Steiner Leisure Management Discusses Q3 2013 Results - Earnings Call Transcript

| About: Steiner Leisure (STNR)

Steiner Leisure (NASDAQ:STNR)

Q3 2013 Earnings Call

October 31, 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

Assia Georgieva

Jeffrey Richart Geygan - Milwaukee Private Wealth Management, Inc.

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

Operator

Welcome, and thank you for standing by. [Operator Instructions] I'd also like to inform all parties thattoday's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn today's call over to Clive Warshaw. Sir, you may begin.

Clive E. Warshaw

Thank you very much. Good morning, ladies and gentlemen, and welcome to the Steiner Investor's Conference call for the third quarter of 2013. And as usual, I'd like to hand you straight over to Leonard Fluxman.

Leonard I. Fluxman

Thank you, Clive. Good morning, everyone. Thank you for joining us this morning for Steiner Leisure's 2013 Third Quarter Earnings Call. With me on the call today, you heard from Clive, our Chairman; and Stephen Lazarus, our CFO will follow with comments after my comments.

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 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. The examples of these risks are described in our Form 10-K for 2012 and our other SEC filings.

I'll commence the call, as usual, with an overview of the business and results of the quarter, followed by an analysis of the performance by division. I'll then hand you over to Stephen to give you the breakdown on the specific balance sheet items, debt, cash on hand, stock repurchases summary to date, CapEx during the quarter and our other pertinent balance sheet data. We will also address guidance for the fourth quarter and for the full year and turn it over for our regular Q&A session.

Total revenues for the third quarter increased 5% quarter-over-quarter to $215 million, delivering $0.82, excluding a noncash charge for leasehold written off at one of our resort spas, where we elected not to renew our option.

Gross profit increased 8% quarter-over-quarter. Service margins declined 240 basis points quarter-over-quarter, primarily attributable to the expected drag on earnings from the opening of new Ideal Image centers this year.

Product margins increased 650 basis points quarter-over-quarter, primarily attributable to the continued rollout of products into our Ideal Image network, complemented by new and exciting product innovation released to the market by both Bliss and Elemis, as well as the higher mix of retail product sales onboard the cruise ships.

Turning to the cruise ship spa division. Total revenues decreased 2.8% quarter-over-quarter, negatively impacted by such events as unscheduled dry docks, as well as the drag-on effect on a few cruise lines we serve, all of which have been played out by the media and has continued to create negative sentiment for the cruise industry as a whole. This resulted in deeper discounting by the cruise lines and has drawn a weaker passenger, which negatively impacted spend on board our spas. The negativity created by the media in reference to the industry has driven a greater proportion of discounted passengers onboard during the third quarter, a season which typically is stronger for us and the industry as a whole.

Average weekly revenue on all ships declined 3.8% quarter-over-quarter. Average weekly revenues from spa ships declined 4.1% quarter-over-quarter, with non-spa ships declining 5.1% quarter-over-quarter.

Gross revenues per staff per day decreased 4.4%. And revenue per staff per day on spa ships declining 4.8% and non-spa ships declining 3%.

Turning to land-based spa operations. Revenues for the land-based spa operation divisions are down 4% quarter-over-quarter. Our average weekly revenue in land-based spas decreased 1% quarter-over-quarter.

Turning to third-party products division. Our products -- our product brands, Elemis and Bliss, delivered solid revenue growth of 16.3% quarter-over-quarter, driven by the continued strong sell-through in our third-party retail channels due in large part to the launch of new and exciting products in the channels and the commencement of Christmas shipments into the largest chain stores.

Turning to the education division. Revenues increased by 7% quarter-over-quarter. At September 30, our populations were up 6.9%. And as you recall, at year end, our populations, excluding Houston, were down 12%. So a decent improvement there. Our starts year-to-date on the same-campus basis are up 9% versus the year ago, reflecting an improvement in the segment from last year, which hopefully indicates that we're expecting a more stabilized segment as we've continued to turn the corner to healthier population growth in 2013 and into 2014.

Given the success of our 2 centers in Texas, we expect to open a third center in Arlington in the fourth quarter of 2013, with our first start projected to occur in Q1 of 2014, following the customary accrediting approvals.

Finally, turning to our laser hair removal division, Ideal Image. This quarter, group cash revenue was $37.4 million, an increase of 23% versus the prior year. Average weekly sales in our centers increased 2% quarter-over-quarter and by 9% versus the same 9 months of last year.

