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Regis Corporation (NYSE:RGS)

F2Q10 Earnings Call

January 27, 2010 11:01 AM ET


Paul D. Finkelstein - Chairman of the Board, President & Chief Executive Officer

Randy L. Pearce - Senior Executive Vice President, Chief Financial and Administrative Officer


Rick Bethel - Bank of America - Merrill Lynch

Tracy Kogan - Credit Suisse.

William Armstrong - CL King & Associates

Erika Maschmeyer - Robert W. Baird & Co.

Jill Caruthers - Johnson Rice

Mimi Noel - Sidoti & Company, LLC

Jeff Stein - Soleil Securities.

Ross Haberman - Haberman Funds



Good morning. My name is Sarah and I will be your conference facilitator today. At this time I would like to welcome everyone to the Regis Corporation Second Quarter 2010 Conference Call. (Operator Instructions).

I would like to remind you to the extent, the company’s statements or comments this morning represent forward looking statements. I refer you to the risk factors and other cautionary factors in today’s news release as well as the company’s SEC filings. Reconciliation to non-GAAP financial measures mentioned in the following presentation can be found on their website at

With us today are Paul Finkelstein, Chairman, resident & Chief Executive Officer and Randy Pearce, Senior Executive Vice President and Chief Financial and Administrative Officer.

After the management have completed a review of the quarter we will open the call for questions. (Operator Instructions).

I would now like to turn the call over to Mr. Paul Finkelstein for his comments. Paul you may now begin.

Paul Finkelstein

Thank you Sarah and good morning everyone. Thank you for joining us. I would like to apologize in advance in the event I start coughing. I’m getting rid of a cold.

We are pleased to report second quarter operational earnings were ahead of plan at $0.28 per share versus $0.27 last year, after adjusting for the impact of our recent equity and convert offering. The second quarter did include a non-operational benefit of $0.02 a share related to an adjustment in insurance reserves that Randy will talk about during his portion of the presentation.

As we mentioned on our first quarter conference call, the second quarter also saw continuation of customer and business trends that we've seen during the last several quarters. Second half of December was stronger than the first half, even though we were significantly affected by the Saturday snowstorm that occurred just before Christmas.

In this challenging economy, our management team has been quite proactive in increasing average ticket, enhancing gross margin, reducing expenses and closing underperforming salons.

During the second quarter, consolidated gross margins were much better than plan and improved 70 basis points compared to last year primarily the result of a recently implemented leverage pay plan as well as reducing retail product commissions.

We continue to see improvements on the expense side in many other categories including travel and marketing costs and administrative head count. Our efforts to increase average ticket through a combination of price increases and by selling add-on services and products continued to produce strong results.

Second quarter average ticket was up almost 4%, maintaining and strengthening our balance sheet by continuing to build cash and improving liquidity remains a top priority. Customer visits continues to be a major challenge.

Compared to the prior year in North American average service ticket was up 3.7% in the quarter while customer visits were down 7.8%. Customer counts were down 6.7% in value and 11.5% in the higher price point of Regis division.

As I'll discuss in a minute, we are starting to see some positive signs and we are expecting to see improvement in comps in the second half of the year. Long-term, our growth in earnings is primarily dependent upon increase sales.

While we forecast continued expense control on gross margin enhancement, the major focus has to be on increasing our top line. There are two questions that obviously have to be asked and commented upon.

First, are we losing market share? The short answer is, no we are not. Three weeks ago I was in Loreal’s offices in Paris with the head of its worldwide professional division. Loreal is by far and away the leading company in the beauty industry and they constantly monitor salon visits by country.

All of that data indicate that worldwide salon visits continue to be a challenge. We believe industry is nearing the tail end for the 5% to 10% worldwide contraction due to reduced visitations, which is primarily the result of a more frugal customer. Issues we are dealing with are impacting the entire salon industry, not just Regis.

The second question, which I’ve already referred to, is when will visitation patterns normalize. We don’t have the crystal ball and we can’t predict whether or not that will be in the third quarter of our fiscal 2010 or the first or second quarter fiscal 2011. It’s inevitable that will happen and when it does the industry should resume it’s 2% plus annual growth rate.

In the event that we will negatively comp this year, it will only be the second year in our 88-year history where we will have had negative comp. There continues to be no evidence of consumers trading down on service or product and our sweet spot value continues to become a larger part of our overall business. There is some reason positive developments that I’d like to share with you.

First our U.K. business started to show significant strengthening in the second quarter. Comps in the U.K. were down a modest 1.6% against the 10.7% decrease a year ago. The U.K. retail economy has been in the doldrums for over three years. We’ve had a dramatic change in our business and our results are ahead of plan in the U.K.

