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Regis Corporation (NYSE:RGS)

F4Q08 Earnings Call

August 20, 2008 5:00 pm ET

Executives

Paul D. Finkelstein – President & Chief Executive Officer

Randy L. Pearce – Senior Executive Vice President & Chief Financial Officer

Analysts

Jeffery Stein – Soleil Securities

Neely Tamminga – Piper Jaffray

Daniel Hofkin – William Blair & Company, LLC

Mimi Noel – Sidoti & Co., LLC

Operator

Welcome to the Regis Corporation fourth quarter and fiscal year 2008 conference call. (Operator Instructions)

I would like to remind you that to the extent the company’s statements or comments this afternoon 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 www.RegisCorp.com.

With us today are Paul Finkelstein, Chairman, President and Chief Executive Officer and Randy Pearce, Senior Executive Vice President and Chief Financial and Administrative Officer. After management has completed its review of the quarter and year we will open the call for questions.

I would now like to turn the conference over to Paul Finkelstein for his comment.

Paul D. Finkelstein

I’d like to review our financial results for the quarter and for the year. Our fourth quarter revenues increased 5% to $709 million. Revenues would have increased slightly over 10% absent of deconsolidation of European franchise business and beauty schools. For the fiscal year, revenues increased 4.3% to $2.7 billion. They would have increased almost 8% absent of deconsolidation of Europe and schools. Fourth quarter reported EPS was $0.54 versus $0.62 last year. However, there is some noise in the quarter for items such as workers’ comp and insurance reserves as well as a $0.06 per share charge associated with a write off of certain fixed assets related to our store closing program.

Thus, operationally EPS for the quarter was $0.55 this year compared to $0.53 last year. Likewise, EPS for the year on an operational basis was $1.99 versus $2.05 last year. EBITDA for the year was $313 million compared to $317 million last year. The deconsolidation of Europe and schools resulted in our booking $12 million less in EBITDA than we would have had deconsolidation not occurred.

Information found in today’s press released coupled with information on our website will give you additional input to help you analyze our financial results. During the quarter we acquired 54 locations, built 72 and closed or relocated 62. Our franchisees built 29 and sold, closed or relocated 75 locations, resulting in a decrease of 46 franchise locations during the quarter. During the year we acquired 388 locations, built 328 corporate locations and closed or relocated 225 units. Our North American franchisees added 131 locations and closed or relocated 79. As of June 30, we had 2,198 North American franchise locations. We ended the year with 10,837 company owned and franchise salons and total locations, including ownership interests, of 13,551.

For the year we spent $100 million on capital expenditures, $169 million for acquisitions and $50 million for stock buybacks. Debt at June 30 was $765 million and our debt-to-cap ratio was 43.9%. Fourth quarter North American same store service sales increased 3.3%. There was a positive 4.3% price increase impact, a positive 1.7% service mix impact and a 2.7% negative customer count impact. Fourth quarter product comps decreased 4.5%.

We all know that the economy has enormous challenges ahead of it and these challenges will not soon go away. Additional monetary policy will certainly not be a cure all. Discretionary income for many consumers has diminished considerably. Consumer related businesses will be adversely affected. Our retail product business will certainly have its issues for a year or two, especially when we’re trying to transform a significant number of Trade Secret stores to the PureBeauty concept. Yet Regis is extremely well positioned. In fact I’m more bullish today for the long term than I’ve been for four years. It’s interesting to note that for four years I’ve begun our fourth quarter conference call by saying, “Thank God the year’s over.”

As you know, casual lifestyles have really affected our industry and obviously our company. However, the basic metric to use in evaluating the health of our company is service comps and our service comps are stronger than they’ve been in eight years. We continue to have a reduction in customer comps. In part this is due to department stores within malls not fulfilling their charge, mainly generating mall traffic. This obviously has affected us has the fashion effect to which I previously referred which certainly has reduced salon visits.

Let’s get to the heart of the matter. Our average female customer now visits us seven times a year. Our male customers, who represent 42% of our customer count, visit us approximately 10 times a year. Our average service check for females is $25.00 and $13.00 for males plus our female customers are spending $180 a year for services. Men are spending approximately $130 per year. A $2 price increase only costs women $14 a year incrementally and likewise men $20 a year incrementally; not a big deal. In fact, we have seen no empirical evidence that have given us any concern with respect to salon visitation as being reduced because prices have increased; quite to the contrary.

So what is our strategy going forward? At $20 a pop we certainly can increases prices a dollar or two a year for the next several years. Also, price increases are necessary for our employees. Our employees are partners and they’re basically paid a percentage of their sales. So as their automobile costs increase, their wages have to increase. Realistically, the only way this can occur is for prices to increase. We’ve been around for 86 years and have never had an annual comps from a decrease because this is the quintessential replenishment business and this is not an affordable luxury; this is an affordable necessity.

