Steiner Leisure Management Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 1.13 | About: Steiner Leisure (STNR)

Steiner Leisure (NASDAQ:STNR)

Q2 2013 Earnings Call

August 01, 2013 11:00 am ET

Executives

Clive E. Warshaw - Chairman

Leonard I. Fluxman - Chief Executive Officer, President and Director

Stephen B. Lazarus - Chief Financial Officer and Executive Vice President

Analysts

Steven M. Wieczynski - Stifel, Nicolaus & Co., Inc., Research Division

Daniel Hofkin - William Blair & Company L.L.C., Research Division

Emmett Wright

Assia Georgieva

George A. Kelly - Craig-Hallum Capital Group LLC, Research Division

Operator

Welcome, and thank you, all, for the standing by. [Operator Instructions] This call is being recorded. If you have any objections, you may disconnect at this point.

Now I will turn the meeting over to Mr. Clive Warshaw. Sir, you may begin.

Clive E. Warshaw

Good morning, ladies and gentlemen, and welcome to Steiner Leisure's Second Quarter 2013 Earnings Release Conference Call. I'd now like to hand you over to Leonard Fluxman.

Leonard I. Fluxman

Thank you, Clive. Good morning, everyone, and thank you for joining us this morning for Steiner Leisure's 2013 Second Quarter Earnings Call. With me on the call today, you'll hear from Clive Warshaw, our Chairman; and Stephen Lazarus, our CFO.

Before we get into our results and my comments about the current operating environment, I'd like to remind you that during this call, we may make forward-looking statements within the meaning of the federal securities laws. These statements reflect our current views about future events, do not guarantee future performance and are subject to risks and uncertainties, which may cause our actual results to differ materially from those expressed in or implied by such forward-looking statements. Examples of these risks are described in our Form 10-K for 2012 and our other SEC filings.

I will commence this call as usual with an overview of the business and the results of the quarter, followed by an analysis of the performance by business division.

I will hand you over to Stephen Lazarus to give you the breakdown on specific balance sheet items, debt, cash on hand, our stock repurchase from year-to-date, CapEx during the quarter and other pertinent balance sheet data.

We will also address guidance for the third quarter and for the full year, and then turn it over to you for our regular Q&A session.

So moving into my comments. Total revenues for the second quarter increased 5% quarter-over-quarter to $208 million, delivering $0.83 of earnings.

Gross profit was flat quarter-over-quarter. Service margins declined 250 basis points quarter-over-quarter, primarily attributable to the expected drag on earnings from the continued opening of new Ideal Image locations this year and weaker on-board spend on the field of major cruise lines.

Product margins increased 120 basis points quarter-over-quarter, primarily attributable to the continued roll-up of product into our Ideal Image network and some of the new and exciting product innovations released by -- to the market by our Bliss and Elemis product divisions.

Turning to the cruise ship spa division. Total revenues decreased 2.1% quarter-over-quarter, negatively impacted by certain events, fires, unscheduled dry docks and those other issues on the few cruise lines we serve, all of which is being played up by the media and has created negative sentiments for the cruise industry. This has resulted in deeper discounting by the cruise line and has drawn a weaker passenger, which negatively impacted spend on board on spas. The negativity created by the media in reference to the industry has driven a greater proportion of discounted passengers onboard during the season, which is typically stronger for the industry as a whole.

Average weekly revenue on all ships declined 2.4% quarter-over-quarter. Average weekly revenues from spa ships declined 3.7% quarter-over-quarter, with non-spa ships increasing by 3.8% quarter-over-quarter.

Gross revenue for spa per day decreased 3%, and revenue for spa per day on spa ships declining 4% and non-spa ships increasing by 6%.

During the quarter, we commenced operations on the 2 new ships, the NCL Breakaway and the new Royal Princess.

Turning to our land-based spa operations. Revenues for the land-based spa operation division was down 5% quarter-over-quarter, with our average weekly revenues in land-based spas decreasing 2% quarter-over-quarter.

Third-party products division. Both our product brands, Elemis and Bliss, delivered solid revenue growth of 13% quarter-over-quarter, driven by good sales through primarily in Ideal Image centers and other retail channels due in large part for the launch of new and exciting products in these channels.

Turning to our postsecondary education division. Revenues decreased by 1% quarter-over-quarter. At June 30, our populations, excluding the Houston campus, were down 2.5%. And as you recall, at year end, our population, excluding the Houston campus, were down 12%.