Likewise in North America, we're seeing more and more days with positive comps, which was not in the case for many months. In fact, comps over the last three weeks have been flat. Also our Hair Club comps are improving significantly, they were flat for the quarter against the 1.5% decline a year ago.

At the first time in two years retail performed better than service, Supercuts in particular had positive 4.7% of retail comps for the quarter. We have new initiatives in the retial arena where we're adding impulse items at price points that are quite affordable.

Lastly, the current fashion books such the February issue with ELLE are showing more style than cut hair in their ads and the ads are the things to look at, that I've seen for quite sometime.

Last year has been the year of transformation for Regis. Today, we have leaner company that is focused primarily on value and that's a good strategy for us in the long-term. We believe there are significant opportunities in our franchise business and we're being more aggressive with respect to growing this business.

A little bit of self-flagellation as in order as we have not made some of the progress that some of our franchise competitors have made in recent years. We're changing that. In markets where we're extremely strong like Boston, we feel there are significant opportunities to expand.

We're going to aggressively sign leases and give those opportunities to existing and new franchisees and we're more than prepared to step-in and have company on Supercut stores in the Boston market in the event that we cannot add a franchise operation.

As I have mentioned many times before, ours is one of the few companies in retailing that does have a ceiling. We certainly have all the liquidity and resources to resume our expansion strategy once comps normalize. At that point in time, we should be building 400 salons a year and buying 400 salons a year with our franchises rolling us well.

We certainly will not resume this level of expansion until comps normalize. However, we will be opportunistic in markets where we're strong because the business model works extremely well, for both company-owned and franchised locations in these strong markets.

Individual investors have asked why we don’t make more acquisitions at this point in time and the answer is quite simple. If a 50-salon chain is experiencing 3% negative comps, their profits are probably going to be down 15% to 20%.

That’s what we are waiting on, until accounts normalize and buy it cheaper. We have the ability to wait that out as there are no other purchases and there is no reason to pay a 15% premium in the event that profits go down 15%.

Likewise, we feel strongly that many of our landlords have not adjusted to the new retail environment and until rents are reduced significantly in the places in which we want to be located, would be propelling our new bills.

Four additional salons were closed in the U.K. during the second quarter and there are plans to close 13 more in the current quarter. We should be finished with our negotiations to close or get significant rent relief in the U.K. by the end of March.

We expect to realize approximately $2.4 million in annual cash saving once the project is completed. We also rebranded 41 Hair Express salons to Supercuts or Regis and have seen significant improvement in sales and profits.

I’d like to now talk about our investments in Empire Education Group and Provalliance. Both companies are doing extremely well. Empire Education sales and EBIDA in fiscal 2009 were a $150 million and $16 million respectively and they were on track to go to 170 million in sales and 20 million in EBIDA during this fiscal year.

Likewise Provalliance, which includes Jean Louis David and Franck Provost Salon operations expects to meet its 2009 EBIDA projections and is forecasting positive comps of approximately 2% in 2010 with significant growth in EBIDA.

As we stated in our press release, we now believe EBIDA may come in towards the higher end of our previously stated range of $200 million to $240 million and at this level we should produce excess cash flow of at least $90 million which will be used to pay down debt and build cash reserves.

I know that we have been talking about the visitation problem for three or four years and the story does become old not only for investors but for me as well. It is however inevitable that visits will normalize. People have to get their haircut and colored on a regular basis.

This sole issue is when visits will normalize and we see enough positive signs that makes us quite confident that by this time next year our results will be much better. We believe our strategy is appropriate, so we’ll continue to focus on value. We can’t force customers to come in more often, however we can make sure that the customer experience is as good as it possibly can be, so that when they return they return to us.

We continue to be very bullish about our future. It’s inevitable that this industry, which is an enormous industry, $150 billion to $170 billion worldwide, will stabilize. We’re extremely well positioned strategically to grow our company when visits do normalize. Our balance sheet is extremely strong. The business model is still very attractive. Buying and building salons have extremely high rates of return. We are 10 times larger than our nearest competitor and yet only have a 2% worldwide share.

Our stock price is quite important to us and with our stocks trading at 12 times street estimated this fiscal year EPS versus an historical multiple of 17 times and with free cash flow per share of a $1.70 we think that our future is bright indeed and our shareholders should be able to benefit in the long term.

Randy will now continue.

Randy Pearce

Thanks Paul, and good morning everyone. Overall, I believe we’ve had a relatively straightforward quarter. Today we are reporting second quarter fiscal 2010 earnings of $0.30 a share, which includes about $0.02 of non-operational benefit associated with an adjustment to our prior year worker compensation and insurance claim reserves.

