Q4 2021 Regis Corp Earnings Call
While retail and services are broadly feeling the effects of this labor shortage. It is amplified in our industry since salon staffing directly translates to revenue generation.
Our nominal sales continued to improve month over month as Q4, 2021 comps were four points better than Q3, 2021, but perhaps even.
Selling is that Salon hours worked is down 25% versus pre pandemic levels, causing a slower sales recovery than we would've liked to see.
We're confident that this disruption is temporary in nature as in one fourth of our franchise salons that ran flat in labor hours compared to pre COVID-19 levels.
<unk> also ran flat in sales indicated that when we're able to capture more labor hours the sales do return.
We were encouraged last week by the announcement of the end of the additional federal unemployment benefits given the direct correlation between labor hours and revenue in our business.
From a geography perspective, and our largest brands Supercuts states.
States, such as Florida, Oklahoma, Alabama in Arizona have been able to improve labor hours by five to 10 points versus the rest of our fleet, resulting in these states, which were posting sales 10 points short of pre COVID-19 levels in Q4, almost touching pre COVID-19 comps as we moved into July.
Additionally.
The state that reopened earlier continued to outperform states, such as California, and the northeastern states, which have been more restrictive during the pandemic with residents taking longer to return to their normal routines.
States that ended unemployment benefits earlier are also performing better.
Supporting our franchisees and ensuring their salons are properly.
<unk> staff is one of our top priorities and we're actively working with our franchisees to facilitate these efforts we are implementing a new recruiting tool that delivers a fast frictionless mobile solution that streamlines the entire hiring process to assist our franchisees and hiring the stylists they need.
This will save our franchisees' time every week.
And gift candidates a white glove experience that has been shown to increase hiring conversion rates and overall candidate satisfaction.
We think this has the potential to provide us with competitive differentiation, which is key in a world where our people are our product.
If we can help our franchisees hire the best Dallas before their competitors do so.
It is a major win for our brands.
I will also remind you that we are the employer of choice for Empire Education Beauty school graduates, giving us preferred access to new stylists just entering the Labor Force. We're also encouraged by the industry. We're in.
While it has no doubt been an industry hit harder than others. It is also one that remains resilient.
<unk>.
The disruption other industries have seem to their service and delivery models is one that does not exist in hair care as the need for physical retail space and a professionally trained stylists to provide our services will continue to hold true.
And the desire for people to use these services to look and feel their best is not going away.
We're.
We're confident that staffing will return to pre pandemic levels, but what we cannot do is to predict the exact timing of when that will occur.
Whenever that timing is regis is in the best position to capitalize on growth opportunities given our many transformations over the past year.
The Regis of today is an entirely different company when compared to.
<unk> a fiscal 'twenty, one from our management team to our technology platform and everything in between.
We have a new team a brand centric focus set to drive sales the right business model for growth and the right size or structure and tech platform to support and drive that growth.
The skill set of our management team.
<unk>, our business model with a hungry driven and aggressive growth mindset.
They represent the perfect blend of deep franchising expertise and legacy Regis operational Knowhow.
The level of franchise expertise. This team has is something we just never had before join upon experiences driving value for franchisees and other systems.
This combined with close to a 100 years of Regis operating history is a differentiator from other franchise horse, we organize ourselves in a brand centric manner compared to a brand agnostic approach prior great.
Great franchise systems aligned both the franchise or and franchisees around optimizing their respective brands.
A key to brand building here will be further driving sales and we are in the best position to deploy our marketing dollars than ever before.
Through collaboration with our Supercuts franchise Council Regis will be centrally managing the supercuts add fund for the first time.
This is having a majority inefficiently spent by franchisees themselves on local initiatives.
<unk>.
This past practice left Regis with insufficient visibility to the marketing investments being made for supercuts and an inability to measure the effectiveness of an incremental return on the investments.
It also resulted in limited dollars to drive National media marketing and brand initiatives that would have leveraged supercuts our scale, we're now able.
All of this making use of our scaled to deploy our AD fund dollars more efficiently into impactful initiatives that the entire supercuts fleet can benefit from <unk>.
During the pandemic and continuing to today, we have made the conscious decision to pause most of our marketing efforts given the labor shortages.
The last thing we want is to spend promotions.
To us to drive customers into salons that are staff below full capacity.
Currently rebuilding our advertising funds as labor comes back into our salons, and we'll be ready to go with tactical marketing and promotions when the timing is right.
As I mentioned earlier, our salons are now essentially fully operated by franchisees the major business transformation.
No doubt that we embarked on four years ago.
As of today only about 200 company owned salons are left in our portfolio.
The acceleration in completion of this refranchising process given the current business environment was remarkable.
And we could have easily been here with hundreds more corporate salons, given the continuing uncertainty of the.
