Regis' (RGS) CEO Dan Hanrahan on Q4 2014 Results - Earnings Call Transcript

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Regis Corp. (NYSE:RGS)

Q4 2014 Results Earnings Conference Call

August 26, 2014 11:00 AM ET


Dan Hanrahan - Chief Executive Officer

Steve Spiegel - Executive Vice President and CFO

Eric Bakken - Executive Vice President and CAO

Mark Fosland - Senior Vice President, Finance


Jeff Stein - Northcoast Research

Bill Armstrong - CL King & Associates

Jill Nelson - Johnson Rice Investment Firm

Ben Franklin - Intrepid Capital

Jeremy Kahan - Bow Street



Good morning. My name is Jessica, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Regis Corporation Fiscal 2014 Fourth Quarter Earnings Call. All lines have been placed on mute to prevent any background noise.

If anyone has not received a copy of today's press release, please call Regis Corporation at (952) 806-2154(952) 806-2154 and a copy will be faxed to you immediately. If you wish to access the replay this call, you may do so by dialing 1 (800) 101-20091 (800) 101-2009, using the access code 1131937. 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

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 to questions. (Operator Instructions)

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

Dan Hanrahan

Thank you, Jessica. Good morning, everyone, and thanks 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.

Last quarter, I outlined the path we have taken since I joined Regis in August of 2012. I highlighted there was and still is a clear need for transformational change to lay the foundation for the turnaround.

I also said, although early, we are seeing the first signs of transitioning from disruption to execution. I emphasis the interaction of people, process and metrics is key to improving our execution and performance.

Today I will spend some of my time updating you on the progress in these areas during the fourth quarter then I will switch gears and provide some insight into emerging thoughts fiscal 2015. Afterward, I will turn the call over to Steve to cover fourth quarter results in greater detail.

When we started 2014, we said it would be a year, where change would continue to be disruptive, but we would begin to manage change and get control of the business. Our quarterly same-store sales trends for the first three quarters of fiscal 2014 demonstrated our field organization, salon and stylist struggled with the foundational changes we made at the start of the year.

However, as discussed on previous calls, our good field leaders who are executing our strategy and providing positive leadership to their salons are getting encouraging results, where we have people, process and metrics working we are getting good execution.

The fourth quarter saw the disruption caused by the field reorganization in SuperSalon begin to wane, the execution processes we put in place at the begin of the year are helping create accountability, driving business conversations at all levels of the organization, fostering best practice sharing and friendly competition, while focusing the field on improving guest traffic and selling retail.

Same-store sales were down 1.8% during the fourth quarter of the current fiscal year compared to declines of 5.8% for the nine months ended March 31, 2014. We are at a point where the field organization has beginning to slow the service revenue slight. In fact, consolidated same-store sales -- service sales were near flat in the fourth quarter, mainly driven by Supercuts and SmartStyle.

During the fourth quarter, overall same-store service sales were down 20 basis points and our value salons were up 90 basis points. The last time these kinds of numbers were reported within the first quarter of fiscal 2009.

However, and I want to stress, there are still significant work to do before we say we are turning the business. While our same-store service sales were near flat. We still have too wider range of performance across our salon base, a significant number of salons have yet to see traction and continue to comp negatively. Additionally, during the fourth quarter, our same-store retail sales were down 8.4%.

Let me shift now to what we are doing to continue to make progress. I’ve showed this slide last call and given we are still in the nascent stages of the turnaround, I think its important to remind ourselves, how much we had to do to be in a position to begin controlling the business.

The initiative we executed against laid the foundation for us to position Regis for long-term success. We reorganized our field leadership, rounded out our senior leadership tier in salon support, including starting Regis’ first ever Human Resources Department.

SuperSalon was installed in all salons in less than three months. We implemented processes to drive accountability, execution and business performance, asset protection is building the team and establishing standard operating procedures to support field leaders in growing their businesses.

Marketing is building tools that will eventually help drive traffic and retain guest, when our field operations and salons are capable of managing these tools. An integrated foundation has been built for the turnaround and all these initiatives are beginning to stabilize a business and will have significant value when we are executing well at all levels within the organization.

All the work we are doing is focus on building our capabilities around people, process and metrics, they are completely interrelated and we need all three firing in our salons and markets to drive execution and results.

