Regis Corp Q4 FY2020 Earnings Call

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Regis Corporation Fourth Quarter Fiscal 2020 Earnings Call. My name is Ryan and I will be your conference facilitator today. At this time, all participants are currently in a listen-only mode. As a reminder, this call is being recorded for playback and will be available approximately 12:00 p.m. Central Time today. I'll now turn the conference call over to Biz McShane, AVP of Finance. Please go ahead.

Thank you, Ryan. Good morning, everyone and thank you all for joining us. On the call with me today, we have Hugh Sawyer, our Chief Executive Officer; Kersten Zupfer, our Executive Vice President and Chief Financial Officer; Eric Bakken, President of our Franchise segment; and Amanda Rusin, our General Counsel. Before turning the call over to Hugh, there are a few housekeeping items I would like to address. First, today's earnings release and conference call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of performance, and by their nature, are subject to inherent risks and uncertainties that could cause actual results to differ materially from such forward-looking statements. Please refer to the company's current earnings release and recent SEC filings, including in our most recent Form 10-K for the year ended June 30, 2020 for more information on these risks and uncertainties. The company undertakes no obligation to update or revise any forward-looking statements to reflect events or circumstances that may arise after this call. Second, this morning's conference call must be considered in conjunction with the earnings release we issued this morning and our previous SEC filings, including our most recent 10-K. On today's call, we will be discussing non-GAAP as adjusted financial results that exclude the impact of certain business events and other discrete items. These non-GAAP financial measures are provided to facilitate meaningful year-over-year comparisons, but should not be considered superior to or a substitute for our GAAP financial measures and should be read in conjunction with GAAP financial measures for the period. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures can be found in this morning's release, which is available on our website at www.regiscorp.com/investorrelations. With that, I will now turn the call over to Hugh.

Good morning, everyone. I want to start by expressing my gratitude to our stylist community, franchise partners, and both our field and corporate employees, who have shown remarkable courage during this difficult pandemic. I appreciate each of you for your contributions to our business in these unprecedented conditions. The key event this quarter was our successful amendment of our revolving credit facility in May, which will expire in March 2023. This amendment eliminated all prior financial covenants, including the net leverage and fixed charge coverage ratios, and introduced a minimum liquidity requirement while providing our lenders with security in our assets. This flexible credit facility is expected to support our transformational strategy and help us navigate the uncertainties created by the pandemic. We are pleased with this result, especially in light of the ongoing uncertainty surrounding the pandemic and the North American economy. We anticipate that the amended credit facility will help us fully realize our growth strategy, which includes converting to a capital-light franchise model, leveraging technology, focusing on the value salon sector and our core brands, cutting costs while investing in necessary capabilities, and enhancing our marketing and digital education. Regarding our salon operations, aside from our California locations, which faced temporary closures due to state mandates, our salons have mostly reopened. Recently, Governor Newsom announced that California salons can restart indoor operations with County approval, which is encouraging news given our significant presence in the state. As of month-end, approximately 82% of our total salon portfolio was open, including both franchise and company-owned locations. We expect that number to grow as California counties begin to open. Excluding temporarily closed California salons, around 90% of our franchise salons and about 88% of our company-owned salons, representing about 90% of our total portfolio, are now open. We have been collaborating closely with our franchisees and operating teams to develop new ideas and adapt our operations to a post-COVID environment, prioritizing the safety of our stylists and customers. We have partnered with infectious disease specialists to ensure health and safety remain at the forefront of our salon operating procedures. We are exploring innovative approaches to enhance traffic while adhering to safety protocols, such as the outdoor salon concept we launched in Southern California, modeled similarly to a sidewalk café. Even though our post-COVID volumes have declined, our scale provides significant advantages not found in most of the salon sector. We believe that consumer interest in grooming remains sustainable in the long term. Regis has weathered many challenges for nearly a century, surviving numerous recessions and significant historical events. With advancements in COVID-19 treatment, better testing, and upcoming vaccines, we believe that our customers will return to a more typical lifestyle that includes salon visits. While we've adjusted our timeline for completing our refranchising process due to the pandemic, we now anticipate finishing this effort by the end of fiscal year 2021 or by next summer at the latest. We expect that the one-time cash proceeds from this final phase of refranchising will be lower due to pandemic-related uncertainty. However, these assumptions may change based on the duration and severity of the pandemic and the potential effects of treatment advancements and vaccines. Although challenges remain, we believe the core aspects of our strategy, along with our evolution into a technology-enabled growth platform, will enhance shareholder value over time. To support our growth strategy and improve capabilities for our franchisees and customers, we have made a long-term commitment to strategic technology investments. In August, we launched OpenSalon Pro, our cloud-based salon management and point-of-sale solution, enabling customer-facing booking and information delivery. This follows a broader initiative that began in 2019 to facilitate direct bookings via Google, Facebook, Messenger, and Alexa. We also revamped the Supercuts mobile app to streamline same-day check-ins and next-day service bookings, aligning with consumer demands, particularly in light of COVID-19. Additionally, we launched the new Cost Cutters mobile app and website, which allows appointments to be booked up to three days in advance and supports brand-wide loyalty programs. In June, we implemented further measures to cut administrative costs, resulting in an expected annual savings of $6 million. Throughout the year, we made tough decisions to reduce non-essential general and administrative expenses as we transitioned to a fully franchised model. Overall, our G&A expenses dropped by about $45.3 million compared to last year, largely due to transferring company-operated salons to franchise status, closures, and furloughs caused by the pandemic. In closing, I want to acknowledge the challenges our nation has faced this year. We condemn racism, inequality, and hatred in any form. My thoughts are with healthcare workers, first responders, victims of Hurricane Laura, and California firefighters. Thank you for your continued support of Regis. I will now hand the call over to Kersten to discuss the financial details.

