Regis Corporation (NYSE:RGS) Q2 2023 Earnings Call Transcript February 1, 2023
Biz McShane: Good morning, and thank you for joining the Regus Second Quarter 2023 Earnings Release Conference Call. I’m your host, Biz McShane, Vice President and Corporate Controller. All participants are in a 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. After the prepared remarks, we will have time for questions. Please use the chat feature or raise your hand feature to ask a question. Please note, 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 regiscorp.com/investorrelations along with any reconciliation of any non-GAAP financial measures mentioned on today’s call with the corresponding GAAP measures. Today’s slides are located in the Investor Presentation & Supplemental Financial section of the Investor site. With that, I will now turn the call over to Matt.
Matthew Doctor: Thank you, Biz. Good morning, everyone, and thank you for your interest in Regis. For today’s call, I will highlight our second quarter fiscal 2023 results and reiterate our strategy and the priorities we have for the business as we enter the second half of our fiscal 2023 year. I am pleased to report continued business progress that resulted in a strong quarter for Regis and our best start to a fiscal year in quite some time. We have built upon our positive start to the fiscal year by delivering further sales and EBITDA growth with Q2 2023 adjusted EBITDA of $8 million dollars more than double our adjusted EBITDA of $4 million that we reported last quarter. These results come just 18 months after we reported an adjusted EBITDA loss of $77 million for our full fiscal year 2021.
In the last two quarters, we have reported adjusted EBITDA of $12 million, which is a testament to the progress made by the Regis team and our franchisees. It is worth mentioning again, as I have on previous calls that I am proud of the progress we are continuing to make in a relatively short period of time. Coming out of fiscal 2021, we utilized 2022 as a year to stabilize Regis through the winding down of our legacy businesses, streamlining our G&A, selling our technology platform and amending and extending our credit agreement while simultaneously aligning on a go-forward strategy with our franchisees to drive our business forward, all of which required a tremendous amount of work and execution and that work continues to come through in our results.
And not only having turned the corner on profitability from an adjusted EBITDA perspective, but also accelerating it. We will continue to focus and execute against our strategic initiatives of stylist retention and recruitment, customer retention and traffic-driving and the rollout of our technology partners Zenoti salon management platform in an effort to grow top line sales and franchisee profitability, which will in turn drive Regis sales and profitability. While we have come a long way, we still have a ways to go and work to be done, but I continue to remain excited and encouraged by the strides we have been making in our business and the future of our scaled fully franchised platform. I will now speak to some of the highlights of our second quarter and year-to-date results.
Kersten will be diving deeper into the results in her section. And I think it is important to note the details and nuances Kersten will mention, as there are a number of onetime items that had an impact on the quarter. That being said, the overall theme of progress and strong results continues to hold regardless of the onetime impacts. For the quarter, same-store sales rose 4.5% versus the prior year’s second quarter. Adjusted Q2 ’23 EBITDA on a consolidated basis was $8 million compared to $3 million in the prior year’s quarter, a $5 million improvement. Adjusted EBITDA on a six month year-to-date basis improved by $14 million year-over-year at $12 million versus a loss of $2 million a year ago. Our franchise segment EBITDA was $8 million for the quarter, increasing $2 million as compared to the second quarter of fiscal 2022.
On a year-to-date basis, our franchise segment EBITDA is up over $10 million versus a year a year ago, a $12.5 million year-to-date versus $2 million during the prior year period. We reported our second quarter in a row of positive operating income of $1 million versus an operating loss of $0.5 million in Q2 fiscal ’22. Operating income on a year-to-date basis has improved by almost $9 million versus the prior year at $3 for the six months ended December 31, 2022, versus a loss of $5 million during the prior year period. And finally, from a cash perspective, we continue to make strong progress in decreasing our cash use as we’ve come a long way from the cash use over the past two to three years and are getting closer to cash flow breakeven.
Our liquidity position and capital structure remain healthy as we ended the quarter with total liquidity of close to $44 million, providing us ample runway to continue investing in and improving the business. Turning now to our business initiatives. Much of what I will be talking about will be a reiteration of the strategies and priorities I have mentioned on previous calls as they remain the same, and they will continue to remain the same for the foreseeable future. All of these items, we view as foundational to our business and our plays for the long term. Given the velocity of our business, with customer visitation cycles generally will see between one to two months combined with how important increasing our franchisee stylist workforce is, these are not factors that will change overnight, but rather require the repeated investment of time and effort in addition to testing and learning.
