Regis Corporation
Q4 2021 Earnings Call Transcript

Published: 26 Aug 2021

[Biz McShane:]

Good morning and thank you all for joining the Regis Fourth Quarter 2021 Earnings Release Conference Call. All participants are in a listen-only mode. After the prepared remarks by our Chief Executive Officer, Felipe Athayde; and Executive Vice President and Chief Financial Officer, Kersten Zupfer, we will have time for questions. Joining Felipe and Kersten on this call, we have Jim Lain, President of SmartStyle and Portfolio Brands; Matt Doctor, Executive Vice President and Chief Strategy Officer; and Amanda Rusin, our General Counsel. I am your host, Biz McShane, AVP Finance. As a reminder, this conference call is being recorded. Before turning the call over to Felipe, 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 can be found on our website, www.regiscorp.com/investor-relations.html along with any reconciliation of non-GAAP financial measures mentioned on today's call, with their corresponding GAAP measures. With that, I will now turn the call over to Felipe.

[Felipe Athayde:]

Thank you, Biz. Good morning and thank you for joining us. The end of fiscal '21 marks an important milestone in the history of Regis. The journey towards a fully franchised business model and away from an operating company began four years ago and I can proudly say that this major transformational phase is now complete. Our salons are essentially fully in the hands of franchise partners. And we can, for the first time, make decisions for Regis through the lens of a true franchisor with a management team that combines both deep expertise in franchising and legacy operational know-how. Along with the full transformation of our business model, I am very pleased to say that we have a large number of salons running on our proprietary tech platform, OpenSalon Pro, a platform that until three years ago simply did not exist. These are all remarkable accomplishments in the face of unprecedented times. And I want to take this opportunity to personally thank both our teams and our franchisees for working tirelessly through such challenging environments. I want to take a few moments to update you on the progress we have made on key initiatives that have gone hand-in-hand with our business transformation. Major highlights for the year include

[Kersten Zupfer:]