Starting with metrics, we discussed over the last several quarters, the challenges we experienced when rolling out SuperSalon. Our IT Departments priority is focused on continues improvement of technology to drive better stylish and guest experiences. In the fourth quarter, we made further advances in improving speed and transaction efficiency in the salon.

Now on to people, as I have said repeatedly, where we have the right talent and leadership position we win. To that end, we are continually assessing, developing and upgrading our leadership talent.

Last quarter, we establish clearly defined role expectations across all levels of field leadership. We have leveraged these guidelines in evaluating our leaders, identifying knowledge gaps and providing requisite training. In the past couple of weeks, we have provided extensive hands on leadership training to our field leaders.

On the last call, we also discussed our staffing issues and the progress we made to respond quickly to increases and stylish attrition. Over the last two quarters we continue to leverage new reporting tools that provide early warning signs to stylist turnover by salon, while stepping progress was made, this slide highlights the work ahead of us in terms of overall execution.

We move quickly to hire new staff to replace those who left. Having salon’s properly staffed helps us grow revenues. The key is to match growth in stylist hours to corresponding revenue growth.

During the fourth quarter our stylist hours grew than revenue. This is an example where strong leadership, a solid process and appropriate metrics must merge to drive execution results. It’s a very important part of our turnaround. Historically, Regis cut stylist hours to protect profits today we are investing in stylist hours to grow profits.

In order to better align stylist hours with guest demand patterns, we continue to provide scheduling training, expectation, execution guidance and reporting for our field leaders and we are holding them accountable for staffing plans and results. This is an example of where we are getting better at managing change while highlighting the need for continued training and leadership development.

Another example where people, process and metric is gaining momentum is in our efforts to improve underperforming salons. You may recall, we began an initiative in the beginning of the third quarter, where we targeted our worst performance salons for an intervention.

Leveraging detail playbooks, our RDs worked in these salons to turnaround their performance. As we mentioned last quarter, initial results were indicative of the strong potential that exists when we operate a salon well, while the regional director was present we saw very good results, but we were unable to sustain results over a longer period of time.

During the fourth quarter, we continued aligning people, process and metrics and drove improved results and better sustain these improvements. Overall trends have improved by 900 and 500 basis points in these salons when compared to the second and third quarters, respectively.

While encouraging, the salon comps are still not positive and we have significant work to do to drive these salons to their full potential. When comparing the fourth quarter of this fiscal year to the nine months period ended March 31st, a greater percentage of our RVPs, RDs and DLs are posting positive same-store service sales, while we remained in the early innings, it is encouraging the people, process and metrics work we're doing is indicating a bit of traction.

I would like to spend the remainder of the call outlining our priorities as we head into fiscal 2015. Our number one asset is our people, our 50,000 stylists and the talented individuals who lead and support them everyday. As I outlined our priorities you will continue to see the theme of people, process and metrics permeating our activities next year.

In fiscal ‘15, we will continue to make investments in our people by providing leadership development, stylist training, actionable information and incentives that motivate performance aligned with shareholder interests. Execution will be the key to making fiscal ‘15 the year where changes we’ve put in place over the past 12 months begin to add value.

Our ongoing focus is on improving our ability to execute across our entire base of salons. Helping stylists have successful and satisfying careers, through strong leaders, executing against initiatives already in place, is a lens we use to prioritize our focus for fiscal 2015.

We are focused on three key corporate initiatives during 2015. First, we plan to build asset protection capabilities. Second, we will continue to improve field leadership talent and capabilities and leverage recruitment pipelines. Third, we will invest in our stylist by strengthening technical education program. These objectives are directly tied to what motivates stylist and they are well linked to our key strategies.

Let me provide some color on each of these initiatives. Creating an environment where all stylists are working together, positively contributing to the health of the salon and the salon team will be a key outcome of asset protection activities.

We are off to a very good start with our asset protection organization. And Ken Warfield has done an excellent job building his team. Ken’s team is in the process of implementing our Stylist Asset Protection awareness program. These training sessions will be ongoing as we continue to educate field leadership, conduct salon investigations and interviews and partner with operations.

We will also continue to leverage technology to improve execution by providing regional dashboards and risk rankings to help asset protection, prioritize efforts against our most compelling opportunities to reduce loss. Talent development is an ongoing refrain that our team hears from me on a daily basis. Nothing is more important than developing our field leaders, where we have the right talent in leadership positions, we win.