Therefore on an operational basis, we are reporting second quarter earnings of $0.28 a share, up slightly from our operational results of $0.27 that we reported last year on our second quarter after you adjust for the impact of our recent equity and convert issuance.

For many years, we’ve talked about the direct correlation of our earnings with our same store sales performance. With our actual comps declining 3.7% during the second quarter, we would have expected our operational earning could be about $0.20 a share, which included an incremental $2.5 million or two and half cents per share of planned cost savings that we discussed with you in recent quarters.

Therefore, our operational results of $0.28 a share are about $0.08 higher than what our comps would indicate. The $0.08 of upside came from strong expense control including gross margin enhancement. Our service and retail product margins came in about $0.03 per share better than planned during the second quarter.

In addition, our site operating and G&A expenses were about $0.03 favorable to plan on an overall basis. Earnings from our equity investments exceeded plan by about a penny a share primarily due to the performance of our European Salons managed by Franck Provost.

Finally, our effective income tax rate came in favorable to plan by about a penny and I will address each of these items with you in more detail a bit later on.

As always, we've included in today's press release, as well as on our corporate website a concise reconciliation that bridges our reported earning to our operational earnings for both the current year and the prior year second quarters. Also feel free to contact Mark Fosland or Alex Forliti here at the Regis corporate office should you have any questions regarding the financial models.

I will now transition my comments by giving you a bit more detail behind our second quarter operating results for each of our business segments. A breakout of our segment performance is once again filed in today's press release. My comments this morning is going to focus on our operational performance.

And I'll begin with our largest segment, which is our North American salons. Please remember that our former Trade Secret results have been removed from the prior year individual revenue and expense line items on the North America segment P&L as required by the discontinued operations accounting treatment.

As we've discussed in past quarters, Regis has agreed to provide certain transitional support services to Premier Salons, the company that now owns Trade Secret. These services included the sale of certain retail products to Premier at Regis's cost for a limited period of time.

These product sales to Premier effectively ended this past September 30th, the end of our first fiscal quarter. As a result, beginning in the second quarter you will no longer see the revenue and the related offsetting cost on the face of our P&L.

Our total North American salon revenue, which represented 87% of our consolidated second quarter revenue, declined 2% during the quarter to $500 million. This revenue decrease was the result of a decline in total same-store sales of 400 basis points, partially offset by revenue from company owned salons that were built or acquired over the past year.

Service revenue declined 240 basis points during the quarter to $390 million. This reduction was a due to a decline in service comps during the quarter of 4.1%, partially offset by revenue from new and acquired salons over the past 12 months.

Our same-store service sales continued to benefit during the second quarter by an increase in average ticket of 3.7% in large part due to price increases that we implemented during our third fiscal quarter of our prior 2009 fiscal year.

However more than offsetting the increase in average ticket was a 7.8% decline in same-store customer business during the quarter as many consumers continued to lengthen their salon visitation patterns due to the economy. Our retail product revenue fell 1.8% in the quarter to $101 million due to a decline in product comps of 3.7%.

Second quarter royalties and fees from our North American Franchise Salons were $9 million flat to the same period a year ago. New franchise units that were added to the system over the past 12 months were slightly more than the total number of franchise buybacks, franchise unit closures and relocations during the same period of time.

In addition, our Franchise Salons continued to experience the same general weakness in consumer visitation patterns and same-store sales trends as our company-owned concepts. And let me make one anecdotal comment regarding our North American salon revenue.

As Paul mentioned, our value priced salon concepts are performing much better during this recession than our higher priced Salons to illustrate service comps and our value concepts were off just 2% in the December quarter compared to a much larger decline of 9.3% in our higher priced Regis Salon division.

Although our Regis Salons remain quite profitable, the level of profitability is understandably declined in recent years due to general economic conditions. Rest assured that our operating people continue to focus on a variety of initiatives to increase sales and improve profitability.

I'm going to now speak to our gross margins and I am very pleased to report that our combined gross margin rate from North American Salons came in better than planned at 43.8%, this rate was 50 basis points better than the rate we reported last year in the second quarter and as I will discuss in a moment, the growth in overall margin was the result of both service as well as product margin rate improvement.

Our second quarter service margin rate came in better than planned at 42.4% and was 40 basis points better than the rate we reported in the same quarter last year. The primary reason for this improvement was reduced salon labor costs.

As each of you know, salary and commissions paid to our salon stylists represent our single largest expense category and our operational control over salon payrolls continues to be excellent.

During the second quarter, we continued to realize benefit from new leverage pay plans that we implemented this past year in many of our salons. Partially offsetting this improvement was a slight increase in salon health insurance costs that we had planned for.

