Q1 2025 Regis Corp Earnings Call
Speaker Change: Thank you for joining the quarterly regist earnings call. We will begin shortly. Good morning and thank you for joining the regist first quarter 2021 earnings.
Speaker Change: Conference Call. I am your host, Kersten Zupfer, Executive Vice President and Chief Financial Officer. I am joined today by our President and Chief Executive Officer, Matthew Doctor. All participants are in a listen-only mold and this conference is being recorded.
Speaker Change: I would like to remind everyone that the language on forward-looking statements included in our earnings release and 8K filing also apply to our comments made on the call today.
These documents can be found on our website www.regiscorp.com forward slash investor dash relations
along with a reconciliation of any non-GAAP financial measures mentioned on today's call with their corresponding GAAP measures. With that, I will now turn the call over to Matt Doctor.
Matt Doctor: Thank you and good morning everyone. On today's call I will go over the financial highlights for the quarter and provide updates on our key initiatives.
Matt Doctor: Regarding our first quarter results, I'd say the headline here is our results reflect the stabilization of our business as we continue to put in the time, effort, and investment required to position Regis for growth.
Matt Doctor: Our adjusted results are largely in line with the prior year, and our gap financials came in slightly lower, driven by largely one-time expenses related to severance accrual from the recent reorganization done in August.
Matt Doctor: as well as an outsized increase in stock-based compensation expense due to the movement in our stock price over the quarter.
Matt Doctor: Same store sales in Q1 was down 1.1% versus the prior year's quarter.
Speaker Change: As I mentioned on prior calls, over the last few years, price has largely driven the sales comp gains.
Speaker Change: and it is the decade-plus traffic trends we are most focused on addressing, not through just marketing, but operations as well. We will not be satisfied until we reverse these trends and drive profitable traffic back to our franchisee salons.
Speaker Change: We want to be extra cognizant of not relying on price much further as we continue to work on solidifying our value proposition.
Speaker Change: Our adjusted EBITDA for the quarter was $7.6 million versus $8.1 million a year ago.
Speaker Change: The 40% adjusted EBITDA margins during the quarter represents a 2 percentage point margin expansion versus the prior year. The slight decline in adjusted EBITDA dollars is driven by lower store counts and some favorable timing of expenses and accrual reversals that occurred in the prior year.
Speaker Change: Our adjusted earnings per share for the quarter was $0.93 versus $0.71 in the prior year.
Speaker Change: Reported GAAP earnings per share was a loss of 36 cents versus earnings per share of 51 cents in the prior year.
Speaker Change: As I mentioned in my earlier comments,
Speaker Change: The decline versus the prior year from a gap perspective was driven in part by the $2.3 million severance accrual during the quarter, as well as the stock-based compensation adjustment, both of which get added back to our adjusted results.
Speaker Change: Now one final note on our adjusted results. We did make a change to the add-backs that we are making to bridge to gap financials to our adjusted results. Most notably adjusted EBITDA, GNA, and net income that Kersten will detail in her remarks.
Speaker Change: Turning to our business strategies and initiatives, you know, I am really excited to be leading Regus during this pivotal time and I strongly believe that the work we are putting in now is critical to setting our brands and franchisees up for long-term success.
Speaker Change: I believe the work streams we have going are the right ones and while they are taking time to manifest and get right
Speaker Change: which is due to the number of factors, including the need of driving habit changes, the cadence of our business that is roughly in the range of 6 to 12 times per year per prospective guest.
Speaker Change: as well as the large-scale change management occurring within our system, we're on the right track and have a path to grow our franchisee sales and profitability.
Speaker Change: As I mentioned on prior calls, we have significant opportunity to drive traffic back into our salons and ensure our franchisees are well-positioned to attract, retain, and train great stylists to provide a superior guest experience.
Speaker Change: increased operational rigor, and optimizing our digital platform.