Thanks, Hugh, and good morning, everyone. As Hugh mentioned, the last few months have been unprecedented, but we are committed more than ever to our strategy. Despite the unfortunate consequences of this pandemic, we continue to be pleased with the progress of our transformation. We reported this morning on a consolidated basis fourth quarter revenues of $60 million, which represents a 76% decrease from prior year as a result of the government-mandated closures of our salon. At one point in the fourth quarter, virtually all of our salons were closed. Franchisees began opening their salons in April and more than half were opened in May and June. Company-owned salons began reopening in June. As additional insight, we estimate we lost roughly $105 million of revenue in the fourth quarter due to the COVID pandemic. We are pleased, but as of today, approximately 82% of our salons are open across the entire portfolio. Excluding California salons, nearly 90% of our salons are opened. As Hugh mentioned, with California reopening, that number should increase in the next few weeks. We also reported that our operating loss was $69 million during the quarter. The economic disruption caused by the pandemic was the key driver of this loss. Our management was quick to react to the store closures and furlough the majority of our workforce in April and into May and June to partially offset the lost revenue. Further, we implemented aggressive wage reductions for the small number of essential employees who continued to work. Additionally, the company recognized a $23 million non-cash long-lived asset impairment, primarily related to its lease assets during the quarter. The impairment was also driven by the impact of the pandemic. Fourth quarter consolidated adjusted EBITDA loss of $34 million was $73 million or 186% unfavorable to the same period last year and was driven primarily by the decrease in the gain associated with the sale of company-owned salons of $27 million and the planned elimination of the EBITDA that had been generated in the prior year period from the net 1,448 company-owned salons that have been sold and converted to the franchise portfolio over the past 12 months. As we promised, management has taken steps to align the company's cost structure to materially offset the decline in adjusted EBITDA from our company-owned salons. We executed workforce reductions in January and June resulting in nearly $25 million of annualized savings. We have also significantly reduced our marketing spend. As I've already noted, the COVID-19 pandemic also contributed to the decline in the fourth quarter adjusted EBITDA. On a year-to-date basis, consolidated adjusted EBITDA of $20 million was $103 million or 84% unfavorable versus the same period last year. The change includes a $20 million decrease in the gain, excluding non-cash goodwill de-recognition related to the year-to-date sale and conversion of 1,475 company-owned salons to the franchise portfolio. Excluding the impact of the gain, fourth quarter year-to-date adjusted EBITDA was a loss of $30 million, which was $82 million unfavorable year-over-year. This unfavorable variance was largely driven by the elimination of the EBITDA related to the sold and transferred company-owned salons over the past 12 months and the COVID-19 pandemic. Of course, as you know, the elimination of EBITDA associated with the sold and transferred company-owned salons was a key element of our strategy and a planned event. Turning now to segment-specific performance and starting with our franchise segment. Fourth quarter franchise royalties and fees of $7 million decreased $19 million or 72% versus the same quarter last year. Product sales to franchisees decreased $5 million year-over-year to $7 million. Both decreases were driven primarily by the COVID-19 pandemic. Franchise same-store sales were unfavorable 20% due to a decline in traffic as customers learned to navigate the pandemic. As a reminder, same-store sales represent the total change in sales for salons that were open on the same day each year. Salon closures are not included in the same-store sales. So, as we've previously discussed with you, it will take some time for the dust to settle and for same-store sales to be an entirely reliable metric for our performance. Let's hope that by this time next year, we can all rely on these year-over-year comp comparisons