Looking forward to the balance of our current fiscal year, we expect that our service gross margin rat should be at or slightly better than the rate we reported in our second quarter.

Our retail product margin rate for the second quarter improved to 49.5%, which was 100 basis points above the same period a year ago. There were several factors contributing to the improvement in rate, many of which we expect should be continued to be realized in the future.

One major item contributing to the rate improvement was our continued focus to work with product vendors to improve our gross margin on those products we choose to promote. We discussed this initiative with you in the past.

As we have also discussed our product margins are benefiting from our recent initiative to pay new stylists an 8% commission rate on their product sales rather than the historical rate of 10%. As we look forward to the balance of the current fiscal year, we expect product margins for our North American salons should approximate 50%.

Let me now address our site operating expense, which includes costs directly incurred by our salons such as advertising, insurance, utilities and janitorial costs. Our site operating expense in the second quarter came in better than planned at 8.5% of sales, which was 10 basis points higher than the rate we reported in the same period a year ago.

As I mentioned earlier, second quarter site operating expense benefited from an unplanned reduction of $1.9 million or $0.02 a share due to prior year accruals for our workers' compensation and insurance claim reserves being adjusted. This reduction was made following a periodic review by our independent insurance actuaries.

As we've discussed with you over the past several years, our actuaries have allowed us to record significant reductions to our workers' comp and insurance reserves due to the effectiveness of our aggressive salon safety and return to work programs. Also remember that last year in our second quarter, we also recorded a reduction to our insurance reserves resulting in a $6.7 million pre-tax benefit.

Cleansing both this year and our prior results of the workers' comp benefits, our site operating expense rate improved 90 basis points in the second quarter. We had planned for all of this improvement as we discussed with you during past conference calls, certain expense items, which had previously been categorized within our rent expense have now been appropriately reclassified into our site operating expense.

These items primarily related to utilities and rubbish removal costs for which Regis pays its landlords as part of our lease agreements. You may recall that last year, in our second quarter we made a reclassification that included amounts for both the first and second quarters and therefore the prior year rate was about 85 basis points higher than normal.

In addition to the impact of this reclassification, site operating expense benefited in the second quarter from certain cost saving initiatives in areas such as freight expense and salon repairs. These cost savings essentially mitigated any negative leverage from declining sales and inflation.

Next we will talk about our North American G&A expense, which came in at exactly 6% of revenue during the second quarter. This rate came in on plan and was 10 basis points above the rate we experienced in the same period last year.

We would have expected to see some negative sales leverage in this expense category during the second quarter, however continued focus on expense control and reduced year-over-year marketing cost allowed us to keep North American G&A relatively flat as a percentage of sales compared to the same period last year.

And let me make on final comment on North American G&A, many of you monitor the sequential run rates of this category and you’ll notice that North American G&A was up about $2 million on the second quarter compared to the preceding first quarter.

Our first quarter G&A is generally a little lower than the remainder of the year due to the timing of certain marketing and advertising programs. Rent expense which is primarily a fixed expense came in at 14.6% of total second quarter sales, which was 100 basis points above the rate we’ve reported last year on the comparable quarter.

As I just discussed, the six-month reclassification of certain expenses from rent into site operating expense favorably reduced last year’s second quarter rep rate by about 90 basis points.

In addition, the negative leverage in this fixed cost category caused from reduced sales volume is being largely offset by reduction in our percentage rent payments, also the result of reduced sales levels.

Depreciation and amortization came in essentially on plan at 3.6% of sales, equal to the rate we reported last year in our second quarter. Our reduced level of capital and acquisition expenditures during the past 12 months is servicing to slightly reduce our D&A expense, which in turn is helping to offset the negative leverage from reduced same-store sales.

The net effect of all the items I just discussed caused our operational operating income to come in at 11.8% of sales that’s up 30 basis points from the rate of 11.5% we reported last year in our second quarter.

Next let’s discuss the second quarter performance of our international salons segment which includes our company owned salons located primarily in the United Kingdom. We were very pleased that our comps came in better than planned during the quarter and significantly better than last year, declining 1.6% versus a decline of 10.7% last year.

We remain focused on improving our overall profitability. For example, second quarter results were favorably impacted by strong payroll management, aggressive expense control and through the closure or obtaining lease concessions for unprofitable salons.

These efforts continued to pay dividends as we have improved our U.K. operational profitability with the second quarter operating margin coming in at 4.7% of sales up from an operating loss of 2.3% of sales in the second quarter last year.

Today, I once again plan to provide some brief commentary behind the quarterly change in revenue and also give you some high-level comments on any expense categories that may have surprised us during the quarter. Once again those of you who built segment models may want to give Mark or Alex a call here at Regis and they can help you further.

