Q2 2022 Regis Corp Earnings Call
We will begin shortly.
[music].
Conference call.
All participants are in a listen only mode.
The prepared remarks by our interim Chief Executive Officer, Matt.
Matthew Doctor.
And executive Vice President and Chief Financial Officer, Kirsten Duffer are accompanied by slides to help participants fall along <unk>.
After the prepared remarks.
We will have time for questions.
Please use the chat feature or raise your hand feature to ask a question.
Also joining Matt and Kristian on this call is Jim Jim Lane, our Chief Operations Officer Iman.
I'm your host business, Shane Vice President corporate controller.
As a reminder, this conference is being recorded.
I would like to remind everyone that the language on forward looking statements.
Including in our earnings release, and 8-K filing also apply to our comments made on the call today.
These documents along with our presentation today can be found on our website.
New Ww Dot Regis Corp, Dot com forward Slash Investor Relations.
Along with a reconciliation of any non-GAAP financial financial measures mentioned on today's call.
With their corresponding GAAP measures.
Today's slides are located in the supplemental financials section of the Investor site.
With that I will now turn the call over to Matt.
Thanks.
Morning, everyone.
Let me just start by saying how excited I am to be given the opportunity to step in as interim CEO here at Regis.
Since I'm new in this role let me share a bit about my background before I discuss our second quarter performance.
I believe we are well positioned for future growth.
Additionally, I'd like to spend more time on this call than we have historically showing what this business can deliver on a more normalized go forward basis, given the many actions we've taken in fiscal 2021, and our move to a fully franchise model.
We've made many announcements over the course of the past year regarding organizational changes Prada.
Product distribution model changes, our operating company wind down the rollout of open Salon pro our G&A guidance.
But we've never quite tie that all together into what that means from a profitability perspective.
We owe that to you all.
I will also discuss our priority is to continue to drive our business forward.
By way of background I started my career as an investment banker in New York after spending several years there I would look to do something completely different and ended up in entering the world of franchising and I haven't looked back I.
I joined the restaurant brands International in 2014 and held several roles there.
Mainly focused on development and franchising, having led global development and franchisee performance for the Burger King brand as well as leading development efforts for Tim Hortons.
While I was progressing my career I always had in the back of my mind, the desire to be an entrepreneur and just never knew what the opportunity would look like.
And then it hit me.
After years of selling the benefits of large scale franchisee ownership and work inside a large global franchise order.
I decided to step on the other side of the table and become a franchisee that's important system.
So I've had the unique opportunity of being both the franchise or and the franchise.
I became a franchisee in 2018, and my partners and I grew to 83 restaurants, ultimately, culminating in the sale of most of our restaurants at the end of 2020.
After the sale of our restaurants I ended up joining regions initially as a consultant and as a consultant for aegis.
I saw a platform with tremendous potential.
Industry that while no doubt has been hit hard by the pandemic.
It represents a fundamental needs.
Became so energized by the opportunities here that I want to be part of helping regions navigate this unprecedented time.
And I started full time in February 2021, as Chief strategy Officer.
In addition to my background. There is some other qualities I'd like you to know about.
I believe in respect and transparency.
You can expect to hear a balanced view on the things that are going well.
And the challenges that we're facing.
I'm also big on accountability and begun execution.
Turning to our second quarter results, we are still very much dealing with the same themes we've touched on in previous calls our.
Our sales recovery continues to be challenged by lower active stylus and customer counts compared to pre COVID-19 levels.
Priorities are built around addressing each of these items as we have encouraging data that validates the salons and demonstrate a greater number of active stylus Andrew.
<unk> retention of existing customers of sales that are back in line with 2019 levels.
We have significantly reduced our operating losses for the quarter.
Even with our remaining company owned salons and product business sales dampening our performance.
But that being said the shift in our business model and initiatives. We've taken in fiscal year 2021 are really starting to come to light in our current results.
In the second quarter, our franchise segment, which represents our go forward business model at a profit of $5 5 million for the first time since the pandemic.
That segment turned a profit during the quarter, where we saw two year comps down 17%.
In OSP only 44% rolled out in the U S launch.