Our spas year-to-date on a same-campus basis are up 5% versus 1 year ago, reflecting an improvement in the segment from last year, which hopefully indicates that we stabilized the segment and turned the corner to help the population growth in 2013.

Now finally, to our laser hair removal division, Ideal Image. Ideal Image continues to generate healthy cash flows. This quarter, cash revenue of $44.3 million, an increase of 39% versus the prior year. June cash sales were our highest ever in the history of Ideal Image.

Average weekly sales in our 6 centers increased 7% quarter-over-quarter and by 30% versus the same 6 months in the prior year.

Cash sales generated in the quarter increased the deferred revenue balance to $103 million, an increase of 14% from the beginning of the year. The deferred revenue balance is a strong barometer of the future health of this division.

In conclusion, the positive takeaways from this quarter were: stabilization of our postsecondary education division; stronger sell through performance from our product lines, supported by robust product innovation platform; and lastly, the continued strong cash sales generated from our laser hair removal centers, coupled with the continued rollout of new centers.

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 activity in the quarter and guidance for the third quarter and full year 2013. Thanks, Stephen.

Stephen B. Lazarus

Thank you, Leonard. Good morning, ladies and gentlemen. First, as usual, I'll provide some details in the second quarter 2013 covering depreciation, capital spending, cash and our share repurchases.

Depreciation and amortization for the second quarter of 2013 was $4.8 million. That's broken down at $953,000 below-the-line depreciation and $220,000 below-the-line amortization. Above-the-line depreciation was $3.7 million.

Our estimate for the third quarter is for depreciation and amortization at $5.1 million, with below-the-line depreciation at $950,000 and below-the-line amortization at $220,000. Above-the-line depreciation is expected to be $3.9 million.

Capital spending in the second quarter was $8.4 million and is expected to be $8 million in the third quarter.

Cash and investments at June 30 were $82.9 million, and outstanding on our term loan at June 30 was $119.2 million with 0 owing on our revolving line of credit, $60 million is thus available on the credit line.

During the quarter, we made an additional unscheduled principal payment of $10 million on our term loan. On June 21, we amended our credit agreement such that amongst other things, the scheduled capital repayments on the term loan due at the end of each quarter of 2013 will be an amount of $3,058,000, and the interest on this loan for 2013 is anticipated to be LIBOR plus 1.75%. Prior to the amendment, these amounts were $4.125 million and 2.5%, respectively.

Since our last conference call, we repurchased a nominal 1,000 shares at $47 each for $47,000, and therefore, have $97.8 million remaining from our February 2013 repurchase plan authorization.

Total shareholders' equity as of June 30 was $377 million.

Moving then onto our guidance. For the third quarter, we expect revenue to be in the range of $205 million to $215 million, with Q3 earnings per share estimated at $0.78 to $0.83.

For the full year, we are narrowing our range of guidance and increasing our full year revenue guidance to $840 million to $855 million, and we are increasing our earnings per share guidance to earnings per share of $3.32 to $3.42 for the year.

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

Question-and-Answer Session

Operator

[Operator Instructions] Okay, we have our first question on queue coming from Steven Wieczynski of Stifel.

Steven M. Wieczynski - Stifel, Nicolaus & Co., Inc., Research Division

So Leonard, you talked about that the margin decreasing by about 250 basis point. You talked about that being a combination of new Ideal Image stores and then also part weak spending patterns on the cruise ships. Is there any way to break that down in terms of that 250 basis points? Is that kind of equal between both of those? Or is that more Ideal Image or vice versa?

Leonard I. Fluxman

Yes, Steve. Clearly, we can break it down, but we're not going to. I would say a greater proportion of the degradation in service margin was attributable to the opening of Ideal Image stores in the quarter. So we opened I believe 10 -- 13 stores from the beginning of this year, 10 stores in the quarter. So clearly, as you know, in early stages of opening these stores, it negatively impacts service margins.

Steven M. Wieczynski - Stifel, Nicolaus & Co., Inc., Research Division

Got you. And then from the cruise division, can you break down, in terms of itineraries, where you're seeing weaker spending? Is that still pretty much European-based? Or is that circled over here in the North America as well?