In summary, our price increases have worked. However, my long term bullishness has to be moderated by the current state of the economy. We don’t know how long and how deep the recession will be. July/August comps are slightly down. As a result we are lowering our internal expectations for the first quarter but not for fiscal year 2009. Randy will talk to this point during his presentation.

Let’s be clear as to the short term issue. This is not like department stores stating that their business is off due to customers trading down to discounters. We are the low cost provider. This is solely a function of reduced traffic and belt tightening on the part of the consumer. We are not losing share.

Let’s look at our other businesses and their performance. As you know, we have a 49% interest in Intelligent Nutrients. The initial game plan was for us to partner with Aveda founder, Horst Rechelbacher, who is by far and away the industry giant in terms of product development to come up with a captive organic line of products. We knew that the joint venture would be unprofitable for three to five years. However, we thought this could be a $30 million to $50 million line in our salons with significant profitability attached to it.

Horst has completed a magnificent product line. In fact, it’s spectacular; it’s groundbreaking. It’s unique and very special and should be very successful but the price points are $35 and $40. So time will tell whether these price points will work in a majority of our salons. We’re going to be embarking upon a 50 salon test within the next several months plus our joint venture with Horst and Intelligent Nutrients has morphed into an investment rather than as a profit generator for the salons. We have a relatively modest amount of money, $13 million, invested in this business at this point in time and will give you updates in future quarters.

Now let’s turn to Empire Education Group in which we have a 55% interest while the Empire Group controls the Board and controls the management of the company. Empire purchased our beauty schools on August 1, 2007. The first year was extremely challenging due to the investment in systems and the cost of amalgamating the Regis schools into Empire’s structure. Empire’s management team is excellent. Empire will generate approximately $9 million in EBITDA this year which frankly is less than planned. However, we are highly confident that EBITDA for fiscal 2009 will increase by 50% to 75%. Long term this should be a very profitable business.

Let’s move on to Provo. As in the case of Empire, Provo has had huge transition and amalgamation cost issues since our merger last January. They’ve also made several other acquisitions in addition to Jean Louis David and it’s really too early to make any determination as to how they will do in fiscal 2009. The management team is excellent and the profit opportunities are huge.

To reiterate what we stated before, Provo had increased its EBITDA three fold in the last five years, growing from $5 million to $27 million which is unheard of in our industry. As the top salon operator in Europe we are highly confident that Provo will continue to significantly increase its market share and this should also be a very good investment for us in the years ahead. We did not pursue this transaction based upon a quarter or a six month or a nine month timeframe; we do not look at Europe in this manner. We are very excited to be a partner in the Provo operation and think our financial performance in the future will be excellent.

Our U.K. business continues to struggle as the economy in the U.K. struggles. U.K. is still profitable and we’re very excited with our new management team, led by Jackie Lang in the U.K. Either way, results in the last several weeks have been quite promising. They actually continue to be committed to reduce costs and have implemented many programs to reduce home office costs. Randy Pearce will talk about this during his presentation.

I’d like now to focus on Trade Secret and salon closures. The Trade Secret retail universe is extremely crowded. Both Sephora and Alta are building stores. Store comp is increasing faster than industry wide sales. The Limited’s Bath and Body division through June had a negative 10% comp. Victoria’s Secret, which is one-sixth beauty, had an 8% negative comp. The initial transformation of Trade Secret into PureBeauty has had mixed results. To date, we have transformed nine Trade Secret locations to PureBeauty and will 17 completed by the end of September.

We are having some wonderful successes with vendors such as Jane Iredale and Joy, Bliss, Murad and Fekkai. Our Mall of America comps have been strong and at the same time there have been disappointments. However, these disappointments have to be analyzed on an individual case basis. It’s important to have patience in analyzing the results. These stores have been open for a short period of time during a terrible retail selling season. It’s going to take a year or two to fully sort out our assortments and marketing strategies.

We still feel that this is a very appropriate initiative for us. We will not have a division of 700 PureBeauty salon stores within the next year or two. Rather, if our tests are successful, the number probably will be somewhere between 150 and 200. After the 17 conversions from Trade Secret are completed by the end of September, we will pause and analyze our assortments before we make additional cap ex to convert additional stores. We will, however, broaden assortments in all of our Trade Secret stores.

Our sales of beauty related items other than hair care have exceeded plan and it makes sense for us all to be patient with respect to analyzing the results. Once again, let’s put this in perspective. Trade Secret accounts for only 9% of our revenues and 6% of our system wide sales. Frankly, diversions continues to be an issue but not as much of an issue. Some companies are taking diversion very seriously. Paul Mitchell and Proctor & Gamble should be commended and several other companies, including the very biggest beauty company and you all know who that is, don’t seem to be taking the problem very seriously and the result has been that the lines between professional and retail product are blurred, perhaps permanently.

