Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Clive Warshaw – Chairman

Leonard Fluxman – President and CEO

Stephen Lazarus – EVP and CFO

Analysts

Assia Georgieva – Stanford Financial Group

George Kelly [ph]

David Katz – Oppenheimer

Barry Haimes – Sage Asset Management

Steiner Leisure Limited (STNR) Q4 2008 Earnings Call Transcript February 26, 2009 11:00 AM ET

Operator

Welcome to Steiner's fourth quarter earnings conference call. At this time, all lines are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would like to introduce your host for today's conference, Mr. Clive Warshaw, Chairman of Steiner Leisure; and Mr. Leonard Fluxman, Chief Executive Officer of Steiner Leisure. Sir, you may begin.

Clive Warshaw

Thank you very much. Good morning, ladies and gentlemen, and welcome to this fourth quarter conference call. I’m going to commence as usual by handing it straight over to Leonard Fluxman.

Leonard Fluxman

Thank you, Clive. And good morning, everyone. I’d like to thank you for joining us this morning for our fourth quarter earnings call. With me today, you’ve heard from Clive Warshaw, the Chairman of our Board; Stephen Lazarus, our Chief Financial Officer; and Robert Boehm, our General Counsel.

During this call, we will be making comments which are forward-looking statements. Forward-looking statements do not guarantee future performance and involve risks and uncertainties. Examples of these risks are described in our SEC filing and other disclosures.

I’m going to start in usual fashion with an overview of the business and the results of the quarter, followed by an analysis of the performance by segments. I will then hand you over to Stephen Lazarus to give you the breakdown on specific balance sheet items, cash on hand, our stock repurchase summary to date, CapEx during the quarter, and other pertinent balance sheet data. We will also address guidance for the first quarter and for the full year 2009 and then turn it over for regular Q&A session.

The economic deterioration and negative consumer sentiment that accelerated starting in mid-September adversely impacted our fourth quarter results. Our fundamental business model has proven to be remarkably resilient of the 20 years or so that I've been around, but nothing could have prepared us for the pullback in consumer spend we experienced in the fourth quarter.

Consequently, total revenues for the fourth quarter declined 8.5% quarter-over-quarter. Growth profit fell 9% quarter-over-quarter. And gross profit, excluding the beneficial impact of foreign exchange declined 11.5% quarter-over-quarter. Service margins declined 30 basis points to 18.6% quarter-over-quarter. This decline was primarily attributable to the continued softening in the economic environment (inaudible) shifted some of the ongoing demand to a higher service mix and product mix that we have historically reported, particularly offset by the improved performance in our post secondary school segment.

Product margins expanded by 1,530 basis points to 45% enhanced by the significant strengthening of the US dollar against the British pound in the quarter, which favorably impacted cost of goods by $6.3 million. Product margin, excluding the benefit from foreign exchange previously mentioned, declined by 60 basis points to 29%, delivering gross margin of 27%, or 22% excluding such benefit in the quarter.

Included in G&A expense is a negative foreign exchange impact of $2.8 million, without which admin expenses would have improved 90 basis points quarter-over-quarter. The aforementioned were the primary drivers for the decline in operating margin of 110 basis points.

Our Cruise Ship Spa Division experienced its toughest quarter since 9/11, combating the challenges of lower consumer demand for services and retail spend. Guests were more value-driven and significant discounting was necessary to drive the demand to our facilities onboard. The largest challenge we still face once we got guests up into the spa was getting them to purchase retail products. The level of retail product attachment to service was further challenged.

Total revenue declined 6.8% quarter-over-quarter. Average weekly revenue on all ships declined 7.9% quarter-over-quarter. And average weekly revenues from spa ships declined by slightly lower amount, 7.3% quarter-over-quarter, with non-spa ships, which is primarily the luxury segment, declining by 25.6% quarter-over-quarter. Gross revenue per staff per day declined by 13.3%, and this is derived by revenue per staff per day for spa ships declining 13% and non-spa ships declining by 23.8%.

On the positive side during the fourth quarter, we successfully concluded a number of ongoing negotiations to renew some very important cruise line agreements that we have discussed on prior calls. These were Disney Cruise Lines; Celebrity, including their new Solstice class of vessel; NCL, including their F3 ships; Seabourn Cruises, including their new Odyssey class luxury yacht; as well as two very important classes within the Carnival fleet of ships. This was a very busy and typically tough period of negotiations. But I’m very proud of my team and their efforts to get this completed so that we can now put this behind us and focus 100% on maximizing the operations on board. This now locks a solid amount of ships over the next five years, including most of the capacity each of these cruise lines will bring on line.