We are confident that our areas of focus are the right ones, and we will continue to bring the right balance of urgency, discipline and patience as we execute on our business initiatives to move the needle on sales and franchisee profitability. Now regarding our Regis specific business items, our team continues to do a great job of tightly managing G&A and winding down our company-owned salons. These actions remain instrumental in continuing to provide us the runway need to drive the turnaround and position for Regis for growth as we implement our sales-driving initiatives. From a G&A perspective, over the last several quarters, we provided revised guidance to a range of go-forward G&A. And during this quarter, we have continued to make improvements.
We are pleased with our efforts here. And Kersten will be providing another update on a revised range during this call. I also want to make it clear that while we have been optimizing G&A to match our current business model, it is not affecting the manner in which we support our business and our franchisees. In fact, we’re actually increasing our field level support and the programs our franchisees have access to and will continue to do so as we are on the path of being a strong franchisor. In regards to our company-owned segment, we ended the quarter with 75 company-owned salons while our company-owned segment was positive for the quarter on an EBITDA basis, largely due to a one-time COVID relief payment that Kersten will touch on. This is an area continues to provide a drag on our profitability.
And due to the hard work of the team, we now have clear line of sight over the next 12 months to wind down another 55 to 60 salons. And with those rolling off, we will have mitigated the majority of a negative contribution these salons have on our business by this time next year. Now as we move ahead, will continue to monitor our G&A and our company-owned portfolio very closely. Moving on to, our salon level initiatives of technology stylist retention and recruitment the customer marketing. On the technology side, our key initiative here remains consolidating our system onto a singular point-of-sale software system. Through the sale of our open salon – software platform in June of 2022, we have partnered with Zenoti as our main technology partner.
And as of December 31, 2022, we’ve had over 500 salons actively using the product and many more signed up to migrate. Currently, the main priority for us in Zenoti is to engage with and stay close with our migrated user base to ensure the experience and functionality meets the unique needs of our brands, our franchisees and stylists. We are listening intently to the feedback, and we’re deploying the requisite resources to address any issues raised in short order with the goal of accelerating sign-ups and migration when our franchisees needs have been met. We believe the product is close to being properly tailored for all of our brands, and we look forward to tapping into the many benefits the Zenoti platform will provide. We believe having Zenoti rolled out across our franchisee base will allow us to better engage with customers and connect deeper to digital channels.
We also be able to drive the many initiatives we have around life cycle marketing and loyalty, which should further unlock the benefits of our size of scale as well as being – and bring greater uniformity to our brand promotions. Zenoti will also provide us and our franchisees the ability to make an even more personal approach to getting to know our customers, their preferences and ultimately provide a better service experience across our salons in addition to increased stylist productivity. On stylist retention and recruitment, I’ve spoken on previous calls about the labor challenges, which has been putting pressure on our sales recovery. We are constantly thinking through with our franchisees how they can invest attract, hire, train and retain stylists.
We are working on refining each of our brands’ unique employer value propositions to ensure we have impactful reasons why stylish should join one of our Regis brands. Not only is it important that we have clear messages, but another key initiative will be ensuring that the message gets out to, meet the stylists where they are. This includes us and our franchisees taking time to cultivate and build relationships at beauty schools as well being active on social and digital channels. In addition, we have spoken at length about our increased investment in education as a tool to attract and retain given the importance of ongoing education to stylists. I am very pleased at the foundation we have been building through our various programs that include our in-house artistic directors and field-based technical trainers.
We want to build the largest and most impactful educational platform in industry. And we have grown our collective training team significantly over the course of past year to over 1,000 trainers across our system versus less than 150 at this time a year ago. Given the recent exponential growth, we have only scratched the surface regarding the impact this team can have on elevating the technique of stylists, driving the latest trends and ensuring customers are receiving the quality services that they are seeking. We have ramped up the number of in salon crisis across all of our brands as well the digital trading support we are providing to our trainers and stylists. We believe this will go a long way in keeping stylists engage and is a critical touch point that we uniquely provide.