So in the future, hair care will end up with high price, medium price and low priced lines. However, we do have the advantage of 65,000 employees actually touching people’s hair and being able to effectively sell them products. So we will very much be in the retail product business and frankly whether our product sales represent 30% of our total revenue or 26% of our total revenue, it really should not make a lot of difference in the years ahead as long as our profits grow.

I’d like now to talk about a new Regis mens barbershop concept that we just opened on August 8 called RAZE For Men in Minneapolis. It has a $25 to $30 haircut price point which is relatively high end and yet not super high end and we have found that this is a very scalable business. There are similar high end barbershop chains in Portland, Seattle and Phoenix and there’s no question that this is a growing market. There is a very crowded field of hair cutting shops in the $15 price range whether the brands be Supercuts, Cost Cutters, SmartStyle or competitors such as Hair Cuttery and Grey Clips.

There are very few chains that are selling $25 and $30 haircuts with an ambiance and build out that is quasi luxurious. We would not enter any new category unless we could have at least 400 to 500 locations and this concept will not only be company owned but mostly franchised. Many of our existing franchisees want to expand with RAZE. We’ll give you more information over the next year or so as we build out this concept.

Before Randy takes over, I’d like to briefly talk about our store closure program. We have recently announced closing up to 160 stores in malls and strip centers prior to the end of their lease terms. These stores represent less than 2% of our company owned portfolio. Approximately 100 of these stores are in malls and the balance are in strip centers and as you know, many other retailers are following suit. This does create a certain amount of challenges for us as mall owners do not want their malls to have significant amount of dark spaces. However, we are going to be working with our mall developing partners and will hopefully either obtain closures or significant rent relief.

We view the store closing initiative as an investment decision much like our decisions to build or buy salons and repurchase company stock. This is a strategy which should yield significant returns within the next three to five years. The strip center closures have fewer challenges attached to them. Once again I’d like to reiterate what I said in the very beginning. The service business is getting stronger and this is the true barometer of the health of our company so yes, I’m bullish with the long term and I’m excited although we all know that the economy has enormous challenges ahead of it.

Randy will now continue.

Randy L. Pearce

Good afternoon everyone. As you are aware our quarterly earnings guidance always will directly correlate to our same store sales guidance. At the beginning of our fourth fiscal quarter we had forecasted our earnings to be in the range of $0.55 to $0.62 per share and that was based on an assumed same store sales range of positive 50 basis points to 2.5% with actual same store sales growth coming in at the low end of our range for the quarter. One would expect our earnings to also be at the low end of our range and they were. Today, as Paul mentioned, we’re reporting fourth quarter operational earnings of $0.55 a share, up from operational earnings of $0.53 a year ago.

Our reported earnings for the fourth quarter this year as well as last year in the fourth quarter includes some non-operational items and Paul touched on them there. We had some non-cash fixed asset write offs associated with our previously announced plan to close up to 160 underperforming salons and we also had an unplanned favorable adjustment to our prior year workers’ comp and insurance claim reserves. We’re always trying to make this as transparent as possible and so to make it simple for everyone we have included in today’s press release, as well as on our corporate website, a concise reconciliation of our reported earnings to our operational earnings both for the quarter as well as for the full fiscal year.

Absent these non-operational items I believe we had a relatively straightforward quarter from an operational perspective. I’m going to transition my comments by giving you a bit more detail behind our fourth quarter operating results for each of our business segments. A breakout of our segment performance is found in today’s press release and my comments this afternoon are going to focus on our operational performance and I’m going to begin, as always, with our largest revenue segment and that’s North American salons.

Our North American salon revenue, which represented 86% of our consolidated fourth quarter revenue, increased 12% during the quarter to $610 million. This revenue growth was primarily due to the net increase in the number of new and acquired company owned salons that we operated year-over-year as well as positive same store sales of 100 basis points. Service revenue, which represented 72% of North American revenues, was up 12.7% during the quarter to $438 million. This increase included a 330 basis point growth in service same store sales which was our strongest fourth quarter comp increase in eight years. Our same store service sales continue to benefit by the increase in average ticket in large part due to price increases that we implemented in our third fiscal quarter.

Fourth quarter retail product revenue grew 9.4% in the quarter to $161 million but was tempered by a decline in product comps of negative 5.2%. Royalties and fees from our North American franchise salons grew 5% during the quarter to $10.6 million. This increase was primarily due to an acquisition of 42 Canadian franchise salons that took place in our first quarter of this fiscal year as well as the acquisition of 51 BeautyFirst franchise locations that we acquired in February. Absent these acquisitions new franchise units that were added to the system over the past 12 months were being slightly more than offset by franchise buy backs, franchise unit closures and relocations. Our combined gross margin rate for North American salons came in slightly better than planned in the fourth quarter at 43.4% but represented a 60 basis point reduction over the same period a year ago. As we’ll talk about in a moment this reduction was due to a decline in retail product margins.