as a key indicator of traffic and performance. Fourth quarter franchise EBITDA of $1 million declined approximately $9 million year-over-year driven by reduced royalties and product sales due to the government-mandated closures in response to the COVID-19 pandemic partially offset by a decline in G&A. Year-to-date franchise adjusted EBITDA of $38 million was flat decreasing by less than a million dollars or 2% year-over-year. Adjusted EBITDA was favorable year-over-year until the impact of the COVID-19 pandemic hit. Looking now at the company-owned salon segment, fourth quarter revenue decreased $195 million or 93% versus prior year to $15 million. COVID-19 was the primary driver along with the year-over-year decrease of approximately 1,476 company-owned salons over the past 12 months, which can be categorized into three main categories. First, the conversion of 1,475 company-owned salons to our asset-light franchise platform over the course of the past 12 months, of which 112 were sold during the fourth quarter. Second, the closure of approximately 250 company-owned salons over the course of the last 12 months, most of which were underperforming salons that we closed at lease expiration and are not essential to our future strategy. And third, these net company-owned salon reductions were partially offset by 234 salons that were bought back from franchisees over the last year and 15 new company-owned organic salon openings during the last 12 months, which we expect to transition to our franchise portfolio in the months ahead. While historically, the company has waited until we send and close underperforming salons, in the current environment, we may utilize our balance sheet to terminate some leases early, where the economics justify the decision, which will lead to early termination fees. However, we believe closing certain salons sooner is in our best interest as we get close to a fully franchise model. Fourth quarter company-owned salon segment adjusted EBITDA decreased $44 million year-over-year to a loss of $22 million. Consistent with the total company consolidated results, the unfavorable year-over-year variance was driven primarily by COVID-19 and the elimination of the adjusted EBITDA that had been generated in the prior year period from the company-owned salons that were sold and converted into the franchise platform over the past 12 months. On a year-to-date basis, company-owned salon, consolidated adjusted EBITDA loss of $7 million was $95 million unfavorable versus the same period last year. The unfavorable year-over-year variance is driven by the elimination of the adjusted EBITDA related to the sold and transferred salons over the past 12 months and COVID-19. As I mentioned earlier, management has taken significant steps to reduce costs associated with this segment. It is important to remember that our company-owned salon performance will continue to be less critical to the future trajectory of our business. As we continue our conversion to a capital-light franchise model. Turning now to corporate overhead. Fourth quarter adjusted EBITDA loss of $14 million increased $20 million and is driven primarily by the $27 million decline in that gain, excluding non-cash goodwill de-recognition in the prior year from the sale of and conversion of company-owned salons, partially offset by the net impact of management initiatives to eliminate non-core, non-essential G&A expense. Finishing cash proceeds during the fourth quarter declined approximately $36 million or approximately $33,000 per salon compared to $49,000 per salon in the third quarter of fiscal ‘20. The company is still committed to its conversion to an asset-light franchise business model and expects to be substantially complete with the transition no later than the end of fiscal ‘21, a few months later than we had originally expected. We do believe the economic uncertainty created by the pandemic has and may impact the number of salons to be sold, the pace of sales to franchisees, and we expect proceeds per salon to continue to decline. However, given the lack of visibility related to the length or severity of the pandemic, it is not possible for us to predict the outcome of our refranchising. We do remain confident that we will get it done. However, the timing and cash proceeds are still uncertain. We have tried to be conservative in our estimates and we'll keep you