Regis Corporation's (RGS) CEO Daniel Hanrahan on Q2 2016 Results - Earnings Call Transcript

| About: Regis Corporation (RGS)

Regis Corporation (NYSE:RGS)

Q2 2016 Results Earnings Conference Call

January 28, 2016, 10 AM ET

Executives

Daniel Hanrahan - Chief Executive Officer

Steven Spiegel - Executive Vice President, Chief Financial Officer

Eric Bakken - Executive Vice President, Chief Administrative Officer and General Counsel

Mark Fosland - Senior Vice President, Finance and Investor Relations

Analysts

Jeff Stein - Northcoast Research

Operator

Good morning. My name is Angel and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Regis Corporation Fiscal 2016 Second Quarter Earnings Call. [Operator Instructions]

If anyone has not received a copy of today’s press release, please call Regis Corporation at 952-806-2154 and a copy will be sent to you immediately. If you wish to access the replay for this call, you may do so by dialing 1-888-203-1112, access code 9714235. The replay will be available 60 minutes after the conclusion of today’s call.

I would like to remind everyone that 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, as well as others, can be found on their website at www.regiscorp.com.

Speaking today will be Dan Hanrahan, Chief Executive Officer; and Steve Spiegel, Chief Financial Officer. After management has completed its review of the quarter, we will open the call for questions. [Operator Instructions]

I’d now like to turn the call over to Mr. Hanrahan for his comments. Dan, you may begin.

Daniel Hanrahan

Thank you, Angel. Good morning, everyone, and thank you for joining us today. With me are Steve Spiegel, our Executive Vice President and Chief Financial Officer; Eric Bakken, our Executive Vice President and Chief Administrative Officer; and Mark Fosland, our Senior Vice President of Finance.

Our second quarter performance demonstrates continued progress in executing against our strategies. As we review the quarter in greater detail, you will see consistency in our message. Our vision to make Regis a place where stylists have successful and satisfying careers remains unchanged. Our continued focus on leadership development, technical education and asset protection will enable us to make Regis that place.

Our strong field leaders are driving sustainable improvement by using tools, processes and metrics we provide to drive growth in their districts and salons quarter after quarter. As more of our leaders continue to positively comp and our business further stabilizes, investments we make in stylist hours will further contribute to longer-term growth and profitability. And as I’ve said in the past, while our progress is moving in the right direction, it will not be linear. I will now provide you with more detailed color on the second quarter.

Second quarter same-store sales increased 220 basis points. Service same-store sales increased 90 basis points and retail same-store sales increased by 720 basis points, both driven by improving execution. Service and retail same-store sales trends improved across each of our concepts. SmartStyle and Supercuts remain our best service performers, posting service comps of 480 basis points and 180 basis points, respectively, in the second quarter.

I was very pleased with what our team accomplished in the second quarter retail performance, driven by a strong holiday promotional assortment and increased combo sales, which are retail sales attached to a service ticket. During the second quarter, our combo sales percentage of 9.5% increased 120 basis points compared to the prior-year quarter.

Our leadership trends improved during the second quarter providing support we’re developing in upgrading field leadership talent. During the second quarter, a higher percentage of our regional vice presidents, regional directors and district leaders posted positive comps compared to all of fiscal 2015 and the first quarter of 2016.

While encouraging, two underlying trends remain that need to continue to improve to drive long-term sustainable growth. First, we still have too many negative comping leaders whose results are slowing the momentum of our overall growth. Second, our overall service guest traffic needs to grow.

While many of our leaders are driving quarter-over-quarter growth in service guest traffic, we have not yet posted positive growth in service traffic. I will cover what we are doing to address these underlying trends as I update you in a few moments on our progress in leadership development, technical education and asset protection.

During the quarter, we continued to make progress with our digital integration initiatives focused on guest satisfaction, mobile and web check-in, and guest data capture. Since its launch about a year ago, approximately 600,000 people have downloaded our Supercuts mobile app.

Visitation to our enhanced Supercuts and SmartStyle websites is up approximately 20% and 40%, respectively, and visitors are spending more time in our content-rich site, engaging with our brand, reading articles, discovering the latest style, viewing products and learning how to use them.

