Q3 2023 Regis Corporation Earnings Call
As our core business continues to improve that will ultimately lead to unit count growth counterbalanced, the net closure impact.
Turning now to some of our updates regarding our headline business initiatives, which remain the same ones that I've mentioned on previous calls as all of these work streams are foundational to our business over the short and long term.
We continue to tightly manage our G&A and wind down our loss, making corporate salon portfolio from.
From a G&A perspective, we continue to find that right balance of right sizing the spend while increasing our field level support and programs. Our franchisees have access to and we will continue to do so as we remain on the path of being a strong franchise or.
From a corporate Salon perspective as.
As of the end of our third quarter. We had 70 company owned salons remaining now assuming no acceleration of closures around five of these will be closed between now and the end of 2023 with another 55 salons will run off in 2024.
The whole transition isn't really Prime example of the need to balance short term financial game and longterm franchise the success.
On our last call I spoke on how the main priority for us and nobody was to engage with and stay close to our currently migrated user base.
And group of pilot testers to ensure the experienced in functionality meets the unique needs of our brands.
Franchisees and stylus and we have been doing exactly that.
Migration is taking longer than we had originally hoped for and expected.
This is a process that while we can and are moving with urgency.
Can't rush.
Or force for the sake of our system and a salon level business.
So nobody is a collaborative partner that has all the capabilities and resources needed to ensure this will be an innovative best in class solution with value added only on Zanotti features and we are getting closer.
We estimate the reprove mints made.
Mind with the work that is being done over the next few months will.
Will position us for an acceleration of migration around July of this year.
And it is important to note from a payments perspective.
<unk> starts to receive migration payments after a certain hurdle rate number of salons migrate over.
That first cook cohort, representing the upfront payment portion of the deal. So additional payments will not be received the moment migrations start again.
But rather will likely be realized towards the end of the calendar twenty-three and into the beginning of calendar 2024.
And I want to end my comments on technology by reiterating the benefits and consolidating onto cenote is this will be a key driver for many of the initiatives, we have around lifecycle marketing and loyalty.
As well as a platform that will strengthen the knowledge of an engagement with our customers to ultimately provide a better service experience across our salons.
Ah regarding our marketing efforts I spoken a lot about initiatives centered around customer retention.
Spent the better part of the last year building up our muscle in this fundamental area of our business and industry. One that was quite frankly, lacking when greatly needed and I am pleased with the progress that has been made.
Is to go down this past required us to make some changes in how we allocated add $5 and set the foundation for attention efforts from a data and technology perspective.
We are continuing to increase our efforts in certain social.
We have a better handle on our customer base their historical profiles and have now revamp messaging out through email and S. M S.
And after months of <unk> research, we're about to launch our pilot loyalty program across two of our major brands starting the week of May 22nd and this is an area that we believe is largely untapped and our segment of the industry.
Having the ability to engage with and retain customers. After a visit is critical not only for those coming through our doors today, but also new and heavily laughs, yes, when we seek to entice them back into our salons.
And while we are excited to have some new programs and tested in the market.
It is also important to note as I've noted in the past that given the time between haircuts cycles.
It may take several months to observe the effects of these have Ah repeat behaviour.
You will learn from these tests in parallel with the zanoni rollout.
So when the time comes when the entire system is on Zanotti, we've been having a really strong point of view and recommendation regarding the performance marketing initiatives to be powered by our point of sale.
And as we start to think about the next phase of our marketing efforts.
We believe we're at the point, where we should start making stronger efforts towards driving traffic back into our salons and introduce some new brand campaigns.
This dovetails a bit between marketing and stylists retention recruiting as as we've discussed a lot on previous calls the need to ensure we not only have retention foundations in place, but also stylus behind the chair in order to provide services to our customers.
While the underlying components of what we've put in place from a stylus retention in recruiting perspective will constantly be ongoing efforts we.
We do see an opportunity you increase customer accounts and productivity based on the current Salon staff. Our system has which is largely stabilised at this point.
We also believe that busier stylus in salons will ultimately be a major driver.
Tieless recruitment and retention.
So we are pushing to launch some promotional tests that will not only drive traffic.
But also encourage repeat behaviour to build habits and loyalty to retain those customers.
The potential impact of these efforts can have on sales given the price increases that have been taken over the last three years is meaningful.
And will translate into strong profitability to our franchisees.
<unk> given our <unk>.
Now this is in no way signals moving on from any of the elements. We have put in place regarding stylus retention in recruiting if.