Leonard I. Fluxman

Well, at this time of the year, a lot of the ships sort of move itineraries and shift over to the Europe and Alaska. Some of the weaknesses are actually being sort of experienced here in the Caribbean. Which for the Caribbean it's unseasonal. Europe's too early for us to tell versus last year, but we have done and are doing better on some of our European brands than last year. But given how early on we are here in the season, it's tough for us to tell really what the whole season is going to look like versus last year.

Steven M. Wieczynski - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then last question with Ideal. You talked about June being the strongest, I guess, month that you guys have seen. Has that trend pretty much remained the same in July as well?

Leonard I. Fluxman

Well, June, actually, is promotional month, which we do for the summer. So we have a huge promotion going on, which we do typically each year. We have 4 big promotions, June being one of them. So we do it early on right sort of at the commencement of the summer and so annually, this is a strong month. And then in July, certainly, not as strong as June, but there has been nothing disappointing in terms of July either.

Operator

Next question coming from the line of Mr. Daniel Hofkin of William Blair & Company.

Daniel Hofkin - William Blair & Company L.L.C., Research Division

Just to, I guess, follow up a little bit on the cruise business. Can you discuss the trend over the course of the quarter? Did things sort of weaken into the higher volume months? Or was it fairly steady?

Leonard I. Fluxman

I think the trend started from a low point and has got better, just because sort of the state and negativity and that sentiment out there. Clearly, it strengthens as it moves into the -- you know the better summer months for the industry, so we're hoping it gets a little better, but clearly, we're still too early.

Daniel Hofkin - William Blair & Company L.L.C., Research Division

Okay, so when you say got better, you're obviously, seasonally, it's naturally going to get better, but you're saying year-over-year growth trends improve as the quarter progress.

Stephen B. Lazarus

Correct. Seasonally -- the second quarter, which includes part of the summer vacation, is seasonally a better quarter, but given all that's been happening in the industry, it certainly has not been as good as it was in the prior year.

Daniel Hofkin - William Blair & Company L.L.C., Research Division

Okay. And then on the Ideal Image, can you -- and I guess, the product comment that you made, some of it being related to continued rollout to Ideal Image centers, some of it to -- it sounds like specialty retail. Can you discuss a little bit more -- I know you said on the first quarter call that there were a couple of months where you had very encouraging initial product sales. Have you seen that same momentum kick in? Or is it picking up even more in the June quarter on the product side?

Leonard I. Fluxman

Well, we rolled out early with our product initiative in Ideal at the beginning of the year. And the strong rollout continues clearly in the month where you have strong cash flow that's bundled into that, stronger retail sales. So those 2 go hand-in-hand and clearly, it's been a big contributor toward that. That coupled with good sell through in both QVC and here in the United States. We have an exciting platform, robust. Innovation is everything to do with how you sell through in our specialty channels, and that has gone well so far this year.

Daniel Hofkin - William Blair & Company L.L.C., Research Division

And that goes for both Bliss and Elemis? I know, obviously, there's different degrees of awareness for those brands depending on the geography.

Leonard I. Fluxman

Absolutely. And in both of the geographies where they are strong, they did have strong sell through.

Operator

Next question coming from the line of Mr. Emmett Wright of Milwaukee Private Wealth Management.

Emmett Wright

Can you add a little bit of color with respect to the amount of product that's being pulled through your Ideal Image?

Leonard I. Fluxman

A healthy amount. We bundled at certain levels, depending on the type of service that you buy, so whether it be underarm, back, legs, just depending on the body parts. It's different level of bundling of products goes along with that and just excess in some of the sell through and cash sales, particularly in months such as June, will carry with it a nice coupling of those products.

Emmett Wright

The June promo month in 2013, how does that compare to your June promo month on a same-store sale basis of June '12?

Leonard I. Fluxman

This year it was much stronger. We had a more aggressive campaign, and we tried to sell in to more than one body part, and it's the most successful campaign we've had in the history of the company.

Emmett Wright

All right. And with regard to the number of Ideal Image stores that you are looking to open, can you provide some color on a forward basis in terms of store count?

Leonard I. Fluxman

Right. For this year, we intended to finish the year at a hundred and --

Stephen B. Lazarus

[indiscernible]

Leonard I. Fluxman

We're going to open 30 this year. Maybe 31, probably ramping up to about 35 next year and 35 the following year. We may revisit the number of store openings and increase that. But so far, that's the plan.

Emmett Wright

So the 3 stores in Q1, 10 stores in Q2, you'll pick that pace up progressively as you move forward here?