In addition, we’re about to launch salon leader and manager training this month to build soft skills on the non-technical side. And looking at data from the past few months, early findings suggest that those salons that have a dedicated technical trainer are outperforming the rest of the system on a sales basis. We look forward to not only rolling this out further, but also developing programs to fully optimize the use of this valuable team and resource. We have also brought back in-person advanced education award trips in a big way. With our most recent one having just taking place in Las Vegas for the Supercuts brand in early January. The entire leadership team, along with many other Regis employees and franchisees, attended this event that hosted around 850 trainers, managers and stylists.
As events like this are differentiators and will be, key to rewarding top performers, drive further engagement and retaining our franchisees’ top talent. These events are also critical to enhancing brand culture and providing stylists the sense that they are part of a community versus an individual salon. Taken together, we believe all of these components will truly differentiate our brands and set us apart as a destination to work for both stylists that are looking to start their careers as well as those with experience. On marketing, we continue to prioritize retention and building further loyalty to our brands. I’ve previously mentioned the shift in media spend, which we are continuing to make to optimize those channels, providing the highest ROI.
We have test campaigns out in market with various lifecycle and CRM messaging, and we will seek to expand on the ones that are driving the most traffic. Our loyalty programs are getting closer to being piloted and refreshed brand campaigns are in the works. We are finding the right balance between performance-based traffic driving initiatives and overall brand strategy as it is important that neither one of these get lost. The goal of all this is to create a stronger relationship through more communication with our customers, and I am encouraged as we test and learn new tactics utilizing the rich data we have and we’ll continue to gather and I look forward to gaining further insights and landing on high-impact programs to drive traffic and awareness to our salons.
I will wrap up our initiatives here. And while this was not exhaustive of what we were doing, I wanted to provide you some examples and insights into the work streams we have in place and how they can impact our business across the entire system. As we look forward to the third quarter and beyond, I want to ensure that I set the proper expectations of what our results may look like. And I want to give the impression that our Q2 results are the new benchmark for a quarterly run rate from an EBITDA perspective, at least not at this stage of our turnaround, given that there were some one-time items and timing that contributed to the quarter. That said, I want to be very clear that our results thus far have been in line with where we have expected them to be and that nothing has been a surprise to us.
Staying with the theme of expectations and no surprises, given the timing of certain expenses such as the Supercuts education event that took place in January, as well as the seasonality of sales, we expect the next few quarters to come in below Q1, ’23 adjusted EBITDA, which still represents continued year-over-year improvement. I want to not only give you that visibility, but also let you know in advance that from our perspective, a dip over the next few quarters does not signal a step back, but rather what is fully expected and planned for, given the timing of investments that we will be making. Taken in totality with our first two fiscal 2023 quarters, we are on track to deliver significant EBITDA growth over the course of fiscal 2023 versus our prior years.
I would like to close by reiterating the excitement for the future of Regis. We have all the elements in place to continue building on the momentum we are gaining. We have strong conviction around the industry that we are in, our positioning within the industry, our revamped and more streamlined business model, the stabilization we have achieved for our platform, the positive results we are delivering and the strategy we have in place to address the challenges our business faces in order to drive sales and franchisee profitability. I am proud of all of our team members, our franchise owners and business partners for their resilience, passion and dedication to Regis. This is an exciting time for us, and I want to again thank the entire region system for their contribution to our results, and thank you for your continued interest in our company.
With that, I will now turn the call over to Kersten to review the financials in more detail. Kersten?
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Kersten Zupfer: Thanks, Matt, and good morning. We are pleased to speak with you to share our second quarter and first half fiscal 2023 performance. The quarter marked our start to a fiscal year in five years when measured by GAAP operating income and demonstrates the future of Regis as an asset-light franchisor. Our operating income improvement is driven by our focus on controlling G&A, the wind-down of last generating company-owned salons and our distribution centers and to a lesser extent, the benefit some onetime items, which were partially offset by onetime costs. Reviewing the second quarter in more detail and beginning with the income statement. On a GAAP basis, total second quarter revenues were $60 million and declined $9 million from the prior year.