While our results did not meet our expectations. This is an encouraging step forward and shows the potential of the new asset light franchise model.
Now I'd like to share why I believe this company has such exciting growth prospects and is well positioned for the future.
Yes.
We are no doubt in the challenging time.
But I'd like to take the time to reframe the mindset and recognize all of the things that we have going for us.
First we have scale in an industry that represents a fundamental need that is not going away.
We are well known brands with years of equity behind them.
Collectively have a large network of stylists.
Given our size, we have inroads in beauty schools, we have scale and large presence in real estate.
We have a relationship with Walmart is one of their largest tenants.
We have a proprietary technology platform and we have seasoned operators and a large franchisee base with.
Within all of these elements there is an equation to meet the stylist needs and consumer demands as well as enable the flexibility necessary to succeed in this ever changing environment.
Second.
I, even inherited a great committed team.
I know there's been an evolution of this management team over the last year, but I think I can speak on behalf of all of them. When I say, we are in a good spot.
We have complementary skill sets.
Represent a mix of new players and legacy knowledge and <unk>.
Most importantly.
We trust each other.
All the changes our employees have remained incredibly resilient and I am grateful to be on this journey with everyone here at regions.
Third we have an extremely dedicated and passionate franchisee base.
These last few years have not been easy.
And given regions as change in business model. The majority of our salons moved from corporate to franchise, either right before or during the pandemic.
Our franchisees have worked tirelessly to run their businesses during the most difficult environment for our industry.
And that needs to be recognized.
The success of our franchisee basis of Paramount importance and the key driver to the success of <unk> and.
And I look forward to working closely with them and strengthening our partnership ensuring that we incorporate their feedback along the way.
Our goal is to enable franchisees to maximize profits, which in turn helps drive reaches.
Finally, we have a transformed business model, which will ultimately to more predictable revenue streams and cash flow generation.
I think it's important to revisit the key accomplishments during 2021, the finalized our business transformation and set the stage for the future.
First we wound down our operating company from over 1600 salons to under 150 that are remaining today.
This was a business that loss reached $43 million of EBITDA in fiscal 'twenty, one and drove a major use of cash during the pandemic as.
As we were unable to qualify for any PPP loans, given our status as a public company.
We implemented G&A savings to the tune of around $10 million.
We exited a product distribution business start to become a financial and logistical challenge.
And we began the rollout of open Salon pro or OSP as we call it.
That is now operating in over 2000 of our salons.
Now I understand that a lot of these items relates to EBITDA loss mitigation and cost cutting.
And a year of uncertainty.
We had to focus on the items in our control that also coincide with the future of our business.
The culmination of these efforts resulted in an over $50 million of EBITDA savings based on our fiscal 'twenty, one results and as I mentioned earlier, we're starting to see this come to bear in our Q2 'twenty two results.
Sure I share a little bit more and go into what our normalized business can achieve in our current priorities I'd like to turn the call over to Kirsten dig a little deeper in our second quarter results after which I'll return post christian's remarks to discuss these items Kristen.
Thanks, Pat and good morning.
Yesterday, we reported on a consolidated basis second quarter revenues that reflects our transition to a fully franchise business model and the continuing impact of the pandemic unbelievable market.
Total revenues of $70 million declined $34 million from the prior year due to 97% of our salons being franchise now compared to the 84% in the prior year.
Second quarter revenues were below our expectations and reflect continued labor shortages and the persistence of the pandemic.
We are encouraged by salons that have increased stylist hours quarter over quarter and have seen their sales improved for.
For example, 20% of our salons increased hours by 10% and saw approximately a 10% increase in comps.
As Matt noted addressing labor issues as one of our top priority.
Our system wide revenue, which includes <unk>.
Total sales at franchise and company owned Salon increased $43 million from prior year, driven by an improvement in comparable same store sales of 22%.
On a two year basis of comparison to pre Covid systemwide comps were down 17% in the quarter.
We reported an operating loss of $1 million during the quarter, which is a significant improvement from an operating loss of $27 million in the prior year quarter.
The improvement results from an increase in system wide sales, our G&A savings initiatives wind down of our company owned salons and a few onetime noncash benefits.