Stylists depend on their salon and field leaders for coaching, mentoring and motivation. Salon leaders set the tone for a positive salon environment which we know motivates stylists to perform. In fiscal ‘15, we will build on the work we began in fiscal ‘14 to strength field leadership.

We also plan to step up our recruiting efforts across all levels within our organization. We are proactively cultivating a pipeline of field leaders through succession planning and recruitment venues from within and outside of the salon industry. We have rethought the traditional approach to recruiting stylists by building a story on the advantages of pursuing careers at the Regis.

We will equip our field leaders and salon personnel to become more influential in telling the story. We’ll also leverage beauty school relationships and participate in job fairs and industry events. From a senior leadership perspective, we are very pleased with the team we have built. Two key areas remain to be filled.

We are recruiting for merchandising and premium business leaders. Both leaders will need to develop strategies to stabilize trends in each of their businesses and help drive executional excellence. Training must become a point of difference in attracting and retaining stylists at Regis.

Supercuts is most illustrative of this point. It adds the most robust training program within our portfolio and has performed the best over the past year. Supercuts same-store service sales for the fiscal year ended June 30th improved 1.7% versus year ago compared to our overall business which was down 2.9%.

In fiscal 2015, we are focused on expanding technical education to all of our salons. This will involve the phased approach to align technical trainers with our field leaders. Our three key corporate initiatives are focused on creating an organization where stylists can have successful and satisfying careers.

This will lead to improved execution allowing us to build upon the ground work we laid in 2014. We will continue to file our execution processes in the field to drives guest counts and retail sales and will leverage the data management capabilities to identify correlations of activities that lead to significantly improved performance.

We will continue to intervene in underperforming salon, do a salon makeover that includes staffing, training store cleanup and use of our execution discipline. As we continue to learn from these efforts and as we reach a greater number of salons, we expect to realize further trend improvement.

Partnering with IT, we will continue to make improvements to SuperSalon, make it easier for stylists and guests to interact and better leveraging real-time reporting capabilities in the salon and field. We are also focused on improving and standardizing the way we plan and execute against -- across our banners. This will have the biggest impact in the areas of scheduling, salon execution and reporting and will make it easier to lead and execute in a multiunit environment.

Because we are a people organization providing services, investments, we make often flow through our earnings instead of our balance sheet. Well, this impacts near-term profitability. These investments will provide significant operating leverage once we turn around our business.

We think of all investments whether funded by earnings or through our balance sheet as cash outlays. Consistent with our capital allocation policy to maximize shareholder value, we will stay focused on cash flow and diligently manage the investments necessary to turn Regis around.

Funding investments and managing inflation through disciplined cost management and Regis review of all spending will ensure we continue to protect the balance sheet we have built. Improving profitability will be dependent on our ability to drive same-store sales growth. Simply stated, we will be very careful with the cash on our balance sheet. Investments will be thoughtfully made where they will contribute to our turnaround and add to shareholder value.

We are seeing early signs of traction where we have great leaders in place and where we focused our attention. While we are cautiously encouraged by these early signs, significant work is ahead of us before we achieve similar results across 7000 salons. As we leverage the foundation we build in the past year, I expect execution to improve in fiscal 2015.

I'm proud of what the team has accomplished this past year. We recruited and hired a strong leadership team. We built the balance sheet which we will continue to protect that allowed us to settle our convertible debt without diluting our shareholders and we will remain focused on building our capabilities around people, process and metrics. We still have a lot of work to do but we're beginning to create the cultural transformation needed to turn Regis.

I would now like to turn the call over to Steve. Steve?

Steve Spiegel

Thank you, Dan and good morning. Before discussing our consolidated financial and operating performance for the fourth quarter, I want to remind you of two housekeeping items. First, as a result of our field reorganization at the start of this fiscal year, district leaders’ labor costs are now reported within cost of service and their travel costs are now reported within site operating expenses.

Previously, these costs were reported as general and administrative expenses. Recasted historical annual and quarterly financial statements are available on our corporate website to better assist you with your comparisons. Second, because of the valuation allowance against most of our deferred tax assets, associated reported and as adjusted results of operations that have been tax affected. Consequently, current period reported results are not comparable to tax affected prior periods.

