issued equity grants. Additionally, we had $900,000 positive cash impact from exchange rate movements during the year. Net-net, we grew cash by $25 million and finished the year with $172 million of cash, a $123 million of total debt and no outstanding borrowings under our $200 million revolving credit facility. Before we open up the call to questions, I’d like to provide some insight into recently announced field reorganization and the impact it will as you build out your 2018 models. As a reminder, mid-July, we announced the reorganization of our field leadership team that we believe is better aligned by brand and concept. This change was designed to better focus the team around four distinct field organizations; SmartStyle, Supercuts, Signature Style and our premium and mall brands, which substantially include our Regis Premium brand and our MasterCuts value brand. As a result of this reorganization, beginning in first quarter of fiscal 2018, we will move our senior district leader cost out of cost of goods sold where they have historically been recorded and into G&A. It is important to note that this move, for the most part, will have zero net impact to our consolidated numbers, rather it will simply be a geography change that will result in cost of goods sold to decrease and G&A to increase by a corresponding amount. As part of our first quarter 2018 earnings release, we will provide reconciliation on a pro forma basis to help investors understand this change. And with that, I’d like to now the turn the call back to Don for questions. Go ahead, Don.

Thank you [Operator Instructions]. And we’ll take our first question from Tucker Golden with Solas Capital.

I appreciate your new disclosure. I think it’s helpful in gaining more insight into your franchise operations versus your own. I would say though we still have $73 million as adjusted of unallocated corporate cost, and I think that’s what's preventing the markets from getting its head around the value of each of your segments. Understanding that there’s certainly going to be some shared cost, it just seems like an awfully large number given the size for the company. Can you give us any more clarity in terms of how you would further allocate that very large unallocated overhead bucket?

Tucker, this is Andrew, thank you very much for the question. I would say that as we continue to go through the analytical process as I'm getting up to speed, understanding where exactly those unallocated overhead and administrative costs lie, we will go through a more refined process by which we can provide insight as to how they would be allocated. Predominantly, the cost will reside in labor related cost, support related cost. And at this point, it's too soon for me to specifically point out where these costs align. Then there’s also a strong component of IT cost in that bucket that support the overall portfolio. But as I continue to develop the -- or develop the analytical background to feel comfortable allocate those expenses, we will be able to provide more detail.

I think, philosophically, Andrew and I agree with you. If there is an opportunity for greater precision and to be -- add clarity to the allocation methodology, so the company and we’ll work on it. You will see as we -- you guys asked for greater clarity, and I think we’ve given it to you and that’s first step and we’ll continue to provide more insight in the quarters ahead.

Okay, I appreciate the start and I look forward to more. And I appreciate the renewed sense of urgency here, it's time and we’re cautiously optimistic. It seems like things are starting to work. Thank you.

Thank you for your comments.

That does conclude today's question-and-answer session. So at this time, I'll turn the conference back to you, Sawyer, for any closing remarks.

Thank you for your attendance today. And thank you for your continued support of Regis, and we look forward to talking to you again next quarter. Thanks everyone.

This does conclude today's conference. Thank you for your participation. You may now disconnect.