Turning to our Resort Division, our Resort Division was impacted to a greater degree by lower occupancies than our maritime model. During this quarter some of the major properties we serve were materially impacted by such low occupancies resulting in lower capture rates and decline in revenues of 22% quarter-over-quarter. Our average weekly revenue of resorts also declined 17% quarter-over-quarter.

The department store channel was not immune to the compression in consumer spend and was negatively impacted as were other distribution channels. The weakened US and UK economies closed revenues in our product divisions to decline 21% quarter-over-quarter. At the end of the fourth quarter, we were in the total of 61 Nordstrom stores in the US, 23 department stores in the UK, bringing the total number of department stores we offer Elemis products in to 85 stores. We have no immediate plans to roll out any future department store operations.

Lastly, and most pleasingly, we turn to Steiner Education division, which was the bright spot in the quarter. Revenues increased by 27% quarter-over-quarter, primarily due to higher number of enrollments and increased student populations at our schools this year versus last year at the same time. We continue to be satisfied with the positive turnaround in the operations of our East Coast school group.

Clearly we are experiencing difficult times. And with the high degree of uncertainty in the market today, we are focusing on being as cost conscious as possible while continuing to deliver superior guest experience and service in all our maritime and resort spas. We are, however, very comforted by the fact that we have a strong balance sheet, strong cash flows from operations, and liquidity to weather this difficult economic storm. Given the challenges we experienced in the fourth quarter without yet having seen a sustainable turnaround in our business segments, we will providing a much broader 2009 full year guidance than we have historically.

I will now hand the call over to Stephen who will go through some of the other balance sheet items, cash on hand, share repurchase update, and guidance for the first quarter and the year. Stephen?

Stephen Lazarus

Thank you, Leonard. Good morning, ladies and gentlemen. First, as usual, I’ll provide some details on the fourth quarter of 2008, covering depreciation, capital spending, cash and our share repurchases and then move on to 2009. Depreciation and amortization for the fourth quarter of 2008 was $3 million broken down as $650,000 below the line depreciation and $135,000 below the line amortization. Above the line depreciation was $2.2 million. 2008 full year depreciation and amortization was $12.2 million.

Capital spending in the fourth quarter was $1.7 million, taking 2008 capital spending to $6.2 million. Net cash and investments at December 31st was $24.5 million and as of today, we have $32.8 million of net cash on hand and $30 million available on our line of credit.

Since our last conference call, we repurchased 500,549 shares at a cost of $12.7 million. Therefore for 2008, as you recall, in February of ’08 our Board of Directors authorized a new repurchase program under which up to $100 million of Steiner shares could be purchased. Under this plan we have $50.5 million of authorization that remains.

The total number of shares repurchased in 2008 was approximately 1.77 million shares for $57.9 million. These 1.77 million shares include approximately 47,000 shares surrendered by employees of the company in connection with vesting of restricted shares and used by the company to satisfy payment on employee federal income tax withholding obligations upon the vesting of such restricted shares. Total shareholder equity as of December 31st was $164.9 million.

Moving then on to our 2009 assumptions and guidance. Our estimate of the non-cash equity expense for 2009 using a straight line method is $6 million. Depreciation and amortization is estimated as follows. Q1, $2.74 million; Q2, $2.72 million; Q3, $2.67 million; Q4, $2.63 million; and that takes the full year to $10.8 million. 2009 capital spending is forecast as follows. Q1, $1.9 million; Q2, $1.1 million; Q3, $800,000; Q4, $600,000; that takes the full year to $4.4 million.

Cruise ships on average for 2009 in total we expect to be at 127. That’s 127 in Q1, 124 in Q2, 129 in Q3, 128 in Q4. Breaking that out between spa ships and non-spa ships, spa ships in total 98; 97 for Q1, 96 for Q2, 99 for Q3, and 100 for Q4. Non-spa ships in total 29; 30 for Q1, 28 for Q2, 29 for Q3, and 28 for Q4. Average resort spas for 2009 are 51 in total. Q1 is 50; Q2, 51; Q3, 51; and Q4, 52.

