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Text: Before turning the call over to Hugh, there are a few housekeeping items I'd like to address.
These non-GAAP financial measures are provided to facilitate meaningful year-over-year comparisons which should not be considered superior to or as a substitute for our GAAP financial measures and should be read in conjunction with GAAP financial measures for the period.
I am grateful to each one of you for your many contributions to our business while confronted with these extraordinary unprecedented conditions.
There's little doubt that the most important event of the quarter was the company's successful amendment of its revolving credit facility in the month of May, an amendment that expires in March of 2023.
Among other things, these negotiations removed all prior financial covenants including the net leverage ratio and fixed charge coverage ratio and added a minimum liquidity covenant while providing the lenders security in the company's assets.
This covenant-light facility is expected to provide the long-term flexibility we need to see our transformational strategy through to completion and at the same time, enable us to successfully navigate the uncertainties caused by the pandemic.
We were pleased with this outcome, particularly given all of the uncertainty related to the pandemic and the state of the economy in North America.
Broadly speaking, we expect the -- I mean, the credit facility will enable us to move forward.
We move forward to embrace the full potential of our growth strategy which includes, among other elements, completing our conversion to a capital-light franchise platform, transforming our company with technology, focusing on the value salon sector and our core brands, eliminating costs while continuing to invest in capabilities needed for a better future, and upgrading our marketing and ongoing digital education efforts.
As to the current state of our salon operations, with the exception of our salons in California which opened and then were closed again due to a state mandate and several company-owned salons we elected not to open, our salons have substantially reopened.
As I understand it, Governor Newsom announced on Friday that salons in California can reestablish indoor operations, subject to county approval.
We believe this is late-breaking good news for us given our significant populations of salons in California.
But as of today at month end, roughly 82% of our total salon portfolio was open for business including both franchise and company-owned salons.
Of course, we expect the number of open salons will begin to increase as California and its individual counties begin to reopen.
Excluding the salons in California that are temporarily closed due to state mandate, 90% of our franchise salons and about 88% of our company-owned salons, representing approximately 90% of the company's portfolio, have reopened.
So normalizing for California folks, we are substantially reopened, and we just got a little bit of good news on late last week out of Governor Newsom.
I think you would be interested to know that we've been working very closely with our franchisees, our franchise councils, and our company's operating teams to identify ideas, new ideas to adjust our operations to a post-COVID reality, while keeping the safety of our stylists and customers as our top priority.
As we previously shared with you, we worked with infectious disease specialists at the University of Minnesota to assure that the health and safety of our customers and stylists will be at the forefront of our salon operating procedures.
As I mentioned earlier, while adjusting to the impact of this pandemic, we are trying creative new ideas to help build traffic, while maintaining social distancing and our safety protocols.
For example, collaborating with one of our leading Supercuts franchisees, we recently introduced an outdoor salon concept in Southern California in a format somewhat similar to a sidewalk cafe.
While it's still early days, we really like the new concept and believe it may ultimately prove to have a longer-term application in other locations and perhaps brands.
While our post-COVID volumes are down, our scale confers significant benefit that's not shared by most of the salon sector.
And we certainly believe that consumer interest and good grooming is something that has long-term sustainability.
It's important to consider that despite constantly changing external conditions, Regis has been around for almost 100 years now.
We have survived in spite of multiple recessions, a great depression in the Second World War.
And I believe that with advances in the treatment of COVID-19, better testing and the potential introduction of new vaccines in the months ahead, our customers and their families will return to a more normal lifestyle that will include visits to our salons.
Although much has changed since we embarked on our multiyear strategy, we remain committed to our transformation to a capital-light growth platform.
We originally believed we would complete our refranchising process by the end of this calendar year, and that was the trajectory.
However, no one expected this pandemic and the timing of our transition will likely be delayed a few months by the disease.
Given the impact of the pandemic, we now expect to be substantially complete with the refranchising effort on or before the end of fiscal year 2021.
In other words, we think we'll finish the process no later than next summer.
At this point, the transition, we also anticipate that the onetime cash proceeds generated by this last phase of our refranchising process will be lower due to the uncertainty in traffic erosion created by the pandemic.
However, as you may expect, these assumptions could change depending on the length or severity of the pandemic and the potential impact of advances in treatment, better testing and the introduction of new vaccines.
Although we have more work to do and must find effective ways to adapt to this new reality, we believe the core elements of our strategy and our continuing evolution to a technology-enabled growth platform will, in the long run, enhance shareholder value.
In order to support our growth strategy and provide enhanced capabilities to our franchisees and to establish frictionless customer relationships, we kept our promise and made a long-term commitment to strategic technology investments which we shared with you today.
In August, the company launched its proprietary cloud-based salon management and point-of-commerce solution, OpenSalon Pro.
OpenSalon technology now powers customer-facing booking and information delivery on branded platforms.
This follows a wider initiative launch in 2019 to enable booking directly from Google, Facebook Messenger and Amazon Alexa.
We overhauled and launched the Supercuts mobile app which improved same-day check-in and the ability to book services for the following day.
This update represents an alternative to the traditional walk-in model that consumers and even some states are demanding, particularly in the face of COVID-19 restrictions and wider consumer preference.
And finally, during the quarter, we also launched the new Cost Cutters mobile app in iOS and Android, and a new Cost Cutters website.
With the ability to book an appointment up to three days out, the new mobile app will also be at the center of brandwide loyalty and rewards programs at Cost Cutters.
When downloading the app, customers will be able to earn points in our salons for discounts on future services or toward purchase of Regis's exclusive private label retail products.
And we've also kept our promises regarding expense rationalization.
In June, we took further action to eliminate administrative costs and personnel, with an expected annualized savings of $6 million.
During the year, we made a number of frankly painful decisions to eliminate nonessential G&A cost as we continued our transition to a fully franchised portfolio.
On a full-year basis, our G&A expense was approximately $45.3 million lower than last year primarily due to the transition of company-operated salons to franchise, salon closures and furloughs resulting from the COVID-19 pandemic among other factors.
Please note that our company rejects racism, inequality, cruelty and hatred of any kind.
My thoughts and prayers are also with our healthcare workers and first responders, who are helping fight this pandemic, the victims of Hurricane Laura and our firefighters in California.
May god bless them all.
I'm also grateful to each one of you for your continued interest in Regis.
As Hugh mentioned, the last few months have been unprecedented, but we are committed more than ever to our strategy.
And despite the unfortunate consequences of this pandemic, we continue to be pleased with the progress of our transformation.
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 that 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 noncash 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 noncash goodwill derecognition 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.
And like the fourth-quarter results, this unfavorable variance was also 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 represents 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'll take some time for the dust to settle and for same-store sales to be an entire 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 salon 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 $1 million or 2% year over year.
Adjusted EBITDA was favorable year over year until the impact of 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 bucketed 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 signed the 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 periods 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 net gain excluding noncash goodwill derecognition 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.
Vendition 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 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 franchises, 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'll 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 to 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 3 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, 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 is the pivotal event of fiscal '20.
And in my view, greatly increase 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.
Formalizing a company policy for collection of any past due amounts 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, but will 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 Cutter Salons in Walmart locations.
We are fortunate to have a collaborative long-term relationship with Walmart and greatly appreciate their partnership in this circumstance.
Finally, we are proactively managing cash payments to our suppliers wherever is possible to do so.
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 unprecedented period in Regis's history, we remain excited about the investments we've made in technology.
In particular, we're pleased with the August launch of OpenSalon Pro, proprietary back office salon management system designed to help our franchisees run their business 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 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 if 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.

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expects to complete its transition to a fully-franchised model no later than end of fiscal year 2021.

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