On an adjusted basis second quarter consolidated adjusted EBITDA was $2 million.
Compared to a loss of $18 million in the prior year's quarter.
Adjusted EBITDA improved due to higher operating income higher systemwide sales and lower costs. Additionally.
Additionally, the quarter benefited from a couple of noncash benefits amounting to approximately $3 million that we do not expect to reoccur next quarter.
Our core franchise business achieved adjusted EBITDA of $5 5 million.
Compared to a loss of $6 $8 million in the prior year.
We are pleased to see positive EBITDA results, which reflects the cost savings initiatives, we have undertaken.
We do caution that the pandemic and in particular, the <unk> variant will likely impact the third quarter, but to an extent we cannot predict.
The company owned segment recorded an adjusted EBITDA loss of approximately $3 million.
Including a charge to increase the inventory reserve by approximately $1 million.
Our cost structure is nearing what we expect in terms of our go forward run rate, we completed the exit of our distribution centers in the quarter and reorganized our salon support operations to better serve our franchisees and reduce costs.
Second quarter G&A benefited from a reversal of stock compensation expense in the quarter of approximately $2 million and other one time benefits of approximately $1 million in the quarter.
We continue to believe our end state run rate G&A will be in the range of $65 million to $70 million annually likely at the low end of that range and we expect we will achieve that level in the fourth quarter turning to liquidity.
As of December 31, we had $138 million of liquidity, including $82 million of available revolver capacity and $35 million of cash.
Our net available liquidity as of December 31.
It was $63 million, which reflects our minimum liquidity covenant requirements and the permitted add back of the shortfall in certain refranchising proceeds in accordance with our credit agreement.
Our liquidity and provides us with sufficient operational and financial flexibility to navigate the recovery and operate as a pure asset light franchise or in the second quarter, we used $12 million of cash from operations.
As consistent with our cash used in the first quarter.
Included was $2 $5 million of social security contributions, we remitted in December that we had deferred as part of Covid relief.
And the executive bonus related to fiscal year 2021.
We expect our cash used in operations to continue to decline in the second half of the year due to our lower cost structure.
We believe <unk> is poised for a return to growth and sustained profitability as we emerge from the pandemic and look forward to continued recovery in the second half of the year.
This concludes my prepared remarks.
Like to thank you for your continued support and interest in Regis and I will now turn the call back to Matt. Thanks Kristen.
As I mentioned earlier I'd like to frame what this business looks like on a normalized go forward basis, and how we get there from here.
This is what gets our internal team excited and is certainly relevant for you all to know.
Also want to be clear this isn't a model that calls for any major shifts or additional change, but rather what EBITDA looks like assuming the exact platform and infrastructure we have in place today.
Assuming we at least maintain our current store count.
Get back to 2019 sales levels. As this is a pre COVID-19 sales level that we have demonstrated being able to achieve.
And assuming we complete the rollout of open Salon pro.
Starting with royalties.
Taking our current franchise Salon count to 5553 <unk>.
As these loans get back to within 10% of 2019 levels, resulting royalties are $76 million.
Because the salons achieved plus 10% versus 2019 levels, resulting royalties or $92 million.
Moving to fees, which primarily consists of open salon pro franchise fees and product rebates from our distribution partners.
That's a full rollout of open Salon pro at set monthly rate plus a franchise fees and product rebate fees that are currently flowing through our P&L.
The resulting revenue is $22 million.
For this exercise we will assume that our legacy company owned salons in distribution business are wound down so no financial impact here and lastly, our cost structure.
We've given guidance that G&A is generally going to be between $65 million to $70 million and as Christian mentioned, we feel confident.
Listen our latest results this will come in closer to the lower end of the range.
Also want to reiterate this G&A includes both corporate resources for our franchise business as well as the infrastructure for open Salon pro.
Wondering on corporate rent.
G&A and corporate rent equals approximately $68 million.
So, bringing this all together our EBITDA at minus 10% versus 2019 sales levels to plus 10% in 2019 levels is 30% to $46 million and demonstrates strong margin I want to reiterate again. This is not guaranteed and the timeline is predicated on us one keeping our current salon.
