Q3 2022 Regis Corp Earnings Call
Good morning, and thank you for joining the region third quarter 2022 earnings release Conference call.
All participants are in a listen only mode.
The prepared remarks by newly appointed President and Chief Executive Officer, Matthew Doctor and Executive Vice President and Chief Financial Officer, Chris Zephyr are accompanied by slides to help participants all along.
After the prepared remarks, we will have time for questions.
Please use the chat feature or the raise your hand feature to ask a question.
Also joining madden person on this call is Jim Lane, our Chief operations Officer I'm Your host isn't Exane, 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 included 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.
At Www Dot Regis Corp, Dotcom foreign Slash Investor Relations.
Along with a reconciliation of any non-GAAP financial measures.
On today's call.
With their corresponding GAAP measures.
Today's slides are located in the supplemental financial section of the investors site.
With that I will now turn the call over to Matt.
Thanks, Pat and good morning, everyone.
Today I will walk you through highlights of our third quarter results and the status of the some of the key initiatives, we highlighted on the last call as.
As well as how we are refining our priorities and areas of focus.
Christian will cover our results in more detail. In addition to addressing a few one time items. There continues to be some noise in our reported results as we worked through the shift in our business model.
Our third quarter same store sales and adjusted EBITDA improved year over year.
Total adjusted EBITDA came in around breakeven for the quarter and franchise EBITDA, which represents a proxy of our go forward business model.
Positive compared to a loss in the prior year and positive for the second quarter in a row.
As sales remained well below pre COVID-19 levels organizational moves we have made to streamline our G&A has helped mitigate losses. During this period of slower than expected sales recovery.
As our legacy businesses continuing to wind down in sales eventually improve.
We will benefit as our G&A remained largely fixed.
While our results reflect progress on the path to profitability.
They remain below where we want them to be.
There were several factors during the quarter that affected our results. Some one time and some related to ongoing issues. The omicron variance had an impact on sales throughout the quarter as we had articulated.
Weighted it would on our last call.
In addition, several themes continue to affect our business as we drive towards recovery.
Our sales continue to be challenged by labor issues with active stylus and stylist hours remaining significantly below pre COVID-19 levels.
Labor shortage translates to an outsized effect on our results.
Given the specialized labor pool, and the best stylists are the direct link to our revenue revenue generating capabilities.
Lower customer accounts due to remote work and longer haircut cycles continue to impact our sales as well I want to be very clear.
But even though we have made progress towards mitigating losses, we mean to grow the business.
We know our sales levels were not close to where they need to be and as we go forward.
It is critical we start making meaningful strides in this area and is a key driver for the health of our business.
In addition to the stylus shortage and lower customer counts in packaging sales are business model shift is also affecting near term profitability as we continue to wind down our legacy businesses.
Our transition away from our wholesale product distribution business and remaining company owned salons, where an EBITDA drag for.
For reference these businesses impacted our adjusted EBITDA by contributing to loss of $4 million during the quarter and a loss of $13 million year to date.
During the third quarter, we have taken steps to ensure we will be out of the product distribution business in the beginning of fiscal 2023 and.
Meanwhile, progress continues to be made we still have work to do.
By fully winding down product distribution and continuing to run off company owned salons the effect on our EBITDA will be minimized.
And we will be able to squarely shift our focus to the core business now.
While I mentioned being disappointed in where we are.
Not at all surprised that our third quarter results landed where they did.
Our results reflect the fact that we have not yet implemented the initiatives. We know are needed to improve our performance across key areas of the business.
Let us turn to what those initiatives are.
I've been in the seat for four months now and I want to help you understand some of the work we have been underway and will improve our performance on our Q2 call. We had articulated priorities for the balance of the year split between regions specific and region brand initiatives.
Right off the bat, we took action top tackling our top REIT, a specific priority, which is addressing our maturing revolving credit facility.
Last quarter, we mentioned that we are working with our advisors to seek out new sources of capital with the goal of a refinancing.
I think we had the least amount of words dedicated the largest priority, but I hope you can all appreciate that this is by design and the reality is there's only so much we can say here given we are in the midst of identifying the appropriate solution.
However, I want to make it very clear that this continues to be our most important business priorities.
And our efforts around evaluating our capital structure is not something that is just beginning.
But rather that has been underway for several months.
I also want to emphasize that we are keeping the go forward plans for regions and shareholder value top of mind as we drive towards a financing solution.