Cash sales generated in the quarter increased the deferred revenue balance to $105 million, an increase of 17% from the beginning of the year. The deferred revenue balance is a strong barometer of the future of the business.

I'll now hand the call over to Stephen, who will go through some of the other pertinent data, as well as cover guidance for the fourth quarter and full year 2013. Stephen?

Stephen B. Lazarus

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

Depreciation and amortization for the third quarter of 2013 was $5.1 million, broken down as $220,000 below-the-line depreciation and $988,000 below-the-line amortization. Above-the-line depreciation was $3.9 million. Our estimate for the fourth quarter is for depreciation and amortization at $5.3 million, with below-the-line depreciation at $960,000 and below-the-line amortization at $220,000. Above-the-line depreciation is expected to be $4.1 million. Capital spending in the third quarter was $9.3 million and it's expected to be $12 million in the fourth quarter.

Cash and investments at September 30 was $67 million, and the outstanding on our term loan at September 30 was $106.2 million, with 0 owing on our revolving line of credit. $60 million is, therefore, available on that line of credit. During the quarter, we made an additional unscheduled principal payment of $10 million on our term loan. And due at the end of the fourth quarter, is an amount of $3,058,000 and the interest on this loan for the remainder of 2013 is anticipated to be LIBOR plus 1.75%.

Since our last conference call, we did not repurchase any shares, and therefore, continue to have $97.8 million remaining from our February 2013 repurchase plan authorization. Total shareholders' equity as of September 30 was $392.8 million.

Moving then onto our guidance. We are increasing the low end and maintaining the high end of our full year revenue guidance at $845 million to $855 million. And after taking into account the $0.05 leasehold write-off in Q3, we now expect full year earnings per share to be in the range of $3.30 to $3.35.

For the fourth quarter, we expect revenue to be in the range of $210 million to $220 million, with Q4 earnings per share estimated at $0.84 to $0.89.

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

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Steve Wieczynski.

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

So Leonard, I guess, if you look at the margins, the service margins, they've been under pressure here for the last couple of quarters. I know you talked about how that's mostly because of the Ideal acquisition or the Ideal integration and the opening of the new centers. But as we look out over the next couple of quarters, I mean, can you help us think about -- is this 15% kind of level a bottoming? Or is there more room for these to move further lower?

Stephen B. Lazarus

Steve, it is a continuing process of an aggressive rollout of new centers. I mean, we did 20 centers last year. We've already opened 20 centers this year, with 10 to go in the back quarter of the year. Clearly, when you're opening centers, as we said before early on, the concentration of centers and more centers this year, together with centers that were opened late in 2012 impact and compress the service margins. If we were to stop opening stores completely and not add any more stores, I could affirmatively say, "Yes, margins will improve." But as we said before, we want to continue to grow and continue to roll out centers in states that we're not fully rolled out in. And just as long as we continue to do that, the margins will rest around the threshold that you mentioned. The opportunity to improve that is -- as the stores grow to maturity, then you'll see -- start seeing margins move up.

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

Okay. And then on the flip side of that, the product margins continue to get stronger. And I mean, the third quarter margin, there was -- was extremely strong. How should we think about those moving forward as well?

Leonard I. Fluxman

It's really very nice here. It's very exciting to see. When I look at our NPD, the new product development calendars that I'll send to the guys next week, it's just a really invigorated full calendar, a lot of exciting new products that came out this year. Next year's calendar looks even more exciting. Driving margin is all about new product developments, staying ahead of the curve, bringing up the price points in these new products to centers[ph]. To the extent that the mix of these new products filters through all of our channels, clearly, there is opportunity, but I'm not going to speculate where that margin moves to.

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

Okay. And then turning to the cruise side of the business. Can you talk about what you're seeing or what you saw so far for October? I mean, some of the cruise operators indicated that they saw a pretty nice pickup in on-board trends in over the last 30 days or so.

Leonard I. Fluxman

Yes. October was -- yes, actually a little better for us than September even. And October typically is a shorter month. We've got all the ships transitioning back here. So actually thus far for October, I've been sort of pleasantly surprised that we've held -- if not, in some cases, in some cruise lines improved a little bit.

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

Okay, last question then. In terms of cash flow deployment in terms of your thoughts there. You guys continue to pay down the debt. But is there any more thought about potentially moving -- or doing something else in terms of a potential dividend at some point?