We are once again very pleased with our service margin rate which came in better than planned at 42.2% during the quarter virtually identical to the rate we reported last year in our fourth quarter. We had initially expected to report a slight service margin decline in the quarter this year due to the same two factors we discussed with you in recent quarters, an accounting reclassification associated with retail to shop product transfers as well as slightly higher payroll costs in certain salons we recently acquired. However our service payrolls came in significantly better than planned as a result of the favorable leverage we enjoyed from strong service comps of 3.3% during the quarter.

Our retail product margin rate for the fourth quarter came in at 46.5% down 200 basis points from the rate we reported in the same period a year ago. We had budgeted for a quarter-over-quarter decline in product margins primarily due to two factors, during the past year we completed the acquisition of Beauty Supply Outlet as well as PureBeauty and BeautyFirst. These businesses have a number of franchise units and we in turn sell retail product to these owners. The product we sell them is obviously at a lower average margin than the product we sell in our corporate locations which serves to reduce our consolidated product margin rate. In addition the PureBeauty and BeautyFirst acquisition also included 63 company owned salons. These stores have lower average retail margins due to their product assortment. These two factors accounted for a planned reduction in margins of 130 basis points. Having said that our fourth quarter product margin rate came in a bit lower than we had initially expected largely due to negative payroll leverage in our Trade Secret salons as they posted a negative product comp of minus 11% in the quarter.

The next item I’d like to discuss is the line item that we call site operating expense which includes costs directly incurred by the salon such as salon advertising, workers’ compensation insurance, telephone, utilities and janitorial costs. Our site operating expense came in at 7.2% of sales. Although this rate was significantly better than planned it was 50 basis points higher than the same quarter a year ago. Over the last two years we’ve enjoyed significant reductions in our workers’ compensation and other insurance reserves. As you recall several years ago we aggressively focused our efforts on reducing escalating costs associated with work place injuries in our salons. We implemented new safety programs, we worked with injured employees and their positions on return to work programs as well. The benefit of our labor began paying off over the past two years as we have seen continued reductions in the frequency and the severity of salon injury claims. As a result our insurance actuaries have authorized reductions to our prior years’ claim reserves. This continued in our fourth quarter of fiscal 2008 as we were authorized to record an additional benefit of $3.4 million. Last year in our fiscal 2007 fourth quarter we recorded a benefit of $7.5 million. Therefore if you factor out these benefits from our fourth quarter results our site operating costs have improved quarter-over-quarter by 30 basis points largely the result of recent cost savings initiatives that we have implemented.

Next we’ll talk about our North American general and administrative expense. Although our fourth quarter G&A rate of 5.9% came in slightly better than planned it was 30 basis points higher than the comparable prior year rate. This quarter-over-quarter increase was in large part due to the back office functions we recently acquired with the PureBeauty, BeautyFirst transaction. All of the back office support functions located in Wichita are included in the G&A category. We expect to have these functions amalgamated into our Regis facilities here in Minneapolis by the end of this October.

Our fourth quarter rent rate also came in on plan at 14.5% of sales which represented a 30 basis point improvement over the same period last year. The improvement in this category was largely due to several recent salon acquisitions which have slightly lower occupancy costs as a percentage of sales. Our fourth quarter depreciation and amortization expense included $3.4 million related to the write off of fixed assets for underperforming salon locations that we hope to close during our current 2009 fiscal year. Absent this amount depreciation and amortization expense came in on plan at 3.7% of sales and was 50 basis points better than the rate we reported last year. As you recall last year’s rate was negatively impacted by the write off of fixed assets associated with the sale of five money losing salons.

The net effect of all the items I just discussed caused our fourth quarter reported operating income for North American salons to come in at 12.5% of sales 130 basis points lower than the same quarter a year ago. However on an operational basis when you factor out the noise our fourth quarter operating income of 12.5% of sales was identical to that of last year.

Next let’s review the fourth quarter performance of our international salon segment. As we discussed with you last quarter analyzing the quarter-over-quarter line item comparisons for this business is very difficult. This segment includes our company owned salons located primarily in the United Kingdom. Also recall that beginning in fiscal 2008 this segment also includes our Vidal Sassoon academies in the United Kingdom as unlike the previous year we no longer report schools as a separate segment. Historically our international salon segment had also included results from our franchise business on the continent of Europe. However following our joint venture transaction with Franck Provost the European business was de-consolidated this past January 31st. As a result our fourth quarter 2008 international segment does not include any continental Europe activity whereas this activity was fully consolidated in the comparative period a year ago.

For all of these reasons the quarter-over-quarter comparisons are tough. However, I’ll provide you a bit more color behind the quarterly change in revenue and also give you some high level comments on any expense categories which may have surprised us during the quarter. Those of you who build segment models may want to give Mark Fosland or Alex Forliti a call here at Regis and they can help you with your models.

