Q4 2022 Regis Corp Earnings Call
for Regis. On the stylists for treatment and retention front, I don't want to give away too much in detail here what we have planned, as I think this is a major, major source of competitive differentiation. At a high level, we are substantially increasing our investment into education with the goal of building the largest best-in-class education platform in the industry. The best-in-class education platform in the industry.
and ultimately forming a large foundational element of the why Stylus should work for our brands
This is something that we know matters to stylists and something that we can offer at a scale that if done right.
will be difficult to match.
And we have programs in place to ensure that this will be felt at every single level that our salons.
from a franchising owner perspective.
We are ensuring that each owner has access to specialized trainers, whether they be corporate employees or franchisee team members who became certified educators.
To help our franchisees with the cost burden of employing these trainers and getting them into salons, we are rolling out programs to help offset these costs to our franchisees.
With an increased number of field-based trainers in place, we will be ensuring those trainers receive even more personalized attention and live education opportunities to be able to execute seasonal trends or any other technical aspect they feel requires attention.
Those trainers will now be going into our salons multiple times per year in a structured manner to provide further in-person touchpoints to our stylists.
ensuring consistency, and raising the collective skill sets.
I really want to emphasize this point as this is a departure from the past few years, where the hidden salon visits have been limited and a shift has been made to digital.
We recognize in this industry, while digital is a great complimentary tool, that cannot replace hands on training.
We will also be recognizing and awarding these trainers.
as well as our top managers and stylists.
through all expense paid trips, with the first one taking place in Las Vegas in October , followed by another in January of 2023, with ongoing events to be scheduled thereafter at a regular cadence.
The goal of these trips is to ensure our brands retain our top talent, create excitement in the system, and provide opportunities to gather, learn, share best practices, and cultivate a sense of belonging and community beyond the four walls of their individual salons.
We have a large branch. We want to ensure that our trainers, managers, stylist, all feel that they are a part of something larger.
with the support network that we are building on.
one thing to launch and establish these programs, it's another to ensure the right audience knows about.
In addition to the investment we're making in education, we are placing an importance on bringing our talent brand to life and to reach new stylists through recruitment marketing.
In addition to our collective internal focus, we have established agency partnerships to concentrate exclusively on generating the right campaigns, collateral assets, and toolkits for us and our franchisees to use in beauty schools, social media, and salons to get the right messaging out in a relevant, authentic manner, as this is something that should be widely publicized and celebrated.
There are many more elements and details that go beyond what I just stated, but the overall goal of all of this
is to increase the average total stylist hours worked per day per salon.
And if we're successful in our goals of retaining our existing stylus and hiring new stylus
We should see a requisite increase in hours worked and in turn drive meaningful, profitable sales for both our franchise owners and for Regis.
leading to further EBITDA growth.
shifting gears to our marketing efforts.
One piece of this that I mentioned was a focus on recruitment marketing to drive our talent brand and attract silos.
The other is driving customer traffic.
We announced yesterday the hiring of our new marketing head, Michelle Devore, and we could not be more excited than Michelle is joining our team.
Her background in digital marketing, retention, and loyalty is exactly the focus that we need for short to medium term tactics to drive traffic, as well as laying the foundation for broader lifecycle marketing, CRM, and loyalty efforts.
Michelle's knowledge of the beauty industry, combined with her experience with franchisees, and there's a noted platform from her days at European wax center, bringing the right combination of skills at the right time for readers.
And while Michelle will have no doubt be shaping the direction of our marketing function over the coming months, changes have already started. I mentioned on our last call that our approach to marketing is shifting.
and we have engaged a specific agency partner to aid in this transition.
Historically, our ad funds have either been 1. These are jumping off competition in between the Madam Vice Chair, theoutline of forces that address
heavily weighted towards expensive, top-of-funnel awareness.
Currently our brands have awareness.
What we need is to drive decisions.
We are in the process of shifting our ad fund dollars to more middle and bottom funnel performance marketing.
things like paid search, promotions and loyalty programs.
increased advertising for local spending.