For the fourth quarter, Regis reported a net loss of $17 million or $0.30 per diluted share. This includes approximately $16.4 million of non-cash charges or $0.29 per diluted share relating to our investment in Empire Education Group, which I will discuss in more detail shortly.

Adjusted EBITDA for the quarter came in at $25.9 million compared to $37 million in the prior year quarter. Excluding net discrete charges, fourth quarter diluted net loss per share as adjusted was $0.10 compared to earnings of $0.06 in the prior year quarter declining $0.16 per share.

This can be explained by three main impacts. $0.04 per share is driven by negative same-store sales. $0.05 per share is mainly the result of higher salon labor costs, relative to same-store sales, increased marketing, and lease termination costs, partly offset by improved product costs and cost savings. $0.07 per share represents non-cash losses associated with our equity investment in Empire Education Group.

We included in today's press release as well as on our corporate website, a reconciliation bridging reported results to earnings as adjusted for the impact of discrete items for the fourth quarter of current and prior years. Regarding fourth quarter operating results, my comments this morning focused on as adjusted results.

References to prior year numbers are on a basis recasted for our field reorganization. Revenue in the quarter of $483.9 million declined $18.3 million or 3.6% compared to the prior year quarter. While same-store sales declined 1.8% compared to the prior year quarter.

We estimate the shift of Easter from March of last year to April of this year positively impacted same-store sales by approximately 70 basis points. Year-over-year total company-owned store count decreased by 158 locations. During the quarter, we built 40 company-owned salons, closed or relocated 67 other company-owned locations and sold 13 locations to franchisees.

Service revenues were $380.2 million, a $9.9 million reduction or 2.5% compared to the prior year quarter, mainly driven by declines in North American salons. During the period, same-store service sales declined 0.2%, driven by a decline in guest traffic of 1.5%, partly offset by an increase in average ticket price of 1.3%. The remaining 230-basis-point decline in service revenues compared to the prior year quarter was primarily due to a net reduction of 167 North American salons.

Product revenues were $92.6 million, a decrease of $9.3 million or 9.2% compared to the prior year quarter. Product same-store sales for the quarter declined 8.4%, lapping significantly clearance activity last year in anticipation of planogram standardization.

Royalties and fees were $11.1million, an increase of $0.9 million or 8.4% compared to the prior quarter. Our franchisees posted positive same-store sales during the quarter and added 97 net locations in the last 12 months. In the quarter and last 12 months, we added 39 and 144 new franchisees to the system, respectively.

Cost of service and product as a percent of associated revenues increased 30 basis points compared to the prior quarter, coming in at 59%. I will discuss this increase in greater detail by reviewing service and product components separately. Cost of service, as a percent of service revenues for the quarter increased 120 basis points versus the prior year quarter, coming in at 61.2%.

The primary driver of this increase was stylist hours, which were up 3.5%, versus the prior year. Also, increases in minimum wages, incentives and the shift of Easter holiday pay into the fourth quarter were essentially offsets by savings from the field reorganization

As Dan said earlier, we swung the pendulum too far and experienced year-over-year increases in stylist hours that put us out of balance guest traffic, fixing this imbalance is a top priority of the organization.

Cost of product, as a percent of product revenues was 50.3%, a 320-basis point improvement when compared to the prior year quarter. This improvement was primarily the result of lapping clearance sales in the prior year.

Site operating expenses of $52.4 million increased $3 million compared to the prior year quarter. This was primarily driven by increased marketing expenses and lapping a favorable adjustment to self-insurance reserves. Partly offsetting these items were lower freight cost.

General and administrative expenses of $44 million decreased $1.4 million compared to the prior year quarter. This improvement was primarily driven by lapping SuperSalon rollout costs in the prior year quarter, cost savings, and reduced health care cost.

These were partly offset by the lapping of favorable adjustments to reduce incentives and certain other costs in the prior year quarter and purposeful investment in assets protection capabilities in the current year quarter.

Before moving onto our liquidity, I would like to cover a few housekeeping items in the areas of income taxes and equity and loss of affiliated companies. In the fourth quarter, we recognized a $1.7 million income tax benefit. As we discussed earlier in the fiscal year, our GAAP tax rate will likely fluctuate from quarter to quarter, because we have a valuation of allowances against most of our deferred tax assets.

Within our tax provision going forward, we expect to incur non-cash tax expense relating to tax production we claimed for goodwill amortization that we do not recognize for GAAP purposes.