Last quarter, I emphasized the convenience of check-in into our salons digitally and how digital check-in is driving improvement in repeat guest visits. During the second quarter, we surpassed 1 million mobile and web check-ins. We’re also leveraging information within our guest database to offer promotions to our guests and upsell add-on services or retail sales in a more targeted fashion. Not only can we tailor our guest messages to drive repeat traffic with service reminders and promotional events, but we can use our digital knowledge to market a guest while in the salon.

On the franchising front, we added 22 new franchisees to the system and opened 65 new franchise salons during the second quarter. These new franchisees are helping to expand our Supercuts footprint and along with our strong existing franchise base, we’re contributing to revenue, the Supercuts marketing fund and cash flow improvement.

Now, let’s cover our progress against our initiatives focused around leadership development, technical education and asset protection. I’ll start with leadership development.

Our top priority continues to be the development of our field operations leaders. Having strong field leaders in place is critical to creating a solid foundation for recruiting, coaching, developing and retaining our stylists. This is our means to achieving sustainable growth. While ongoing leadership training and development have become commonplace for our regional vice presidents and regional directors, we continued to extend our reach to our district leaders and salon managers.

During the second quarter, we completed a second round of training where our 900 plus district leaders attended regional training programs integrating technical education with positive leadership. This training emphasized multi-unit leadership and staffing and retention strategies. As the fiscal year has progressed, we’ve seen a higher number of district leaders achieve growth and the results are improving throughout the year.

Similar to what we’ve seen with regional vice presidents and regional directors, we are providing additional training and development, or upgrading talent as required, in order to strengthen our overall district leader team. You may recall from last quarter I discussed the launch of our new training program called DASL, which stands for developing amazing salon leaders.

DASL is a 12-week online training program for salon managers that focuses on stylist retention and salon staffing. The curriculum helps them with the basics like stylist recruitment, onboarding, retention and revenue generation. To date, over 97% of our existing salon managers have successfully completed the program.

I must admit I was pleasantly surprised by the completion rate. From past work experiences outside of Regis, I would have expected a much lower rate. DASL is now a key requirement in our salon manager onboarding process and we have approximately 600 new salon managers at varying stages of DASL training today.

Technical education has the potential to be the most significant impact to our performance because it touches each of our 45,000 stylists. During the second quarter, we completed the build-out of our technical education team and alignment of artistic directors with regional directors. In the same period, this new team provided over 1,300 days of salon training to about 9,000 stylists.

Since the beginning of the year, we have conducted technical training classes in approximately half of our salons and we are on track to deliver technical education to every salon during fiscal 2016. We continue to receive positive feedback from leaders and stylists about the impact our technical education team is having across the field.

Moving onto asset protection, the work our asset protection team is doing to help coach stylists to grow their business and earn higher commissions is also helping us retain stylists. Partnering with field leaders, our asset protection team continues to see positive trends in salons where we’ve conducted awareness training sessions and salon visits.

During the second quarter, the asset protection team conducted over 1,000 awareness training sessions and salon visits, bringing our year-to-date total to approximately 1,900 salons, representing close to a 40% increase in coverage.

As you can see, we continue to make progress on leadership development, technical education and asset protection. These are and will remain key initiatives that will make Regis a place where stylists can have successful and satisfying careers, which will lead to improved stylist staffing and retention and in turn outstanding guest experiences.

Before I move on to capital allocation, I would like to revisit the investment in stylist hours I introduced in our previous earnings call. As we have been stabilizing the business, we began to thoughtfully invest in stylist hours to grow guest traffic and we continued to do so during the second quarter.

While this has a short term unfavorable impact on margins, we will not consistently grow our revenue and margin dollars without enough stylists in our salons. Investments are focused on salons with the greatest needs to improve staffing and stylist scheduling in our salons.

Making this investment is not simply a flip the switch decision. It requires execution across the board. As we add hours to grow the business, we monitor stylist productivity by salon and field leader to ensure the additional hours are becoming more and more productive. Our strategy is to staff the salon, coach stylists to commission, so they are earning well and work diligently to retain these productive stylists.

The process is iterative and why I say our progress will not be linear. To deliver more linear progress and consistent growth, we are focused on optimally balancing the investment in stylist hours with driving guest traffic and growing comps. Progress we’ve made in laying our foundation for the future, continuing field leadership training, development and upgrades, improvement in our execution capabilities each quarter and the fact that our best leaders grow comps following the investment in stylist hours gives me the confidence this investment will pay off longer-term.

