Q1 2023 Regis Corp Earnings Call
Now we will begin shortly.
Okay.
[music].
Good morning, and thank you for joining <unk> first quarter 2023 earnings release conference call.
All participants are in listen only mode.
<unk> remarks by our President and Chief Executive Officer, Matthew Doctor, and Executive Vice President and Chief Financial Officer, Chris <unk>, Our company by slides all participant follow up.
After the prepared remarks, we will have time for questions.
Please use the chat feature or raise your hand feature to ask your question.
Joining Matt in person on this call is Jim Lane, our Chief financial Chief operate since officer.
<unk> business Jain Vice President corporate controller.
As a reminder, this conference is being recorded.
I'd 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 can be found on our website www dot <unk> Dot com Fourth-class Investor relations along with the reconciliation of any non-GAAP financial measures mentioned on our call today with the corresponding GAAP measure.
Today's slides are also located in the supplemental financial section of the Investor site.
With that I will now turn the call over to Matt.
Thank you Bruce good morning, everyone and thank you for your interest in <unk> I am excited to speak with you today and share our results for the quarter over.
Over the past several quarters, perhaps years, even we have been discussing what our company will look like and what the results should be on the other side of completing the transition to a fully franchise model and winding down our legacy businesses.
Over the course of the past year, we've made a lot of progress on this front and.
And I mentioned on our last call that we should start demonstrating positive EBITDA going forward.
And we are starting to do exactly that.
We have come a long way to the hard work and resilience of the Regis team and our franchisees.
And that work is coming to fruition and our results.
I am pleased to share our positive start to the year with the first quarter marketing key milestones as we make progress towards advancing our strategy.
And in the first quarter, we generated more EBITDA than all of fiscal 2022.
And we recorded positive operating income for the first time since the quarter ended September 32018.
Now, while we have certainly come a long way I would be remiss if I didn't acknowledge there is still significant work ahead.
That we are addressing head on through the initiatives, we have in place and have discussed at length on previous calls.
We have strong conviction that they are the right ones to capitalize on the foundational work that has transformed the regis into an asset light.
Franchise model.
With a durable balance sheet.
Talented team and dedicated franchisees, we continue to be laser focused on providing our franchisees with the tools to ensure we continue to build the momentum.
On which we are gaining and pave the way for a bright future for the entire ecosystem.
For today's call I will highlight our results I will share the progress that we've been making on our strategy and I'll review the priorities we have for the business as we enter the second quarter and for the full fiscal year.
Delving deeper into our first quarter results.
Same store sales rose four 5% versus the prior year's first quarter adjusted.
EBITDA on a consolidated basis was $3 $8 million compared to a loss of $5 million in the prior year's quarter and $8 $8 million improvement are.
Our franchise segment, EBITDA was $5 million, increasing $8 $5 million from a loss of $3 5 million in the first quarter of fiscal 2022 or.
Our franchise segment EBITDA continues its positive trend representing yet another quarter of strong franchise EBITDA growth.
And as I mentioned in my opening remarks, we reported positive operating income of $2 $5 million versus a loss of $4 9 million in Q1 and fiscal 'twenty two.
Representing again in the first quarter of positive operating income in 16 quarters.
Another financial highlight is our decreased cash use is we've come a long way from the cash use we've seen over the past two years.
Kirsten will get into the details of this item later during her remarks.
Our liquidity position and capital structure remains strong having successfully renegotiated our credit agreement during the quarter.
We ended the quarter with total liquidity of $48 million, providing us ample runway to continue investing in and improving the business.
Now turning to our business initiatives operationally, we are sticking with the game plan on staying on top of those items directly in our control.
We work to be done in a timely manner I am encouraged that this partnership is set up to be a successful one.
And after months of work we are on the cusp of accelerating the rollout with the right feature set that meet the unique demands of all of our brands.
Our expectation is during this month of November .
Equally migration rates will ramp up into the triple digits and carry us to completion of the rollout by the end of our fiscal year.
As discussed we believe our franchisees will benefit significantly from the targeted marketing platform improved guest communication tools greater product stability and many other only owns an Ot features. It should also be noted that during the quarter. We did receive $4 million in proceeds related to the refinancing hold back.
As well as an additional $500000 in October .
Bringing the total cash proceeds of $17 $5 million from the sale of thus far.
As a reminder.
All proceeds will go towards repaying our bank debt.
Now in regards to stylist retention and recruitment and other customer marketing efforts.
For the purposes of this call I will mostly be reiterating the initiatives, we have in place and I'm going to reserve more details and updates on subsequent calls.
I mentioned on the previous quarter's call that we expect these initiatives to be largely in effect by the end of the calendar year.
So we will likely be start measuring in discussing results in a much more robust way during the back half of fiscal 2023.
Now with that said, we are starting to execute on our stylist retention and recruitment efforts.
Two major work streams, the first being our increased investment in stylus support and educational efforts.
As well as recruitment focused marketing.
In terms of what we've been up to on the increased education front.
Our artistic directors have been getting back into stronger regularly for the first time in years and providing live customized hands on training across our entire supercuts brand.