This non-cash tax expenses will continue as longest as we have a valuation allowance in place. Also in the fourth quarter, we incurred $16.4 million of non-cash losses relating to our equity investment in Empire Education Group. $12.6 million of this loss was discrete and represented Regis’ share of Empire’s non-cash goodwill impairment.

The remaining $3.8 million was primarily attributable to Regis' share of Empire’s non-cash fixed asset impairment. These non-cash losses are the result of declining enrollment revenue and profitability in the for-profit secondary education market.

Moving onto liquidity, we ended the fiscal year with $379 million of cash, total debt of $294 million, and no outstanding borrowings under our $400 million revolving credit facility. During the fiscal year, our business generated $170 million of operating cash flow which included $34 million of one-time benefits.

On July15th, we settled with cash of $172.5 million convertible notes at par value, staying true to a key tenant of our capital allocation policy of minimizing dilution to existing shareholders.

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

Question-and-Answer Session


Thank you, Dan and Steve. (Operator Instruction) Our first question is from the line of Jeff Stein from Northcoast Research.

Jeff Stein - Northcoast Research

Good morning, guys. Dan, just a question on product sales, since the planogram reset, there really doesn't seem to be much progress in terms of gaining some positive momentum in the -- on the retail side of your business? Where do you stand in terms of, I mean, where do you go from here, what's the next step to get the momentum moving in the right direction?

Dan Hanrahan

Thanks, Jeff. A number of things, I’d like to clarify for you. First is our results this past year have been a little bit more challenging in the fourth quarter because we left our largest clearance activity in the company's history. So, it’s made a little more difficult to analyze and maybe a little worse than it really was.

As we look forward, we are moving into a period, it is a little softer performance, so we do have that. But then, beyond that we are testing a number of things in the first quarter here and it’s to early to comment on it.

But we've done a lot of work around, where we are with the products and we have looked at everything from our assortments to on a macro scale down to geographic, more testing some promotional activity, we are testing some things that we think can get stylist more engaged. And like I said, it’s early in the quarter, but we've done a number of things that we put in place in this first quarter that we will be reporting on our next call.

Jeff Stein - Northcoast Research

Okay. Would you expect over the near-term that you will continue to see your salon payroll grow at a faster rate than sales?

Dan Hanrahan

Yeah. Good question. That’s -- we've historically been pretty good at cutting hours and managing to profits by that way. We can’t get the glory by cutting hours, so we need to increase hours and we've done a lot of work, Mark Fosland and his team in particular are in constant contact with the fields. We built out a team that supports each region, our financial team that supports each region, so that they can have help and guidance.

And we have done, what I think is a lot of work on that. We’re starting to gain some traction. If you look at it over the fourth quarter that we’ve just finished, we got better in each month and in the last few weeks of the quarter we actually getting better week by week.

And with the new -- it’s a new thing that we are doing investing in hours, but where we've got good operators in place, they are matching the hour increase with the appropriate sales increase and when they go up like that together that generates a lot of extra profitability for us.

So, I think, that as we move through this year we will get pretty good at this. But we will have -- we still have work to do on it and in particular areas we have more work to do in others. But it is something that I see a lot of progress on.

Jeff Stein - Northcoast Research

Okay. And final question for you, Dan. Can you kind of discuss with us the current state of your field service organization and the progress you've made, I mean, what kind of -- what inning are you in, how many high performers do you have, how many kind of average performers and how many below average performers within that group?

Dan Hanrahan

Sure. Sure. I won’t get into really specific detail on that but let me talk about that a little bit, because you hit on the thing that the most important part of our turnaround and that's good leaders in the field.

Jim Lain, who is our COO and Carmen Thiede, our Chief Human Resource Officer, have done an absolutely terrific job putting training and development program in place and we are seeing that take hold. We just had our -- all of our regional directors, so that’s about 100 people in our regional vice presidents, which is 10 in a couple weeks ago for very in-depth leadership training, ranging from how to conduct an effective one and one, how to work in a multi-unit environment, how to conduct a performance of the evaluation, how to conduct a productive salon visit and then how to train your people on how to do that. They were in for the week.

I have to tell you I left that meeting excited because it was a very, very motivated group. We still have work to do. Definitely have work to do in that area and we have found that the people that we are bringing in from the outside that have multi-unit experience are doing well. They are quickly understanding the industry.