Before concluding, I want to spend a few moments covering capital allocation. We continue to believe we have begun to stabilize our business. We’re confident in our strategy and in the direction our business is heading. Our primary focus has been on stabilizing the core business and building the foundation for growth.

As a result, we’re not yet at a point where we can consistently deploy capital to grow our business by reinvesting salons where expected returns provide attractive rewards relative to risk taken.

Our default use of capital remains share repurchases at reasonable prices. In the first half of our fiscal year, we repurchased 6 million shares for $77 million at an average price of $12.90 per share. We will continue to follow our capital allocation policy by ensuring our balance sheet remains strong and deploying excess capital in a manner that maximizes shareholder value.

In a few moments, Steve will provide further color on this and recent modifications we made to our high yield notes and bank credit facility. I’m confident we are following the right strategies and I’m proud of our team for the progress in making Regis a place where stylists can have successful and satisfying careers.

Our field leadership talent and execution capabilities are improving. We have work to do to drive sustainable growth in guest traffic which will enable us to realize the potential of each of our salons and result in long-term growth and shareholder value.

I’d now like to turn it over to Steve.

Steven Spiegel

Thank you, Dan, and good morning. Before discussing our performance for the second quarter, I want to cover two housekeeping items. First, included in today’s press release as well as on our corporate website is a reconciliation bridging reported results to earnings as adjusted for the impact of discreet items for the second quarter of the current and prior years. Also on our website are revisions to our fiscal 2015 quarterly income statements.

Second, the presence of evaluation allowance against most of our deferred tax assets affects comparability of reported and as adjusted results to prior periods, mainly as a result of tax benefits we claim for goodwill amortization, but do not recognize for GAAP purposes.

Our income tax benefit for the six months ended December 31, 2015 of $1.4 million includes $1.9 million of non-cash tax benefits associated with goodwill amortization. The total non-cash tax expense related to this matter is expected to approach $8 million for the fiscal year ending June 30, 2016 and will continue annually in decreasing amounts as long as we have a deferred tax asset valuation allowance in place.

As we’ve said in the past, the associated quarterly non-cash charge or benefit could fluctuate significantly as a result of how the effective tax rate is determined at interim periods. Since our press release and 10-Q include detailed explanations for our major P&L line items, I will focus my comments on our liquidity and financial position.

In the first half of our fiscal year, we repurchased 6 million shares of our stock for $77 million at an average price approximating $12.90 per share, excluding transaction costs. At December 31, 2015, $34 million remained outstanding under our existing share repurchase authorization. In January, our Board of Directors authorized an additional $50 million for share repurchases.

In December, we exchanged $120 million 5.75% senior unsecured notes due December 2017 for $123 million 5.5% senior unsecured notes maturing December 2019. We were fortunate to be able to extend this liquidity at an effective borrowing rate approximating 6% especially during a turbulent period for high yield notes.

In January, we amended the terms of our revolving credit facility primarily reducing our borrowing capacity from $400 million to $200 million. This was primarily driven by our desire to rightsize this facility now that we’ve extended the tenure of our senior unsecured notes and to reduce unused commitment fees.

We remain focused on funding investments and managing inflation through disciplined cost management and rigorous review of all spending to ensure we continue to protect our strong balance sheet. To that end, our business generated approximately $12 million of operating cash flow during the first half of our fiscal year. We finished the quarter with $130 million of cash, $120 million of total debt and no outstanding borrowings under our revolving credit facility.

This concludes the financial portion of the call. We would now like to answer any questions you may have. Angel, can you please provide the instructions for the Q&A portion of the call?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question will come from the line of Jeff Stein of Northcoast Research.

Jeff Stein

My question is this. You’re obviously trying to achieve that balance between investing and payroll and driving comps. At what point do you believe you’ll reach that balance where we’re not going to see such a dramatic impact on your service margin? In other words, you can invest in payroll ahead of comps forever, but at some point there’s got to be a leveling off and where do you see that percentage and the timeframe?

Daniel Hanrahan

It actually varies quite a bit and it’s not inconsistent with anything that we’ve seen in our business so far. We’ve got good leaders, investments that we’ve been making are already paying off. And you know what, we essentially look at the investment paying off as this, we can grow revenues and hours at the same rate and we look at leverage when we can get revenue to grow faster than hours.

And then when hours grow as faster than rate, I mean, there are still for a while there it’s still adding value. But we’re seeing it happen with leaders, so I can’t give you an exact time that we’re going to turn that corner, but our good leaders took those hours invested and turned that into increased contribution at the salon level right away.

