Regis Corporation (RGS) Q1 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Regis Corporation Fiscal 2019 First Quarter Earnings Call. My name is Jacob, and I will 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 PM Eastern time today. I’ll now turn the conference over to Senior Vice President of Finance, Kersten Zupfer. Please go ahead.

Thank you, Jacob. 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 couple of 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. And 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, which should not be considered superior to, as a substitute for and should be read in conjunction with the GAAP financial measures for the period. A reconciliation of these 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/investorrelations. With that, I will now turn the call over to Hugh.

Thank you, Kersten, and good morning, everyone, and thanks as well for your interest in Regis. We are pleased to report this quarter continued signs of progress, progress in our multiyear strategic and operational transformation. All of us remain committed to the execution of initiatives that we believe will enhance shareholder value and help us build the company we can all be proud of. During the quarter, we continued to diversify our salon portfolio with the sale of 124 company-owned salons to the high-quality franchisees. At the close of the quarter, approximately 52% of our salon portfolio was franchised, including the salons that make up the Beautiful Group, and 48% of our portfolio is company-owned salons. Although we have more work to do, company-owned salons continue to perform as evidenced by a 50 basis point improvement in year-over-year same-store sales. The financial performance of the company continues to stabilize as today’s reported results marked the sixth consecutive quarter with year-over-year growth in adjusted EBITDA. And we are establishing a foundation for our technology transformation. Our baseball analogy from our Major League Baseball sponsorship, we are in the very early innings of this work. We are cautiously optimistic that the efforts we have underway to transform the manner in which we interact with our customers and the services and capabilities we are able to offer our franchisees will yield long-term shareholder value. I would like to thank our associates and franchisees for their many contributions to our business this quarter and each one of you for your continued interest and support for Regis. I will now turn the call over to Andrew to take you through some of the details and to provide additional clarity to our numbers. Andrew?

