Regis (RGS) Q3 2022 Earnings Call Transcript

Regis (RGS 16.18%)
Q3 2022 Earnings Call
May 10, 2022, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Biz McShane

Good morning, and thank you for joining the Regis third quarter 2022 earnings release conference call. [Operator instructions] The prepared remarks by newly appointed President and Chief Executive Officer Matthew Doctor and Executive Vice President and Chief Financial Officer Kersten Zupfer are accompanied by slides to help participants follow along. After the prepared remarks, we will have time for questions. [Operator instructions] Also joining Matt and Kersten on this call is Jim Lain, our chief operations officer.

I am your host, Biz McShane, vice president and 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.regiscorp.com/investorrelations, along with a reconciliation of any non-GAAP financial measures mentioned 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.

Matt Doctor -- Chief Executive Officer

Thanks, Biz, and good morning, everyone. Today, I will walk you through highlights of our third quarter results and the status of some of the key initiatives we highlighted on the last call as well as how we are refining our priorities and areas of focus. Kersten will cover our results in more detail, in addition to addressing a few onetime items as there continues to be some noise in our reported results as we work 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, was positive compared to a loss in the prior year and positive for the second quarter in a row. As sales remain well below pre-COVID levels, the organizational moves we have made to streamline our G&A have helped mitigate losses during this period of slower-than-expected sales recovery. As our legacy businesses continue to wind down and sales eventually improve, we will benefit as our G&A remains 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 onetime and some related to ongoing issues. The omicron variant had an impact on sales throughout the quarter, as we had articulated it would on our last call. In addition, several themes continue to affect our business as we drive toward recovery. Our sales continue to be challenged by labor issues with active stylists and stylist hours remaining significantly below pre-COVID levels.

The labor shortage translates to an outsized effect on our results, given the specialized labor pool and the fact that stylists are a direct link to our revenue-generating capabilities. Lower customer counts due to remote work and longer haircut cycles continue to impact our sales as well. I want to be very clear that even though we have made progress toward mitigating losses, we need to grow the business. We know our sales levels are not close to where they need to be.

And as we go forward, it is critical we start making meaningful strides in this area as it's a key driver for the health of our business. In addition to the stylist shortage and lower customer counts impacting sales, our 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 were an EBITDA drag. For reference, these businesses impacted our adjusted EBITDA by contributing a 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'll be out of the product distribution business in the beginning of fiscal 2023. While progress continues to be made, we still have work to do. By fully winding down product distribution and continue to run off company-owned salons, the effect on our EBITDA will be minimized and we'll be able to squarely shift our focus to the core business. Now while I mentioned being disappointed in where we are, I'm not 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 that's been underway that will improve our performance. On our Q2 call, we had articulated priorities for the balance of the year, split between Regis-specific and Regis brand initiatives.

Right off the bat, we took actions tackling our top Regis-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 resources of capital with the goal of a refinancing. I think we had the least amount of words dedicated to 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 priority 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 Regis and shareholder value top of mind as we drive toward a financing solution. Turning to our company-owned salons. We reduced the number of company-owned salons to 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.

The best strategy will fall flat without their trust, and we felt they needed to be heard and involved in shaping our areas of focus as it relates to the critical areas of the business, especially stylist recruiting and retention and customer traffic. It is critically important to us to gain share alignment and ensure that we are on the same side of the table, especially as we'll 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, test some hypotheses and then get a sense of areas of opportunity that may not fully be on our radar. So four days after our last earnings call, we did something that had not been done at Regis 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 who did not present but instead hosted intimate roundtable discussions, so everyone could provide feedback and everyone could be heard. Across those five cities, we met with over 220 franchisees, representing more than 3,200 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 and communication with our franchisees is fundamental to our business and ongoing behavior as their involvement will be key in improving our collective performance. To further these efforts, we are in the beginning stages of setting up priority-specific committees, and we will be making our way to Canada in June. We wrapped up the U.S. franchising visits in mid-March.

And since then, we've been working diligently on the action steps we will be taking. We are pushing ourselves as an organization to focus on the most meaningful drivers of our business. At our business core, we need three things: trained stylists, satisfied customers and the ability for stylists and customers to seamlessly interact with our brand and technology. We laid out our priorities relating to this during our last call, but 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 three major initiatives as it relates to technology, stylist recruiting and retention and customer traffic. Number one, ensuring our franchisee base is 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, direct marketing efforts. We'll address each of these a bit more. On the technology front, this is being in lockstep with our franchisees is critical to our success.