Total revenue from our international segment represented 7% of our consolidated second quarter revenue and came in at $40 million in the quarter, a reduction of $1 million from the same period a year ago.

This slight drop in sales quarter-over-quarter was due to a decline in same-store sales of 1.6% as well as a reduction in revenue following the closure of 48 underperforming salons in the U.K. over the past year as part of our U.K. store closure initiative. Partially offsetting these declines with a favorable foreign currency impact.

Improved service and product margins contributed to an increase in the combined overall gross margin rate of 310 basis points versus last year. Service margin improved 200 basis points over last year, and was due to a few factors including improved operational payroll control as well as the benefit from under performing stores.

Let me now address retail product margins in a little more detail. As we previously discussed with you, are expectations going into our current 2010 fiscal year was for international product margins to improve to the mid-to-high 40% range due to a number of recent initiatives. Product margins have indeed improved.

In our preceding first quarter, we saw our product margin rate grow to exactly 49% and we’re pleased to say that we post the identical rate of 49% here in the second quarter.

Looking ahead to the second half of our fiscal year, we expect that our international product margin rates should remain near the current level of 49%.

I’m now going to discuss Hair Club for men and women. Our Hair Club business performance remained strong, but as we had discussed last quarter, the economy is having a slight impact with second quarter comps up slightly.

Let me highlight a couple of items. Revenue from our hair restoration centers came in at $35 million in the quarter, up 2% over the same period a year ago and represented 6% of our consolidated second quarter sales.

Second quarter operating margin rate for Hair Club came in at 14.7%, which as we expected was down from the rate of 18.3% we reported last year in the second quarter. The largest reason for the decline in operating margin rate was an increase in advertising during the second quarter. Hair Club second quarter EBIDA margin came in at just over 23%.

I’m now going to switch gears and make a couple of comments regarding our corporate G&A expense. The major component within our corporate G&A continues to be salaries and related benefits for more than 700 employees working here in Minneapolis and the 500 associates that work in our two distribution centers.

Centralized back office support functions provide leverage on our operating model. As I have said before, our company owned salon counts have continue to increase over the past five to six years at a much greater rate than our corporate home office head count. Despite this leverage we continue to be very aggressive with expense control during these challenging times of slow sales growth.

Our second quarter corporate G&A expense came in a bit better than planned at just under $31 million and was comparable to the amount we reported in the same period a year ago. Borrowing the impact of any timing issues we generally expect our corporate G&A to be in the range of $31 million to $33 million each quarter.

We continue to aggressively manage our G&A expenses and we continue to be pleased with our results. Let me make one remainder type comment to you regarding our corporate G&A. This expense category in the second quarter included $1.1 million of home office and distribution center cost related to providing transitional back office support to our former trade secret salons.

As we have discussed with you in the past Premier Salons who once again owns trade secret is wholly reimbursing Regis for all cost and that we are incurring on their behalf. However accounting convention requires that this expense reimbursement be included in our P&L under other income rather than being netted against our G&A expense.

Now that concludes my comments regarding business segments and I’d like to move on now to our investments, which are reported on the P&L line item called equity and income of affiliated companies.

This line item includes the after tax results of our investment in businesses such as Empire Education Group and Provalliance. Let me quickly say that we are pleased to report that our share of the second quarter earnings in these equity investments grew to $2.7 million on an after tax basis. Both businesses are posting results that are ahead of plan and are up from last year.

Let me now make a couple of comments regarding our effective income tax rate which came in about 300 basis points better than we expected in the second quarter at 36.3%. There were two primary reasons, the first related to a higher than anticipated amount of workers opportunity tax credits.

The second item related to a true up of our Canadian income tax provision following the filing of that tax return. Looking ahead we anticipate that our underlying tax rate for the second half of our 2010 fiscal year should be in the range of 39 to 40%.

Our balance sheet continues to be in great shape. Today we have no borrowings under our $300 million revolving credit facility, we have no liquidity issues, we continue to be in good standing with all of our financial debt covenants, and we have plenty of covenant cushion. At December 31st, total cash has increased to $114 million and total debt declined slightly to $470 million over the preceding quarter.

Anecdotally let me also say that our total debt of $470 million includes our recently issued convertible notes which have generally been trading above the strike price, assuming these notes were all converted today to equity, our debt is actually less than $325 million.

I have one last item, as we look forward to the remainder of the current fiscal year, our outlook really hasn’t changed all that much. We still expect same store sales in the second half of our fiscal year to be better than the first half.

As we are now half way through our current fiscal year, we expect that comps for the entire year may likely be closer to the low end of our previously stated range of negative 3% to positive 1%. However, let me reiterate a comment Paul made.