Historically, we've had pretty much all stylists in those roles that had grown up through the business and now we are bringing in strong multi-unit people and we are finding that with the story we have to tell about the progress we’re making on turn, it’s never simple to recruit good people, but it is not as hard as it was year ago to bring good people in.

Jeff Stein - Northcoast Research

Got it. Thank you very much.

Dan Hanrahan

You bet, Jeff.


We’ll now go to Bill Armstrong from CL King & Associates.

Bill Armstrong - CL King & Associates

Good morning, gentleman. A couple of thing, so I was wondering if you could maybe expand on Supercuts a little bit, where you have the comps up 7%, that number certainly stood out, was that just the Easter shift or is there something else going on that may point to improved performance ahead?

Dan Hanrahan

So, there's a few things going on there. That’s the good question. We did benefit from the Easter shift there. We also benefited from some change in promotion. We had a pretty aggressive loyalty program that we believe was the subject of some abuse. And so, we pulled that a year ago and so we saw some benefits by pulling that.

It’s also the area where you have the most robust training program. The operating procedures there are very well laid out and well thought out. And so, I think, all three contributed to it and as you can see, as I mentioned in my comment, that Supercuts is up 170 basis points for the year.

So in the quarter in particular, is those three things that drove it, but I think, the reason that we are up 170 basis points for the entire year is also driven by the fact that it’s got a great training program, we’ve got well laid out operating procedures and we’re executing well in the Supercuts.

Bill Armstrong - CL King & Associates

Sounds like pulling a loyalty program would reduce comps, that…

Dan Hanrahan

Yeah. Well, this loyalty program it was eight equals nine program, is the way it works. So eight haircut gives you ninth free. We didn't have very good controls around that, so we believe that there was a lot of abuse around it and when we pulled it, we think that the abuse heightened. And when -- and then we’re comping against that, so we got some benefit against comping against that.

So I don’t want you to misinterpret what I’m saying about loyalty program. We think the loyalty program will play a very strong role in our success at Regis, but we need to do it in the right way and this was the program that was open to abuse.

Bill Armstrong - CL King & Associates

I see. Okay. It looks like from one of the charts that you have in your presentation that stylist turnover increased somewhat in the fourth quarter versus the third? Could you address that, what's going on there?

Dan Hanrahan

Nothing that we were worried about, it sort of the regular run of the mill turnover that we have. We do believe that as we get better at managing our people and having good leaders in place that turnover should go down.

But in general, the position, the way our stores were staffed in the quarter and the fact that we were actually up in hours. I think is indicative of the fact that we're doing a better job being staffed in the salon, so we can limit wait times and provide a better guest experience.

Bill Armstrong - CL King & Associates

Got it. Okay. Thank you.

Dan Hanrahan

Thank you.


Our next question comes from Jill Nelson from Johnson Rice Investment Firm.

Jill Nelson - Johnson Rice Investment Firm

Good morning. If you could talk about in the fourth quarter your total adjusted expenses dollar amount was actually up, first time we've seen growth year-over-year in about five quarters? Could you just talk about that trend going forward? I know you've seen a lot of progress on cost savings? But it seems as though now we are investing more in the business versus netting off this cost savings?

Steve Spiegel

I just want to make sure I heard you, where you speaking our G&A expenses?

Jill Nelson - Johnson Rice Investment Firm

Actually, total expenses adding kind of all the four line items together?

Steve Spiegel

Well, in our excluding cost of service and cost of product?

Jill Nelson - Johnson Rice Investment Firm


Steve Spiegel

Okay. Well, I’ll start with G&A, just because I went there in response to your question. On the G&A perspective, where the movement in our fourth quarter was largely driven by the buildout of asset protection and training activities. And so as a result, we saw those costs begin to elevate relative to the earlier quarters.

In rent, I would argue that the percentage of rent increase is largely due to two things. One is some lease termination costs we incurred and also we’re getting negative leverage as a percentage of sales. Inside operating or salon selling, I'm sorry, we've seen increases predominantly in marketing expenses. We spend more this quarter than we did in the previous year at this time.