Our international salon revenue which comprised 9% of our consolidated fourth quarter revenue declined by $12 million from the same period a year ago coming in at $64 million. This decline was due to the de-consolidation of our continental franchise business in Europe as well as a 4.5% decrease in overall comps in our UK business. Also recall that last year our fiscal 2007 fourth quarter results included an additional week of sales due to the fact that our UK business operates using a 52/53 week accounting calendar. Partially offsetting this revenue reduction was the inclusion of the Vidal Sassoon academies and the addition of new and acquired beauty salons. When reviewing the international fourth quarter operating results on an apples to apples basis we were clearly disappointed with our UK salon performance which posted unplanned negative comps of 4.5% during the quarter. However despite the difficult retailing environment both our service margins and our product margins were better than planned in the fourth quarter so we are controlling expenses very well.

One of the other items of note relates to our depreciation and amortization expense which includes an additional $1.1 million of expense related to the fixed assets write offs for underperforming locations that we hope to close in fiscal 2009. This is part of our 160 store closure initiative that we previously discussed.

Let’s now talk about Hair Club for men and women. As we’ve talked about over the last couple of years this business is incredibly consistent and the revenue and profit contribution for the quarter once again exceeded our expectations. Our Hair Club management team which is led by Darryl Porter continues to perform exceptionally well. Fourth quarter revenue from our hair restoration centers increased 12% to $35.7 million. Hair Club’s revenue growth benefited from positive fourth quarter comps of 2.8% as well as the acquisition of six franchise centers over the past year. Hair Club revenues represented 5% of our consolidated fourth quarter revenue. Our fourth quarter operating margin rate for Hair Club came in better than planned at 20.1% but was down slightly from last year’s reported operating income rate of 21.3%. The planned decline was primarily related to lower operating margins at the six acquired franchise centers. Hair Club’s fourth quarter EBITDA margin came in at over 27%. We remain very pleased with the performance of this segment of our business.

Next let me make just a couple of brief reminder type comments regarding our beauty schools. As you know we merged our Title IV funded beauty school with Empire Education Group on August 1st of 2007 which was during our first quarter of our 2008 fiscal year. As you also recall the merger means that the school business was de-consolidated from the Regis financial statements and we no longer report school performance under a separate business segment. Our proportionate share of the after-tax school performance is now included on our P&L under the line item called equity in affiliated companies. This line item not only includes the after-tax results of schools but also our equity interest in other joint venture partnerships with Intelligent Nutrients and Franck Provost.

Let me now switch gears again and I’d like to make a quick comment regarding our fourth quarter G&A rate that appears in the corporate segment of our P&L. Our corporate G&A rate came in on plan at 4.5% of sales which was an improvement of 50 basis points over the same period a year ago. As you may recall last year’s expenses were higher than normal due to some severance costs that we recorded in the quarter but also last year our expenses included some fees that we paid to Deloitte Consulting in connection with our very successful cost reduction project here at Regis.

Now that concludes my comments concerning our individual business segments. Let me now speak to our interest expense and debt levels. Our fourth quarter interest expense came in on plan at $10.9 million and as we expected our debt levels declined during the fourth quarter. As Paul mentioned we ended the fiscal year with total debt of $765 million that was up $56 million from our previous June 30th fiscal year end. Most of this year-over-year increase in debt was due to our $50 million of stock repurchases that we made during the 2008 fiscal year. Our debt-to-capitalization ratio stood at 43.9% at June 30th. Our effective income tax rate came in at 39% during the fourth quarter which was about 400 basis points higher than our initial plan. This increase primarily related to a new gross margin tax in the state of Texas that impacts service companies. This new law which was effective in January of 2008 impacted our tax liability for both our 2008 as well as our 2007 fiscal years. As a result Regis accrued the entire tax liability in our fourth fiscal quarter. Looking forward we expect our effective tax rate for our current 2009 fiscal year to be in the range of 37.5% to 38%.

Let me now focus on three final topics, our recent store closure announcement, our Trade Secret transformation project and first quarter earnings guidance. First, let’s talk about our plans to close up to 160 under performing salons which we announced to you on July 9th. As you are aware salon closures are a regular component of our portfolio management each year. However we typically wait to close a salon at the end of its lease term. The 160 salons identified in our recent announcement represent a separate initiative to enhance overall profitability by closing certain money losing salons prior to their lease expiration dates. These salons represent less than 2% of our total company owned portfolio. About 100 of these salons are regional based concepts in malls. Another 40 locations are in strip centers and 20 locations are in the United Kingdom.