Due to strong expense control and gross margins enhancement, our EBITDA in fiscal 2010 may come in at the high end of our previously stated range of $200 million to $240 million. As a result, we’re budgeting to generate excess cash this year of $90 million or more.

So that’s it. That completes my prepared remarks. And Paul and I are now happy to answer any questions you have. So Sarah if you could step in and provide instructions, we would appreciate it.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Rick Bethel - Bank of America/Merrill Lynch.

Rick Bethel - Bank of America/Merrill Lynch

Could you just provide some color around your January comp improvement? Can you point any differences between the service and product comps? And secondly, did you do anything differently in the business in the New Year that you didn't do during the second quarter to get people in the door?

Paul Finkelstein

We’re quite pleased with respect to our product business. Our product business continues to be stronger than our service business. And that’s the main reason for the pick up in business.

Any changes with respect to customer visits and the like, in this industry would become really glacial. My vision is though, haircuts are on sale, 1400 people come barging in a particular salon door; it just hasn’t worked that way. But we’re very pleased with what’s happening in the retail environment, in terms of any other retail product environment.

Rick Bethel - Bank of America/Merrill Lynch

Did the January comp improvement occur across the chain or did you see pockets of improvements and certain reason to be –

Paul Finkelstein

It's getting better all over.


Your next question comes from Tracy Kogan - Credit Suisse.

Tracy Kogan - Credit Suisse

Just a quick follow-up on January. What is the traffic versus the ticket there? And then secondly, for the December quarter, just looking at the performance of your value concepts, it was better than the overall results, but just wondering about the SmartStyle results and if you could give more color on the comps there. And is there are anything you are doing at that concept maybe to drive traffic?

Paul Finkelstein

Our locations in SmartStyle and Wal-Mart are by far the best locations in the entire system. We are right in front of the store, so we have plenty of Wal-Mart traffic. In part, the Wal-Mart comps throughout the years have been very, very strong. So, we are just meeting very, very strong comps from several years ago.

The Wal-Mart business is extremely strong. It is quite profitable and we will continue to grow with Wal-Mart. So, if you have two or three months there, at a time where businesses are somewhat flat, it doesn’t create any major concern for us or our partner in Wal-Mart.

Randy Pearce

To address the first part of your question, I think in Paul's earlier comments, he indicated that in the last several weeks comps have been essentially flat. What we are seeing is average ticket continues to be up 3% to 3.5% and so it is really saying is that customer declines have improved. As we said in the first and the second quarter, customer comps were off close to 7.5% to 8%, which means in the last three weeks they are down maybe around 3.5%.


Your next question comes from William Armstrong - CL King & Associates.

William Armstrong - CL King & Associates

Paul, you mentioned commissions and we've been seeing that I guess for a few quarters now helping margins. What's the rate of employee turnover among your stylists? I know the lower commissions are only for new stylists. I'm trying to get a sense for how long of tail that we have where we'll continue to see benefits from that?

Paul Finkelstein

Quite a long time. We have a turnover of about 40% a year. The industry has a turn of about 60% and our turn is overstated because if somebody goes from one store to another, that’s a turn and if somebody does go from one store to another, obviously we don’t affect that person's commission rate. But there should be a betterment over the next two or three years because once again are returning our workforce to about 35%, 40% a year.

William Armstrong - CL King & Associates

Right and can you just remind me is that lower commission just on product sales or is it on service also?

Paul Finkelstein

Well, commissions on product went from 10% to 8%. The question with respect to services is a far more difficult one to explain because we have a myriad of commission arrangements.

But basically what we are trying to do is get leveraged payrolls into in terms of increased sales to generate a higher margin for us because the hair stylist will still make more dollars at a lower percentage commission on the incremental business. I don’t know if I am explaining it appropriately.

William Armstrong - CL King & Associates

And then one other question for Randy, I think. In the corporate G&A, you had some Trade Secret transition cost. How much was that?

Randy Pearce

I think it was $8.1 million is what I said Bill.

William Armstrong - CL King & Associates

$1.8 million. Okay great. All right thanks.

Randy Pearce

You're welcome and Bill I just want to clarify the offsetting reimbursement is in other income. So overall there is no overall cost to Regis.


Your next question comes from Erika Maschmeyer - Robert W. Baird & Co.

Erika Maschmeyer - Robert W. Baird & Co

Anecdotally, is there is anything that you think could be behind the differential and trends you’ve seen in January from December? I mean is that mostly comparisons?

Paul Finkelstein

Well three weeks does necessarily make a real difference and it would be far more comfortable when we have three or four months of flat comps or positive comps. It’s really difficult to make any kind of statement concerning what happened in the last three weeks.