posted as we gain more knowledge regarding the impact of the pandemic on refranchising in the months ahead. Please remember salon proceeds are included in cash from investing activities, so they are not included in the reconciliation of operating cash flows to adjusted EBITDA. As Hugh mentioned, in May, we amended our revolving credit facility that expires in March of 2023. The amendment provided relief for the maximum consolidated net leverage covenant and minimum fixed charge coverage ratio. Our liquidity position as of June 30 was $210 million. This includes $96.5 million of available revolver capacity and $114 million of cash. This compares to a liquidity position of $241.5 million as of March 31, which is a reduction of $31 million or approximately $10 million per month. We continue to believe that the successful amendment of our credit facility will provide the long-term flexibility we need to see our strategy through to completion and enable us to successfully navigate the uncertainties caused by this pandemic. I agree with you. This was the pivotal event of fiscal ‘20 and, in my view, greatly increased the probability of our long-term success in this uncertain environment. Please be aware that refinancing our credit facility was very challenging, but your management team and the credibility of our strategy both proved equal to the task. Since the onset of the pandemic, I can report that we have greatly increased our internal focus on all liquidity matters. It has not always been easy, but we are being aggressive on all fronts to preserve cash until visibility improves. This includes, but is not limited to an intense review of all company payables on a weekly basis. No dollar leaves the company without my personal approval. We are formalizing a company policy for the collection of any past due amount from our franchise partners. Historically, Regis has had very few problems with unpaid rent or royalties from our franchisees. However, we recognize that this risk exists in the new normal, and we intend to take appropriate steps to protect the interest of our shareholders. Ongoing negotiations with our landlords to seek rent abatements, deferrals, or permanent rent reductions. This aspect of cash management will not be a short-term project, so we'll continue into the foreseeable future, including proactive negotiations at lease renewal. For example, we have recently been successful in securing various accommodations from Walmart in order to better support our SmartStyle and Cost Cutters salons in Walmart locations. We are fortunate to have a collaborative long-term relationship with Walmart and greatly appreciate their partnership in the circumstances. Finally, we are proactively managing cash payments for suppliers whenever possible. So, in summary, when it comes down to liquidity at Regis, you can be confident that cash is queen. Although the second half of fiscal ‘20 has proven to be an unprecedented period in Regis' history, we remain excited about the investments we've made in technology. In particular, we're pleased with the August launch of Open Salon Pro, a proprietary back-office management system designed to help our franchisees run their businesses in a more effective manner. When combined with the launch of our upgraded customer-facing mobile apps and the launch of our private label merchandise lines, my confidence in our strategy and the company's future continues to grow. As I said earlier, I believe it was the long-term potential and viability of our strategy that enabled the successful outcome of our refranchising refinancing efforts. We are committed to the completion of our transformation and believe we remain well positioned to generate long-term shareholder value. As we transition the company to its growth phase in the coming calendar year, and as our nation receives a new vaccine and improved treatments for this terrible virus, I also believe our customers will ultimately return to our salons with their families. In closing, our thoughts are with all of you and your families for safety and well-being in the months ahead. These are certainly unusual times, but all of us at Regis remain focused on long-term value creation for our shareholders, our franchise partners, and our employees. I'd like to thank all of you for your continued support and interest in Regis. I will turn the call back to Ryan for any questions.