Thanks, Felipe and good morning. On a consolidated basis, we reported fourth quarter revenue of $99 million versus $60 million in the prior year which was 65% higher as the majority of our salons were closed in the fourth quarter of last year. Core royalties and fee revenue increased 263% from Q4 of 2020 from $7 million to $27 million. The increase is due to improved comps and fewer government-mandated closures. Quarter-over-quarter comps and royalties improved due to improved performance and fewer government-mandated closures. The only significant shutdowns in Q4 were in Canada, where approximately 300 salons were closed, impacting our overall revenue by approximately 5%. In the remaining fleet, we can see improvements in our nominal sales as we move away from reopening dates and states normalize their environments. As we look at some of the states and regions negatively impacting our comp, particularly California and the Northeast which are returning to normalcy more slowly, we are seeing 10% to 20% increases in nominal revenue per store since the beginning of Q4 which means they are growing, they are just behind the curve. Overall, with the direct correlation between labor hour performance and sales performance that Felipe mentioned and 75% of our stores running well below pre-COVID levels from a labor hour perspective, we remain unclear to the exact timing of staffing levels returning to pre-COVID levels. We reported an operating loss of $27 million during the quarter which includes a $5 million non-cash inventory reserve charge associated with the change in our merchandising strategy. Fourth quarter consolidated adjusted EBITDA loss of $23 million compared to a $34 million adjusted EBITDA loss in the fourth quarter of 2020 as we are lapping the closure of our fleet last year. It's worth noting that this quarter's adjusted EBITDA includes $13 million of losses related to our company-owned salon portfolio that will be dramatically reduced as we exit these salons. Looking at the segment-specific performance and starting with our franchise segment, I mentioned fourth quarter royalties and fees increased $19 million versus the same quarter last year, primarily due to the government-mandated shutdowns last year. Fourth quarter franchise adjusted EBITDA was $11 million, an increase of $10 million year-over-year driven by increased sales and increased salon comps. In our company-owned salon segment, fourth quarter revenue was $25 million, an increase of $10 million or 65% versus the prior year. Company-owned salon segment adjusted EBITDA increased $9 million year-over-year to a loss of $13 million versus a loss of $22 million, primarily due to the shutdown last year. As it relates to corporate overhead, fourth quarter adjusted EBITDA loss of $21 million increased $8 million year-over-year compared to adjusted EBITDA loss of $14 million in the prior year. This increase is driven primarily by the furlough program in effect for the majority of the workforce across the corporate office, field support and distribution centers in the fourth quarter of the prior year. Switching gears to G&A; as many of you have been asking about what our future state looks like. Upon the successful execution of our zero-based budgeting, we expect G&A excluding rent to be in the range of $72 million to $80 million annually which not only represents G&A for our franchisor structure but also G&A for our full technology company that developed, supports and maintains OpenSalon Pro. To be clear, this run rate is expected to be achieved in Q4 of fiscal year '22 due to the exiting of the distribution centers and refranchising of company-owned salons in the first half of fiscal year '22. Achievement of these G&A levels is subject to the risk factors disclosed in our fiscal year 2021 10-K filed this morning. I want to also state that while our corporate reorganization and ZBB projects have right-sized our G&A to the identified needs of Regis in the short term, ZBB is a continuous process which we believe will continue to identify savings. I also thought it would be helpful to spend a few minutes discussing our transition away from the wholesale product business. A few weeks ago, we announced that we will be partnering with SalonCentric and BSG for the distribution of product to our franchisees. SalonCentric and BSG will be able to better service our franchisees as we move to a fully franchised model versus purchasing wholesale from Regis. Had we continued to operate as is, our wholesale product business would have lost $2 million to $3 million in fiscal year '22. On the flip side, had we wanted to prevent this loss, given the nature of our cost structure to support a fully franchised business, we would have had to raise product pricing to our franchisees considerably which would have been a detriment to their four-wall profitability. We believe that our new model will bring value to our franchisees, preserve our private label business and be EBITDA positive, while greatly reducing the complexity of our business. Turning to the balance sheet and liquidity; as of June 30 we had $129 million of liquidity, including $89 million of available revolver capacity and $19 million of cash. Our net available liquidity as of June 30 was $54 million which reflects our minimum liquidity covenant requirements and the permitted add-back of the shortfall in certain refranchising proceeds in accordance with our amended credit facility. Looking forward to fiscal year '22; we expect to continue to remain a net user of cash for the fiscal year as we refranchise or close the remainder of our company-owned salons and wind down our two distribution centers. However, as a post-pandemic recovery continues, coupled with the realization of the savings identified as part of the ZBB process, we expect to achieve monthly positive cash flow inflection during the latter half of fiscal '22. We believe that our current liquidity levels are sufficient to fund our cash needs during fiscal year '22. In closing, progress on key initiatives accompanied with encouraging trends has us feeling very confident as we wrap up fiscal year '21 and move into fiscal year '22. This concludes my prepared remarks. I would like to thank you for your continued support and interest in Regis. And we'll now turn the call back to Biz for questions.

[A - Biz McShane:]

Thank you, Kersten. Our first question is from Steph Wissink of Jefferies. Please go ahead, Steph.

[Stephanie Wissink:]

Thank you. Good morning, everyone. We have two questions to begin, if we could. Kersten, just in relation to your final questions on cash, thinking about cash use in the first half, it sounds like maybe an inflection in the back half. But can you help us think about the puts and takes? Inventory on the balance sheet, I would guess, would be a cash contributor as you move away from the products business. Any other things we should be thinking about that relate to the final kind of downdraft in the old model and the investment in the new model from a cash perspective?

[Kersten Zupfer:]

Yes, great question Steph. The other two factors is as we roll out of the two distribution centers, there's cash uses associated with that line down as well as the remaining refranchising efforts that will occur in the first quarter of this fiscal year. So as we move through those, then we start to see some moving from being a cash user to the latter half of the year where we'll generate some cash in certain months.

[Stephanie Wissink:]

Okay, that's helpful. And then my second question, it's super encouraging to hear about the G&A, excluding rent being around that $72 million to $80 million on a full year basis. So I think it's running closer to low 90s run rate exiting Q4. Can you just help us bridge the roughly $2 million to $4 million a quarter? Where are the incremental savings expected to be realized? And maybe it also relates to the DCs. So just trying to bridge the incremental cuts that you are anticipating to realize over the course of the next 12 months.