Turning to our company owned salons.
We reduced the number of company owned salons to a 117 from 150 during the quarter.
As mentioned on the last call we continue to scale down the rest of the portfolio through either sales buyouts or runoff at lease expiration.
These will continue to wind down and even in the event there are no further sales or buyouts.
The vast majority of these will naturally run off within the next two years.
As far as initiatives relating to our brands.
Strengthening our partnership and relationships with our franchisees is critical to this effort.
Best strategy will fall flat without their trust and we felt they needed to be heard in involved in shaping our areas of focus as it relates to the critical areas of the business.
Especially stylists recruiting and retention and customer traffic.
It is critically important to us to gain shared alignment and ensure that we are the same side of the table, especially.
Especially as we will be executing on these plans together.
We wanted to hear from our franchisees firsthand to get a sense of what's happening on the ground level.
To test some hypotheses and again a sense of areas of opportunity that may not fully be on our radar.
Four days after our last earnings call, we did something that had not been done that re just in the past.
13 of us, including the entire leadership team and functional Department heads embarked on a five city tour visiting Orlando, Dallas, Los Angeles, Philadelphia, and Minneapolis to meet with our franchisees we.
We did not present, but instead hosted intimate round.
Round table discussion, so everyone could provide feedback and everyone could be heard.
Across those five cities, we met with over 220 franchisees, representing more than 3200 of our U S salons.
We held 110 of these roundtable discussions that resulted in many learnings, which we have taken into account in our action planning.
This connection communication with our franchisees would be fundamental to our business and ongoing behavior as our involvement will be key in improving our collective performance.
To further these efforts we are in the beginning stages of setting up priorities specific committees and.
And we will be making our way to Canada in June .
We wrapped up the U S franchisee visits in mid March and since then <unk> been working diligently on the action steps will be taken.
We are pushing ourselves as an organization to focus on the most meaningful drivers of our business.
And our business core.
You need three things.
<unk> stylus satisfied customers.
And the ability for stylus and customers to seamlessly interact with our brands through technology.
We laid out our priorities relating to this during our last call.
We have refined our focus even more on the heels of discussions with our franchisees and further deliberation by the leadership team.
We are seeking to identify the root cause of our current business challenges and have arrived at the three major initiatives as it relates to technology stylist recruiting and retention and customer traffic.
Number one ensuring our franchisee basis on a single technology platform.
Two increasing our commitment to stylist education and events to drive our talent brand and improve recruiting and retention and three.
Refocus on more marketing on more digital.
Marketing efforts.
Let me address each of these a bit more.
On the technology front.
As being in lockstep with our franchisees is critical to our success.
So is the right technology and the reality is we are in a situation right now with our franchisee base being split between two platforms.
The legacy <unk>.
And our new open Salon pro point of sale system.
It's not uncommon to have this dynamic what makes us a little more complex as we're in the middle of a wind down of a legacy system.
And our ramp up of a new one that candidly needs to improve its functionality to ensure that it is a platform we can fully standby.
We are taking the necessary steps to provide our franchisees with the right solution for their businesses.
And our goal is to have the system on a single point of sale system by the end of the calendar year.
There will be more to come on this effort and I look forward to keeping you all updated.
On stylist recruiting and retention we look through this we look at this through the lens of.
What can we do as a franchise or that will have the most impact.
We have an AI recruitment tool that we rolled out to help franchisees process silencer applications and this has been a fantastic tool for our franchisees to aid in the process.
However, it does not fulfill the applicant funnel.
Or does it address retention.
For that we need to better articulate our value proposition for franchisees Salon employees and defined why the Regis Salon brands are a great place to work too.
To address this we are increasing our commitment in person stylist education, and Relaunching national and regional Stylus defense.
We know from the research and conversations with stylists and franchisees just how much does matter.
Not only the style was coming out of beauty school is looking to learn.
But also experienced stylists, who are continually seeking to advance their craft.
Having a strong digital platform for education has been a great development.
You cannot replace the importance of in person training and events.
Further in education allow stylists to uphold our brand promises that the delivery quality.
Consistent hair services.
It also addresses the top two purchasing criteria that matters to consumers, which are receiving a quality haircut.
Feeling that their stylus is trained and knowledgeable.
Bolstering this piece touches all facets of our business and.
And as a franchise or in the hair care space can be a major differentiator at scale versus our competitors.
We are a people business.