So is the right technology. And the reality is, we're in a situation right now where our franchisee base is split between two platforms: the legacy ProPoint and our new OpenSalon Pro point-of-sale systems. While it's not uncommon to have this dynamic, what makes this a little more complex is we are in the middle of a wind-down of a legacy system and a ramp-up of a new one that candidly needs to improve its functionality to ensure that it is a platform we can fully stand behind. 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, when we look through this, we look at it through the lens of what can we do as a franchisor that will have the most impact? We have an AI recruitment tool that we have rolled out to help franchisees process stylist applications. Now this has been a fantastic tool for our franchisees to aid in the process. However, it does not fill the applicant funnel nor does it address retention.

For that, we need to better articulate our value proposition for franchisees, salon employees and define why the Regis salon brands are a great place to work. To address this, we are increasing our commitment to in-person stylist education and relaunching national and regional stylist events. We know from the research and conversations with stylists and franchisees just how much this matters not only to stylists coming out of beauty schools looking to learn, but also experienced stylists who are continually seeking to advance their craft. While having a strong digital platform for education has been a great development, it cannot replace the importance of in-person training and events.

Furthering education allows stylists to uphold our brand promises of delivering quality, consistent hair services. It also addresses the top two purchasing criteria that matters to consumers, which are receiving a quality haircut and feeling that their stylist is trained and knowledgeable. All three in this piece touches all facets of our business. And as a franchisor in the hair care space, it can be a major differentiator at scale versus our competitors.

We are a people business. And what better way of investing in people than providing the best-in-class education platform with a large network of in-house educators, complemented by the largest network of trained trainers and a top-notch digital platform. And our education curriculum will go beyond technical education. It will also include manager training and soft skills development.

We aspire to be the landing spot not only for stylists out of beauty school, but experienced stylists as well. While recruiting is key, retaining top stylists and trainers is equally important. We will be relaunching national and regional stylist 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 25 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 as they are worth promoting and can form the basis of future marketing initiatives in a very authentic manner. Transitioning to marketing. We plan to refocus our efforts to meet both the stylist community and consumers of where they are at with a stronger focus on digital marketing.

Our customers and stylists are living on social media and digital channels more than ever, and we need to build our presence and strategies and connect there in a meaningful way. We will work to build stickiness and loyalty to our brands through direct marketing initiatives powered through CRM and branded loyalty programs. We have solid traffic coming through our salons, which is a great starting point to create repeat business. We are seeing the data the effective customer retention works, and it is worth an area of our focus.

Our system right now is roughly split 50-50 between the salons that have greater than 40% 90-day customer retention and salons that have lower than 40% 90-day retention. For Q3, those salons that delivered 40% plus 90-day customer retention had a 12.5 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 both stylist 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 a traditional marketing function that can help return us to growth.

While these may look like three district work streams, they are all very much connected in driving results. Efforts around hiring and retaining stylists ensures the ability to generate salon sales and provide consistent quality hair services. Tenured, trained 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 Kersten, I want to set the stage and expectations regarding the timing of implementation of these priorities given that they are major shifts and foundational in nature. We are currently laying the groundwork now and expect to launch these items by the end of fiscal 2022 and early fiscal '23. I have always been confident in our priorities, but 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 franchised business model, have the ability to lead to stronger profitability collectively for our franchisees and for Regis going forward.

I will now turn the call over to Kersten to provide more detail on our Q3 results. Kersten?

Kersten Zupfer -- Executive Vice President and Chief Financial Officer

Thanks, Matt, and good morning. Yesterday, we reported on a consolidated basis third quarter revenues that reflect our transition to a fully franchised 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 is now franchised, 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 $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 variant that impacted our results in the quarter. Same-store sales growth was 9% in the quarter compared to the third quarter 2021, but still lagging behind pre-COVID 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 year's quarter. Adjusted EBITDA improved due to higher systemwide sales and 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, a $10 million improvement, compared to a loss of $7 million in the prior year.

This is the second quarter in a row that our core business has been profitable. This improvement is driven primarily by higher systemwide sales and the rightsizing of our G&A structure over the last year. Compared to the second quarter of fiscal year '22, franchise-adjusted EBITDA declined. 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 onetime benefits of $3 million, the third quarter improved by $0.5 million compared to the second quarter. The company-owned segment recorded an adjusted EBITDA loss of approximately $3 million, including a charge to increase the inventory reserve 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, a $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 resulted 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 systemwide 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, 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 advisor 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 franchisor.

This concludes my prepared remarks. I'd like to thank you for your continued support and interest in Regis, and I will turn the call back to Biz, who will lead us through the Q&A.