As I mentioned before these will be ever ongoing strategies and I'm pleased to how far we've come on this front.
The stripes, we've made in building up our education and field based training teams have been tremendous.
Getting back into our salons, our hands on training was and will continue to be key.
And we will maintain our investment and stylus retention efforts like manager training and are differentiated stylists events like the one we hold them in Las Vegas in January .
And the one we're going to be holding in Miami in June .
We will continue to work on refining the story of lifestyle should join our brands.
And ensure that story is properly amplified on recruiting trips to beauty schools.
As well as residing in all social digital and hiring platforms.
We believe these components will truly form the foundation of differentiation of our brands and set us apart as a destination to work for both stylus that are looking to start their careers.
As well as those with experience.
Now before wrapping up these initiatives until it's important to point out that while most of our collective efforts continue to be aimed towards moving the needle on our core business.
We are continually strategizing a potential catalyst for growth.
Whether that be new geographies to develop.
Branch to expand or concepts to test.
We are laying the groundwork for the ongoing evolution of our platform and look forward to discussing those efforts in more detail in the near future.
I also wanted to touch on today's announcement of Nancy Banacci, joining our board of directors Nancy.
Nancy is a phenomenal addition to our board as she has an extremely relevant background, having ran equity research keybanc for 15 years the.
The capital markets and broader strategic perspective, she will bring will be complementary skill sets represented on our board I am really looking forward to working with her on all things related to readers.
I'm looking forward to the fourth quarter and beyond we believe when taking the core business initiatives together with our potential growth catalysts. We are in a position to build upon the progress we've been making.
And just as I have done when closing out all the calls that I had been a part of a.
I'd like to reiterate my excitement for the future of religious.
With a stabilization of our business largely in place.
We can focus predominantly I'm looking ahead and accelerating the growth of our franchisees sales and profitability.
Big Thank you again to all of our team members are franchise owners and business partners for their resilience passion and dedication to resist.
Thank you to the Investor community for your continued interest in our company.
I will now turn the call over to Kirsten to review the financials in more detail.
Person.
Thanks, Matt and good morning, we are pleased to speak with you to share continued progress on our strategy that delivered improved operation on financial metrics with our third quarter results.
For this morning's call I will review, our financials and care perspective, as we enter the final quarter of the year.
Third quarter saw positive system wide revenue growth increased system why the same store sales and increased operating income while we made further investments in support of our strategy.
Overall, we are pleased with the health of our business and we believe we remain on pace to deliver operating profit for the fiscal year for the first time since 2017.
Reviewing the third quarter in more detail and beginning with the income statement.
Total third quarter revenue is $456 million and declined $8 million from the prior year.
That's revenue decline was expected and really it's primarily to a reduction in franchise rental income and the wind down of our company on salons Fran.
Franchise rental income flows through.
Revenue and expense and therefore has no impact on profitability.
We believe a better reflection of our revenue performance is system wide same store sales, which grew six per cent and a quarter looking into a queue for revenue. We expect these revenue trends to continue.
We posed to GAAP operating profit of $2 million <unk>.
The increase in gap operating profit of $24 million was driven by a lapping $20 million an impairment charges incurred in the prior year quarter, our focus on controlling jannie and the wind down of lost generating company on four lines.
We have produced operating profit each quarter of this fiscal year and are currently projecting that trend to continue.
Now, let's turn to our adjusted results, which eliminates the noise and the reported numbers.
On an adjusted basis third quarter consolidated EBITDA was $4 million compared to near breakeven in the prior year quarter. The.
The 5 million dollar improvement was driven by lower G N a and the wind down of last generating company on Salon.
As we discussed during our second quarter earnings call, we expected to report lower adjusted EBITDA, that's quarter compared to the last quarter due to one time benefits recorded in a second quarter and expected DNA investments and stylus training and retention in this corner.
D N a run rate as a metric we monitor very closely CNN the quarter improved year over year by approximately $2 million as a result of efforts to optimize our cost structure.
The million dollar increase in G&A from the second quarter was expected to the investments and stylus training and retention I just mentioned looking.
Looking forward, we believe our annual run rate <unk> will be in the range of 51 to 55 million annually.
This is a substantial decrease from the fiscal year 2022, adjusted <unk> of $61 million.
Our core franchise business achieved adjusted EBITDA $5 million, and a quarter or $2 million improvement compared to $3 million in the prior year quarter.