Our assumption on the number of weighted average diluted shares outstanding for 2009 is 14.5 million. Based on that and with the increased range that Leonard referred to, our 2009 guidance is as follows. For the first quarter we expect revenue to be in the range of $115 million to $120 million, with Q1’s earnings per share forecast at $0.48 to $0.53. Full year 2009 guidance has revenue at $495 million to $520 million, with resulting earnings per share guidance of $1.95 to $2.30.

We will now move to Q&A. Sherry, if you could please open the call to questions? Thank you.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question comes from Assia Georgieva.

Assia Georgieva – Stanford Financial Group

Good morning. This is Assia.

Leonard Fluxman

Good morning, Assia.

Assia Georgieva – Stanford Financial Group

Leonard, thank you very much for going through the foreign exchange calculation, how it impacted the various line items. In Q1 guidance, I assume that you will continue to have a benefit as the British pound has weakened further. I think it was down 18% in Q4 and quarter-to-date in Q1 is 7.26. Would you be able to quantify how much benefit you expect on the cost of products side and then how much negative impact in administrative expenses so we can model sort of the four businesses?

Leonard Fluxman

Sure. Let me have Stephen on to that for the full year, Assia.

Stephen Lazarus

Assia, good morning. The benefit of negative impact of the F-exchange, as you know, is driven primarily from a change in the rate within a quarter. So unless we see a significant change, which we are not anticipating in the dollar versus pound rate, between January 1st or December 31st and March 31st wouldn’t see a significant pickup or decline. The fact that it's improved versus Q4 of last year is reflected not only in our cost of product, but the numbers that we’ve been seeing specifically in Q3 and Q4 of last year are a function of the severe rate change within those quarters. So we don’t expect to see that again in 2009 and certainly not in the first quarter.

Assia Georgieva – Stanford Financial Group

I’m not sure that I understand and I’m sorry. Would you like me to take that offline?

Leonard Fluxman

Yes. I means, we can run you through how it impacts both cost of products and SG&A and how the volatility in the US, UK, and to some extent the euro impacts those line items, Assia. Not a problem.

Assia Georgieva – Stanford Financial Group

Okay. One related question. I thought you had a French manufacturer of your product. So I thought the euro might be more relevant than the British pound. Is your contract with them in pounds? Is that why the pound seems to be having much more of an impact?

Leonard Fluxman

Yes, he is not a very happy guy because we did put our contract in pounds. And so we’ve also taken the benefit there. Clearly that was obviously a riskier proposition for him than it was for us. So we have seen some benefits from that contract.

Assia Georgieva – Stanford Financial Group

Okay, okay. And then a more general question – and Leonard, again thanks for specifying that the productivity decline at the smaller ships was from the premium lines. And it seems that for the industry in general December was the toughest month and may have impacted the sort of mass market products the worst in December with a slight improvement in January, and February is a little bit difficult to call yet, but it seems to have done a little bit better. If you look at the large spa ships, do you see that trend so far? And then would you be able to give us an update over the past month and a half, two months what has happened in the non-spa segment?

Leonard Fluxman

The non-spa segment for us is primarily more of the luxury smaller ships that are struggling significantly more to fill their ships than the much larger spa ships. And the mass market or premium market are definitely filling much better. Their occupancies may not be 117% as measured by lower berth, but they certainly are sailing pretty much a 100% full. Certain itineraries obviously have some of their unique challenges. But the real luxury segment strangely seems to be the one segment that’s struggling to get to sometimes even 90% occupancy rates from what we’re seeing here in the first two months of the year.

Assia Georgieva – Stanford Financial Group

Well, I think with what is happening in luxury real estate, that’s not very surprising. I imagine Oceana would be one example of that segment. Is that fair?

Leonard Fluxman

When we look at small spa ships, definitely Oceana would be included in that statistic and metric just by virtue of the size, yes.

Assia Georgieva – Stanford Financial Group

And so far in the first quarter of this year, are you seeing any marginal improvement?

Leonard Fluxman

I haven’t seen anything sustainable. I’ve seen one or two itineraries pop, but until I see three or four weeks of sustainable improvement, I couldn’t comment as to what the future six months or three months or the whole quarter looks like. I mean, February is a shorter month. It’s shorter than last year. It’s just too early to call.