As I mentioned in my opening comments our fourth quarter fiscal 2008 results did include an incremental charge of $4.5 million on a pre-tax basis related to the write off of fixed assets from these underperforming locations. In addition we expect that we could record an additional $15 million to $20 million of lease termination costs in our current 2009 fiscal year. Accounting convention dictates this pre-tax charge can only be recognized at the time we are successful in completing lease termination agreements with our landlords. We do expect most of this charge will be recognized during the first half of our current fiscal year. Closing these salons will be accretive to our bottom line and to our EBITDA. We all recognize that we won’t be successful in closing all 160 salons. However if we were full year earnings should increase by about $0.09 per share and annual EBITDA would improve by $6.7 million. We will adjust our future earnings guidance once we know the extent and the timing of our store closure initiatives.

Let’s now talk about our Trade Secret initiative. As Paul mentioned our efforts to transform Trade Secret to Pure Beauty continues to progress with testing currently being conducted in eight locations. We anticipate by the end of September the end of our first fiscal quarter we should have a total of 17 stores in our test group. During our previous conference call we informed you that this transformation effort would be far reaching impacting such items as store design, product assortment, information systems, gross margin, store employee compensation as well as marketing. Although it’s still far too early to reach any conclusions results from these test salons will eventually be used as the basis to formulate a business plan and roll out strategy for future Trade Secret conversions. As we also discussed with you last quarter our fiscal 2009 earnings guidance included a baseline operating budget for Trade Secret using a business as usual approach. In other words our guidance excluded all incremental revenue and costs associated with transformation to Pure Beauty due to the obvious difficulty early on to estimate these items. However we did commit to you that throughout fiscal 2009 we would track and report all incremental revenue and costs related to this transformation project. These items will be removed from our consolidated reported results in order to measure our underlying performance on an apples to apples basis against our fiscal 2009 baseline budget.

Lastly let me now transition to our earnings guidance. We’ve continued to reiterate our full fiscal 2009 guidance. We are making no changes. For the full year we continue to believe revenue should grow to approximately $2.85 billion and earnings to be in the range of $2.03 to $2.29 per share based on same store sales assumption of positive 50 basis points to 2.5%. Today’s press release also includes our guidance for the first quarter of our current fiscal year. We forecast revenues to be n the range of $695 million to $705 million which includes a same store sales assumption of minus 1% to positive 1%. Based on this comp sales range our first quarter operational earnings this year should therefore be in the range of $0.41 to $0.47 per share. Our reported earnings will be less due to our nonoperational store closure costs and could also be impacted anywhere from $0.03 to $0.05 per share related to the Trade Secret transformation costs.

Now that concludes my prepared remarks so Paul and I would now be happy to answer any questions you may have. Brittany, can you please step in and provide some instructions? We’d appreciate that.

Question-And-Answer Session

Operator

(Operator Instructions) Your first question is from Jeffery Stein – Soleil Securities.

Jeffery Stein – Soleil Securities

Paul and Randy, you stated that declining mall traffic has reduced your customer counts in your salons and I presume you’re referring mainly to Regis and MasterCuts and Trade Secret. I was wondering if you could comment on traffic trends, visitation patterns in your strip center salons and at Wal-Mart? Are they too seeing drops?

Paul D. Finkelstein

We had very, very strong service comps for the fourth quarter in Wal-Mart, I think they were in excess of 7% and Wal-Mart, if anything, has increased share certainly over Target. The strip center business, our promenade division, and Supercuts have had better comps than our mall business and that’s been the case for the last several quarters.

Randy L. Pearce

Jeff, just to add to Paul’s comments there, looking at customer count declines, Paul is right. We’re seeing customer count declines across all of our divisions but on a far less basis in Wal-Mart as well as Supercuts and in promenade. We’re seeing somewhere in the 2%, 3% customer decline range in those three concepts. Overall in the fourth quarter our customer counts were off 4.6% in North America.

Jeffery Stein – Soleil Securities

So is visitation then continuing to drop across the industry at a higher rate because you’re suggesting that you‘re not losing market share? Are people, I guess is the frequency visitation which has been an issue for several years now, is that continuing? It sounds like it’s continuing, perhaps even getting worse.

Paul D. Finkelstein

I don’t think it’s getting worse. It’s a bad statement. Let’s assume it’s stable, Jeff. It’s so hard to get industry statistics because half the industry is underground. You look at Department of Commerce numbers of the industry is 22, 23 billion. We know it’s in excess of 50 billion. But customer visitation patterns now I think are affected not only by lifestyle but the fact that people are traveling less, making less visits, so there’s less traffic. Therefore we get less walk ins. But there’s no question, we’re not losing share. We’re very close to the senior players at Hair Cuttery, their comps mirror ours. Share is not an issue.

Randy L. Pearce

We also see it in the franchise salons that we have as they report royalties to us based on sales. We see it in the stores that we acquire throughout the year, that their performance is many times worse than ours. So again we’re convinced, Jeff, we’re not losing share.

Jeffery Stein – Soleil Securities

With regard to PureBeauty, you’re taking a $0.03 to $0.05 hit in the first quarter and then you’re going to stand pat with 17 conversions, should we assume as we build our models that there will not be additional conversion costs over the balance of the year in second through fourth quarter or should we build something in for additional conversions?