<unk>.
Getting back to those 2019 sales figures and three.
Rolling out open Salon Pro <unk>.
All of which are fundamental aspects of our business.
There are certainly challenges and risks to achieving these results.
There is work to be done, but the exercises maintaining what we have and returning to where we have been anything beyond this as potential upside. So how will we continue to stabilize and return regions for sales growth and profitability.
Let me walk you through our six key priorities.
First.
Starting with our capital structure.
Our bank debt maturities in March of 2023 makes our capital structure and key initiatives and.
And we're currently evaluating alternatives to address it with our advisers to help seek out new capital.
Including both sources of debt <unk> equity.
Next is a continuing our exit of the remaining corporate salons.
This wind down consists of multiple strategies, one our current deal pipeline negotiated lease buyouts.
<unk> operations to the extent possible.
And closures at lease expiration.
Our current pipeline of deals negotiated buyouts should have around 100 salon market short order with the remainder either running off or being negotiated out.
Shifting to our brand priorities.
And it should be noted that while all of these are meant to drive near term results. They are absolutely fundamental to our learned return strategy as well.
I also want to note that within these priorities are so groundwork to be done to bring some of these initiatives to life, which will take some time.
But that said the drivers of this business are clear and we should not look to overcompensate them.
And foundational to all of these initiatives is strengthening our franchisee relationships.
We need to ensure we are closer than ever to the franchisee community and provide them the support needed.
We are working to incorporate their feedback into our initiatives is building back. During this environment is going to look way different than the past.
Given our day to day business is in their hands. It is critical to work their feedback into our brand building strategies and executing with him shoulder to shoulder.
I haven't been on the road and we'll continue to be meeting with our franchise partners and pushing forward to establish a best in class franchise or franchisee relationships.
Given the challenging labor environment, and how core stylists are to our business.
Recruiting and retaining stylists as a key priority.
We want our salons to be a place where stylists want to work and earn a competitive wage.
We need to fill the funnel with a pipeline of stylists.
Convert them quickly from application to offer.
And retain them through Salon culture and training.
To fill the funnel. We're currently leaning on recruitment marketing efforts as well as leveraging our scale with beauty schools.
To convert them quickly from application to offer.
We rolled out an AI recruitment tool that sits on social media and major hiring platforms that move application barriers, making it seamless and easy for franchisees to interview and make offers to stylists that apply to the tool.
We have learned that in this competitive labor environment.
Speed is the key to hire and we now have the majority of our salons signed up on this platform.
Lastly, we need to retain the stylists that we have.
Efforts on this front will be built around brand standards to drive strong salon cultures, as well as ensuring training platforms that provide ongoing and relevant training, which is key for stylus and their career journey.
Our goal is to make the job of the stylus is easy it can be <unk>.
<unk> opportunities for career development and become a preferred destination to work.
Our fourth priority is driving customer traffic, which will be driven by marketing and customer experience.
On the marketing front the immediate opportunities to retain the customers who are currently visiting our salons, we have an opportunity to convert our natural customer accounts to more repeat business, which will help increase traffic in the near term with broader brand building strategies for new customer acquisition to follow.
On the experienced front, we will be rolling out in upholding a uniform brand standards and guest satisfaction metrics.
Measuring and ensuring adherence to these standards will be key to uphold our brand promises and solidify our value proposition.
Our salons needed to be a place where customers look to visit for a quality convenient haircut with strong value for money.
Brand standards will include things that relate to Salon culture guest experience in stylist training.
All designed to deliver quality haircuts seamless differentiated customer experience our fifth priority is technology.
We are very excited about our proprietary open Salon pro platform. This is a great tool that is intended to provide data for us to analyze each of our brands and drive marketing strategies enable.
Enable our franchisees to run their salons and a more streamlined way with real time access to their business on the go.
Allow stylists to focus on what they do best which is hair.
And provide a differentiator to our customers, making it easy for them to book and pay.
We view this as another key equation and the value proposition for our swaps.
The adoption curve for OSP, a slowdown in the recent months.
And that is because after having open salon pro operating in our franchisee businesses, we received constructive feedback as to what OSP can be doing better.