Obviously, we’re gratified. It’s about time. Eventually visitation patterns normalize. We don’t expect them to go back to the old rates. Let me give you an example. In Portugal two years ago the average woman went eight times a year to a salon. Last year the average female in Portugal went 5.4 times a year.

I mean that is a tremendous decline now in fairness. Clients, female clients in Portugal and Spain do go more often to get their hair blown dry for instance. So it’s sort of an unfair comparison, but eventually it does normalize and we think we are close to normalization.

Erika Maschmeyer - Robert W. Baird & Co

Do you think your trends are closely tied to unemployment?

Paul Finkelstein

No. I think they tie to the fact that the consumer has become more frugal. If you look at the Spa business, the Spa business nationwide is up 25% and people are just spending less money on those kinds of classy luxury.

Now, especially if you're unemployed and if you have a job interview you want to look good. Some guy having a job interview is not going to wear a ponytail. I mean that would be absurd.

Erika Maschmeyer - Robert W. Baird & Co

And then could you give some more detail on your thinking behind expanding your franchise business. How much do you think of your kind of 2011 expansion could be franchise versus company owned acquisitions?

Paul Finkelstein

Well, as I mentioned in my transcript, we are going to be far more aggressive in markets where we have a tremendous share and tremendous strength. Northern New Jersey, Boston, Los Angeles, there were plenty of markets where we're extremely strong.

And we're going to sign a bunch of leases and it's really appealing to new franchisees because the brand is already established, so the returns are really quite strong. Now, having said that, financing today continues to be a problem for small businesses. Not a problem for people like, for companies like ours. But that’s the issue.

I mean, we're going to, we've always been very, very good partners with our franchisees. We will continue to be good partners with our franchisees, but it's in everybody's best interest, especially our franchisees if we are able – if we can aggressively build those brands.

Let's not forget we have ad funds and ad funds are dependent upon volumes. So the more volume we do the more money we have to spend to really merchandize these brands.

Erika Maschmeyer - Robert W. Baird & Co

And then, in terms of what you're doing to increase your add-on sales and adding impulse items, was that something that was new for Q2? Could you talk a little bit more about that?

Paul Finkelstein

Well as I mentioned, we’re experimenting with an awful lot of impulse items. The main drivers of our sales betterment and product are a small line called “It's a 10” and that’s really driving sales tremendously.

We have also added Pureology in a lot of our stores and added appliances in Salons where we haven’t had appliances before and those are the big generators of volume.


Your next question comes from Jill Caruthers - Johnson Rice

Jill Caruthers - Johnson Rice

I know you mentioned you are going to be anniversarying a chunk of your price increases in the third quarter, just wondering if you could talk about your outlook for I guess the second half of this fiscal year, I'm trying to lap those price increases?

Paul Finkelstein

Lets assume that we will raise prices in about 5000 of our company-owned stores and I’ll give you a better fix on this next quarter because most of the price increases have all been implemented.

Randy Pearce

We would expect maybe 2-3%.

Paul Finkelstein

No, it will be the same order of aptitude this year. Price should add about 2.5% to our comps.

Jill Caruthers – Johnson Rice

And then just given your overall expense costs in a year, its kind of getting a plane out there to cut 10 million incremental expenses and how is that tracking, your doing really well and we feel like your going cut more than that this year?

Paul Finkelstein

Well I rather be more conservative that buoy, but I will say we are – we still have our sights on at least $10 million, through the first half of the year we have achieved close to $6 million, so I think if you did the math you would probably see that we are going to be ahead of plans.

Once again, we just continue to be very aggressive on looking for opportunities to shave costs, without dramatically cutting into the bone or impacting the business and we have been success at that.


Your next question from Mimi Noel - Sidoti & Company, LLC

Mimi Noel - Sidoti & Company, LLC

Would you remind me some of the advantages to the franchise model?

Randy Pearce

Sure, well are you wanting --?

Paul Finkelstein

I’d say advantages for the franchise or for us?

Mimi Noel - Sidoti & Company, LLC

It’s For Regis.

Paul Finkelstein

You’ll make an effect on infinite return on capital if the franchise finds the capital. But we can – there are 40,000 strip centers in the United States. We could never build them all out from a company owned perspective. So we want and we need franchisees to help build out the strip centers.

Now having said that we don’t, the franchise model doesn’t work well on mall and with a limited universe such as Wall Mart, we’ll just soon have a company owned store rather than the franchise store. But the franchise model, I mean we are generating 40, 45% pretax on our royalty income and that’s fully loaded with everything.

The model works extremely well for us.

Mimi Noel - Sidoti & Company, LLC

Then the only other question I had was for Randy. You said that you had planned on increases in certain areas of site operating cost and I think you did list them but I missed them, would you repeat them?