Information and nature of the remaining slots.
The pipeline of remaining of additions is set to get this figure down to under 130 corporate salons by the end of this calendar year, making the transition essentially complete.
Our team is now free to focus their efforts on fully supporting our franchisees and shifting to phase II of our refranchising process.
And then providing growth opportunities to our most capable franchisees both existing and new.
It is imperative now to ensure our salons are in the hands of capable well capitalized business partners that can be the best representative of our brands and it is dose partners that will enable regis to fill in the geographies that we identify as white.
Space Salon growth opportunities.
In parallel with the Refranchising, we're working on our Salon of the future concept to ensure new builds across our brands not only elevate our customer experience, but also provide a strong ROI to accelerate unit growth both domestically and internationally.
We have completed our corporate where you.
And our zero based budgeting work to ensure we have the right structure to support a fully franchise business model.
We have conducted a robust six month assessment of our people and cost structure and these changes are a major component of the plan to bring regis back onto a path of growth and profitability.
While we do expect net savings.
Youre going to say it is important to remember that investment is needed in our brands and our technology platform and in other areas of our business in order for Regis to grow Carsten, who will discuss our G&A in more detail, but I want to state that while we believe our go forward structure supports our growth initiatives in the most efficient manner, we will always continue to assess our structure.
S zero based budgeting is a continuous process. We also made important progress in our rollout of open Salon probe.
We now have just under 1900 salons live on OSB with another 200 contracts to install the system in the coming weeks.
We also entered into a transition services agreement with our former Pos.
<unk> to make the transition into OSB, even more seamless for our franchisees.
Our goal is to have most of our salons runny on OSB by the end of fiscal 'twenty, two and all of them by the end of calendar 'twenty two.
One of the most important aspects of having our salons on OSB is the quality of the data, we're able to collect and utilize.
So we can drive sales and traffic into our salons.
This data will help us understand behavioral patterns design, new promotions and drive individualized marketing initiatives with CRM and loyalty.
Stylist around the country have reported improvements in ease of use as well as speed of checking in checking out with customers.
While our franchise owners have reported far better visibility into key business metrics. Thanks to the open Salon go app functionality that gives owners and their field leaders real time dashboard reporting of their businesses.
Our product engineering team continues to enhance all aspects of OSB and were excited as to the impact.
This will continue to have on the business and serve as a differentiator for <unk>.
I also want to express how excited I am to have welcomed Mike men's back into the Regis Board back in June.
As former President of mind body of software as a service firm that supports the fitness and wellness industries.
Mike helped grow.
Grow the business before playing an instrumental role in the sale of mind body to Vista equity partners.
Mike is a tech industry veteran who brings a depth of expertise in connecting digitally with customers a skill set that I'm confident will help enhance the overall customer experience for our Regis brands.
And as we continue to evaluate.
Eight our strategic options related to open Salon Pro Mike's experience in building enterprise value product strategy and marketing, while creating global scale will help ensure we maximize value to our shareholders.
While we're still investing in open Salon pro and our top priority is to bring our entire fleet onboard before considering potential.
<unk> external customers I am encouraged to see tech companies offering similar products achieved substantial valuations some of which with the customer base is much smaller than ours. It is a combination of all of these achievements that enable us to look ahead and position us well for fiscal 'twenty two.
Our focus is clear we need to continue.
<unk> drive system wide sales ensure our franchisee base has a strongest can be by providing our existing franchisees with opportunities to grow and bringing new franchise partners continue.
Continue the OSB rollout and laid the foundation for growth through our Salon of the future framework that provides an investment case for large scale development.
<unk>, both domestically and internationally.
For all the challenges that fiscal 'twenty, one broth. The Regis. We are today is a fundamentally different company than the Regis of one year ago.
Im encouraged that Regis is best positioned for the future and I am confident that we have the right people in place to execute on our plans.
Thank.
Agreement much for your continued interest in Regis and I will now turn the call over to Kirsten to take you through the numbers kersten.
Thanks, Philippe and good morning on a consolidated basis, we reported fourth quarter revenue up $99 million versus $60 million in the prior year, which was 65% higher as the majority of our salons.
Some are closed in the fourth quarter of last year quarter.
<unk> royalties and fee revenue increased 263% from Q4 of 2020 from 7 million to $27 million. The increase is due to improved comps and fewer government mandated closures.
Quarter over quarter comps and royalties.
Improved due to improved performance and fewer government mandated closures.
The only significant shutdowns in Q4 were in Canada were approximately 300 salons were closed impacting our overall revenue by approximately 5%.
And the remaining fleet, we can see improvements in our nominal sales as we move away.
Away from reopening dates and states normalize their environment.
As they look at some of the states and regions negatively impacting our comp, particularly California, and the northeast, which are returning to normalcy more slowly.