And I just did EBITDA basis, our company one segment last just over half a million dollars from the for the quarter and improved $3 million from the same corner last year.
Improvement is driven by having fewer last generating company on salons in the current period as we're closing salons, either at least then or negotiating a buy out when it makes economic sense to do so.
As Matt mentioned, approximately two thirds of our remaining corporate salons will come to lease and by February of next year. So our company wants the lines will have significantly less impact in the second half of fiscal year 2024.
Turning to liquidity as of March 31st we had $43 million of liquidity, including 34 million of available revolver capacity and $9 million of cash at.
March 31st 2023.
Outstanding excluding deferred financing fees was $181.9 million.
Do you do accounting standards, our balance sheet shows $400 million of operating lease liabilities related to liabilities associated with sub leasing salons to our franchisees over the entire life of their respective leases.
These liabilities our service by our franchisees and should not be factored and read this is depth physician. So long as franchisees continue to pay the lease obligations just as they are currently.
<unk> is solely responsible for release liability is for a corporate office space and the 70 remaining company on for lines, which amounts to $12 million over the life of all the leases.
In the first nine months of the year, we use $8 million of cash from operations of which $1.6 million was used in Q3.
On a year over year basis cash used improved $26 million from the prior year due to our Lord D. N a structure the exiting of our distribution business in fiscal year 2022, and the closure of lost generating company on salons, partially offset by increased interest expense of approximately.
$1.5 million due primarily to higher variable interest rates on our bank debt.
Future Kashi this may be impacted by variability in interest rates that we cannot control.
We expect to use a similar amount of cash in the fourth quarter as we are hosting another stylus training and retention event.
<unk> mentioned in Miami are cast you as in fiscal year, 2023 has improved significantly compared to fiscal year 2022.
Management is committed to smart cash management and returning to cash generation.
This concludes my prepared remarks, I would like to thank you again for your continued support and interest in the region I will turn it back to base, who will lead us through the Q&A.
Thank you Kirsten.
Our first question is from Eric Theater from small calf consumer research. So you don't have it on mute Eric.
Good morning congratulations.
Is that right Sir.
Judy It was kind of a general overview of what you were seeing economically I know that you guys.
Franchisees raise prices a little bit after COVID-19. What are you seeing in terms of what are they seeing in terms of throughput of clients.
Now that people I guess, we're going back to work and more events.
Yeah. So her cause man I appreciate it so yeah.
It's been pretty significant price increases is covered about 2025 per cent. Since then but that's pretty in line with a lot of other retail has kept up competitors in terms of like throughput of what that's done to customer traffic and profile of customers.
No. It's it's actually interesting I think we discuss a little bit in the past that there hasn't been much elasticity from a you know increase the price perspective, whether it's a minimal price increase or a large price increase traffic between those who are taking a little price and a lot of price, it's actually been pretty steady between those two data points.
So that's why we think there's actually a pretty decent.
<unk> for pricing as we do to nuance in terms of profile a customer.
Haven't seen much difference is you know a lot of our brands are actually tailored to a wider range of customers, even though we sit in the value segment I think I've mentioned in the past that can range from anyone from someone who really cares about what their hair. It looks like because you know our salons do provide really strong.
[noise] convenient haircuts to someone who's just looking for a quick convenient in and out and everything in between so the profile of customer similar but I think we're just going is are we set off to be successful at an ever changing macroeconomic environment and absolutely because as I mentioned, it's a place for someone who is looking for that value price for it to the <unk>.
Someone's looking for that in the future different what happens economically will be a great landing spot for those folks as well.
Right now in terms of the stylus I know that we're going back to normal Silas <unk> tomato I just have to go for schools get their trainings pieces. So there's probably some lag here. Your what are you seeing in terms of your ability to kind of squeeze that gap between what you Wanna do with the soil and kind of what the capacity is.
Needed, especially now that you are it seems like they're big granite campaigns are rolling out other pieces that you're gonna drive more people into the stores.
Oh, that's a great question as I should ever ongoing initiative right, even before Covid Stylus security of your attention is always a key topic got even more amplified as he went through it I would say we sit here today is kinda crept back up to a place where it's been largely stable.
The past.
A couple of quarters. So you know, we're actually doing a pretty decent job. Our franchisees are are recruiting we're seeing actually the ability of meeting to retain almost as much as important.