Leonard I. Fluxman

Yes, it was the same as last year. We opened more stores in the back half of the year, and it's the same this year. So a lot of the stores will be opened in the next 6 months.

Emmett Wright

Is that your strategy?

Leonard I. Fluxman

We're completely on track with the store openings that we intended. So nothing is fallen behind in that time line.

Emmett Wright

Got it. Final question, regarding the educational segment, you indicate things are stabilized. What type of headwinds do you anticipate going forward?

Leonard I. Fluxman

I think the headwinds have slowed down a little bit for us. Clearly, it's hard work every day. The enrollment -- it's all about enrollments, enrollments, and keeping our students in the schools as long as possible, making sure that nobody drops out. The good news is, as I said, our students, we start to see better starts. We're going into an important part of the year right now in the third quarter. And I feel we've turned the corner, we're out of the trough here and the headwinds, which have been primarily compliance and regulatory, seem to be something now that the admission folks and our lead people are managing much better. And so it seems to be a much more stable environment in which we are much more comfortable.

Operator

Next question coming from the line of Ms. Assia Georgieva of Infinity Research.

Assia Georgieva

First off, can we follow up on the July trends on the maritime business, especially as it relates to European deployments? How those compare versus the year-ago month? And whether you expect -- that whether you are being conservative here in the Q3 given the macro headwinds in Europe?

Leonard I. Fluxman

No. Clearly, Europe is not back to where it was in 2011. We don't have as big of overhang from the Concordia incident this year. So I think a lot of that have moved on, and I think that's good for the industry. The spend will depend on the mix of passengers from the U.S. and from Europe. And so, to the extent that we get a higher proportion of U.S. passengers spending time in Europe this year, that's typically a good thing for on-board spends, but I don't have enough detail and granular data to say that, that is the mix so far. I will say that Concordia as a whole affected the Costa brand tremendously, but that has improved as well this year. So from that perspective, things will get better for us in Europe.

Assia Georgieva

Well, I think -- I'm sorry, all those 3 major cruise lines did say that they are sourcing a lot more out of North America, and with the economy doing better here than it does in Europe, one would think that we should see an improvement year-on-year, especially during the key summer months. And I guess my question is, have you seen some of that already in July?

Leonard I. Fluxman

No, too early for us to tell that, Assia. But, yes, I mean, to the extent that we get a better quality U.S. passenger on board, historically, that has always been better for on-board spend.

Assia Georgieva

Okay, well, it sounds as if you might get that this year, so I'll keep my fingers crossed. And my second question is with regard to guidance. Backing into the second half of the year from prior guidance and from what's given off to us today, it seems that you haven't really changed the range as it relates to the second half itself. Am I doing the math correctly?

Leonard I. Fluxman

Well, it's about right.

Stephen B. Lazarus

Yes.

Assia Georgieva

Okay, and despite the fact that the school division seems to be stabilizing and you do have growth in the start figures, should -- shouldn't we expect to actually see an uptick in the second half?

Leonard I. Fluxman

I think just to the comments you made, we narrowed the range. That obviously speaks to the confidence in the back half the year, which I think maybe Stephen could jump in quickly, but I'm going to take the lead on that. So I think narrowing that range and sort of increasing some of the numbers that you did speaks to how we feel about where we are at this point versus last year. We may be to go and do that. That's a good thing. It's a positive thing. To the stabilization in the school segment, what it speaks to is stabilization of any further erosion of margin. Once your enrollment and population growth start to stabilize and you can grow from a low threshold to a higher threshold, given the fixed cost nature of that model, it should continue to help at least stabilize margin degradation and maybe improve the margin.

Assia Georgieva

Okay, all right. And one quick follow-up. You have mentioned that deferred revenues at Ideal Image are -- stand now at $103 million. And I think the comparable figure 3 months ago was $95 million. Would you have that number in front of you?

Stephen B. Lazarus

Sorry, can you repeat the question?

Assia Georgieva

The deferred revenues from Ideal Image now stand at $103 million, and do I recall correctly that 3 months ago, this figure was $95 million?

Stephen B. Lazarus

I think last quarter, it was about $94 million.

Leonard I. Fluxman

Yes.

Stephen B. Lazarus

Sorry, $90.3 million last quarter.

Operator

Your last question on queue is from the line of Mr. George Kelly of Craig-Hallum Capital Group.