Being 10% to 20% increases in nominal revenue per stores since the beginning of Q4.
It means they are growing they are just behind the curve.
Overall with the direct correlation between labor hour performance in sales performance that Philippe mentioned and 75% of our stores running well below pre COVID-19 levels from a labor hour perspective, we remain unclear to the exact timing of staffing levels returning.
With pre Covid levels.
We reported an operating loss of $27 million during the quarter, which includes a $5 million noncash inventory reserve charge associated with the change in our merchandising strategy.
Quarter consolidated adjusted EBITDA loss of $23 million.
Compared to a $34 million.
Turning to adjusted EBITDA loss in the fourth quarter of 2020, as we're lapping the closure of our fleet last year.
It's worth noting that this quarter's adjusted EBITDA includes $13 million of losses related to our company owned salon portfolio that will be dramatically reduced as we exit these salons.
Looking at the segments.
Specific performance and starting with our franchise segment, I mentioned fourth quarter royalties and fees increased $19 million versus the same quarter last year, primarily due to the government mandated shutdowns last year fourth quarter franchise. Adjusted EBITDA was $11 million, an increase of $10 million a year over year driven by increased.
Segment sales and increased Salon com.
And our company owned Salon segment fourth quarter revenue was $25 million, an increase of $10 million or 65% versus the prior year company owned Salon segment, adjusted EBITDA increased $9 million year over year to a loss of $13 million versus.
Increased $22 million, primarily due to the shutdown last year as it relates to corporate overhead fourth quarter, adjusted EBITDA loss of $21 million increased $8 million year over year compared to adjusted EBITDA loss of $14 million in the prior year.
This increase was driven primarily by the furlough program in effect for.
For the majority of the workforce across the corporate office field support and distribution centers in the fourth quarter of the prior year.
Switching gears to G&A as many of you have been asking about what our future state looks like upon the successful execution of our zero based budgeting, we expect G&A, excluding rent to be in the range of <unk> 70.
There's a lot of $80 million annually, which not only represents G&A for our franchise our structure, but also G&A for our full technology company that developed supports and maintains open salon pro to be clear. This run rate is expected to be achieved in Q4 of fiscal year 'twenty two due to the exiting of the distribution.
Two centers and Refranchising of company owned salons in the first half of fiscal year 'twenty to achieve.
Achievement of these G&A levels is subject to the risk factors disclosed in our fiscal year 2021.10-K filed this morning.
I want to also state that while our corporate reorganization and BBB projects have right sized our G&A.
<unk> to the identified need that Regis in the short term BBB is a continuous process, which we believe will continue to identify savings I also thought it would be helpful to spend a few minutes discussing our transition away from the wholesale product business.
Few weeks ago, we announced that we will be partnering with salon centric and BSG for the distribution.
To our franchisees.
Salon centric and BSG will be able to better service our franchisees as we move to a fully franchise model versus purchasing wholesale from Regis.
How do we continue to operate as is our wholesale product business would have lost $2 million to $3 million in fiscal year 'twenty two on the flip.
Product had we wanted to prevent this loss given the nature of our cost structure to support a fully franchise business, we would've had to raise product pricing to our franchisees considerably which would've been a detriment to their four wall profitability. We believe that our new model will bring value to our franchisees preserve our private label business and be.
EBITDA positive while greatly reducing the complexity of our business turning to the balance sheet and liquidity as of June 30, we had $129 million of liquidity, including $89 million of available revolver capacity and $19 million of cash.
Our net available liquidity as of June 30th was 50.
<unk>.
Which reflects our minimum liquidity covenant requirements and the permitted add back of the shortfall in certain refranchising proceeds in accordance with our amended credit facility.
<unk> four into fiscal year 'twenty, two we expect to continue to remain a net user of cash for the fiscal year as we re franchise or <unk>.
4 million meander of our company owned salons and wind down our two distribution centers.
However, as a post pandemic recovery continues coupled with the realization of the savings identified as part of the <unk> process, we expect to achieve monthly positive cash flow inflection during the latter half of fiscal 2002, we believe.
Leave that our current liquidity levels are sufficient to fund our cash needs during fiscal year 'twenty, two and closing progress on key initiatives accompanied with encouraging trends has us feeling very confident as we wrap up fiscal year 'twenty, one and move into fiscal year 'twenty two.
This concludes my prepared remarks, I would like to thank you for your continued.
Those the report and interest in Regis and will now turn the call back to <unk> for questions.
Thank you Kirsten and our first question is from SEC with Nick of Jefferies.
Please go ahead Sir.
Thank you good morning, everyone. We have two cuts.
So to begin if we could quickly just in relation to your final question is on costs.
About cash use in the first half it sounds like maybe an inflection in the back half, but can you help us think about the puts and takes.