We are looking forward to enriching our CRM data to better segment and target our audiences.
and determine the right cadence and campaigns to improve their attention.
We will be enhancing increasing our social media content and presence to meet the stylists and customers where they are.
These efforts will not only optimize our dollars for the greatest return on investment, but will also provide us more real-time visibility into what is working versus what isn't.
And that will enable us to quickly flex our dollars accordingly.
The shift has already started, but we are in the early stages and expect a more wholesale shift over the coming months. And the goal and culmination of these efforts should be moving the needle on existing and new customer retention.
and in turn increase customer traffic and sales. Once again culminating ultimately in eva.growth.
More to come on this in the months ahead.
And turning to our last company-wide goal.
The transition is the node.
Since we closed the OSP sale as a no-dee at the end of June , our collective teams have been working closely together to get this platform Regis rollout ready.
There are several work streams to ensure the transition goes as smoothly as possible. That is a massive undertaking for both companies.
The majority of this work is getting the product and functionality to be Regis ready. So there are some nuances of our brands and we want to ensure that the functionality our franchisees are used to are not lost in transition.
addition to all the added features the Zenody platform brings.
I am pleased today to announce that this work has already been through and that yesterday morning our Roosters brand was successfully migrated and is now running on Zenodi.
There are pilot tests underway for our other brands, and we expect the next waves of salons to migrate in mid-September. For more information, visit www.fema.gov
And while we will not sacrifice quality for speed, our plan is to transition the roughly 3,000 salons from the Legacy ProPoint system by the end of the calendar year.
with OSP locations migrating in calendar Q1 2023 or our fiscal Q3.
Having all the locations on the right singular point of sale system is a catalyst to our digital marking initiatives.
So we are very eager to having our salons transition over in a timely and orderly manner.
Tying this back to how this drives our results.
As more salons transition over to Zenodi, we will receive migration payments that will go towards further debt pay down. In addition to the positive impact we expect to see on sales, given the robust nature of the platform that will help drive further customer and stylist engagement.
as with the other two company-wide goals.
More to come on this one in the coming months as well.
Now I know that was a lot but there was a lot to update on and I want to reiterate that I am proud on what we have been able to achieve in a short period of time.
I am also aware of the current challenges we face and where we need to dedicate our energy.
Quite frankly, a lot of our time has been spent ensuring that we have the proper time to continue to move our business forward.
Now that we have that, we can dedicate 100% of our focus to a targeted set of company-wide goals that we all have such strong conviction around.
Execution on these goals will move the needle.
and I have the utmost confidence in our team to be able to deliver.
just as we have since the beginning of the year.
Regis is in as strong of a position as we have been in quite some time.
and we look forward to delivering strong Yuba-Dah growth.
and our fiscal 2023.
I will now turn the call over to Kirsten to provide more detail on our Q4 and full year results.
more detail in our Q4 and full year results. Kirsten?
Thanks, Matt. Good morning. Yesterday, we reported on a consolidated basis improved fourth quarter revenues compared to the prior quarter, which was driven by an increase in royalties.
Year over year, total revenue of $66 million declined $32 million from the prior year as we expected, due to 98% of our salons now being franchised, compared to 95% in the prior year. The year over year, total revenue decline also reflected the transition away from our
These businesses caused
Revenue to decline $34 million. Offset by $2 million of improved royalty and advertising revenue.
Same store sales growth with 7% in the quarter compared to the fourth quarter of 2021.
On an adjusted basis, fourth quarter adjusted EBITDA was $1 million compared to a loss of $23 million in the prior year's quarter. We delivered positive adjusted EBITDA on this quarter despite incurring $2 million of losses associated with our 105 remaining company-owned salons.
The improvement in adjusted EVA-Dot is a result of higher system-wide sales and our lower GNA structure.
On a full year basis, adjusted EBITDA improved $75 million to an annual loss of $2 million from a loss of $77 million in fiscal 2021.