Thank you, Hugh and Kersten. We will take our first question today, and that is from Laura Champine with Loop Capital. Please go ahead with your question.

Thanks for taking my question. It's really on the mall-based salons. I think you disclosed in the release that there are still 166 of these that are company-owned. What's the likely fate and time horizon there? And if you can give us a sense of how long those leases extend from here, that would be great. Thanks.

I'll take the first part and then I'll let Eric address it. Thank you for the question, Laura. We approach the mall-based salons just like we do with our other company-owned salons. We tend to examine these salons in detail as we refranchise them and hand them over to franchise partners. It's usually unlikely that we make a general assumption about these salons. Sometimes we close them, sometimes we sell them, and sometimes we bundle them with other deals and transition them to partners. With that said, I'll let Eric add to that and clarify further.

Yes, thanks, Hugh, Laura. Our plan with the mall-based salons mirrors what we're doing with the rest of our portfolio. So we plan to have all of that addressed by the time we get to the end of our fiscal year in June, and that'll be a combination of transferring stores to other owners and where it makes sense working something out with the landlord too, to exit again, where it makes sense. So, our plan is the same as the rest of our portfolio, and we have a relatively short lease term on these, as you know, we have not been extending them for some time. So, our lease term is greatly limited and that gives us optionality in terms of exiting the location or transferring it to a franchisee.

Understood. And then if I can just ask about the financial impact of the new POS system and how long you think that'll take to fully roll out across the chain.

I'll take the first part. We've always looked at the investment in our technology as a long-term undertaking, consistent with the multi-year strategy and transformation and all of our technology investments. Laura, we are trying to better enable the franchisees to run their businesses because we're clearly dependent upon their results. On our mobile apps, we're trying to establish frictionless relationships directly with the consumer. So, I think we've described this in the past as a measured rollout where we've moved carefully, and of course, our franchisees may have an existing agreement with other providers, and we certainly want them to abide by whatever service contracts they have in place and adhere to the terms of those agreements. So, I would look at this as an undertaking, and I think we’ve described it during the past. We still feel that way about.

Understood. Thank you.

Thank you. We'll take our next question. And that is from Steph Wissink with Jefferies. Please go ahead with your question.

Thanks. Good morning, everyone. Hugh and Kristen, a question on the comp performance. It actually came in somewhat better than I would have expected. And I think Kirsten, you mentioned that's for comparable day-to-day opening. So, salons that were open on a comparable day last year, but it was down much less than I would have anticipated. Can you talk a little bit about the progression of comps during the quarter, maybe what you've seen quarter to date as your salons have reopened? Are you finding that you're recovering some of that lost revenue and maybe re-engaging even new customers?

I'll address the first part of that question. Unfortunately, we haven't observed the recovery we anticipated. There are understandable reasons for this. Schools are still closed across the country, and we've traditionally benefited from children attending school, which brings families in for haircuts. Additionally, many offices and headquarters remain closed, leading to a more casual approach to personal grooming as people connect through video calls. This has resulted in significant fluctuations in customer traffic, varying from day to day and week to week, and we lack the visibility needed to predict future outcomes. While the situation remains uncertain, I don't think it will be permanent. A lot depends on the effects of the pandemic. If we see improvements in treatments, better testing, and hopefully a vaccine, I genuinely believe people will be eager to return to a more normal lifestyle. Companies are prepared to reopen their offices, and when that happens, I expect individuals will go back to their regular grooming habits, including haircuts and coloring. However, at this moment, traffic hasn't returned to our historical levels, and our visibility remains limited. Eric, feel free to add to that.