And what better way of investing in people and providing the best in class education platform.
With a large network of in house educators complemented by the largest network of train trainers and a top notch digital platform.
In our education Caribbean will go beyond technical education, but also include manager training and soft skills development.
We aspire to be the landing spot not only for silos that a beauty school.
The experienced stylists as well.
Recruiting is key retaining top stylists and trainers is equally important.
We will be Relaunching national and regional stylists recognition events to create excitement drive engagement and build community to improve retention.
Through our current Salon data, we can see just how much this matters to the performance of salons, where stylist hours are down less than 20% versus 2019 levels have outperformed those that are down by more than 20% by 'twenty five percentage points on a same store sales basis in the third quarter.
We are excited to launch a revamped approach to education for all our brands.
And we are equally excited about the ability to bring them to life through marketing campaigns.
We're promoting and form the basis of future marketing initiatives and a very authentic manner.
Transitioning to marketing.
Plan to refocus our efforts to meet both the stylist community and consumers are where they are at with a stronger focus on digital marketing.
Our customers and stylists are living on social media and digital channels and more than ever and.
And we need to build our presence in strategies and connect their any meaningful way.
We will work to build stickiness and loyalty to our brand through direct marketing initiatives powered for CRM and branded loyalty programs, we have solid traffic coming through our salons, which is a great starting point to create repeat business we.
We've seen the data the effective customer retention works.
And it is a work in area of our focus our system right. Now is roughly split 50 50 between the salons that have greater than 40% 90 day customer attention and salons that have lower than 40% 90 day retention for.
For Q3, those salons that delivered 40% plus 90 day with customer retention at a 12 five percentage points better same store sales versus those under 40%.
Moving to a more digital and direct focus enables us to be more agile with the use of our AD fund dollars to address those stylists and customer retention as well as new customer growth.
I expect that our marketing and technology teams will be working more closely together than they have in the past in order to build that their digital marketing function that can help return us to growth.
While these may look like three distinct work streams, they're all very much connected and driving results.
Efforts around hiring and retaining stylists ensures the ability to generate salon sales and provide consistent quality hair services.
10 year train stylists combined with direct marketing will help drive customer retention and new traffic.
Technology will continue to build loyalty and engagement with our brands before during and after each salon visit.
Before turning the call over to Kirsten I want to set the stage and expectations regarding the timing of implementation of these priorities given the any of our major shifts and foundational in nature we.
We are currently laying the groundwork now.
To launch these items by the end of fiscal 2022 in early fiscal 'twenty three.
I have always been confident in our priorities.
I have even more conviction now that they've been shaped with feedback from our franchisee partners.
The measures we have underway combined with our fully franchise business model has the ability to lead to stronger profitability collectively for our franchisees.
And for <unk> going forward.
I will now turn the call over to kersten to provide more detail on our Q3 results.
Thanks, Matt and good morning yesterday, we.
We reported on a consolidated basis third quarter revenues that reflects our transition to a fully franchise business model and the continuing challenges across both customer traffic and the labor market.
Total revenues of $65 million declined $36 million from the prior year as expected due to the 98% of our salons now franchise compared to 87% in the prior year and the transition away from our product distribution business.
These business changes caused revenue to decline by $41 million offset by a $5 million of improved royalty and advertising revenue.
Third quarter royalty revenues were below our expectations and reflected the impact from continued labor shortages and the persistence of the pandemic, including the omicron variance that impacted our results in the quarter.
Same store sales growth was 9% in the quarter compared to the third quarter 2021 is still lagging behind pre COVID-19 levels.
As Matt noted addressing labor issues and engaging customers through digital marketing are our priorities that will address revenue growth.
While Matt addressed headline EBITDA figures earlier I want to put into context, the results and progress compared to last year.
On an adjusted basis third quarter consolidated adjusted EBITDA was essentially breakeven compared to a loss of $20 million in the prior years quarter.
Adjusted EBITDA improved due to higher system wide sales and manage it.
Management's efforts to lower our cost structure.
On a year to date basis, adjusted EBITDA loss of $4 million is an improvement of $52 million from a loss of $56 million in the fiscal 2021 nine month period.
Our core franchise business achieved adjusted EBITDA of $3 million or $10 million improvement compared to a loss of $7 million in the prior year. This.
This is the second quarter in a row that our core business has been profitable. This improvement is driven primarily by higher system wide sales and the right sizing of our G&A structure over the last year.