We are also training a large amount of franchisee technical trainers. This will further increase the span and reach of our educational teams for.
We're increasing our visits to beauty schools and we're collecting current enroll the contact information to ensure we keep a dialog with them as they move along their educational journey with the goal of being in front of them when they seek jobs upon graduation.
Now in addition to the technical side. We are also in the midst of creating Salon manager and leader training modules to ensure we focus on the soft skills to create the right environment and the right culture for stylus and our brands.
As the retention is just as important as a strong pipeline of candidates.
Our incentive award in advanced Education trips are officially kicked off as we hosted our first event in mid October in Las Vegas with the next one the following January that January that will be attended by over a thousand managers stylus and owners.
The second major work stream here as recruitment marketing now we've just started to test some collateral across a very immediate channels to start gauging, where we get the best return we.
We see this work is preliminarily we've seen this work is.
Laying groundwork in order to get a better sense for where messages are resonating with stylus. So we can ultimately deploy newly developed creative assets across those channels with the best ROI.
In the meantime, we're continuing to work on unique ways to convey our employer value proposition and ensure we get our proper story across the stand out amongst the competition on both social and digital platforms.
To come on these efforts as we continue throughout the year.
Now on the customer marketing front.
The goal remains to drive traffic through better customer retention and build further stickiness and loyalty to our brands.
We started our shift in media spend to optimize search and social and we are developing CRM test campaigns through both email and SMS text messaging for the first time.
With the goal of getting out some of these initial test campaigns during the month of November .
We have kicked off the design phase of our brand and loyalty programs and we are gearing up for holiday promotions to ensure we take advantage of these high volume months.
We're also super excited to launch what we believe will be a differentiated structured approach to our brands promotional calendar efforts.
Starting in December .
Releasing the first of our new seasonal trend promotional calendars for the majority of our brands in order to create more consistent brand stories and drive incremental service and retail add ons, along with educational tie ins for our stylists.
Given the scale that we have we believe we should not be reactive to trends, but rather drive them and each seasonal trend will have a service in a retail focus for each month within the season with the goal of driving incremental sales.
Not only do we believe this will be a strong marketing tool.
But as also get another piece in the stylist recruitment and retention story as stylus will be receiving new and exciting educational training on relevant trends on a consistent ongoing basis.
This represents yet another item that we are launching that we believe we can execute on a scale that cannot be matched and I look forward to keeping you updated on the progress of these initiatives as we move throughout the year as well.
Before wrapping up on the initiatives I would like to touch on one other important business item is we've not really addressed this on calls in the past, but I think it's worth discussing here, which is salon closures.
As part of our overall strategy, we will be focused on not only closure mitigation, but also closure optimization.
Speaking candidly, taking some steps back from a salon count perspective may be necessary to move forward.
As carrying low volume loss, making salon does not the best use of time and money for us nor our franchisees.
Losing footprint is something that no system once we want to acknowledge the realities of the situation ensure that once the loans do close.
Can manage customers and stylists accordingly to optimize and improve those salons that represent the strongest return potential ulta.
Ultimately benefiting from the transfer of sales and sales generating capabilities through more stylists as we migrate to ongoing salons.
And it puts us in the context and the impact of salons that are closing are not a major financial drag.
For example, these salons are generally averaging under $100000 in annual sales, which translates to royalties and around $5000 or less to regions on an annual basis.
Through optimizing closures and better managing better performing fleet.
We believe we can strengthen the system, even more for the long run and get back to the path of Epsilon growth in the future.
Okay.
As I stated before all of these initiatives are meant to address driving the core of our business, which is the need for train stylus and customer traffic, which in turn will drive sales productivity and operating performance at the salon level.
To underscore the importance and make these more tangible regarding what exactly these initiatives are meant to achieve.
I mentioned previously that our entire company will be sharing the same overarching kpis to ensure we are fully aligned on moving the needle on the metrics that matter.
Those targets and metrics are geared to result in the following outcomes all of which has specific newer numerical targets and timelines around.
Increasing stylist hours worked personal loan per day.
Increasing 90 day customer retention.
Both ladders up to increasing overall sales adopt.
Adoption of this annuity platform and improved franchisee support scores by proactively asking our franchisees for feedback and acting on it accordingly.
These are the focused set of initiatives for the year and we believe that we can drive improvement in these metrics, we can make strides for our franchisees profitability.
Subsequently improved <unk> business.
Now as we begin the second quarter, our business is performing relatively in line with the first quarter.
The challenges we've been facing continued to be present with sales continuing to reflect the negative impact of labor strength constraints and shifts in customer behavior, such as the lengthening of haircut cycles.
But we are confident in our plans.
Our initiatives are expected to allow us to address these challenges over time as we improve status retention recruitment through increased investment in education.
Drive traffic through more optimized marketing spend and streamline operations the right technology solutions annuity.
I want to thank the entire Regis system for their contribution to our performance.
I am proud of all of the team members.
All of our franchise owners and our business partners for their passion and dedication to Regis.
We believe we have identified and are implementing the initiatives that will allow us to build upon our improved operating platform and.
And deliver long term sustainable growth.