Leonard I. Fluxman

I think we're still in full growth mode on Ideal. We're deploying a reasonable amount of capital there, equipment that we're looking at some new technologies eventually to roll out, at some point, in 2014, '15. This equipment is not inexpensive. And I think that our network of centers continues to grow. It will require a decent amount of capital deployment. Clearly, once Ideal and some of our opportunities get closer to maturity, where we stop rolling out or building as many stores, obviously, that's the discussion that we're open to have and will be having. Because we'll be throwing off a lot of cash at that point.

Operator

Our next question comes from Daniel Hofkin of William Blair & Company.

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

Just a question back to Ideal Image. Thinking about the trend in average weekly revenue growth that has come down year-to-date, is that purely a function of just the larger number of immature locations that are diluting that year-over-year calculation this year? Or is there -- are you seeing any change in sort of the underlying trend, if you will, sort of more of a same-store trend?

Leonard I. Fluxman

Yes. I think it's part of what you first said with regard to the immaturity of some of the stores, but also during the summer months, if you recall last year, but we did see a fall-off in lead flow and treatment, the number of treatments done in the third quarter. And when those are lighter in the summer months, it will impact those comps. So given that and taking a look at that, we're certainly testing some new initiatives and some alternative marketing initiatives to improve the cost of acquisition, I guess, as well as drive stronger leads here in the fourth quarter.

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

Just to clarify that, though. I mean, if we're comparing third quarter this year with third quarter last year, are you saying that, that softening was more intense this year than in last year's third quarter? Or are you -- I'm just sort of asking about the year-over-year trend and why that has shown some deceleration.

Leonard I. Fluxman

It was clearly a deceleration and lighter leads of the summer months, more so than we expected. So the lower leads definitely drove, maybe, lighter cash sales in some of the centers, as well as the number of treatments that we were able to execute in the quarter were lighter, too.

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

Okay. And as you think about the growth, are you still kind of experiencing the similar trend that, when you open new centers, they're starting at the same lower initial volume and then you still expect them to ramp up the same way you had before over time?

Leonard I. Fluxman

Pretty much so. I mean, in some new centers, in some of the newer states, we -- as we start playing around and testing some new marketing initiatives, may not have come out of the box as well. But we certainly twist that up and we hope to see the traction here in the fourth quarter.

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

Any comment so far in the quarter, how that's been?

Leonard I. Fluxman

No, no, no. It's too soon.

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

Okay. And then, I guess, as it relates to the product business, can you talk at all about any specific things on the retail front? Is this -- is it retail distribution also? Or is it, in other words, increased doors or increased retail accounts? Or is it also just more newer product?

Stephen B. Lazarus

It's mainly a good sell-through of the newer products at -- that are high demand in our distribution channels, more so than the sheer increase of the number of doors in which we distribute to.

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

And where do you think -- where have you seen the greater upside versus your expectations? Has it been in Bliss or Elemis? Where has that been more pronounced?

Leonard I. Fluxman

Both brands have been doing very well in each of their geographies that they are dominant. So Bliss has been doing very well in United States, and Elemis has been doing extremely well in the U.K. So they're each performing well. And certainly did very nicely here in the third quarter, followed by -- I mean, sequentially, they were strong in both quarters.

Operator

And our next question comes from Assia Georgieva of Infinity Research.

Assia Georgieva

Leonard, can I ask a little more detailed question in terms of the productivity at the large spa ships? I think once we look at the productivity metric that takes care of some of the dry docks that weren't expected, and yet the number still came down by 5%. Again, I think we had thought onboard was doing better at the cruise lines than you seem to indicate. Can you go into a little more detail for that segment specifically?

Leonard I. Fluxman

Yes. The guidance have sort of any granularity into the onboard spend breakdown -- onboard the ships that they have talked about. But you have to remember, there are incremental, competitive spending challenges onboard the ships today. There's a lot more charged for onboard for a la carte and some of those services, which are driving, perhaps, some of the other onboard spend metrics that may have been mentioned in the other calls. But clearly, there's been a softer spend when it comes to spa that may be a function of some of the spend being diluted in the other areas that we compete with. And with the type of -- the guest profile that we're receiving on board, it has been challenging.

Assia Georgieva

Okay, that makes sense. And in terms of product revenues, when I look at the comparisons versus the Q3 of last year, we had an easy comp. And you did mention in your prepared comments that there was a little bit of a shift in terms of the Christmas shipments occurring at the large box retailers. So is it fair to say that Q4 of this year might not be quite as strong as Q3 and it's facing a tougher comp?

