Q3 2021 Regis Corp Earnings Call
<unk> fully franchise model, we have made an important change to Regis as retail product strategy given the role of retail sales at a major potential driver of top line revenue growth unit economics, and importantly stylist compensation.
Although reduces legacy systems and supply chain infrastructure were well suited for distributing to our network of company owned salons that cost of carrying such infrastructure when taken into account franchise unit economics was inadequate to both cover our costs and adequately service our franchisees.
Therefore, consistent with our asset light model, we have made the decision to transition away from our wholesale distribution move.
Moving forward, our franchisees will source retail products from approved industry leading partners.
This new strategy will allow regis to unload the considerable amount of G&A and lease liability and free up a substantial amount of working capital.
Growth focusing our core competencies of owning brands and driving franchise performance, along with providing our salons with best in class sales support and stylist education through our distribution partners.
Regis This franchise product sales division will wind down throughout this calendar year as our franchisees gradually shifted to sourcing retail products from the new distributors.
We are in the process of finalizing agreements with new partners and will make an official announcement in the coming weeks once the process is complete.
To wrap up we are proud of the progress we have made against our key initiatives that will put us in the best position to optimize our brands and support our franchisees, while theres still much work to be done we're putting in the hard work not cutting corners, and taking the necessary steps to lay the foundation for the future of Regis.
This is not an overnight job, but with the commitment of our great team and franchise partners. We believe we're positioning regis for sustained growth.
Thank you very much for joining us we appreciate your interest in Regis and I will now turn it over to our Chief Financial Officer curtains up for.
Thanks, Philippe and good morning, yes.
Yesterday afternoon, we reported on a consolidated basis third quarter revenues of $100 million, which represented at 35% decrease from the prior year.
This decrease is consistent with our transition to an asset light franchise model and also reflects lower traffic levels, which are primarily the result of the COVID-19 pandemic.
California, and Ontario experienced government mandated closures for most of January and into February which also contributed to the decline in revenue.
Locations accounted for approximately 15% of our fleet.
In Q3, we reported a decline in system wide comps of 21%.
While system wide comps were down 29% in the quarter. We are pleased to that system wide comps improved approximately 11% from down 32% in Q2 to down 21% in Q3.
We reported an operating loss of $19 million during the quarter, which includes a $5 million noncash inventory reserve charge associated with the change in our merchandising strategy that Philippe just described.
Third quarter consolidated adjusted EBITDA loss was $20 million, which is 26 million lower versus Q3 of 2020 and was driven primarily by the decrease in the gain associated with the sale of company owned salons of $14 million and the planned elimination of the EBITDA that had been generated in the per.
Prior year period from the net 519 company owned salons that have been sold and converted to the franchise portfolio over the past 12 months.
In Q2 2021, our adjusted EBITDA loss was $18 million. However, when normalizing EBITDA for the last term ambitions in both periods and onetime noncash inventory reserve charge in the third quarter fiscal 2021, adjusted EBITDA for Q3 was a loss of $10 million.
Versus a loss of $14 million in Q2, representing an improvement of $4 million from Q2 of the Q3 due to improved comps and lower G&A.
It's worth noting that Q3 adjusted EBITDA included $13 million of losses related to our company owned Salon portfolio that will be dramatically reduced as we continue our transition to fully franchise business model, which as Philippe mentioned, we are making strong progress towards.
Looking at the segment specific performance and starting with our franchise segment third quarter of franchise royalties and fees of $24 million increased $15 million or 171% versus the same quarter last year. The majority of the year over year increase was due to the refunding of $15 million of cooperative.
<unk> funds in the prior year, which was entirely offset in <unk> expense and had no impact on operating income.
Franchise same store sales were down 19, 3% primarily related to decreased traffic due to the pandemic.
While franchise same store sales were down 19, 3%. This represents an improvement from down 31% in Q2.
As I mentioned earlier government mandated temporary closures most significantly in California, and Ontario also contributed approximately $1 5 million to the decline in royalties and fees.
Offsetting these segment declines was the growth in our franchise base, which now represents 87% of our portfolio.
Sales to franchisees decreased $2 million year over year to $13 million driven primarily by the decline in traffic.
Third quarter of franchise EBITDA.
Of $12 million was flat year over year, driven by increased salon count offset by reduced royalties.
Turning now to the company owned Salon segment third quarter revenue was $32 million, a decrease of $66 million or 67% versus the prior year.
The impact of COVID-19, along with the year over year decrease of 989 company owned salons over the past 12 months were drivers of the decline.
The decrease in company owned salons can be bucket it into two primary categories.
First the conversion of a net 519 company owned salons to our asset light franchise platform over the course of the past 12 months of which of 126 were sold during the third quarter.
Second the closure of approximately 474 of company owned salons over the course of the last 12 months most of which were underperforming.
Salons at lease exploration and dilutive to our profitability.
Third quarter of company owned Salon segment, adjusted EBITDA decreased $12 million year over year to a loss of $13 million.
Consistent with the total company consolidated results the unfavorable year over year variance was driven primarily by the elimination of the adjusted EBITDA that had been generated in the prior year period from the company owned salons that were sold and converted into the franchise platform over the past 12 months.