Speaker Change: Regarding our increased focus on operational rigor, the main goal here is ensuring that we as a system get back to basics and are delivering above and beyond guest expectations when visiting any of our salon brands, which means a warm, welcoming environment.
Speaker Change: friendly service, and of course a high-quality hair service.
Speaker Change: These are non-negotiable and we must strive to get this right every time.
Speaker Change: Our vehicle to drive this effort has been the launch of our brand excellence standards that define the proper end-to-end guest experience at the salon level.
Speaker Change: After almost a year of planning in our Supercuts brand, we've now defined the standards, launched the expectations and reference guides to our franchisees,
Speaker Change: spent this past quarter conducting pilot visits.
Speaker Change: And now, as of two days ago on November 4th, we have fully launched the first wave of excellence visits across the entire SupraCuts brand. This represents one example of getting a big project fully integrated into our system during the quarter.
Speaker Change: The first wave of visits will be completed in January 2025, and we'll have detailed insights and data on our salon environments that we have not had since becoming Franchisor.
Speaker Change: The visits and supporting data will be a great operational tool for us and our franchisees, at which we will both have ongoing visibility into the current salon environment state, and will enable us to both actively monitor the business and act on deficiencies in tandem.
Speaker Change: The ongoing cadence of visitation will be twice per year, and we will be sure to celebrate those salons that are performing best, while salons that consistently show up as bottom performers may potentially receive additional visits beyond the standard two throughout the year.
Speaker Change: And to provide some examples of what type of things we are focused on monitoring as outcomes of these standards. First and foremost, much more uniformity in image, cleanliness, and upkeep of salons.
Speaker Change: Second, consistent service menus. Ensuring all salons are offering the same baseline of required set of hair services to further build trust with our guests versus the varying service menus that exist today.
Speaker Change: Third, and importantly, strengthen connections between the stylist and guest through increased wait time transparency.
Speaker Change: top-notch consultations, the upkeep of personalized guest notes,
Speaker Change: personalized product recommendations, the consistent delivery of high-value touches like our hot towel refresher in the Supercuts brand, and ultimately ensuring full satisfaction before guests leave the chair.
Speaker Change: The team and I are very excited to be able to start utilizing this data and establishing a baseline of performance.
Speaker Change: again.
Speaker Change: These are insights and data that we have not had access to before.
Speaker Change: in the beginning of calendar 2025.
Speaker Change: We'll be able to correlate visit results with salon performance and start forming a more complete view of what drives key metrics
Speaker Change: and become more adept as an organization at predicting sales. We can then prioritize addressing the top items that matter most across the salons that have a combination of the most opportunity.
Speaker Change: and the largest impact to our franchisees' businesses.
Speaker Change: as well as gather and share out best practices to further move the needle. While this is currently being rolled out in the Supercuts brand, we are progressing the excellent standards for our other brands with the expectation to have those launched in mid-calendar 2025.
Speaker Change: And beyond just the salon visits, we're also looking at ways to implement new guest satisfaction measurements to more actively monitor service and quality.
Speaker Change: I also want to be clear here that our role as a franchisor is not strictly monitoring, but also ensuring the right tools and systems of support are in place.
Speaker Change: And while we made some progress here, quite frankly, we know we have a ways to go to continue to minimize friction and make life easier for our franchisees given the large scale changes we've been implementing over the last few years.
Speaker Change: By complementing these excellent standards efforts with our education programs, we will have a powerful ecosystem of data and tools to ensure we're executing on our brand promises of that warm welcoming environment and superior service and quality.
Speaker Change: Turning to our digital efforts, while excellent standards and education are aimed at providing the right in-salon experience through addressing the environment, service, and quality,
Speaker Change: Our digital efforts bookend the in-salon experience by enabling convenience and driving guests to our salons.
Speaker Change: and taking over post-visit by delivering value and benefits to guests in order to drive incremental frequency. The first critical step towards driving an optimized digital experience is cultivating active digital relationships with our guests.