And we’re opening – so we started to open the door further and further and we’re seeing our leaders that are in development and growing also making good progress there and we haven’t invested hours at the same rate in our leaders that still need to make a lot of progress that we need to upgrade.

So I can’t give any exact date, but I can tell you we’ve got a laser-like focus on this right down to the salon level and we’re being very cautious about doing it. But we do need if we’re going to get traffic growth, the guest traffic growth and we’re going to get long-term sustainable profitability, we’ve got to get our hours up. And there’s a couple of benefits to that, the biggest being if you can provide more hours to stylists, you’re most likely to retain them. And retention, stylist retention is a huge driver of our growth.

Jeff Stein

So when you’re adding stylists, are you doing it – I guess, when you’re adding payroll hours, are you still doing it profitably but at a lower margin?

Daniel Hanrahan

It depends on the salon. Yes, I got the question, it’s a smart one. It depends on the salon, it depends on the leader. So our objective obviously is to add them profitably. We don’t mind at this point seeing our margins go down a little bit because what we’d like to do is see the contribution at the salon level grow.

We’re early at it. This is a new step for us. I think it’s a very, very important one so that we can begin to grow the top line of this business and grow the profitability. So again, I refer back to my previous answer, it really depends on the leader and their ability to turn it into profitable hours.

Now, one of the things we do is we don’t necessarily just hire new stylists. Adding hours might be better scheduling, it might be giving your best stylist more hours. So we’re very, very thoughtful about how we do it. And I think we’re getting better and better on it. What we do do is that if we find a salon that’s out of balance, we pull back on it and get it more in line because that will happen too.

With 7,000 salons as we’re starting to grow hours, some of our younger leaders that probably deal a little more development got out ahead of themselves a little bit, so we reeled it back in. And I think with Mark Fosland and his finance team supporting the field, we’re just going to get better and better at this overtime.

Operator

And your next question will come from the line of Steph Wissink from Piper Jaffray.

UnverifiedAnalyst

This is [Wolfe] calling in for Steph; unfortunately I was on mute. I have a couple of quick questions for you, the first being there have been comments historically about releasing some company-owned sites prior to franchise partners. Do you have any update on that program and where we’re in the overall real estate rationalization phase? And then secondarily, can you comment quickly on Wal-Mart’s announced store closures and whether they have any impact on you and if you could quantify it?

Daniel Hanrahan

I’ll start with I believe your first question was about selling company-owned sites to franchisees. We have been doing that overtime. As we think through our real estate and rationalize our real estate, we go through a number of steps. First, we look at it and see if it’s something that we can turn around. And if we feel it’s something we can turn around, we make sure that our team is focused on that and doing all the right things.

Second is we look very hard at the real estate. And if it’s good real estate, we know that that’s a decision that now has to come down to is this something that we’ve got the right people in place to turn around or can we turn that into quicker cash flow by selling it to a franchisee. And then the decision is made to either hang on to it ourselves or go out to the franchisee and at that point we begin the sales process with our franchisee.

What’s happening is actually pretty good news for us overtime as we’ve been able to sell a relatively small number, but it’s generated incremental cash flow for us. But the good news is that number is becoming smaller and smaller. So as we continue to improve the business, we have fewer and fewer good real estate situations where we’re trying to sell them to franchisees. So it’s a good program and our franchisees like it. We’ve got a good partnership with our franchisees, but overtime our goal is to bring that down to zero because that will mean that we’re operating the salons well.

And then to the Wal-Mart question, we’ve got a terrific relationship with Wal-Mart. They worked with us very well on this. It was just a handful of salons and it’s a de minimus impact. What we did is worked hard and our main focus on that was to make sure that we could place all our stylists in other salons and we were able to do that. So it’s nothing that is going to impact our business.

Operator

This concludes the Q&A portion of the call. I will now turn the conference back to Dan.

Daniel Hanrahan

Thanks, Angel. Thanks everybody for dialing in today. We look forward to talking to you at the end of our third quarter. Have a great day.

Operator

Ladies and gentlemen, this concludes our conference call for today. If you wish to access the replay for this presentation, you may do so by visiting regiscorp.com in the Investor Relations section of the website or by dialing 1-888-203-1112, access code 9714235. Thank you all for participating and have a nice day. All parties may now disconnect.

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