[Kersten Zupfer:]

Yes. I mean it's going to come in various places within the organization. Obviously, the distribution center is a key component of that. And as we've discussed in previous quarters, the ZBB process and the ZBO process is starting from a white piece of paper. So we went through that process and built the work structure to support the business. So as part of that, there were some eliminations that we made at the end of June that you'll see those savings come through as we move into fiscal.

[Stephanie Wissink:]

Great. And then, my last one; if I could pop one more in and it's just related to the products business under the new agreement with SalonCentric and BSG. Can you just give us an illustration of how the dollars would flow through the franchise and then the corporate model? So I want to make sure we fully appreciate that. I mean, you may still have access to some of the product value but you're not directly selling to the franchisees. So just walking through an illustration, I think, would be helpful.

[Kersten Zupfer:]

Yes. So as it relates to how it will flow through the model, there is a rebate with the distribution partners that we will recognize as revenue that will come through the P&L. Is that your question, Steph? I want to make sure that I'm answering it correctly.

[Stephanie Wissink:]

Yes, that's exactly right. So just making sure we understand what's happening to the mechanics of the revenue recognition.

[Biz McShane:]

Steph, do you have anything else?

[Stephanie Wissink:]

Kersten, could you just talk a little bit more about that. So it's a revenue rebate but then what is the attributed margin to the rebate? Is there any expense behind the rebate?

[Kersten Zupfer:]

Yes. So I mean, as it relates to product sales, it will be a rebate that runs through revenue. And then, what hasn't changed is we'll continue to receive a royalty on the product sales that our franchisees are making in their salons.

[Stephanie Wissink:]

Okay. So from a margin perspective, the royalty, of course, would be at your historic margin levels. The rebate would be at almost pure margin. Is that the way we should think about it?

[Kersten Zupfer:]

Yes.

[Stephanie Wissink:]

Okay, right. Very helpful. I'll turn it to the next question asker . Thank you.

[Kersten Zupfer:]

Thanks, Steph.

[Biz McShane:]

Thank you, Steph. Our next question is from Laura Champine from Loop Capital. Please go ahead, Laura.

[Laura Champine:]

Hi.

[Kersten Zupfer:]

Hey Laura, how are you?

[Laura Champine:]

How much do you think was .

[Biz McShane:]

Laura, we're having a hard time hearing you.

[Laura Champine:]

What would you encourage -- I'm sorry, can you hear me?

[Biz McShane:]

We can hear you now.

[Felipe Athayde:]

Yes. You broke up a few times, Laura. Sorry about that. Would you mind repeating the question?

[Laura Champine:]

Okay. Sorry, bad quality of the call here on my end. I wanted to talk a little bit about the labor shortage that you're facing and see how much of the problem you think goes away once we cycle through the enhanced unemployment benefits. And I also wanted to see what you think you can do to help franchisees increase their hiring of folks who have been independent stylists. See if there's much you can do there.

[Felipe Athayde:]

Laura, Felipe here. So look, right now, the major roadblock to sales recovery has been the labor shortage, right. But we're very encouraged with -- some of the facts that I talked about in my prepared remarks. So states, for example, that ended the unemployment benefits sooner have seen a faster sales recovery. And also, if you look at the top-performing one-fourth of our salons in terms of labor hours versus last year. I mean, these guys have been the fastest to recover sales as well. So we've seen a very linear relationship between the recovery of labor hours and the recovery of sales, right. I mean, in this industry, of course, the availability of stylist correlates directly with our ability to do sales, right. So that's as we were very, very confident that as we -- our sales return to the workforce that this will directly translate into sales. And with respect to the second part of your question which is how we can help franchisees? We're about to implement the new recruiting solution to be used by our franchisees which is based on artificial intelligence. Basically, the provider is a leader in this segment, there's been a very successful global franchisor who adopted the system and with a lot of success. Really, we want to replicate their success in recruiting on our end as well. So we're very excited about that and we think that the effects will be seen shortly after the implementation of this tool.

[Laura Champine:]

.

[Felipe Athayde:]

Laura, I think we're losing you again, if you wouldn't mind repeating, you're breaking up again.

[Laura Champine:]

Okay. I'll take the rest of my questions offline. Thank you.

[Felipe Athayde:]

Thank you, Laura. Appreciate it.

[Biz McShane:]

With no further questions, we will adjourn. Thank you very much for joining today.