Randy Pearce

Mimi, can I just do this, can I call you, because I will have to dig it out of the transcript here.

Mimi Noel - Sidoti & Company, LLC

That’s no problem.


Your next question comes from Jeff Stein - Soleil Securities.

Jeff Stein - Soleil Securities

First question for Randy, so your run rate on expense cuts looks like its slightly above $10 million, you do have some inflation embedded in your expense structure. So I'm wondering what kind of comp increase just generally would you need on a go forward basis to hold your operating income margin lapse.

Randy Pearce

We think in this current environment given the level of expense cut that we have and where inflation is currently running Jeff, it would be about 0% comps should give us leverage. That would be our tipping point today.

Jeff Stein - Soleil Securities

Can you talk a little bit about the real estate environment? I mean you guys have 8000 company owned locations, so when leases come up what kind of rent relief are you seeing and can you talk about the number of leases that will expire over the next 12 months?

Paul Finkelstein

Well all the strips and the stores have 5-year leases and we have about 1500 stores a year coming up for renewal and we are getting some significant rent relief but as we mentioned in previous calls, its offset in large part by increases in tenement taxes.

There are some places, like New York City for instance, where personally I think the landlords are delusional. They just don't get it. And we're going to be reducing our footprint in New York unless the landlords do get it. And I think in the long run, they will. I just think they just are not facing reality Jeff. But we don’t need New York City to build our business.

Jeff Stein - Soleil Securities

And aside from trying to grow the franchise business, if we look at company owned unit growth and net your openings against the closing, should we be kind of modeling flattish type unit growth on a go-forward basis?

Paul Finkelstein

Yeah, flat is good right now. As soon as comps become positive, it won't be flat chest, because we generally close to a couple of hundred and we should be opening 300 or 400 and that’s without disease. And let's not forget by the way, we have 8000 company owned stores but we’re on thousands of franchisee leases. And we control the lease and that’s we think a huge asset.

Jeff Stein - Soleil Securities

And free cash flow; if you guys generate 90 million or better free cash this year, what are you going to use it for? Will it be debt repayment? Or is there another priority?

Randy Pearce

Jeff, our strategy right now is just to continue to maintain liquidity and build cash until we start utilizing it to grow the business through new stores and acquired stores. We have about $10 million of scheduled maturities over the next 6 months, of debt maturities, and we have maybe $75 million coming due next fiscal year. So we’re not in any hurry to pay down debt largely because most of our remaining debt has make-whole provisions and we just don't think it's prudent to incur those costs.

So I think what you’re going to see is that debt levels will remain pretty consistent over the next 6 months and cash will continue to increase.


Your next question comes from Ross Haberman - Haberman Funds.

Ross Haberman - Haberman Funds

Just two quick questions on the two equity investments, the Empire and the Provalliance, I think you talked about, roughly $20 million cash flow you expected for Empire 2010. What was the cash flow number for the other operation you expect?

Paul Finkelstein

Well, they have a calendar year. And calendar year –

Ross Haberman - Haberman Funds

Or, what did they do last year? If you have that?

Paul Finkelstein

Yes, Brent, the EBITDA in euros for Provalliance 20 what?

Randy Pearce

For calendar 2009, it’s $23 million.

Paul Finkelstein

$23 million and they are projecting somewhere in the upper $27 million, $28 million.

Ross Haberman - Haberman Funds

Is that euros or dollars?

Paul Finkelstein


Ross Haberman - Haberman Funds

And just refresh my memory, what percentage do you own to each of those?

Paul Finkelstein

55% for Empire and 30% for Provalliance.

Ross Haberman - Haberman Funds

And the plans for that are-- over the next couple of years, what?

Paul Finkelstein

Well, we don’t control the boards in either case. So please understand, it's their plans, not our plans. At some point in the future, we would hope to monetize certainly Empire, and hopefully either buy Provalliance to monetize our investment. But that’s not two-year deal. That’s probably closer to a 4 or 5-year deal.

Ross Haberman - Haberman Funds

And just one question for Randy. Any of that cash flow besides the GAAP income in your $240 million of cash flow estimates?

Randy Pearce

Ross, what was the question about? You are talking EBITDA now?

Ross Haberman - Haberman Funds

Correct, yes.

Randy Pearce

Is there anything other than GAAP estimate?

Ross Haberman - Haberman Funds

Yes, in your cash flow of those two operations.

Paul Finkelstein

No, no equities are not (inaudible).

Randy Pearce

Yes, 240 is GAAP.


If there are no further questions, I would like to turn the conference back to Paul.

Paul Finkelstein

Thanks for joining us everyone have a good day.


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