Yes, thanks, Hugh. Hi, Steph. Our focus is extensively on growing our revenues. I mean, that's what we're looking at. And, you know, I would say most of our owners are now looking at revenue growth on a week-to-week basis or from a pay period to pay period basis as opposed to looking back to the prior year. So many things have changed that it's important to push the numbers forward and grow the business, both in terms of traffic as well as comps. And so, we're looking at things like how do we grow ticket for customers that are coming into the salons. We're focusing more on color. That's an important aspect of what we're doing today. We're heavily focused on those that are in the shopping centers. They've made the decision to come out of their home and get out. So, we're really trying to be scrappy in how we deal with those folks, whether it's posted on the windshield or increased signage, which cities and landlords are much more open to today than they were in the past. So, we're heavily focused on growing traffic, but also growing ticket with our existing customers.

Right. That's great. Two follow-up questions. The first here was just summarizing, you've got a lot of digital initiatives going on. I think I heard you talking about digital training. Certainly, marketing has pivoted more to digital and social, and then the rollout of Open Salon Pro is kind of a digital engine core engine for your franchise partners. Can you just talk about overall what you're thinking about the horizon may look like for transforming the technology of the company at the franchise site level, as well as at the corporate level?

Sure. You're correct to highlight that there is a digital revolution underway at Regis, and my experiences may differ in pace from others. Technology is deeply embedded in our culture; it's not just about the tools themselves. It takes time for people to adopt and adapt to new technologies. I remember being very reluctant to give up my Blackberry because I loved it. For years, I refused to switch because I was accustomed to it and relied on it for my business. Then someone handed me an Android, and I wondered why I had waited so long to make the switch. When you have people involved at both the corporate and field levels, and we have franchise partners who have successfully operated their businesses in a traditional manner for decades, it requires some time for change. However, I am confident that a year or two from now, our company will look significantly different in how we leverage progressive technology to engage with customers and manage local operations. We're in the early stages of developing these valuable capabilities, and I believe this transformation will enhance the company and make it easier for our customers to engage with us. I think over time, our franchisees will adapt to these changes and realize they benefit their businesses as well.

Okay, great. Last one is a question for you just on rent deferrals to your franchisees. I think during the early onset of the pandemic, you had afforded your franchisees a couple of months of deferrals. Any update on the standing of your franchise network and any risks around franchisees now past the PPP government assistance, any risks to that franchise base, where you're needing to step in and potentially remediate. Thank you.

Yes. As it relates to deferrals, I just want to clarify, we did not suffer any branch with the franchisees. We did do some deferral of royalty payments. So, as it relates to franchisees, we're obviously keeping a very close eye on this topic and we'll continue to do so, because I think the next few months will be telling as it relates to what this really looks like. I would add since there are always risks. And I would add there's always risk with that, but the reality is we're pushing very hard to help our franchisees obtain concessions from landlords. You looked at Walmart rent, that's mostly variable, and we're working closely with Walmart to make sure that we have a good path forward. Likewise, we are working with virtually all of our franchisees to assist them in obtaining favorable rent deals from the landlords.

We have engaged third-party advisors, specifically JLL, to assist with the process. They've been a great resource for us in the past, working alongside an excellent internal team that is collaborating with many of our franchisees. It's reasonable to expect that this process will take some time due to the current challenges in commercial real estate. Over time, our chances of securing concessions will improve, especially as we approach lease renewals. This is not a short-term project; it will extend for a while.

Yes. That's well put. It will continue on for, I would say several years.

All right. Thanks for the information, guys.

You are welcome. Thank you. This concludes the Q&A portion of the call. I will now turn the conference back over to Hugh. Thank you everyone for your kind participation today. We extend our best wishes to you and your families, and God bless everyone during this pandemic. We hope you all stay safe and we'll keep everybody on the call in our thoughts and prayers. Thank you everyone. Bye bye.

Ladies and gentlemen, this concludes our conference call for today. If you wish to access the replay for this presentation, you may do so by visiting Regis Corp's investor relations section of the website or by dialing +1 888-203-1112 with an access code of 9393529. Thank you all for participating in today's call and have a nice day. All parties may now disconnect.