Speaker Change: We achieved a major milestone in unlocking our ability to do so last quarter by completing the rollout of the Zanotti point-of-sale system across our salons.
Speaker Change: And I'm pleased to complement that effort with another major milestone regarding the full rollout of our Supercuts Rewards Loyalty Program across all Supercuts salons this past October.
Speaker Change: In keeping with that theme of uniformity and trust across our brands, this marks the first time our entire brand is operating the same loyalty program across the network. And combined with Zanotti, our ongoing CRM efforts, and assets like our websites and apps,
Speaker Change: We will now have a strong base of current ingredients to further cultivate and strengthen our relationships with guests.
Speaker Change: In just three weeks post-launch, loyalty member sales are up to 20% of total sales for the 1,250 Supercut salons that went live in our second and final wave.
Speaker Change: For reference, the pilot program salons that have been holding steady at well above 50% loyalty member sales, a goal that we are shooting for and are actively working to grow the current member base.
Speaker Change: And as we grow our current member base, we have a lot of opportunity to further evolve and optimize the program, providing additional member-only benefits, as well as take the learnings from this launch and carry them over to our other brands.
Speaker Change: To give a little more sense of the significant opportunity we have here, taking just the Supercuts brand alone, we've had a little over 9 million unique guests visit Supercuts salons over the last 12 months.
Speaker Change: 25% of all visits were through digital check-ins.
Speaker Change: and of which 35% of those digital check-ins were done through the app.
Speaker Change: So call it a little over 800,000 app check-ins out of over 9 million visits
Speaker Change: Additionally, 90% of online check-ins were made without an account.
Speaker Change: And I can keep on going, but the point is there's a strong opportunity to not only engage more with those we have an active digital relationship with, but also tap into the vast white space through converting the majority of guests, which we do not.
Speaker Change: To this end, in October, we transitioned all remaining walk-in only salons
Speaker Change: to support online check-in, thus achieving full online availability across Supercuts.
Speaker Change: The key now is to continue capturing usable guest data between in-salon and digital channels, incentivize account creation and digital engagement, and increase our digital touchpoints through email, SMS, and in-app communications.
Speaker Change: Our loyalty program is yet another tool to be utilized to drive incremental frequency.
Speaker Change: And it is now squarely on us to ensure that we are continuously working to improve our websites, our apps, Zanotti functionality, and digital programs, integrating them into a cohesive platform to create a flywheel effect.
Speaker Change: Attracting new guests to our salons through digital programs.
Speaker Change: delivering an outstanding experience guided by excellence standards and using CRM and loyalty to encourage repeat visits.
Speaker Change: And just as we have work to do to provide the proper tools and support systems to our franchisees regarding operational rigor
Speaker Change: We have work to do to continue managing our technology partners and platforms to continue to remove friction and pain points for our franchisees, their salon managers, and stylists to more effectively run and manage their business.
Speaker Change: One more topic I want to touch on before wrapping up.
Speaker Change: I mentioned on the last call this notion of finally having the opportunity to take a longer term view and forming a vision that is necessary to drive business transformation with the refinancing behind us.
Speaker Change: These are not just words, but an effort we have taken action on as an organization.
Speaker Change: While the initiatives I mentioned earlier are important tactical table stakes items,
Speaker Change: We have paused on rolling out any other major changes and adding further initiatives to the system until we align with our franchisees on how this all ladders up to a broader, winning strategy for the future.
Speaker Change: We've engaged another great outside resource to partner with us and facilitate the vision and strategy planning in our Supercuts brand alongside of our franchisees.
Speaker Change: We've been listening and gathering critical feedback over the last month from over a hundred conversations representing most of the system.
Speaker Change: to ensure full collaboration and buy-in as we align on the next phase of top priorities and the proper cadence required to create value through growing sales and profitability for our franchisees.
Speaker Change: And it's ultimately these aligned on initiatives that we will integrate into our current priorities discussed here.
Speaker Change: Before turning it over to Kersten, let me conclude by stating again how excited I am to be going on offense with our renewed capital structure.