Thanks, Hugh, and good morning. As Hugh mentioned, we are pleased to see continued evidence of progress with our transformational efforts across multiple fronts. Before getting into the details of the quarter, I’d like to show with you a quick overview on the accounting changes related to revenue recognition that you likely noticed in this morning’s earnings release. While the new revenue recognition guidelines impact how we recognize franchise fees, gift card revenue and ad funds that support our franchise operations, they do not impact the company’s cash position as all of the adjustments related to the new guidance are noncash in nature. With regards to how the new guidelines affect the P&L, the changes to gift card and ad fund accounting do not have a meaningful impact on the company’s reported operating income. However, the new treatment of franchise fee does impact reported operating income. Specifically, prior to fiscal year 2019, we recognized franchise fee revenue when the franchisee opened a new salon. Under the new guidelines, initial franchise fees – initial fees from franchisees are recognized over the life of the related franchise agreement, which is typically 10 years. In fiscal years 2018, 2017 and 2016, we recognized $8.5 million, $4.3 million and $4.5 million of revenue related to initial fees from franchisees, respectively. These amounts will now be deferred and recognized over 10 years. The new revenue recognition guidance also requires ad fund contributions from franchisees to be recognized as revenue, with a corresponding expense recorded to site operating expense. This treatment results in reversal of revenue and expense on the income statement but has no impact on operating income. The prior year financial statements provided in our press release and 10-Q have been adjusted to reflect these changes. As a result, future financial statements we issue will be comparable to the prior year results, but they will not be comparable to the financial results issued previously. To better assist you with your modeling, we have provided a quarterly pro forma P&L on our website with adjusted historical financial statements. Additionally, independent of the new revenue recognition reporting requirements, I’d like to point out that in response to the increased diversification of our salon portfolio to franchisees, we have provided additional disclosures in both our earnings press release and 10-Q related to the sale of these salons during the quarter. The additional disclosure detail provided includes: total number of closed transactions during the quarter; cash proceeds received during the quarter; the net gain from the sold salons, which takes into account the cost of transferred inventory and F&E, among other things; and the amount of noncash goodwill to be recognized related to the sold salons. As we continue to sell salons to franchisees where it makes strategic sense and maximizes value to our shareholders, we believe this additional disclosure will help our investors better understand the impact of salons sold to franchisees adds to our overall reported financials. Lastly, before I turn to the quarter results, I’d like to remind you that last year’s field reorganization change, which took place on August 1, 2017, that aligned field leadership by brand impacted year-over-year comparability of the results we reported this morning. In last year’s numbers, the expenses associated with these leaders were in the cost of service and site operating expense for the month of July. This year, our field leadership costs are in G&A. While there is no impact to our P&L in total, this change increased G&A year-over-year by $2.8 million in the quarter. As of August 1 of this year, we have fully lapped this reorganization change and accordingly and anticipate that this will be the last quarter that year-over-year comparability will be impacted. Now turning to the results. On a consolidated basis, first quarter revenue decreased $27.6 million or 8.8% versus the prior year to $287.8 million. The year-over-year revenue decline was driven primarily by the closure of a net 681 salons and the conversion of 477 company-owned salons to franchised locations over the past 12 months. These reductions were offset by revenue growth in our franchise segment and a 50 basis point improvement in company-owned same-store sales. The positive same-store sales performance was driven by a 4.2% increase in ticket, partially offset by a 3.7% decline in year-over-year traffic, which we define as total transactions. First quarter consolidated adjusted EBITDA of $25.1 million was $2.8 million or 12.6% favorable to the same period last year. The year-over-year increase was driven by $7.1 million of cash gains, excluding non-cash goodwill derecognition from the sale of company-owned salons to franchisees, profitable growth in our franchise segment and continued removal of non-contributory, non-strategic G&A costs. These were partly offset by stylist minimum wage and commission increases in our company-owned salon portfolio and lapping favorable one-time benefits in the prior year. I'd like to remind you that when comparing year-over-year results on a consolidated basis, that I want you to take into account the adjusted EBITDA associated with the 477 salons sold and converted over the past 12 months. So on a normalized basis, pro forma adjusting for those sold, adjusted EBITDA – related to those salons, adjusted EBITDA was roughly flat to down slightly year-over-year. Looking at the segment-specific performance and starting with our company-owned salons. First quarter revenue decreased $39.1 million or 13.5% versus the prior year to $249.8 million. The year-over-year decline is driven primarily by a decrease of approximately 1,158 company-owned salons over the past 12 months, which can be bucketed into three main categories. First, the closure of 597 non-performing SmartStyle salons during the third quarter of fiscal 2018; second, the sale of 477 company-owned salons to franchisees over the past 12 months; and lastly, the closure of approximately 84 unprofitable company-owned salons over the course of the last 12 months. Partially offsetting the impact of the salon closures was a 50 basis point increase in company-owned same-store sales and favorable foreign currency impacts. First quarter company-owned salon segment adjusted EBITDA decreased $5.7 million year-over-year to $27.6 million. The year-over-year decline was driven primarily by the sale of company-owned salons to franchisees; stylist minimum wage and commission increases; strategic investments in marketing and advertising, including the continued support of our Supercuts MLB sponsorship; rent expense due to inflationary increases; and lapping favorable benefits in the prior year. These declines were partially offset by the closure of unprofitable company-owned salons and savings realized from management operational initiatives. In the franchise segment, revenue of $38 million increased $11.4 million or 43% compared to the prior year quarter. Royalties and fees of $22.4 million increased $3.5 million or 18.6% versus the same period last year. Royalties increased 14.4%, driven primarily by positive same-store revenue in the quarter and increased franchise salon counts. Ad fund revenue increased $1.3 million, driven primarily by increased franchise salon counts. Product sales to franchisees increased $7.9 million year-over-year to $15.6 million. Of this, $5.5 million related to the sales to the Beautiful Group. I'd like to point out that the product sales to the Beautiful Group, which are in line with the transaction agreements, are currently at lower margin rates than our normal franchise business. First quarter franchise adjusted EBITDA of $9.9 million improved $1.3 million or 15.4% year-over-year, driven primarily by the revenue increase, partly offset by cost of goods sold on product sales to franchisees, increased freight and warehousing expenses and bad debt expense. Turning now to corporate overhead. First quarter corporate-related adjusted expenses of $12.4 million decreased $7.2 million or 36.8% compared to the prior year quarter. The primary driver of the year-over-year decrease was $7.1 million of net gain, excluding non-cash goodwill derecognition from the sale of company-owned salons to franchisees and other management actions, partially offset by increased stock-based compensation expense. Looking at consolidated total company reported G&A during the quarter. Although it may not be readily apparent looking at the numbers off the face of the P&L, we continue to make progress on our commitment to remove non-contributory, non-strategic costs. Specifically, a few items in particular make it difficult to compare year-over-year numbers. First relates to the onetime $8 million gain on a life insurance settlement recorded during the first quarter of last year. Second relates to the approximately $2 million net year-over-year increase in restructuring-related expenses, driven by actions taken during the quarter to reduce salon support headcount. Third relates to professional fees associated with the strategic brand work commenced this year that had a net $500,000 impact year-over-year. And lastly is the impact of the realignment of the field leadership's team I discussed earlier. While there is no impact to our P&L in total, this reorganization change increased G&A by approximately $3 million. Taking into account these items on a pro forma basis, we have reduced total reported G&A by about $1 million year-over-year during the first quarter of fiscal 2019. Lastly, turning to the balance sheet. We continue to maintain our strong overall liquidity position while providing optimal balance sheet flexibility through the company's continued strategic transformation work. On the liquidity front, net-net quarter-end cash increased year-over-year by $5.3 million to $215.7 million, and we had $90 million outstanding under our existing revolving credit facility. This cash build was driven primarily by the sale of company-owned salons and the monetization of company-owned life insurance policies that we completed during the fourth quarter of last fiscal year but collected the cash in July. Additionally, we used $19.3 million during the quarter to repurchase 1.1 million shares or roughly 2% of our shares outstanding. And as of the end of the first quarter, we have approximately $216 million of available capacity under our approved stock repurchase program. With that, I'd like to thank you for your continued support and interest in Regis, and we'll now turn the call back to Jacob for questions. Jacob?

Thank you, Hugh and Andrew. The question-and-answer session will begin at this time. Q - :

Since we have no questions this morning, I just want to say thanks to everyone for attending the call, and we look forward to talking to you again next quarter. Thank you.