As it relates to corporate overhead third quarter, adjusted EBITDA loss of $19 million decreased $15 million from a $4 million loss in the prior year.
This decrease was driven primarily by the $14 million decline in net gains excluding noncash goodwill day recognition in the prior year from the sale and conversion of company owned salons, partially offset by the net impact of management initiatives to eliminate noncore nonessential G&A expense.
As Philippe mentioned, we are wrapping up the BBB work and are pleased with the insight. We have gained through the process. We have identified significant cost savings, but we have also identified areas, where we need to invest in new operational functions as a world class franchisor.
So the work is being finalized and we expect to provide more visibility to our future G&A run rate at our fourth quarter earnings call in August.
Turning now to the cash flow and balance sheet, we continue to maintain our positive overall liquidity position.
As of March 31, we had liquidity of $133 million. This includes $99 million of available revolver capacity and $35 million of cash.
To the best of our knowledge and based on our current liquidity position and forecast. We believe we have adequate liquidity to run our business and support our growth initiatives.
In the third quarter, we used $14 $5 million of cash operating the business. This is a decrease of $22 million from our second quarter cash use of 37 million <unk>.
Consistent with the last few quarters I'm going to dive into the details regarding cash use as there are a few onetime cash benefits end uses in Q3.
In Q3, improving comps drove cash collections and cash flow benefited.
$4 $5 million due to fewer inventory purchases related to SKU rationalization and our transition.
Our merchandising strategy.
This benefit is expected to continue into the fourth fiscal quarter, but is not expected to significantly impact next fiscal year.
During Q3, we used approximately $3 million to pay rent due from fiscal year 2020, while not 100% cut up future cash flows similar to Q3 will be much less burdened by prior period expenses.
We're moving the inventory benefit and the catch up of rent payments, our pro forma cash use in Q3 was $16 million.
We expect fourth quarter cash used to increase slightly from Q3 pro forma levels due to expected one time cash uses in the fourth quarter.
As Philippe mentioned, we continue to make progress toward our goal of a fully franchised asset light organization. We have worked hard over the last few months and now have a strategy in place for every remaining company owned salon, whether that be allocated to a deal or a strategic closure to help the overall remaining.
Portfolio.
At June 30th we expect to have approximately 250 to 300 company owned salons of remaining of which the majority of will be closed in an orderly fashion over the remaining lease terms, which on average is 22 months prior to any early exit negotiation.
On the balance sheet I wanted to remind you that the lease liabilities of $659 million represents liability is for both our corporate and franchise location at.
Approximately 84% is serviced by them personally guaranteed by our franchisees.
Additionally of the liability on our balance sheet includes the lease payments for the current term of the leases plus one option period for smart style in supercuts salons, which overstates the rent payments that Regis has committed to.
Excluding the option period, our total lease liability would be approximately $414 million.
Which is approximately $245 million less than the 659 million shown on our balance sheet.
To take it one step further only 15% of the $414 million or $61 million is the lease exposure on the company owned salons before wrapping up I thought I'd spend a few minutes on the business and industry. According to Mckinsey <unk> company COVID-19 U S consumer pulse survey vaccinated people expect their routines.
We'll return to normal by the end of this year.
More than half of the respondents said they plan to treat themselves in 2021, and beauty and personal care was only behind dining out travel and apparel categories.
According to the same Mckinsey study at consumers with under $100000 in household income have changed their buying behavior to trade down to less expensive brand.
At the same trade down may occur with personal services, we believe our Regis family of brands at.
Is well positioned to welcome these new customers to our value salons.
Our salon traffic improved in March and continued to improve in April parts of the country, like Texas, Florida, Oklahoma, and Nebraska, which represent approximately 30% of our salons that have had less restrictions during the pandemic are performing five to 15 basis points better than the rest of the country.
Combination of our own traffic trends consumer research and external positive indicators few of our confidence that Regis will be a major player in the salon industry come back in 2021 and 2022.
In closing we remain optimistic our progress on key initiatives accompanied with encouraging trends has us feeling very confident as we wrap up fiscal year 2021 and move into fiscal year 2022.
This concludes my prepared remarks, I would like to thank you for your continued support and interest in Regis.
And we'll now turn the call back to bids for questions.
Yeah.
Thank you Kirsten.
As we moved at a clean Q&A section of the presentation. Please remember to on mute before you ask your first question one moment. Please for our first question.
Our first question is from Laura Champine from loop capital.
Please go ahead Laura.
Thanks for taking my question is really on the transitions.
Two of franchised model S.
As you decide which stores just are not suitable to be to be franchise kind of where you're setting their hurdle rates.
For the stores that you use or the salons that you intend to have ambition as opposed to the ones that will just close.
Oh, Hi, Laura Kersten, I'll I'll I'll take that question as it relates to the Salon that we don't expect to Vendition. Some of those contractually we cannot vendition and then other.
There's a couple of different components that we look at when looking at the.
So a lot of one of which is location other at the economics of that particular Salon and then also of the brand also plays and so each each salon that we look at is unique.