Compared to the second quarter of fiscal year 'twenty two franchise adjusted EBITDA decline, but as I mentioned on the last call. There were some onetime benefits in Q2 that did not occur this quarter.
Adjusting Q2 for the one time benefits of $3 million, the third quarter improved by half a million dollars compared to the second quarter.
The company owned segment recorded an adjusted EBITDA loss of approximately $3 million, including a charge to increase the inventories are up by approximately $1 million, which is a $10 million improvement in adjusted EBITDA for the same period last year.
The improvement is primarily related to having fewer company owned salons in the current period and we expect losses associated with the company owned segment to mitigate as we continue to reduce the number of remaining locations.
We reported an operating loss of $25 million during the quarter, which includes two noncash impairment charges related to goodwill and inventory totaling $23 million.
Excluding these noncash impairment charges, our reported operating loss was $2 million.
$17 million improvement when compared to an operating loss of $19 million in the prior year.
As Matt noted the transition away from product distribution has taken longer than expected and the inventory write down resulting from an accelerated inventory reduction plan initiated during the quarter.
We don't expect any future material inventory write downs as we plan to monetize the remaining inventory in the next four to five months.
Additionally, the company owned segment with 117 salons remaining reported operating losses of approximately $4 million, which includes approximately $1 million.
Of inventory reserve noted above.
Excluding noncash impairments the year over year improvement results from an increase in system wide sales.
Our G&A savings initiatives and the wind down of our company owned salons.
Our adjusted G&A for the quarter was $15 million, which was lower than our expected run rate due to personnel vacancies and the timing of professional fees.
On a run rate basis, we continue to believe our end state run rate G&A will be in the range of $65 million to $70 million annually like.
Likely at the low end of that range.
Turning to liquidity as of March 31, we had $128 million of liquidity, including $82 million of available revolver capacity and $26 million of cash.
Our net available liquidity as of March 31 was $53 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.
In the third quarter, we used $10 million of cash from operations, which is a $2 million improvement compared to our cash use in the second quarter and a $4 million improvement from Q3 of 2021.
Adjusting both the second and third fiscal quarters for onetime cash outflows in each quarter, our cash used in operations was approximately $7 million in each quarter.
Even at this rate of cash use we still have ample liquidity and we expect our cash used in operations to continue to decline as sales and customer traffic improve.
As Matt mentioned, we have been working with an outside adviser to find alternative financing arrangements to address our revolving credit facility's maturity date of March 2023.
Be assured that addressing the revolving credit facility continues to be our top priority, but in the meantime, we have sufficient liquidity to navigate our recovery and operate as a pure asset light franchise are.
This concludes my prepared remarks I'd like to thank you for your continued support and interest in region and I will turn the call back to Bill who will lead us through the Q&A.
Thank you Carsten.
Just a reminder, please raise.
Raise your hand feature or you can use the question and answer feature to answer your questions. Our first question is from Greece.
<unk> with Jefferies.
Please remember to on mute great before you ask your question.
Thanks, Beth Hi, good morning, Thank you for the question and congratulations on the appointment math Yale.
Starting out I was just wondering if you could talk about the 9% same store sales trends that you're seeing.
How do those vary by region and concept and are you still seeing any capacity constraints in any region.
Yeah, Hey, guys. This is Matt I appreciate the congratulations and thanks for the question. So in terms of regions, it's all pretty similar.
<unk> as we've mentioned on prior calls the regions that were most restrictive call. It during the pandemic are the regions that are lagging the most and those are a little bit less.
We're doing a bit better so that's kind of it's been that way since the pandemic and it continues to hold today.
In terms of brands, we do have a breakout.
In our release of where each individual brands are to supercuts seems to be outperforming the rest of the system with smart style being one that is lagging a bit.
Due to a little bit of a captured captive nature, there and types of Walmart were traffic is a little bit down, but we haven't bunch of initiatives on that underway to address that business as well.
But that's kind of the macro which again kind of similar themes that we've been seeing we're continuing to see things kind of it being moving up nominally as we continue through the year.
Okay.
Thanks, that's helpful. And then just on the capacity constraints in any regions.
No really there's no capacity restraints from any sort of government or local restrictions that are impacting our salons at this point.
Okay great.
And then my next question I was hoping we could dig a little deeper and start while our customer accounts that youre seeing impacted by those longer cycle.