Leonard I. Fluxman

It's possible, but the open to buy situations vendor by vendor can change week-to-week. I mean, U.K. ships earlier in terms of their Christmas orders than the U.S. But given a decent and strong offtake here in the third quarter, the potential for some volumes to drop off in the fourth quarter are there, yes.

Assia Georgieva

Okay. And lastly, can you remind us how many Ideal Image locations you're still planning on opening in Q4?

Leonard I. Fluxman

We have 10 more locations to open up. We've already done 20, which is the whole of our expansion last year. So we are anniversary-ing the 20, and we are going beyond that. 10 centers will open up in the last quarter here.

Assia Georgieva

And for 2014, we should expect a rate of about 10 per quarter?

Leonard I. Fluxman

We haven't yet defined -- we certainly selected where we're going to make our openings, but the actual count, we've not finalized yet. But we're doing that in probably the next 2 weeks.

Operator

.

Our next question is from Jeff Geygan of Milwaukee Private Wealth Management.

Jeffrey Richart Geygan - Milwaukee Private Wealth Management, Inc.

Can you talk about your school revenue and the associated margin?

Stephen B. Lazarus

Please clarify. What would you like us to comment on?

Jeffrey Richart Geygan - Milwaukee Private Wealth Management, Inc.

Really, at an operating level, what's -- how is the margin on your school business? And how has that changed?

Stephen B. Lazarus

Well, if you go back 2 years prior to the introduction of all the new compliance standards, the funding changes, et cetera, margins were certainly much better. Margins, in the following sort of 18 months, got worse. But as the populations, as I said, started to improve and they have increased, as I said, this year that we are bumping back up against [indiscernible] the model that will drive better margin. Specifically, to talk about margin by -- margin by campus is something that we typically don't get into.

Jeffrey Richart Geygan - Milwaukee Private Wealth Management, Inc.

And I'm wondering, just generally, whether you're seeing a stabilization or improvement in margin across your school business.

Leonard I. Fluxman

Definitely, yes. With the increased populations, there's an improvement in the total environment. Population growth is everything in this model. Once you start to move your populations up, so too will your margins.

Jeffrey Richart Geygan - Milwaukee Private Wealth Management, Inc.

Do you report out on Ideal Image same-store sales?

Leonard I. Fluxman

We've done this, yes.

Jeffrey Richart Geygan - Milwaukee Private Wealth Management, Inc.

With regard to opening a new facility, how much does that cost on a unit basis all-in?

Leonard I. Fluxman

In average, they -- depending on the states, some of them are a little more expensive than others that might be utilized. But typically, on average, they range between, I would say, about $550,000 to about $570,000 per center.

Jeffrey Richart Geygan - Milwaukee Private Wealth Management, Inc.

And did Stephen say $12 million in CapEx in 2014? Or was that -- did I misunderstand?

Stephen B. Lazarus

That's Q4.

Jeffrey Richart Geygan - Milwaukee Private Wealth Management, Inc.

On Q4. Did you give a '14 CapEx guidance?

Stephen B. Lazarus

No, not yet. We -- when we have our February call, we -- that's when we do that.

Operator

And our next question comes from George Kelly of Craig-Hallum Capital Group.

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

Just 2 questions. First, the international rollout of products, how is that going? And anything expected for the fourth quarter?

Leonard I. Fluxman

With regard to China, we're hoping still to ship in the fourth quarter, else early in the first quarter of 2014. We've definitely manufactured and assembled. Our product's ready to go. So as soon as we get the green light, we will ship.

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

Okay. And then, secondly, school margin, people have talked about that you've discussed it in the call. But if 3 years ago, you were doing sort of 20-plus percent operating margin with schools, that's not realistic in the next few years, I know, but could you get back to 10 kind of plus range do you think in the next year or 2? How do you think about -- go ahead.

Stephen B. Lazarus

The 20% is gone forever, based upon the new Title IV funding and the way you -- we have to structure around our schools. Our goal in the long term would be to get back to the 15% operating margin. Could we get back to 10% in sort of a year or 2? In 2, probably. Remember, you also have to discount the fact that each time we open a new campus, and in the numbers that you see, there is a drag on the expenses from opening the new campus. So is 10% a realistic number and achievable? Absolutely.

Operator

[Operator Instructions] We show no further questions at this time.

Clive E. Warshaw

Right. Thank you, everybody, for joining us on our third quarter call. We look forward to talking with you, all, when we report our fourth quarter. Thank you.

Operator

That concludes today's conference. Thank you for participating. You may disconnect at this time.

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