Regis Corporation (NYSE:RGS) Q2 2024 Earnings Call Transcript

Regis Corporation (NYSE:RGS) Q2 2024 Earnings Call Transcript January 31, 2024

Regis Corporation beats earnings expectations. Reported EPS is $0.4259, expectations were $-1.19. RGS isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Biz McShane: Good morning, and thank you for joining the Regis Second Quarter Fiscal 2024 Earnings Conference Call. I’m your host Biz McShane, Vice President, Corporate Controller. All participants are in listen-only mode. The prepared remarks by our 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. 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 their presentation today can be found on our website, www.regiscorp.com/investorrelations, along with reconciliation of any non-GAAP financial measures mentioned on today’s call with their corresponding GAAP measures.

Today’s slides are located in the investor presentations and supplemental financial statements section of the investor site. With that, I will now turn the call over to Matt.

Matthew Doctor: Thank you, Biz. And good morning, everyone. On today’s call, I will discuss our Q2 fiscal 2024 results and share my observations about the progress we have made to stabilize Regis over the past 2 years as well as our ongoing work to reaccelerate growth and drive value for all of our stakeholders. Jumping right into our results for the quarter and first half of the year. Same-store sales rose 1.9% in the quarter and 1.8% year-to-date. Now while we ended the quarter 1.9% above last year, we saw a progression in comparable sales throughout the quarter with October being a bit more challenging coming in roughly flat year-over-year. Well, in the month of December, we were up 4.5% versus December of 2022. And from a sales perspective, we’re seeing notable disparity between our top and bottom quartile salons, and this is really driving the overall sales comp.

We are really seeing some bright spots in those top quartile salons across all of our brands as they have collectively demonstrated approximately 6% same-store sales for the quarter with positive traffic comps. Adjusted Q2 EBITDA on a consolidated basis was $6 million compared to $7.8 million in the prior year’s quarter. Part of that gap between this quarter and Q2 fiscal 2023 is due to the onetime $1.1 million received from the state of North Carolina, with the remaining due to our lower salon count driving lower revenues and timing of expenses. For the first half of fiscal 2024, our adjusted EBITDA of $13.5 million is a $1.8 million improvement versus the first half fiscal 2023 adjusted EBITDA of $11.7 million. We reported operating income of $4.8 million in the quarter versus $700,000 in Q2 fiscal ’23.

This is a $4.1 million improvement. Operating income for the first half has improved by $9 million versus the prior year at $12.2 million versus $3.2 million during the first half of fiscal 2023. We ended Q2 with total liquidity of $38 million. Kersten will go into the details relating to our liquidity and cash used which continues to improve year-over-year on a normalized basis. We project our cash use to decline in the second half of the year, assuming no dramatic changes to our business. Additionally, our $2 million indemnity payment from Zenoti that we recognized from an accounting perspective in December ended up coming in as cash in the beginning of January. We continue to see closures from a salon count perspective, albeit at a lower rate than last year with 148 net franchisee closures in the first half of fiscal 2024 versus 210 in the first half of fiscal 2023.

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Q&A Session

The disparity in performance amongst salons I mentioned earlier is expected to continue, and we expect to continue to see salon counts decrease in the short to medium term due to this as lease end dates come up, especially as the efforts required to significantly move the needle on these salons takes time away from the more viable salons that are better positioned with stronger fundamentals. Those salons, as I mentioned, the top quartile performance across our system averaged roughly $440,000 in sales volumes, and these salons are up 6% in sales year-over-year for the quarter, and they are the strong contributors to our and our franchisees’ profitability. There will be continued focus moving forward on optimizing the footprint we have and driving more out of a smaller, much strong base.

And when I think back to 2 years ago, when I became CEO, we faced a difficult situation where there was an urgent need to take action to rebuild the foundation of the company. Our profitability, cash flow profile, upcoming debt maturity, noncore business lines, franchisee support processes, G&A, numerous organizational adjustments and a rapidly changing industry landscape were all things we needed to address and needed to address quickly. Now the priority was to ensure the stability and longevity of this company. And over the course of last 2 years this has really been our primary focus. And as we evaluate the situation today, we have made significant progress in stabilizing the business and increasing the company’s profitability. However, work remains to be done.

Our comp sales are on a lower base of salons due to those closures of underperformers, and our cash is being deployed primarily to service the interest expense on our debt. Now as the Board continues to evaluate strategic alternatives for Regis, I believe we are at a key inflection point and have a huge opportunity to further advance our brands and our business. As we look ahead and assess where we are today, the following 6 areas are what we believe will truly set Regis up for long-term sustainable growth. Now first and foremost, we need to address our capital structure, which is the purpose of our previously announced strategic alternatives process. Improving our balance sheet is critical for us to be able to operate our business as a franchise or from a position of strength.

Now currently, given our financial position, this requires a balancing act, as we must use our limited resources, both to ensure that we stay in debt [ph] complaints and drive the business forward. And if we can address our balance sheet challenges, it will also give us the ability to develop and deploy a capital allocation strategy that maximizes the value of our assets and generates higher returns for our stakeholders. Our strategic review is aimed at this critical component of Regis’ future, and we will have an update on this process in due course. Now our next major area of focus is improving the customer experience across all of our brands. It has become clear to us through data, customer feedback and salon visits that a return to basics and an intense focus on the customer experience is critical.

Now we all know that there is no replacement for quality haircuts and an excellent customer experience and now is the time to return to being more intentional in our and our franchisees approach. We will be bringing more rigor to the standardization, evaluation and execution between us, our customers and our franchisees. It is important to be consistent in how existing and potential customers interact and schedule services with our salons. The service offerings themselves, expected service times, the in-salon experience, interactions pre and post visit and what is probably ultimately more a longer-term focus salon image and modernization. We fully appreciate the fact that bad haircut or a poor experience can have on our brands. And with the price increases that have been taken over the last few years, we need to protect the value proposition of our salons.

The ability to attract and retain new and existing customers really starts here, and we are in the early stages regarding the systems, guidance and processes to implement the change management required to properly execute on this core tenant of our business. In addition to renewing our commitment to the customer experience and other focus areas, increasing salon productivity. Now key to this effort will be finalizing the adoption of Zenoti as our new point-of-sale systems across all of our salons and utilizing the native CRM and loyalty functions built into the software to benefit from the scale of our platform. Now we have been split across multiple point-of-sale systems far too long. Continuing to increase digital engagement with our customers is a major opportunity for our brands as we’ve seen an organic shift to online booking versus walk-ins and call ahead’s.

Online booking across all of our brands is up roughly more than 20% year-over-year in Q2 fiscal ’24. And taking Supercuts as an example, those salons demonstrating 40% or greater bookings through digital channels, demonstrated positive traffic comps for the quarter and overall same-store sales of 8.1%. And with only approximately 15% of Supercuts at 40% plus online booking there was clear runway here. And there is further opportunity when we think about combining Zenoti with the standardization approach I mentioned earlier as part of the customer experience to really drive an increase in digital in a deliberate way. We currently have approximately 1,600 salons on the Zenoti platform with another 900 expected to migrate by March 31 and the remainder by June 30 of this year.