Paul D. Finkelstein

There’s not going to be a ton of additional conversions, but there’s not going to be zero either. Let me give you an example, we have not been able to get into North Park and Dallas for many, many years and that’s probably the best mall in Dallas, if it’s not the best, it’s the second best with Trade Secret. But we have secured space for PureBeauty and obviously there will be a PureBeauty expansion into North Park and Dallas but we’re going to go very slow in terms of our Trade Secret lease driven remodels converting them to the PureBeauty brand. There’s a lot of brand equity in Trade Secret and what we’re going to do is take the PureBeauty footprint and their fixture designs and as we rebuild Trade Secret locations we’ll use that architecture and increase our assortments but we’ll probably maintain the Trade Secret brand. This is a work in progress, Jeff, it’s just too early to make a determination of exactly how many PureBeauty salons there will be. We’ll keep you posted.

Jeffery Stein – Soleil Securities

Final question, guys, this relates to your joint venture with Intelligent Nutrients. It sounds to me like it’s not rolling out as you planned it. I’m wondering what kind of drag are you building into the model for this year for that piece of the business? I presume it is dilutive to earnings.

Paul D. Finkelstein

You’re talking about, Mark, what a couple of million dollars, our share?

Mark

Yes, I think we experienced a drag of about, on an after-tax basis, probably $0.04 in our 2008 fiscal year. I would expect it would be less than that, maybe a couple cents, $0.02 to $0.03, Jeff.

Paul D. Finkelstein

But that’s been budgeted, Jeff.

Jeffery Stein – Soleil Securities

Do you think that Trade Secret, it almost sounds to me like Trade Secret is going to have a hard time making money this year with all of this stuff going on. Does that sound realistic?

Paul D. Finkelstein

We certainly have positive EBITDA but whether the operating earnings will be, call it break even at best. But I guarantee you there are other companies like The Limited having similar discussions. This is a very, very crowded category today and we’re going to have to work our way through it.

Jeffery Stein – Soleil Securities

Obviously you’ve done the homework, you believe that converting it is better than standing pat and just waiting for the economy to get better.

Paul D. Finkelstein

It’s not a question of converting it, it’s a question of broadening our assortments. We can’t totally be in the hair business. We have to be in the beauty business and our beauty related items are performing better than planned. Jane [Arydale] is a blockbuster in the Mall of America. That’s the issue, it’s not really converting the brand name, it’s broadening our assortments, that’s our challenge and that’s our opportunity.

Operator

Our next question is from of Neely Tamminga – Piper Jaffray.

Neely Tamminga – Piper Jaffray

Couple questions here on, I hope I didn’t miss this, there was a lot discussed in terms of some of these numbers on comps, but of the 3.3 comp that you guys experienced for Q4, Randy, how much of that is actually attributable to the price increase?

Randy L. Pearce

Average ticket was up in North America 5.6% and I would say that most of that, Neely, is going to be attributable to price increase. There’s also a mix play higher price point services like hair color, etc. but most of that’s going to be price.

Paul D. Finkelstein

For the fourth quarter North American same store service sales increased 3.3%, prices were a positive 4.3% factor and mix was 1.7% positive factor.

Neely Tamminga – Piper Jaffray

In looking at the guidance for this coming year have you in aggregate for the year I know you do pricing in different markets at different times, but is that a similar sort of dynamic that we should be expecting in terms of some of the comp metrics that go into service?

Randy L. Pearce

One of the things that I would expect is that for the first half of the year we should see similar trends as we saw in the second half of fiscal 2008. We’re having discussions now, Paul seems to be as he said on his conference call, bullish about the prospects of being able to continue to increase prices, that’s not a decision that’s been made yet in terms of how many stores but that would affect the second half of the fiscal year.

Neely Tamminga – Piper Jaffray

Similarly the product comp side, you guys have the advantage of having so much data to really analyze, I’m just wondering is there within the product comps, is there a price point differential? If you’re choosing some of your lower price point brands versus your higher price point brands in terms of the product mix? I think I have a follow up to that.

Paul D. Finkelstein

I think it’s all price categories, Neely.

Randy L. Pearce

But echoing that, we do see that the consumer is becoming a bit more promotional. We talked about that in recent quarters, that we’re not promoting more heavily but we do find that a proportionately slightly larger share of our product sales are those that we are promoting. It just echoes what the consumer is doing across all sectors today. I think they’re tightening the pocketbook and looking for value.

Neely Tamminga – Piper Jaffray

I know it’s not something we want to get rid of necessarily in the store, but Paul a lot of the retailers that you cited that are also dealing with these negative comp trends and some of these categories are in process of pretty big scale skew reduction programs. Is that something that would be on the docket for you guys? Have you done that historically ever in the past from time to time or is it just not in the cards for your concepts?