George A. Kelly - Craig-Hallum Capital Group LLC, Research Division

Guys, a couple of questions. First, on Ideal Image. Wondering if you can compare the stores that you've opened this year with the new stores you opened last year? And more specifically, has the guidance that you gave with regards to timing, breakeven timing and cumulative breakeven, has that changed at all?

Stephen B. Lazarus

Nothing materially.

Leonard I. Fluxman

Well, it hasn't changed materially at all. We're seeing the same sort of pattern from new store openings last year and this year. So there is no different takeaway from the breakeven point that we've guided you on before.

George A. Kelly - Craig-Hallum Capital Group LLC, Research Division

Okay. Just generally, has there been any -- I mean, has there been improvement with the new stores you've opened this year? Or does it look just real similar when compared to last year?

Leonard I. Fluxman

I would say very similar. I mean, actually, some locations surprise us a little bit. We go into some of the colder locations or geographies, and those locations, you would think typically would not be as good, but they are. So we're starting to learn a lot more about which locations can do better when they open, and some that have been opening at the same kind of metrics as the stores we opened 1 or 2 years ago.

George A. Kelly - Craig-Hallum Capital Group LLC, Research Division

Okay, okay. And then on the cruising division, can you talk a little bit about the implementation of the new regulatory NLC [ph] stuff? Is that fully in now? And should we expect any change in margin or anything in the third quarter or fourth quarter?

Stephen B. Lazarus

Yes, we've been having a lot of fun with that, as you can imagine. Always implementing compliance and the regulatory takes a lot of focus, takes a lot of energy from the team. They have done a fantastic job working hand-in-hand with our cruise line partners. And I think the group should be complimented that in some cases, they've had to move faster than they'd anticipated and I'm just extremely proud of what they've done. I think we've got through the door now, which is really the early stages of implementation, and so the development through the fourth quarter, I would say, would be fully implemented, and I don't think there's any material changes in margins in the business.

George A. Kelly - Craig-Hallum Capital Group LLC, Research Division

Okay, and since I'm last, a couple more questions. International products, you talked in the last few quarters about going through the process specifically in China. Any update there?

Leonard I. Fluxman

Yes, the good news is we finally got clearance. So we were in sort of a holding pattern where we had sort of provisional regulatory approval on all the SKUs that we wanted to launch from -- particularly from Bliss. Elemis is in the process as well, maybe not quite as far as into the process, but certainly close behind. Now what we're doing is working with our distributors as to a rollout date, it'll probably be the first quarter of 2014 to the extent that we can do it sooner, believe me we'll jump at it. But the good news is we're greenlighted and we are ready to go.

George A. Kelly - Craig-Hallum Capital Group LLC, Research Division

That’s great. That’s good. And final question, FX impact in the quarter?

Leonard I. Fluxman

It was not material at all. I mean, it's not any material, and I highlighted it to where -- which part of the P&L it impacted. This quarter was very flat and immaterial.

George A. Kelly - Craig-Hallum Capital Group LLC, Research Division

Okay, and then lastly on stock buyback. Any -- 1,000 shares in the quarter, how should we think about that going forward? Just, I guess, in relation to paying down more debt.

Leonard I. Fluxman

I think to the extent that we look at our allocation of capital, and we decide what is the best deployment of that, returning capital back to shareholders. Doing whatever is accretive is what we've always done, and we will do that opportunistically to the extent there's any weakness in the stock price Stephen's marching orders are to jump in and buy stock. We still have plenty of room in the authorization, so there's nothing holding us back. We just want to make sure we're deploying capital at the right time to do the right thing for our shareholders.

Operator

Ms. Assia Georgieva has another question, and she's from Infinity Research.

Assia Georgieva

Looking at Ideal Image weekly revenues, they were up 7%, so a very good metric. Can you discuss what same-store sales were?

Leonard I. Fluxman

Yes, we haven't really started giving it as metric. It's something that I anticipate is going to be an important metric going forward. We will start from 2014 and our quarter call giving you that metric every single quarter when we announce.

Operator

[Operator Instructions]

Leonard I. Fluxman

All right, so if there are no further calls -- questions, Sean. Thank you, everybody, for joining us in our second quarter call. We look forward to speaking with you next quarter.

Stephen B. Lazarus

Thank you.

Operator

That conclude today's conference. Thank you for participating. You may now disconnect.

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