Speaker Change: Thank you to the entire Regis employee base and our passionate, dedicated franchisees and their field-based teams for driving our major initiatives forward and for all of the work put in day in, day out in the business.
Speaker Change: We are actively working on a number of initiatives to drive growth, and are committed to exploring everything that will benefit our franchisee partners to drive performance and value creation.
Speaker Change: I also want to reiterate my comments from our last call that even with continued net closures and slightly softer sales due to a combination of the macro environment and the work required to be done in our business,
Speaker Change: We believe we are set up to continue to drive adjusted EBITDA growth in fiscal 2025 as well as our earnings per share and cash flow.
Speaker Change: I look forward to keeping you apprised of our progress as we move forward.
Speaker Change: And now I will turn it over to Kersten for a detailed review of the Q1 financials.
Kersten Zupfer: Thanks, Matt. Total first quarter revenues were $46.1 million, a decline of $7.3 million from the prior year.
Kersten Zupfer: This revenue decline was expected and relates primarily to a reduction in franchise rental income and advertising fund revenue, which are a gross up of revenue and expense and have no impact on profitability.
Speaker Change: Royalty and fee revenue of $18 million, which represents our core business revenue, was down $1.2 million versus the prior year's first quarter due to the number of salon closures over the course of the last 12 months.
Speaker Change: Another reflection of our revenue performance is system-wide same-store sales, which declined 1.1% in the quarter. We closed a net 41 franchise locations and 8 company-owned locations in the first quarter of fiscal year 2025.
Speaker Change: The 41 net franchise closures in the quarter had an average trailing 12-month sales volume of $140,000.
Speaker Change: This compares to a top quartile salon average sales volume over the same period of $460,000.
Speaker Change: With top quartile sales 3.3 times those of the closure salons, this demonstrates the performance we are seeing possible in our system, as well as how large the gap of underperformance is for these closure salons.
Speaker Change: We have been clear on our calls that this is a trend that we've seen and will continue to see. However, I wanted to provide some additional color and context as to what has been occurring and why this will flow in the coming years.
Speaker Change: The large-scale closures which we have experienced over the past fiscal years have largely been related to the timing of salon shifts from corporate to franchise.
Speaker Change: Beginning in 2017, and with leases generally in five-year increments, we're seeing the waves of closures line up with those franchising efforts, with those transitioned in 2017, driving 2022 closures.
Speaker Change: 2018 driving 2023, 2019 2024, and 2020 now driving the 2025 closures.
Speaker Change: Given the bulk of the transitions completed roughly during this time frame, we expect calendar 2025 to be the last year of closures in the order of magnitude that we've been seeing. Now, this is not to say the trend will suddenly reverse. However, the pace should slow down in years ahead.
Speaker Change: Additionally, we have demonstrated an ability to grow and maintain and grow profitability despite our lower base, and we expect to be able to continue managing to the same outcomes with a smaller, high-performing footprint as we ultimately get back on the path to sales and unit count growth.
Speaker Change: We posted gas operating income of $2.1 million in the first quarter compared to $7.4 million in the prior year quarter.
Speaker Change: The year-over-year decrease in GAAP operating income of $5.3 million was driven by lower core business revenue.
Speaker Change: Increased GNA expense related to severance expense of $2.3 million.
Speaker Change: year-over-year increased stock based compensation expense of $800,000 and a rent benefit of $600,000 received in the prior year that did not reoccur. We continue to produce operating profit each quarter and we expect that trend to continue.
Speaker Change: We reported gap net loss of $900,000 and diluted loss per share of $0.36 per share in the first quarter, compared to income of $1.2 million and diluted income per share of $0.51 per share a year ago.
Speaker Change: driven by decreases in operating income discussed above, partially offset by reduced interest expense.
Speaker Change: Now, let's turn to our adjusted results. As Matt mentioned, we did make a change to how we are calculating our adjusted results. Beginning this quarter, our adjusted results exclude stock-based compensation expense.