This revenue decline was expected and relates primarily to a reduction in franchise rental income and the wind down of our company-owned salons. Franchise rental income flows through both revenue and expense therefore, has no impact on profitability. We believe a better reflection of our revenue performance is system-wide same-store sales, which grew 4.5% in the quarter. We continue to believe our initiatives to drive stylist hours and customer traffic will support continued improvement in system-wide same-store sales. As I mentioned, we posted another quarter of GAAP operating profit and a strong start to the year. The increase in operating profit was driven by the wind down of loss-generating company-owned salons and our continued focus on managing G&A.
Additionally, I’d like to call your attention to onetime expenses and benefits in our GAAP operating income for the quarter. On expense side, we had a $2.6 million depreciation charge driven by the consolidation of our office space and a $1.2 million inventory reserve charge. As it relates to benefits, we had positive insurance adjustments, which lowered G&A in the quarter by $600,000. Now let’s turn to our adjusted results, which eliminates the noise in the reported results. On an adjusted basis, second quarter consolidated adjusted EBITDA was $8 million compared to $3 million in the prior year’s quarter. The $5 million improvement was driven by our lower G&A which included a $600,000 positive actuarial insurance adjustment, the wind down of loss-generating company-owned salons and a $1.1 million grant from the State of North Carolina related to COVID-19 relief.
Our core franchise business achieved adjusted EBITDA of $8 million in the quarter, a $2 million improvement compared to $6 million in the prior year quarter. On an adjusted EBITDA basis, our company-owned segment was just above breakeven for the quarter and improved $3 million from the second quarter last year. The improvement is driven by the $1.1 million grant from the State of North Carolina related to COVID-19 relief and having fewer loss-generating company-owned stores in the current period as we are closing stores at the lease end and negotiating early buyouts where appropriate. For the first half of fiscal 2023, revenues were $122 million compared to $146 million in the first half of fiscal year 2022, similar to the second quarter revenue decline, this decline was expected and relates primarily to a reduction in franchise rental income and the wind down of our corporate-owned salons, as well lower product sales to franchisees.
Adjusted EBITDA for the first half of the year was $12 million, a $14 million improvement compared to a $2 million loss in the first half of fiscal year 2022. Adjusted EBITDA improved primarily due to our lower G&A, the wind down of loss-generating corporate-owned salons and a $1.1 million grant from the State of North Carolina. Breaking this down further, adjusted G&A was $25 million for the first half of the year. This is lower than our expected run rate in the second half of the year due to our investment spend on training, recruiting and retention, which will increase as we accelerate these initiatives in the second half of the year. As Matt mentioned, we continue to optimize our G&A spend. And last quarter, revised our expected normalized G&A spend to $57 million to $60 million from $60 million $63 million.
Even with the planned strategic spend in the back half of fiscal year 2023, we are now reducing our G&A outlook further and expect G&A to normalize between $54 million and $57 million annually with fiscal ’23 trending towards the low end of that range. Turning to liquidity. As of December 31, we had $44 million of liquidity, including $34 million of available revolver capacity and $9 million of cash. In the first half of the year, we used $7 million of cash from operations, of which $5 million was used in Q1 and $2 million was used in Q2. On a year-over-year basis, cash used in the first half of 2023 improved $17 million from the prior year. The $2 million cash used in the second quarter includes $2.5 million of deferred social security payments and another $500,000 in payments to complete our obligations related to our transition services agreement with our former point-of-sale provider.
These cash uses were offset by the $1.1 million of cash received, as I mentioned earlier. Adjusting for these cash uses, second quarter cash used in operations was flat. We expect to use more cash in the back half of fiscal 2023 as we further invest in training, recruitment and retention. With the sale of OSP, our capital expenditures have decreased by approximately $3 million this year which is in addition to the cash saved on G&A. Given our working capital and modest capital expenditure requirements, we believe we have ample liquidity. This concludes my prepared remarks. I’d like to thank you again for your continued support and interest in Regis. With that, I will turn it back to Biz who will lead us through the Q&A.
A -Biz McShane: Thank you, Kersten. Please remember to use the chat feature or raise your hand feature to ask a question. The first question we have is through the chat. Kersten, this is for you. Please give an update on the NYSE compliance.
Kersten Zupfer: Great question. We are currently in compliance with the New York Stock Exchange stock price requirement as well as the market cap requirement, we’re just awaiting the final compliance letter from the exchange.
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