To work inside their salon operations.
Neither this platform to meet the franchisee business.
So we are taking their feedback and working it into our current roadmap.
We also have been looking into a more effective.
Adoption option from a cost perspective.
Until now OSP has been coded to work on a singular tablet device. So we are pleased that we will soon be offering a web based alternatives that can be random existing franchisee hardware, eliminating the need for a tablet purchase.
This feature combined with ensuring best in class functionality should enable us to ramp adoption backup.
But it is of particular importance to me that we are rolling this out in lockstep with our franchisees.
Our final priority relates to resist in our brands, while we are busy driving our near term performance. We also have a unique opportunity in front of us to reassess our salon brands and ensure they are relevant to today's consumer.
We have the opportunity and duty to innovate and respond to a dramatically different marketplace to meet the needs of customers and stylists.
The reason the stylus worked foreign customers visit our brands may be shifting in real time.
We want to be at the forefront and assess the strengths and potential weaknesses of our brands.
Gas Accordingly, and then build marketing strategies that take all of these dynamics into account.
I look forward to keeping you updated on our progress.
Tying together our go forward business model and priorities I am very excited about the potential for <unk> going forward.
The combination of our fiscal 'twenty, one initiatives and getting back to 2019 sales levels has the potential to drive a $38 million EBITDA business at the midpoint of the range provided.
With incremental sales and exelon growth, adding potential upside we expect the balance of this year to be about recovery in progress the hair services market is continuing to be impacted by the pandemic and does not fully back.
Labor is a challenge and we will continue to experience the costs associated with our fiscal 'twenty one actions.
But our transition to a franchise our model is complete.
The benefits of our fiscal 'twenty, one actions are taking hold and.
And we have clear priorities to continue to improve our performance and leverage our leadership position in the industry.
As I mentioned earlier I am very grateful to be in the position to lead <unk> and provide some insights about the potential and what has us so excited for the future.
Thank you for joining us on our call today.
I'll now turn the call back over to <unk>, we just threw any Q&A.
Thank you, Matt as a reminder.
<unk> you raise your hand feature or the chat feature to ask a question.
Our first question do the Q&A.
Can you please speak to your plans for recruiting and retaining stylists.
Yeah, Hey, this is Matt and I appreciate the question.
Kind of mentioned through our top priority of this this is a key one as it relates to our brand and brand growing initiatives and up for the stylists.
It's all about becoming the preferred place for them to work in a destination there and it's not just.
Hiring new but we have to retain the ones we have as well so the key initiatives, we have around making a life as easy as possible for them in the salon and that can be done through technology.
Really a great environment and culture for them to work in providing those career development opportunities through training our training platforms need to be best in class and we need to not only provide that training to all.
On the job at the start but also kind of a continuous ongoing career development and progression changing which is pretty differentiated to get inside of a salon environment.
Also just things that we can do to fill the pipeline and higher quickly beauty school enrollment is back up so we need to ensure that we're ahead of that leveraging our scale getting back into beauty schools and ensuring we're converting stylists at a higher rate to work in our salons.
And also just giving them an environment, where they can make good money in a competitive wage. So those are the things. We're working on we're working on these are our franchisees were receiving feedback all the time.
We look forward to bringing these to bear and.
And use as a tool to.
Recruit new and retain the ones we have.
Thank you Matt our next question from the chat is what obstacles against the total adoption of open phone crowd.
And the franchisee is resisting what reasons are given.
That's another good question and again as I mentioned, just top of mind here as the.
The intent of OSP is a great one for us to have this and build this out to provide a differentiator for our salons in a world where value proposition is key and that is really going to be filled with salon culture customer experience and ultimately technology.
To have this is a great tool to have but it needs to meet the reality of what we're attempting to do and as I said now that it's actually been working for the last several months and franchisee businesses. There has been feedback of things that we could be doing better to ensure this meets their operational needs. It is meeting exactly what it is.
They are expecting things from back office tools, and greater integration there things as it relates to checking into the nuances between appointments in queue times. So again, all these things that are great points and we want this to be something of the franchisees want not something that we're just pushing on to them. So what we've done is we've taken the feedback.