Speaker Change: All adjusted results in the current year and prior years have been adjusted to reflect this presentation.
Speaker Change: We believe our adjusted results are a more representative view of the business.
Speaker Change: Reconciliations of our gap results to our adjusted non-gap results can be found in our press release.
Speaker Change: On an adjusted basis, first quarter consolidated EBITDA was $7.6 million.
Speaker Change: compared to $8.1 million in the prior year's quarter.
Speaker Change: The $500,000 decline was primarily due to lower franchise revenue, prior year benefit and rent that did not reoccur of $600,000, partly offset by subleased revenue associated with the corporate office space that we subleased over the course of the last year.
Speaker Change: Our adjusted GNA was $10 million, essentially flat to the prior year period.
Speaker Change: with continued focus on our corporate GNA and the recent reorganization in August. We continue to expect our fiscal year 2025 GNA to be in the range of $39.5 million and our run rate GNA to be closer to $38 million.
Speaker Change: the run rate range.
Speaker Change: represents close to five and a half million of savings versus fiscal year 2024. While the thirty nine and a half million dollars represents additional investments in our business that offset savings to the extent we see opportunity to invest further in our initiatives, this could change.
Speaker Change: Our core franchise business achieved adjusted EBITDA of $8 million in the quarter, a $600,000 decrease compared to $8.6 million in the prior year quarter. This decline is primarily explained by the same items discussed for the consolidated adjusted EBITDA.
Speaker Change: On an adjusted EBITDA basis, our company-owned segment reported a loss of $300,000 for the quarter, an improvement of $200,000 from the same quarter last year, primarily related to the closure of last-generating company-owned salons over the last 12 months.
Speaker Change: As of September 30th, we had nine company-owned locations.
Speaker Change: During the three months ended September 30th, we used 1.3 million dollars of cash from operations, which is an improvement of 1.5 million dollars from the prior year three-month period, primarily due to less cash used for working capital.
Speaker Change: As I mentioned on the call last quarter, we expected a use of cash in the first quarter due to incentive compensation payments and other scheduled payments like insurance that get paid in the first quarter.
Speaker Change: Additionally, we replenished our inventory of fixtures to aid franchisees in the large-scale smart-style remodels that are occurring. We continue to believe that we will generate cash in the second quarter and for the remainder of fiscal year 2025.
Speaker Change: Additionally, in the first quarter, we received approximately $950,000 of proceeds related to Zanodi migrations, and we continue to expect additional proceeds of approximately $7.5 million during the second fiscal quarter.
Speaker Change: As a reminder, under our new financing arrangement, these proceeds will stay in the business, and we are not required to pay debt down as we were under our previous financing arrangement.
Speaker Change: Turning to liquidity, as of September 30th, we had 21.9 million dollars of available liquidity, including 15.7 million dollars of available revolver capacity and 6.3 million dollars of cash.
Speaker Change: As of September 30th, 2024, our debt outstanding, excluding deferred financing fees and the value of the warrants, plus the accrued paid and kind interest, was $110.4 million.
Speaker Change: As a reminder, due to accounting standards, our balance sheet shows approximately $285 million of operating lease liabilities related to liabilities associated with subleasing our salons to our franchisees over the entire life of their respective leases.
Speaker Change: These liabilities are serviced by our franchisees and should not be factored into Regis' debt position, so long as the franchisees continue to pay their obligations as they have been.
Speaker Change: These liabilities have decreased approximately $309 million over the last three years due to the reduction in salon count, as well as Regis moving off franchise leases.
Speaker Change: Regis is solely responsible for lease liabilities for any corporate office space, net of sub-leases, and the remaining company-owned salons, the total of which is approximately $4.6 million.
Speaker Change: This concludes my prepared remarks. I would like to thank you for your continued support and interest in Regis. Please feel free to reach out to InvestorRelations at RegisCorp.com to discuss any questions related to the business or quarterly results.