Paul D. Finkelstein

It’s not in the cards short term. We’ll certainly look at it but we’re not [inaudible] right now.

Neely Tamminga – Piper Jaffray

One last question, this Raze concept which I think is a very interesting one, I think one that could work well, just wondering if that’s another potential concept that you could actually maybe re-purpose some of your in-mall stores or is it that guys simply need things that are off-mall and on the way home or on the way to work or from work? Just wondering what the real estate strategy could be there?

Paul D. Finkelstein

It’s not going to in malls. We want lower occupancy costs and malls have a greater female clientele. This is not a mall concept. The first week sales were over $5,000 which is our breakeven point. Raze on the basis of the first week is certainly looking like it’s going to be a winner. But if we have 500 stores, 450 will be franchised and that franchise model really doesn’t work in malls, it works in the strips.

Operator

Your next question is from Daniel Hofkin – William Blair & Company, LLC.

Daniel Hofkin – William Blair & Company, LLC

A couple questions regarding the amplifying the first question and the response regarding the sequential trend in customer traffic, have you seen a, it sounds like you have seen a more pronounced rate of deceleration in customer traffic within the malls as opposed to the strip centers or Wal-Mart, would that be correct? Second, just behind you comp guidance for the year, I understand you’re looking for some additional price increase opportunities, see that as a continued opportunity going forward but help us bridge the gap between the first quarter comp plan and the full year a little bit recognizing that you had price increases this past spring and then finally any light you can shed on additional customer loyalty initiatives either just within Trade Secret or beyond that in some of the more service based concepts.

Randy L. Pearce

Daniel, let me take a stab as it relates to customers, what I was saying is that the customer traffic is probably off 2% to 3% in strip center type environment including Wal-Mart which is a lower number than what we were seeing in the malls. We have not seen an increase in the deceleration of those numbers in recent quarters.

Daniel Hofkin – William Blair & Company, LLC

Either at mall or off mall?

Randy L. Pearce

No, it’s been very consistent, unfortunately. I’m sorry, your second question was bridging the comps I think between.

Daniel Hofkin – William Blair & Company, LLC

Just to better understand the full year guidance vis-à-vis the first quarter guidance specifically comp sales. Obviously I know that you’re lapping some easier comparisons later in the year, but help us understand that a little bit better looking for roughly a flattish comp in the first quarter or the midpoint and then something between 1% to 2% for the full year.

Randy L. Pearce

For the full year guidance still is 50 basis points on the low end, to 2.5% on the high end. We’re just having I think as we talked about in the release here the month of July we saw trends that were very consistent with the trends we experienced in the second half of fiscal 2008 including some nice increases in service comps. We’re having a tough month of August. One month or three weeks really hasn’t changed our outlook for the balance of this quarter or for the full fiscal year. I still believe that we talked about just a moment ago that there are some price initiatives that we may be able to implement in the second half of our fiscal year. That is yet to be determined. We have not factored that into our overall comp expectation but right now, again, we still expect that comps, which are very glacial in this industry, changes in this industry are glacial, we should expect to see comps in the positive side anywhere from 50 basis points or higher.

Daniel Hofkin – William Blair & Company, LLC

With regard to customer loyalty? Any additional opportunities there that you’re seeing?

Randy L. Pearce

No, not yet. As you know most of the efforts have been implementing something on the Trade Secret division which we’ve done. We have started testing it in a couple hundred MasterCuts salons and early results look pretty good. We’ve tested it in another concept, a smaller one called, was it Famous Hair?

Paul D. Finkelstein

Holiday.

Randy L. Pearce

Holiday Hair, those results were not good so again we continue to learn from that. Having said that, we don’t really have any more initiatives in the short term to aggressively roll out any loyalty programs to our service salon business.

Paul D. Finkelstein

When Randy says the results weren’t good, Holiday Hair profit performance is excellent. We’re just not adding incremental profits based on the loyalty program at this point in time.

Operator

Out next question is from Mimi Noel – Sidoti & Co., LLC.

Mimi Noel – Sidoti & Co., LLC

Randy, I just have one quick one and I apologize if I missed any commentary on it, but just in looking at the balance sheet and looking at the receivables, trending down starting in the December quarter, what’s taking place to make that happen? Does it have something to do with the partnerships that you’ve aligned with?

Randy L. Pearce

That’s exactly what it is. Our receivables are down $30 million entirely, Mimi, entirely due to the de-consolidation of our schools business as well as our franchise operations on the continent of Europe.

Mimi Noel – Sidoti & Co., LLC

Assuming there is no change in the relationships there, what we saw at the end of fiscal 2008 should be a fair indication of the future balance there?

Randy L. Pearce

That’s right, more normalized level. Yes.

Operator

There are no further questions.

Paul D. Finkelstein

Thank you for joining us everyone. Have a good evening.

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