Can it back and the good thing is the fact that we do have this platform and we do control the development and the roadmap that we can work with that anything quickly solve those issues. So between quickly solving those issues and the new rollout of the web based Pos system, which will be a really great cost effective option to be rolled out. These are the two things and.
<unk> iteration with the franchisees around this is to ensure the product is working as it should be is going to be the path forward here.
Thank you Matt we are now going to take a live question from Grace Wang from guests Jefferies Great.
Please remember to mute.
Hello, Good morning.
Thanks for taking the question.
Couple of questions actually firstly on the system sales just wanted to check in and see where we're at on an <unk> basis relevant relative to the pre pandemic level.
Yeah, I can take that great. So as we mentioned in the script on a on a two year stack.
We're down approximately 17% to pre COVID-19 levels.
Okay, great. Thanks.
And then on the CS revenue.
Are you able to break out how much of that is the taxes versus the.
The franchise onetime additional days.
Oh, great as it relates to Mastec is that what youre talking about are you talking about the.
Either one.
The forecast.
That youre looking at or in <unk>.
The current quarter it would be helpful.
Yes, sure great. So I'll take that it's Matt here. Thanks for the question. So on the go forward fees that we're talking about the $22 million bucket. So.
Around half of that is called open Salon Pro tech fees.
Maybe roughly around a third or a little less than a third.
Are comprised of the franchisees and the rest are call it product rebates and training.
Okay.
That's helpful and then just lastly G&A.
But youre talking two as a run rate puts you at a level that we had expected and I think you had signaled previously it would be a six to 12 months from today. So I'm kind of wondering if you could just elaborate a little bit more on the cuts you were able to find where you're able to just trim things earlier or did you find new areas to cut costs.
No.
The guidance that we've given previously the 65 to 70, I think we've been able to narrow that down to the lower end of that range and we had always had that expectation that we'd be hitting that run rate in Q4 of this fiscal year. So.
As you know we continuously evaluated G&A at the end of the last fiscal year throughout this fiscal year.
But it is meeting our expectations in terms of when we thought we would be there yeah and graces, Matt when we put out that range.
We felt that we would always be kind of in that lower end of the range and after kind of going through a few quarters and living yet we feel way more confident that that's where we're going to be.
Okay, great. Thank you.
Thank you guys our next.
<unk>.
Moving to the chat is can you talk about driving more traffic and how old their marketing and advertising be paid for.
Yes, no absolutely.
Absolutely.
This is a this is a big one that goes hand in hand with with stylus.
One thing to bring the stylus back, but it's walking that.
Wrote to ensure that we have the customer demand there as well and I think some of the numbers that we look at it gives us very excited as we actually have pretty good natural occurring traffic levels that are low hanging fruit for us to go after as well.
What we've seen is we haven't necessarily done as creative a job.
Retaining the existing customers, we do have so when we think about near term traffic drivers, there's a really big opportunity for those that are coming within our salons to come back within 90 days, we're seeing a bit of a drop off there versus pre COVID-19 levels.
This is kind of in the below 40% range today, whereas pre Covid. This was 50 plus and those salons that we see that have that 90 day retention level kind of in that 40, 50, 60, 70, plus level our sales levels back to those two those 2019 levels. So as we think about where we should.
Put effort and it's encouraging that we'd have natural traffic. So when we think about marketing dollars and ROI is going to attract traffic that we can move that 90 day retention number up through targeted ads through CRM campaigns through continuing the chats and the customer journey.
After they leave their salons and really give them reasons to come back there just constant communication being top of mind when that decision is made to get a haircut or.
Provide promotions to incentivize them to come back to that extent time has lapsed. The fact that we can move the existing traffic. We have will be will go a long way to addressing kind of the near term traffic levels. The good thing about that too is not only does it help with the near term, but converting those customers to be repeat retained folks for the <unk>.
Long term, it's foundational to and helps reset the baseline so when we add new and keep retain the new then they start building on each other so this is a big kind of near term priority for us as it relates to near term traffic driver.
Yeah.
Thank you very much Matt further our questions for today. Thank you for joining the <unk> earnings call have a wonderful day.
Yeah.