Excluding the loss associated with selling our salons to franchisees, we recorded positive adjusted EVA dot in fiscal 22 of $1 million versus a loss of $60 million on a comparable basis.
Our core franchise business posted a just to diva dot of $3 million in the quarter, a $12 million improvement compared to a loss of $9 million in the prior year quarter.
This is the third consecutive quarter that our core business has been profitable.
This improvement is driven primarily by higher system-wide sales and the right sizing of our DNA structure over the past year.
The company-owned segment recorded an adjusted EBITDA loss of approximately $2 million in the quarter, which is a $12 million improvement from the same period last year.
The improvement is primarily related to having fewer company-owned salons in the current period.
We expect losses associated with the company-owned segment to continue to decrease as we reduce the number of remaining swans through closures or lease buyouts.
We reported an operating loss from continuing operations of $1 million in the fourth quarter, which includes a loss on franchise product sales of approximately $1 million.
The transition away from product distribution is nearly complete, and we do not expect to incur significant losses going forward.
Additionally, the company on segment with 105 salons remaining reported operating losses of approximately $3 million. As leases end and terminate early, we expect to mitigate these losses going forward.
Our adjusted GNA for the quarter was $14 million, which is an $8 million improvement year over year.
While we saw the same level of GNA in the third quarter, we do expect GNA to increase marginally in fiscal year 2023 as we invest in the revenue generating activities that Matt mentioned.
We have stated previously that we believe our run rate GNA will be in the range of $65 to $70 million. Based on our strategic plans for this year and the removal of GNA associated with the OST platform, we believe our run rate GNA will be slightly lower in the range of $60 to $63 million annually.
In discontinued operations, we reported a loss of $39 million, driven by a non-cash goodwill de-recognition of $38 million, an asset write-off of $10 million, offset by $13 million of cash proceeds received.
The remaining purchase price of our OSP platform of up to $26 million will be recorded as a gain in discontinued operations when the cash is received, which we expect the majority to be received in fiscal year 2023.
In fiscal year 2023, as the additional proceeds are received, we expect to recognize a gain in discontinued operations and further pay down our debt.
The cash consideration of up to $39 million from Zenody represents a significant return on the investment made in the LSP platform.
Turning to cash flows, in the fourth quarter we used $4 million of cash from operations, which is an improvement of $6 million compared to our cash use in the third quarter, and a $16 million improvement from the fourth quarter of 2021.
Adjusting for one-time items including approximately $4 million of fees paid in connection with our debt amendment offset by $3 million of cash from product sales, our cash use was approximately $3 million in the quarter.
Cash flows from operations improved each quarter in fiscal year 2022. While we expect the first quarter of fiscal year 2023 to be a higher cash use quarter due to fees associated with the credit agreement amendment and annual bonus payments, the next
After the first quarter, we expect continued improvement in cash used in operations.
We used $5 million in fiscal year 22 related to capital expenditures.
Going forward, we expect to use significantly less cash related to CapEx as we will no longer be investing in OSP.
As we announced last week and as Matt mentioned earlier, I am pleased with the outcome of our refinancing efforts. We have amended our credit facility and extended the maturity date from March 23, 2023 to August 31, 2025.
Under the amendment, the revolving credit facility was converted to a $180 million term loan and a $50 million revolving credit facility with a minimum liquidity covenant reduced to $10 million from $75 million.
Under the terms of the amendment, we currently have total liquidity of approximately $56 million.
The amended credit agreement includes typical provisions and financial covenants, including minimum EBITDA, leverage, and fixed charge coverage ratio covenants.
The latter two of which are not tested until December 31st of 2023.
We believe the amendment provides us with adequate runway and liquidity to invest in the strategic priorities discussed earlier in the talk.
This concludes my prepared remarks. I'd like to turn the call back to Biz.
who will lead us through Q&A, and thank you all for your continued support and interest in Regus.
Kirsten.
A reminder to use the Q&A function or raise your hand feature to ask a question.
Our first question is from Stephanie with Nick with Jeffries.
Please remember to unmute staff and go ahead.