Jill Nelson - Johnson Rice Investment Firm

Okay. If we look at marketing spend, kind of, how are you approaching that for fiscal ‘15? And then maybe the additional question within that area is, for back-to-school, I saw you were running some $10.95 haircuts at Supercuts. If you could just talk about maybe just take out back-to-school holiday, how you approached it on a pricing perspective versus last year? Just trying to get a handle on how you feel the pricing environment is out there right now. Thank you.

Steve Spiegel

Sure. In terms of marketing Jill, we see marketing being about flat for the year. We’ll watch it carefully. And we’ll see where we can generate that kind of return that we do look forward in every single investment that we make. In terms of pricing, that’s an excellent question, we built out a pretty good pricing capability here. We've been very, very careful to not take price unless it make sense. So we haven't done much price raising at all. We have been much more thoughtful about the way we measure promotions to see what kind of returns we get.

So for example, we are -- couple of years ago, we ran 799 promotion in our Walmart stores. This time -- this year we ran a 999 and we actually saw improved take-up from the consumer on that program. In terms of Supercuts, we’re not doing anything on a holistic basis. We’re being much more surgical. So we’ re going into markets where we feel like there is enough elasticity where when we drop the price, we can get the kind of demand that will give us overall better result.

So it’s a very thoughtful approach to pricing. It’s not a one-size-fits-all and afterwards we do a very deep dive on the results and use that to inform us for what we’re going to do going forward. So in terms of the Christmas holiday, we’re going to see what happens during the whole holiday period. We’re going to see what happens during back-to-school and will use that to help inform us on what we’re going to do in the fourth quarter and through the holidays.

Jill Nelson - Johnson Rice Investment Firm

Okay. Thank you. And just a last one, kind of, if we look at CapEx for fiscal ‘15 as well as acquisition spend, it looked like you're pretty inactive on acquisitions. Could we expect that activity going forward? And kind of what's a good CapEx maintenance type number for this coming fiscal year?

Steve Spiegel

We don’t usually give guidance on those kind of numbers. What I’ll go back to is Dan’s comments earlier. We’re going to manage our capital very carefully whether it’s through the earnings statement or through the balance sheet and manage it to the appropriate level relative to the cash flow we generate.

Dan Hanrahan

And Jill, we don’t have any plans to be acquisitive. So the capital that we will spend is focused on making sure that we execute well within our business. And we deliver the kind of returns that this company should be delivering. We’re going to be very, very careful with our balance sheet. We’re going to be smart about the way we spend capitals.

So we won't plow money into salons unless we feel like we can get a return. We worked hard to build this strong balance sheet. We’re going to make sure we protect it and be really smart about the way we invest our money.

Jill Nelson - Johnson Rice Investment Firm

I appreciate. Thank you.


We will now move to Ben Franklin from Intrepid Capital.

Ben Franklin - Intrepid Capital

Hey guys, Thanks for taking my questions. This is a sort of a follow-up on Jill's question about pricing. There is a competitor out there that has discussed some 38 quarters of same-store sales growth. Their prices are well below yours, some of the cheapest I've seen. I've looked at this competitor's franchise disclosure documents as well as Supercuts, and it looks like they make more money and have higher margins than either corporate or franchise Supercuts stores.

Now, I'm just thinking philosophically here, but it seems like this model of lower prices and higher volume and also higher earnings could grow its market share perpetually if competitors don't react. Is there a point when you start lowering prices to compete with maybe this competitor and others like it?

Dan Hanrahan

So interesting question Ben. We believe that the main focus that we need to execute against is to be good executionally in the salons. We watched competitive pricing. So in a market where we’re right next door, we will price competitively. If we think we need to what we will be careful of doing is not just dropping prices without a way to increase store traffic that we need to make sure that those two go hand-in-hand cause we can we can drop prices and without an increase in store traffic, we’ll decrease our profitability.

We will drop our topline pretty dramatically. So we're -- like I said we've -- you can tell Jill, we build out what is a pretty strong pricing team that’s analyzing all of our businesses across the entire fleet of salons that we have and we’re being very thoughtful about how we use price.

It doesn't mean that we won't use prices as the promotional tool to drive traffic. We’re just not at a point today where we’re going to drop prices on a wholesale basis and expect that we’ll see kind of traffic that we need to generate the kind of returns that would be acceptable.

Ben Franklin - Intrepid Capital

That's very helpful. Thanks. Also going along with that, have you sort of looked at the market to see what percentage of the market goes in just for price versus service versus maybe a combination of both. And how you think that's sort of broken up?