Assia Georgieva – Stanford Financial Group

The fact that both Carnival and Royal have suspended their fuel supplement and for people that were fully paid, provided on-board credits, are you able to see what the impact of those on-board credits has been, or is it very difficult for you to isolate that specifically?

Leonard Fluxman

It’s very hard for us to isolate exactly where all of that spend is going. It’s certainly not going to hurt us. I mean, wherever that spend is unrestricted, whether it be in short excursions, spa, bar or gaming, it's certainly a wonderful thing that the cruise lines are doing to entice passengers to come on board.

Assia Georgieva – Stanford Financial Group

It doesn't seem to be a going to gaming, so –

Leonard Fluxman

I don’t know about that.

Assia Georgieva – Stanford Financial Group

Have you gotten any help from especially the mass market and the premium brands, the larger brands in terms of marketing the spa? Or do you find that they are trying to market various on-board opportunities, not just the spa? Have you gotten any help?

Leonard Fluxman

Across the number of cruise lines the focus and challenges are obviously very unique to every one of them. And therefore, in terms of priorities there are opportunities for us to get additional exposure. And certainly some of the incentives we’ve taken to some of our cruise line partners have been adopted while others had their hands full with other priorities. And as soon as they are able to give us the scope and breadth of some of the marketing opportunities we would like to expand on, I’m sure we’d get a chance to do that.

Assia Georgieva – Stanford Financial Group

And lastly on the maritime segment with one more CCL brand offering online reservations ahead of the sailings, have you been able to increase occupancy or is it too early to really see the impact of that?

Leonard Fluxman

Sorry, which cruise line did you mention, I couldn’t here that?

Assia Georgieva – Stanford Financial Group

I thought the Carnival brand has added online reservations before people – online spa reservations before people actually board the cruise. Has that helped you with occupancies on poor days or are you able to estimate the impact of that program?

Leonard Fluxman

Well, I’m pleased to that it has been like to – I don’t know, maybe 2.5 to 3 years in the making. We have now successfully rolled out onto all Carnival ships. The pre-booking, pre-reservation system, it went for a period of time without any kind of PR or press release. Once the press release was put out by Carnival with regard to the pre-booking opportunity, we’ve certainly seen a spike in utilizing the tool to pre-book. However, it’s just so early in the day right now to say to what extent we will be able to utilize this tool as a yield management tool, which ultimately is the objective here.

Assia Georgieva – Stanford Financial Group

Okay. So it’s still too early for –

Leonard Fluxman

It is too early. I mean, it’s literally been in place maybe, I would say, 2.5 to 3 weeks.

Assia Georgieva – Stanford Financial Group

Okay. I thought it was a couple of months, okay.

Leonard Fluxman

No, no, no. It’s really rolled out in the last – yes, three weeks is probably as long as it has been there on the entire platform.

Assia Georgieva – Stanford Financial Group

I see. And switching over to the school division, obviously I’m glad to see much better revenue numbers. And it is my understanding that the for-profit educational industry is doing quite well. There is still loan availability and a lot of people being out of work, they are focused on expanding their qualifications. Is that partly the reason for higher enrollments or was this a result of the efforts for the past three years that your team has put in place?

Leonard Fluxman

I would rather say – I mean, the post secondary education segment in its entirety typically benefits countercyclically. However, that does not necessarily mean that massage or skin care or cosmetology would benefit the same way as some of the bigger schools that offer many more modalities than we do. So to say that we would rebound the same way as they do, I don’t think we have data that can support that. But certainly, we have shown some countercyclical resilience and in fact, we're doing better. But I would emphasize that it’s more down to the efforts of our business segment leader, his team, our focus, some of the changes that we’ve made which are now starting to pay off.

Assia Georgieva – Stanford Financial Group

And in the quarter, was that business profitable? I would assume it was.

Leonard Fluxman

Yes.

Assia Georgieva – Stanford Financial Group

Would you be able to quantify that since you will file that in the 10-K in any event?

Leonard Fluxman

You will see it in the K on Monday.

Assia Georgieva – Stanford Financial Group

Okay.

Leonard Fluxman

Yes, the segment is broken out very clearly for you.

Assia Georgieva – Stanford Financial Group

Okay. All right. Well, thank you so much. I appreciate all the answers.

Leonard Fluxman

No problem.