It's kind of a three part question, but I guess is this trend indicative of kind of a new normal that you foresee following the pandemic or do you expect that will return to pre pandemic levels as socialization continues to normalize.
And then also do you see any impact from inflation affecting that frequency of return.
And then thirdly, what levers you have to help.
Helped mitigate the impact on results.
Yes, no absolutely I appreciate it's a good question and in terms of the trend and they're foreseeing in normalized <unk>.
Speculation as to exactly what's going to happen if people are going to move back what I will say as you know from survey results that we've seen.
Is a desire at some point when socialization happens when people are back in offices that there is a desire to return to salon and get their haircut by professional trained individuals. So it's probably not so much and if I think it's more of a matter of when to speculate on that win not exactly sure, but some of the data points.
<unk>.
That being the case in terms of inflation.
The restaurant, where we foresee the kind of want to point back to Rick.
Regardless of what's going on there is so much opportunity that we have even though theres longer haircut cycles. There is still a really strong good traffic that does come through our salons for one reason or another and I think we have a really really good opportunity in the short term to do a better job of keeping them so regardless.
Is the customer who is lagging a little bit and extending the cycles out we do have folks who are visiting our salons, we need to do is to mitigate and give people a reason to come back in a more frequent manner, that's why things like CRM and direct marketing the hiring efforts around stylus to make sure. They are there to provide the services all of these things can help.
<unk> retained customers, which will have an impact on kind of near and medium term traffic, which will help kind of bridge the gap over to eventually seeking net new traffic. So I think we just have a lot of opportunity with what we have today that will help and then just building on top of that will take us to another level in future.
That's really helpful. Thank you and actually a great segue to my last question, which is just on the tech platform rollout and what feedback you're getting from Mr. Lyons, who are adopting it alright. Thank you.
Yes, no as I kind of mentioned.
This is this is a big initiatives.
I want to be cognizant of how we speak about technology, given how big of a initiative. This is currently we have an end of lighting solutions and a new solution thats, not where we need to be we've spoken a lot about OSP in the past and what it can do but I rather start talking about it again.
When we can be absolute and what it does do so as I mentioned, we're going to continue to work the functionality is appropriate and I want to come back and talk about this one in more detail when we're ready to ramp adoption backup and what exactly that full solution looks like.
Very helpful. Thank you.
Thank you.
Yeah.
Thank you Greg.
Okay, Matt we've had a couple questions about sales come through the chat feature and I just wanted to so the question is January sales, which were impacted by omicron, how does that compare to more recent months. Yes. So so January was I. Appreciate the question January we're super impacted.
And since then we have seen sales through the quarter and beyond improve from there, but the same things do continue to hold which is why I kind of went back to our initiatives, which is why it's so imperative to start launching those and we're encouraged that those matter really in any environment I mean, they matter in this environment with it was a challenge labor market.
And doing a better job of retaining customers, but they're also so foundational to even in good times, let's say the pandemic didn't happen the idea of driving talent brand to hire and retain stylist matters. The idea of having technology to interact with before during and after visiting matters and customer retention direct.
Digital social media marketing to meet folks where they are matters. So all of these things we think will be helpful. In addressing the current environment that we're in but also super encouraged that these are will be foundational and our elements that will be here for years to come and addressing ourselves.
Thank you. The next question is a consumer business. Please comment on your plans for our press releases and social media activity things of that nature. Please.
Absolutely I appreciate the question as I kind of point back to our opportunities in marketing.
And I kind of mentioned that we have a huge opportunity to shift a little bit of our focus towards digital and social.
Youre going to start hearing from me more and more as the need especially in this industry given the cycle times to meet stylists and consumers, where they are and as I have mentioned they are living more and more on those social media platforms. So we need to kind of meet them and connect with them on those platforms big opportunity to bill.
Our brands at these levels a big.
Big opportunity to increase content output with relevant content and sharpen authentic matters. So I think when we talk about stylist recruiting and direct marketing.
All of these things are interrelated, because increasing the focus on education investing in our people being out there and training our folks to execute on these services. These are things that can we can talk about and can show up in a very authentic manner. On these platforms. So serves a lot of purposes beyond just that baseline fundamental thing.
<unk> for us to really talk about in a meaningful way on these platforms that matter so much so big opportunity and more to come on these.
Okay.
Thank you Matt.
That does it for our questions today. Thank you very much for joining the <unk> third quarter earnings call. We appreciate your interest.
Okay.