Dan Hanrahan

So we’ve done a lot of work around the consumer. Over the past year and a half, we do know that there are consumers out there that are just price focused. That they are pretty agnostic in terms of what brand that they will take and they will move for a price. But we also know that there's consumers out there that are pretty loyal.

So understanding exactly what you have in any given salon is important. But we think as a whole that what we need to do is we need to execute very well and that we need to provide a great guest experience and that we need to get the price right.

So I'm not saying that we are -- that we have our prices completely right. But it’s ongoing work to make sure that we bring all three of those pieces together to deliver the kind of results that this company should deliver.

Ben Franklin - Intrepid Capital

Okay. Thank you guys.

Dan Hanrahan

You bet.


Our next question comes from Jeremy Kahan from Bow Street.

Jeremy Kahan - Bow Street

Hey guys. Thanks for taking my question. I was wondering if you could help us think about the size and scale of some of the investments you are making?

Dan Hanrahan

We don’t usually break our investments down into that level of detail. So, we wouldn’t be investing in things like asset protection unless we thought it was going to provide a return on investment to shareholders that was more than acceptable.

Jeremy Kahan - Bow Street

Got it. Is that a one-year payback or you -- or would you expect that to build through 2016?

Dan Hanrahan

Well, in terms of asset protection, we think that that is, what we built out there is an ongoing team that we believe will provide a lot of benefit for long time. We have business that depends heavily on cash sales and we have got a lot of traffic to the salon.

We have still to this day we have a fairly high turnover in stylist, so we need to be constantly educating the new stylist that come in on our asset protection policies and what is an appropriate discount, what is an appropriate discount and an appropriate discount rather.

So that’s an investment that we think will definitely payback for us and we think it will payback for us within the year, but we think it will be one of those investments that continues to payback.

Jeremy Kahan - Bow Street

Okay. And then given the investments you're making, what sort of positive comp do you guys need to start getting EBITDA on right -- going in the right direction?

Steve Spiegel

We are -- again, we don’t give guidance on where we think our numbers need to be prospectively, but again we always plan our business to make sure that we understand what headwinds we are facing going into a particular year, whether it would be investments or inflationary pressure that we are having on our business. And so, again, we don't give guidance, so it’s hard for me to give you any more specific on that.

Dan Hanrahan

And I would add that, we are running this business to generate cash and that we built a very, very strong balance sheet and we want to manage this turnaround within our P&L, so that we are not dipping into that balance sheet to our manage our turnaround.

We think that all the investments we are making today are very, very thoughtful and we are -- when we got some cautious optimism about what we've seen in the business in the fourth quarter and we believe the investments that we are making over the long run will help us be very successful.

Jeremy Kahan - Bow Street

Got it. And then, just last question on the Empire Education Group, would you guys consider selling that as kind of a non-core asset?

Dan Hanrahan

Actually, we are -- we are actually excited about upcoming efforts with Empire Education. We've recently started with the help of Carmen Thiede in Human Resources to establish a partnership with Empire where we can begin to leverage their pipeline of our graduation candidates to fill our staffing needs.

So in doing so it not only helps Empire navigate their regulatory environment that they have been facing, but it provides sort of a ready stream of placement for their graduates, which not only helps our underlying business, but it helps our underlying investment in Empire.

Jeremy Kahan - Bow Street

Thank you.


And we will now go to Bill Armstrong from CL King & Associates.

Bill Armstrong - CL King & Associates

Thank you. Just a follow-up on the pricing issue, you had a 1.3% increase in your average ticket? Could you break that out between pricing and mix or was it driven by one or the other or was it a combination?

Dan Hanrahan

If it’s all right, would you just to keep this going, we will have Mark Fosland cover that with you after the call.

Bill Armstrong - CL King & Associates

Okay. No problem.


And if there are no further questions, I will now turn the conference back to Dan.

Dan Hanrahan

Thanks, Jessica. Thanks everybody for calling in for the -- to spend some time with us today and we will look forward to talking to you after the next quarter. Take care.


Ladies and gentlemen, if you wish to access the replay for this presentation, you may do so by visiting in the Investor Relations section of the website, or by dialing 1 (800) 101-20091 (800) 101-2009, using access code 1131937. This concludes our conference for today. Thank you all for your participating and have a nice day. All parties may now disconnect.

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