Good morning, everyone. We have a few questions. The first is, maybe this is for you, Kristin, is just to talk a little bit about the 7% comp in the period. Any sense of volume versus value? Just thinking about the price increases that you've taken over the last year or so.
Yeah, no, hey Steph, it's Matt, I can take that one. Yeah, so it's a number of it's driven by price increases, and that's actually, you know, we didn't talk about this on the call, as you know, we kind of outlined the three much higher level of strategic priorities that drive the underlying fundamentals of the business. As I think about kind of some near term.
levers and tactics to drive sales as we in the first half of call it this year, probably will continue to lean a bit on price, just given what's going on in the industry and the world around us. So that'll continue to take hold and probably would expect, you know, the investments that we're making in education and the investments were in shift of dollars that we're talking about from a marketing perspective, that'll end up being the traffic driving catalyst that, you know, as I mentioned.
Action starting now probably will come into play and probably have a major shift in those dollars. Our education efforts will be fully launched towards the end of the year. And kind of think about it, you know, price will kind of hold us as we move through the next couple of months, with traffic starting to come through our initiatives thereafter. So, we'll probably have a good mix of both price and traffic heading into the back half of this year.
Okay, that's helpful. Matt, can we just spend a little bit more time on the different monikers, the different business segments, any delta or performance difference between SmartStyle and the other business lines? Let's maybe talk a little bit about by moniker, by brand. Yeah, no, I mentioned previously in our release, I mean, SmartStyle from an overall sales perspective and traffic perspective is lagging behind the other ones a little bit because there's kind of...
more close to each other from an overall comp perspective and traffic perspective. One thing that we didn't talk about is probably a good piece to touch on here. It actually kind of made some really good headway regarding the smart style brand. We got a number of initiatives going on there regarding a large scale re-imaging program, which will be a big deal kind of from a marketing perspective in and of itself. When you think about the captive nature there, having a large scale remodel, bringing that image up to prominence and presence will probably go a really long way. So that's a big piece.
Another one is kind of the captive nature. We've been talking a lot to Walmart to get more ingrained in their digital ecosystem. And we're actually for the first time doing just that. We've made some really awesome inroads. There's some great marketing programs are going to be launching in store. Examples of that will be, you know, on their TV walls, which basically are huge ad banners a part of the store. We're going to run video loops that'll just raise awareness and show that smart style is there.
First time in a long time that anything like that has happened. Another is we're going to have a campaign where every single kiosk, self-checkout kiosk will have smart style awareness and ads being displayed on them. And also we're in talks of getting as a perk partner on the Walmart Plus platform. So a lot of really exciting things going on from a smart style perspective, but going back to your initial question, yes there is a little bit of a gap from the smart style brand and the rest.
But in addition to all the things we spoke about regarding education, shift in marketing dollars, Zenody, which will help SmartStyle as well. We have those extra in salon traffic driving ecosystem mechanisms that will hopefully go above and beyond for that brand in addition to re-imaging.
All right, that's encouraging to hear. I mean, I apologize. This is going to be a little bit nuanced and technical, but I wanted to just, Kirsten, kind of true up the model with respect to the outstanding lease obligations on your balance sheet. What portion of that is related to Regus' own facilities versus what you're carrying on behalf of your franchisees? And then on the product revenue, I think you mentioned that you're largely complete with that transition to Sally Beauty. That's with,
Should we anticipate any sort of fees and where will those fees be recorded in the P&L? Is it going to be in the fees and royalties line?
Yes, maybe I'll hit on the, I'll hit the first one first.
I know it's deep in the 10k, but there, there is a pretty good footnote, um, as it relates to the, the lease obligations. Um, so, you know, of the, of the total that's on, um, the balance sheet related to leases, um, there's only about $7 million left associated with our Apgo salons.
Um, and then the remainder relates to there's 12 million associated with corporate leases and then the remainder relates to franchise leases.
Okay, that's it for us. Thank you so much.
Thank you.
There are no other open questions at this time.
We thank everyone for your interest in region.
Have a great day.