Operator

Our next question comes from George Kelly [ph].

George Kelly

Hi, guys. Thanks for taking my call. Just one quick question sort of to expand on that’s already been asked, but – with the largest on-board spas, does it appear that the trend – sort of on-board spending trends are stabilizing a bit, or is it still coming down?

Leonard Fluxman

It is too early to say that they are stabilizing. I will say that I haven’t seen them materially worsen since the fourth quarter. That we have not seen. So does that mean they have totally stabilized? I might be too early to call. Certainly we are looking to see what March looks like. Typically March can be a slightly better month than February. So we’d be able to tell once we got through the next month.

George Kelly

Okay. And then just one other quick one. The cause for the jump in administrative expenses, you mentioned it, I just missed it.

Leonard Fluxman

It’s primarily due to the impact of – $2.8 million negative impact of foreign exchange impacting that line item.

George Kelly

Okay. All right. Thank you very much.

Operator

Our next question comes from David Katz.

David Katz – Oppenheimer

Hi, good morning.

Leonard Fluxman

Good morning.

David Katz – Oppenheimer

I wanted to ask a couple questions. The product margin even after we adjust for the FX seems higher than what we have seen in the past. If you could talk about what’s going on there? And then I have one other question. Are you doing something to drive the profitability in that business?

Leonard Fluxman

David, we certainly are focusing as we revisit strong sellers in our total mix of SKUs, the higher margin products, the more products that we can focus in our anti-aging face range, those typically do carry higher margins. And so we are starting to rationalize and have rationalized some of the ranges where we can get more product margin on those type of products and those sell through better. So, yes, we’re doing that. At the same time, obviously there is some benefit in cost of goods from the pound impacting that number.

David Katz – Oppenheimer

Right. So, irrespective of the FX, it would be fair to look at profitability at a sustainable level?

Leonard Fluxman

Unless we have to severely discount product on board to the extent that it would impact that line, I would say your comment is fair.

David Katz – Oppenheimer

Okay, good enough. And the second one is – my second question is that, it looks like payroll and admin were up year-over-year and just wanted to talk about what might be in there or what plans you may have to ratchet that back going forward?

Stephen Lazarus

Admin is actually – if you back out FX, admin is down from $33 million to $31 million.

David Katz – Oppenheimer

In the quarter?

Stephen Lazarus

No, in the full year, because you have to – in the full year number, there is a $3.6 million negative FX impact in the as-reported results. So if you back out that $3.6 million, you will see that we have improved and have taken that number down from $33 million to $31 million.

Leonard Fluxman

And payroll expense as well last year year-over-year was up 15%, this year it is still up 11%. But we are – obviously we have a hiring freeze right now. We are certainly looking at every aspect and business segment of our business where cuts can be made. We run a pretty friendly resourced admin office here, but wherever we feel there is a little fat, we are making the necessary cuts as we go through ’09.

David Katz – Oppenheimer

Okay. Okay, perfect. Thank you.

Leonard Fluxman

Thank you.

Operator

Our next question comes from Barry Haimes.

Barry Haimes – Sage Asset Management

Hi, good morning. I’ve got two questions. One is, can you give us the number of stores? I think it was 85 total. I wonder if you could give us what the number was a year ago in the fourth quarter. And then secondly, just want to follow up again on the currency gain. It sounds like most of that was maybe on the product side. Is that correct? Or where there other parts of the business that contributed to that FX gain that you cited in the press release? Thank you.

Leonard Fluxman

No, it’s primarily product-related. The bulk of it is product related. We have a very small number of ships that actually generate revenue in euros. And sometimes that can even shift at the end of the year to other itineraries where they may be even dollar-denominated. So, it’s primarily product. As to the number of stores, can you – you can call us offline and I can give you the breakout so I can just get to the exact number?

Barry Haimes – Sage Asset Management

Okay, it will do. Thank you.

Leonard Fluxman

You’re welcome.

Operator

(Operator instructions)

Leonard Fluxman

Sherry, there are no other calls?

Operator

I have no further questions.

Leonard Fluxman

All right. Thank you for joining us on our fourth quarter call. We look forward to speaking with you again on our first quarter call. Thank you very much.

Operator

This concludes today’s conference.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Steiner Leisure Limited Q4 2008 Earnings Call Transcript
This Transcript
All Transcripts