Biz McShane

Thank you, Kersten. [Operator instructions] Our first question is from Grace Menk with Jefferies.

Grace Menk -- Jefferies -- Analyst

Congratulations on the appointment, Matthew. 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 regions?

Matt Doctor -- Chief Executive Officer

Grace, this is Matt. I appreciate the congratulations and thanks for the question. So in terms of regions, it's all pretty similar themes as we've mentioned on prior calls. The regions that were most restrictive, call it, during the pandemics, are the regions that are lagging the most.

And those are really 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.

Supercuts seems to be outperforming kind of the rest of the system, with SmartStyle being one that is lagging a bit due to a little bit of the captive nature there and ties to Walmart, where traffic is a little bit down, but we have a bunch of initiatives on that underway to address that business as well. But that's kind of the macro which, again, kind of in the similar themes that we've been seeing, we're continuing to see, with things kind of being -- moving up nominally as we continue through the year.

Grace Menk -- Jefferies -- Analyst

That's helpful. And then just any capacity constraints in any regions?

Matt Doctor -- Chief Executive Officer

No. Really, there's no capacity constraints from any sort of government or local restrictions that are impacting our salons at this point.

Grace Menk -- Jefferies -- Analyst

OK. Great. And then my next question, I was hoping we could dig a little deeper into the lower customer counts that you're seeing impacted by those longer cycles. 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 mitigate the impact of that on results?

Matt Doctor -- Chief Executive Officer

Yes. No. Absolutely. I appreciate that's a good question.

And in terms of the trend and if we're seeing it normalize, the speculation as to exactly what's going to happen, if people are going to move back. What I will say is from survey results that we've seen, there is a desire at some point when socialization happens, when people are back in offices, that there is a desire to return to a salon and get their hair cut by professional trained individuals. So it's probably not so much of an if, I think it's more of a matter of when. And to speculate on that when, not exactly sure, but some of the data points to that being the case.

In terms of inflation and kind of the rest of what we foresee, I kind of want to point back to, regardless of what's going on, there's so much opportunity that we have. Even though there's longer haircut cycles, they're still really strong. There's 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 that.

So regardless if the customer is lagging a little bit and extending the cycles out, we do have folks who are visiting our salons. What 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, direct marketing, the hiring efforts around stylists to make sure they're there to provide the services, all these things can help retain customers, which will have an impact on kind of near- and medium-term traffic, which will help 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 the future.

Grace Menk -- Jefferies -- Analyst

That's really helpful. And actually, a great segue to my last question, which is just on the tech platform rollout and what feedback you're getting from the salons who are adopting it already.

Matt Doctor -- Chief Executive Officer

Yes. No. As I kind of mentioned, this is a big initiative. And I want to be cognizant of how we speak about technology given how big of an issue this is.

Currently, we have an end-of-life-ing solution and a new solution that's not where we need to be. We've spoken a lot about OSP in the past and what it can do, but I'd rather start talking about it again when we can be absolute in what it does do. So as I mentioned, we're going to continue to work with the functionality as appropriate, and I want to come back and talk about this one in more detail when we're ready to ramp adoption back up and what exactly that full solution looks like.

Biz McShane

Thank you, Grace. OK, Matt, we've had a couple of 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?

Matt Doctor -- Chief Executive Officer

Yes. So January was -- I appreciate the question. January was 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 point 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 a challenged 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 stylists matters.

The idea of having technology to interact with before, during and after a visit matters. And customer retention, direct digital, social media marketing to meet folks where they are matter. 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 wildly foundational and are elements that will be here for years to come in addressing our sales.

Biz McShane

Thank you. The next question, as a consumer business, please comment on your plans for press releases, social media activity, things of that nature, please.

Matt Doctor -- Chief Executive Officer

No. 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 toward digital and social.

I mean a theme you're going to start hearing from me more and more is the need, especially in this industry given the cycle times, to meet stylists and consumers where they are. And as I've 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 build our brands at these levels.

Big opportunity to increase content output with relevant content and show up in authentic matters. So I think when we talk about stylist recruiting and direct marketing, all 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 we can talk about and can show up in a very authentic manner on these platforms. So it serves a lot of purposes beyond just that. It can serve baseline fundamental things 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.

Biz McShane

Thank you, Matt. That is it for our questions today. Thank you very much for joining the Regis third-quarter earnings call. We appreciate your interest.

Duration: 32 minutes

Call participants:

Biz McShane

Matt Doctor -- Chief Executive Officer

Kersten Zupfer -- Executive Vice President and Chief Financial Officer

Grace Menk -- Jefferies -- Analyst

More RGS analysis

All earnings call transcripts