Inventory on the balance sheet I would guess it would be a cash contributor as you move away from the products business.
Everything we should be thinking about that relate to the final kind of downdraft in the old model.
The investment in the new model from a cost perspective.
Yes, great question stats the other two factors as we enroll.
Out of the two distribution centers.
Cash uses.
Uses associated with.
That wind down as well as you know.
The remaining re franchising efforts that will occur in the first quarter of this fiscal year. So as we move through that we start to see some.
Sure.
Moving from being a cash user too.
The latter half of the year, where it will generate some cash in seven months.
Okay. That's helpful. And then my second question, it's Super encouraging to hear about the G&A, excluding ramping around that 70% to $80 million on a full year basis, I think it's running closer to low 90 run rate exiting Q4 can you just help us bridge.
Bridge.
Roughly $2 million to $4 million, a quarter, where are the incremental savings expected to be realized immediate also relates to the DP will just trying to bridge the incremental cut side you are anticipating to realize here over the course of the next 12 months.
Yes, I mean, it's going to come in various places within the.
Inflation, obviously the distribution center is a key component of that.
And you know as we've discussed in previous quarters, the BBB process and the video processing starting from a white piece of paper. So you know we went through that process and built that works.
The organization and to support the business so as part of that they're worth.
Some eliminations that we made at the end of June that Youll see on those savings come through as we move into fiscal <unk>.
Great and then my last one if I could talk one more in is this related to the products business under the.
Strong agreement with Salon centric M. D. S. C. Can you just give us some illustration of how the dollars would flow through the franchise and then the corporate model just want to make sure we fully appreciate that.
They still have access to some of the product value, but you're not directly selling to the franchisees. So just walking through an illustration I think would be helpful.
Thank you.
Yes, so as it relates to <unk>.
How it will flow through the model there is a.
Our rebate with the distribution partners that we will recognize as revenue that will come through.
Our P&L is that your question Seth I want to make sure that I am answering it correctly.
That's exactly right and just making sure we understand what's happening to the mechanics of the revenue recognition.
Yeah.
And do you have anything else.
Chris could you just talk a little bit more about that and what the revenue rebate, but.
Then what is what does the attributed margin to the rebate is there any expense.
Behind that rebate.
Yeah. So I mean as it relates to product sales will be a revamped that runs through revenue and then you know.
What hasn't changed is will continue to receive a royalty on the product sales that our franchisees.
Are making in their in their salons.
Okay. So from a margin perspective, the royalty of course would be at your historic margin levels. The rebate would be at almost sure margin that the way, we should think about it yeah. Okay alright.
Alright, very helpful I'll turn it to them.
The next question after thank you.
And stuff.
Thank you. Our next question is from large Empire from loop capital. Please go ahead Laura.
Hi.
Hey, Laura how are you.
Yeah.
Yeah.
How much do you think.
[laughter].
Well, we're having a hard time hearing you can do encourage.
I'm sorry can you hear me here you announced you broke up a few times, Laura sorry about that okay, sorry, bad quality of the call here on my end I wanted to talk a little bit about the labor.
<unk> shortage that you're facing and see how much of the problem youth.
I think goes away once we cycle through the enhanced unemployment of pits and I also wanted to.
See what you think you can do to help franchisees.
Increase their hiring is.
The folks who have been independent stylists see if there's much you can do there.
Okay.
Hey, Laura Felipe here, So look right now the major roadblock to sales recovery has been the labor shortage right, but we're very encouraged.
<unk> with.
Some of the facts that I talked about in my prepared remarks. So states. For example that ended the unemployment benefits sooner have seen a faster sales recovery and also if you look at the top performing a one quarter of our salons in terms of labor hours versus last year.
I mean, these guys have been the fastest to recover sales as well. So we've seen a very linear relationship between the recovery of labor hours and the recovery of sales right. I mean in this industry of course, the availability of stylus correlates directly with our ability to.
Sales right.
That's.
You know as we were very very confident as we.
Astellas.
Return to the workforce that this will directly translate into sales.
And with respect to the second part of your question, which is how we can help franchisees, we're about to implement our new recruiting solution.
To be used by our franchisees, which.
It is based on artificial intelligence.
Basically the provider is a leader in this segment.
Theres been a very successful global franchise or who adopted the system and with a lot of success.
We want to replicate their success in recruiting.
On our end as well so we're very excited about that and we think that the effects will be seen shortly after the implementation of this tool.
Got it.
All settled.
Laura I think we are we're losing you again, if you wouldn't mind repeating youre breaking up again.
Okay I'll take the rest of my questions offline. Thank you.
Thank you Laura I appreciate it.
With no further questions, we will adjourn. Thank you very much for joining today.
Okay.