<unk>, so we have a little bit of our efforts to making sure that we're achieving the styles that recruiting just as good of a clip, but as it kind of mentioned that a lot of the work that we've done here. So you to your point, it's a little bit of an investment to make sure. We're in the best position as possible.
To recruit successfully now and going forward, it's gonna be an ongoing effort. We think we've come a lot further than this muscle given that we're stronger in our stories are stronger in railroad recruiting for stronger and how to recruit so yeah. So I think this is ever going to be an ongoing saying that we're gonna Wanna see over time, I think that's why I kind of mentioned.
In the meantime, given that stabilization that you've given that where we are I think there is capacity in the system by and large right to increase the amount of production of the stylus that we do have and anything that we look to add I'll just be incremental on top of that so there cause there is the capacity to increase pro.
Activity with the base wouldn't be forcing that upon folks that we didn't think there was and just to demonstrate what that could mean, if we think in terms of you know.
Haircuts.
You know one additional haircut day or if you wanted two additional on the weekends, maybe less of wandering the way everyone I cut it cause that's an additional call at nine to $10000 per Solana's current pricing, which is another two and a half million dollars a royalty that occurred right. So yeah I was going to be quite meaningful is there an ability to do.
One extra order two extra whether it's from all those customers are coming in a one and done driving that knew what do you think this actually is a very cheap thing that will help going back to the original question established retention recruiting.
One of the best tools to Richard Stylus.
You'll be busy and so busier salons busier Silas will be not only retention play, but I think I'll also dovetail nicely into a recruitment play when they know they're gonna get even stronger books of business or inflows of business rather than set books from day one.
That makes a lotta sense when.
So nobody and kind of the role of of these new systems in terms of.
Affinity programs and brand pieces, how does the notary change the game for a franchise Z. When you really are on the marketing. Other pieces are doing are those links and if they are are they linked together yeah. No. Thank you. That's a great question, because I I refer a lot too.
The driver of lifecycle marketing efforts the key to performance marketing and yes. There is an underlying reason why and it's you know the way that Oprah Salon pro and it's Super swollen and others that we have currently working as it already has kind of a built in loyalties structure and permission and built in ability.
To actually provide a week and send S. M S and email and rules base right in the P. O S system itself. So actually you know having all the customer profiles within Zanotti allows it to automatically based on franchisee rules are already in our national rules to be that kind of bridge bitch.
<unk> customer and message so that is why enabling in getting folks onto this is so key to that because it as a driver.
Reaching that link between us and customer, which is something that is a little bit functionality gap for the current point of sale system that are currently out there today. So when I mentioned why this is such a weak and why it's important to enable these initiatives is because it actually makes it happen.
Alright last question in terms of talk a lot about <unk>.
<unk> in store styling, absolutely in store training I think I have the last conference call. You mentioned, how there was like a central point in stores for the training pieces and what is kind of a further refinement bear or and or expansions going forward. Thank you.
Yeah no that's.
Same same concept same thing holds you know I think this all gets back to.
Salons that are performing really well have super engaged.
Staff franchisees in all of the above and when you have field based trainers and nail salon trainers dedicated in Salon.
Design team members, you're going to have that natural inherent.
Engagements given that they're gonna be drive hands on training be a resource so as I mentioned in the past you know this has been a program that we received sales of those salons that has dedicated resources, sometimes you know upwards of 10% better than sales of those it down. So this is a program that you know it was.
Relatively new and a lot of our other brands that we rolled out just you know a couple of quarters ago. So as we think about the future tool kit and where he wanted me to vast stories for why someone could come join some of our brands. Yeah. This is a nice career path for new hires they wouldn't get elsewhere, but there is also a great engagement tool for those so long so.
It's a program that's here to stay so long as this we're gonna continue to invest in it's one that's free to our franchisees. So you know that raise their hand, and say we want design team members. They get no problem, we'll train them here on premise through digital means get into their salon. So this is something that's really available to everybody and we hope that the entire.
Your system ultimately continues to take advantage of this program as we can see you to prove out its value.
Good luck for the rest of you. Thank you.
Okay.
And then our next question came here that checks could you. Please advise the status of their continue this thing like M. I C.
Yes, we did have a couple of days in March that we closed hundred dollar, which caused us to fall under that 50 million dollar market cap requirement.
And we are back up to 50 million dollar market cap. So at this point, we do remain in that period as it relates to the market cap requirement N Y S C.
Thank you catch them looking at the Cat again.
Alright, we have no further questions at this time. Thank you everyone for joining every just call. We appreciate your support have a great day.