There isn't a specific like.
Threshold in terms of economics at just pushes that over to one side or the other it's a combination of many factors in determining whether or not we should additional collocation and hey, Laura fleets of here. So just to give you more clarity on that Christians point is not that we have a hurdle rate for individuals salon, but rather.
We try to build.
Healthy viable portfolios through the income franchisees right. So a good example to give you we had a 60 salon.
Transaction in one of our geographies, which we end up making into a 160 salon transaction right. So we added 100 salons to a portfolio of 60, which we made into $1 60. If you look at this delta of 100 salons that were added 40 of them probably would have been not viable and at Standalone base.
Probably this would have led to the closure of those 40, but the aggregate portfolio of 160 is very viable. It is a healthy one it provides the end.
Coming franchisee with a very interesting position from where to consolidate.
The opportunity at very quiet and franchisees.
In those geographies in the index around the areas and also a good position from where to grow Greenfield. So we have this very holistic portfolio centric view and Thats, how we reported kersten point of.
A lot of those 250 to three hundreds of along that we expect to remain in all pulling then run of the leases from there either we could not contractually transfer or we believe that as part of portfolio. They probably wouldn't have been viable to the health of our franchisees. So we want to make sure that our franchisees are going to be into a very viable position.
Moving forward economically so they can prosper in growth.
Got it and just may be mechanics at our auto business that I think you're discontinuing anyway, but it looks like for your company owned stores the product sales were actually.
Loss, creating so the gross margin looks negative if I go through the end of Q today, what what drove that and how can we.
Any kind of pointers, you can give us to model the wind down of your in house managed product line.
Would be helpful.
Florida is kind of in the largest driver of that is the inventory reserve that we recorded in the quarter at $2 $5 million. So that's the largest driver of that cost of sales.
Non cash one time charge that we took on the border.
Got it thank you.
Thank you Laura.
Okay. Our next question is from Stefan <unk> from Jefferies. Please go ahead.
Okay.
Hi, its graceland gone for staff can you hear me okay.
Ken Thank you.
Right so.
So I have a couple of questions. The first being on the monthly cadence that you saw in the quarter. So within that down 20% number or was there an acceleration in tomorrow or any of them.
Any color you can get there.
Yes.
Hi grants of Kurzban, Yeah, you know as it relates to kind of of the month to month progression and com.
We kind of thought.
Similar range for the entire quarter.
Maybe a little bit of recovery and in January and February and into March, but not nothing significant.
Okay, great. Thanks, and then pivoting to the rollout of the open Salon pro which appears to be a bit ahead of plan can you remind us how that value of flow through the P&L as at end royalties and see is there a pass through for hardware of hardware sales.
Yeah. So again this is kersten two components to that there's the hardware components of franchisees are purchasing the hardware when they migrate to open Salon pro.
That's coming through the royalties and fees line and then the other component of it at the monthly subscription. So that also is that for each location. They pay a monthly subscription that also runs through the royalties in view of wine in the P&L.
Okay.
Got it. Thank you that's helpful.
And then on G&A can you just give us a framework for what level of G&A you need to support the business and how you think about the dollars per salon in the future periods.
Yes.
Yeah, as we mentioned in the call, we're still wrapping up the DVD process at.
And going through at I don't know how familiar you are with how that process works, but we're going through what we kind of call of negotiations in terms of the.
G&A expense for next year and future years. So at this point I'm asking people to hold tight until we can share that information in our fourth quarter earnings call.
Alright that makes sense, thanks, and then lastly.
Good morning, just a quick comment ratio.
Balance here is look to adjust the G&A to the current realities of the business, while still keeping our capabilities to grow from here.
At sustainable level of support for franchisees.
The balance that we're going to strike at <unk>.
<unk> points.
Please hold on until.
So Q4 of them I'm going to be able to share with you with more details but the.
Process is very much on track end.
It's been very meticulous of work.
Okay. Thank you for that color.
And then just lastly, if you could share some more about the external distribution partnership for product and how the economic benefit goes to regress and then do you get a referral fee or our sales loyalty for the business you direct to the distributor.
Yeah, I agree sleep at year. So look since we're still in negotiations with the partners I mean, we'd prefer not to disclose.
Too much right now about the model and the economics are.
But more to come later.
As we finalize those deals we're going to we're going to come up with.
A press release of kind of announcing a little bit more of how this is going to play out but we're still.
We're still we're still in the process, but the important thing here is we are changing our model away from being a wholesaler distributors ourselves such that we can focus on our core business, which is managing brands and managing of franchise system wide, we're going we're going to lease product.
In the hands of of partners that can help our franchisees with much stronger sales support stylist education, we're going to focus a lot on our private label brands as well.
Each of our more profitable store franchisees rights of what we're going to focus on the of the core of what we do as a as a franchise company and then have merchandising.
At the end of the experts here, but as soon as we finalize those deals we will offer you more color.
Great. Thank you so much.
That concludes our question and answer we thank you for joining US. This morning, a reminder, that this webcast recording will be available on our website. Later today. Thank you and have a great day.
Okay.