And I am encouraged that we can point to our results this quarter as the inflection point that we were striving towards.
A testament to the work that has been done.
And a glimpse into what we believe is an exciting future to come.
I will now turn the call over to Kersten to review the financials in more detail.
Thanks, Matt and good morning, we are pleased to speak with you to share our first quarter performance, which demonstrated strong progress against our strategy to transform regis into an asset light franchise operator.
This has led to us delivering continued improvements in profitability, notably in the first quarter marked our initial period of positive consolidated operating income since September of 2018.
Driven by improved core revenue consisting of royalty and fee income and reductions in G&A.
Net income was another positive with an increase of $11 $9 million to positive $1 $5 million from a loss of $10 $4 million in the first quarter last year.
The increase in net income reflects the improvement in income from operations and the gain associated with proceeds received from the sale of OSP to the annuity, which Matt discussed.
Overall, we are very pleased with the overall progress in our business.
On the topline while total first quarter revenues of $62 million declined $15 million from the prior year as expected due to our transition to a fully franchise business model core revenue improved by nearly $1 million due to higher average royalty rates.
System wide same store sales increased four 5% in the quarter.
We remain intently focused on implementing initiatives to drive system wide sales growth with actions to improve stylist recruitment and training.
Our goal continues to be to increase awareness of the many opportunities and benefits stylus and beauty squad students can expect from joining our organization.
I want to spend some time on our adjusted results to eliminate the noise, we see in the reported results.
On adjusted basis first quarter consolidated adjusted EBITDA was $4 million compared to a loss of $5 million in the prior year's quarter.
Adjusted EBITDA improved due to higher royalties than our lower cost structure.
Adjusted G&A for the quarter was $14 million, which was lower than our expected run rate due to the timing of filling open positions and stylus recruiting events.
We are continually continuously reviewing our G&A structure and have lowered our expected normalized G&A run rate from 60% to $63 million down to 57% to $60 million annually.
Our core franchise business achieved adjusted EBITDA of $5 million and $8 million improvement compared to a loss of $3 million in the prior year.
Our core business results continue to be driven primarily by higher royalties and our rightsize G&A structure.
We narrowed our company owned segment adjusted EBITDA loss to approximately $1 million, which is eight.
Zero point $4 million improvement in adjusted EBITDA from the same period last year.
The improvement is primarily related to having fewer loss generating company owned salons in the current period.
Prior period results were boosted by Canadian Covid relief benefits of $1 7 million. Excluding these benefits company owned adjusted EBITDA increased $2 million.
As Matt mentioned earlier on the call company owned salons continue to be a drag on the business and our real estate team is focused on aggressively exiting these loss generating plants.
Turning to liquidity as of September 30, we had $48 million of liquidity, including $38 million of available revolver capacity and $10 million of cash in the first quarter, we used $5 million of cash from operations, which is an improvement of $7 million from the prior year.
The $5 million includes our annual bonus payments and annual insurance prepayment and $1 3 million of other one time payments.
This is the closest we've been to generating cash from operations since the fourth quarter of fiscal year 2019, and we expect our cash used in operations to continue to decline as sales and customer traffic improve.
Additionally, with the sale of OSP, our expected future capital expenditures will be around $1 million for the year.
Given our working capital and modest capital expenditure requirements. We believe we have ample liquidity.
This concludes my prepared remarks I'd like to thank you for your continued support and interest in region and look forward to speaking with you at upcoming Investor conferences, including the Wolfcamp Consumer conference in December and the ICR Conference in January I will turn it back to Bill who will lead us through the Q&A.
Thank you Kirsten.
As a reminder, please use the raise your hand.
Q&A feature to ask a question.
The first question, we got was tell us about the trends in our sales channel. We are hearing about other companies in the beauty industry, where customers are spacing out timing between appointments longer due to financial stress.
Yes, sure thanks for the questions Matt.
I'll touch on this a little bit earlier regarding some of the trends in consumer behavior, certainly something that we're seeing not necessarily even due to financial stress but.
I'd, probably say another word I'd use is inconsistent.
Covid and consistently between the lengths of lengthening out the cycles, having longer hair cycles per styles, who they are going to and where and how long. This will last for what I would say to that is even in this environment and even if that being the case, there's still significant opportunity for us to ensure even those who may be going less still stay with.
Some don't go elsewhere, so getting back to that point of customer retention and doing a better job. There. This will be a positive impact on that and also there is still a good opportunity to drive new traffic and keep them as well so even in this kind of environment. Those two will still be net positives and going back to something I said in the call. We're just capitalizing on driving some trends.
And this I mean, actual hairstyle trends versus visitation trends.
These folks within our salons, we can build service tickets to the promotional calendars were talking about hopefully ensuring that when folks do come on we can be the salons. They look forward to go through for their baseline service as well as drive trends in hair and given them further reason to come back versus.
Just give me the usual which of course is totally okay as well.
Yes.
Okay.
Okay.
Alright, well, we're not seeing any further questions here I appreciate everyone joining.
To say probably won't be speaking to you until the new year, So have a happy and healthy holiday season, and look forward to speaking you all when we report second quarter results. Thank you.