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Text: These documents can be found on our website, www.
My name is Felipe Athayde, and I'm the newly appointed president and CEO of Regis Corporation.
I could not be more excited to be joining this amazing company.
And even though these are obviously uncertain times, I believe times like these always open new opportunities.
But before I talk about some of the opportunities I see, let me start by sharing my background with you.
I spent almost a decade at Restaurant Brands International, a portfolio company of 3G Capital, in parent company of the Burger King, Tim Hortons and Popeyes creams.
I joined Burger King shortly after the 3G acquisition, and held positions in marketing, operations and development across all three RBI grades.
I served as president of Tim Hortons U.S., president of Burger King Latin America, and most recently as president of the Americas for Popeyes Louisiana Kitchen, where I led the launch of the Popeyes chicken sandwich and a successful revitalization of the brand resulting in some of the largest same-store sales increases in the history of quick service restaurants.
I also lend the recovery of Popeyes following the COVID-19 pandemic.
Many have asked why I'm excited to have made the transition to Regis.
And the answer is simple.
Regis' brands are in the business of making people look and feel their best.
Hair carries the weight of people's identities and because we cater to such an important human need, I believe core demand for hair salon services is and always will be inherently strong.
Regis has already built the foundation that positions us well for growth even in the current environment.
And the opportunities around us today are very real.
The way I see Regis today is exactly how I saw Burger king back in 2011.
In terms of the magnitude of the value creation potential for our shareholders, and of the wealth creation that can be achieved by our franchisees when we focus on franchise profitability.
Existing Regis franchisees who are good partners of our brands and have the right infrastructure, competencies and resources will have a tremendous opportunity to multiply their footprints, both by driving new unit growth in their territories as well as by acting as consolidators where applicable.
New hospitality-focused franchisees from different franchises systems will be recruited into our many brands, helping us elevate the level of our customer experience.
We are well on our way to becoming a fully franchised business, and my main priority at this moment is to finish the refranchising process started by Hugh which I plan to do at an accelerated speed.
We have seeing consistent high interest in the remaining salons left in the portfolio, and have been approached by a few potential private equity players who see the current environment as a great opportunity to build a portfolio of hair salons which can then serve as a platform for future consolidation and aggressive new unit growth.
It is an avenue we're exploring to bring in new franchise owners.
The hair salon industry in North America is incredibly fragmented, and it's mostly in the hands of independent players.
There's a tremendous opportunity for salon chains to earn market share through brand differentiation, differentiation through technology, through marketing or through advancement opportunities for our stylists.
We are the largest hair salon network in the world.
We own some of the most iconic brands in North America.
We have a strong network of franchisees and a world-class in-house technology group that is not only developing innovative customer-facing technology, but also that will allow us to have a sophisticated business analytics platform based on transactional data from our salons via our OpenSalon Pro POS system.
This will make us into a much smarter company and allow us to use data analytics to design traffic-driving initiatives, drive product attachment in our salons and create loyalty programs that will keep our customers coming back.
My goal is to make Regis into a brand-led company that is in the business of supporting franchisees with a strong focus on their unit economics.
In the franchisee world, unsurprisingly, the brands which have grown the fastest are those that have been the most profitable.
I consider this to be my most important learning for my 10 years in the restaurant industry.
So Regis' obsession has to be and will be the profitability of our franchisees.
I have engaged an outside consultant who I have known for many years and worked closely with in my restaurant days and who's already working with us on the implementation of a zero-based budgeting process at Regis, a process which I have been intimately familiar with in the past decade.
Zero-based budgeting will create better visibility and control over our expenses, increase accountability over budgets and ensure expenses are aligned with our company's new business model and its respective priorities.
Regis will run as one fully franchised company and no longer as corporate opco and franchise.
I appreciate you being on the call.
Today, we reported, on a consolidated basis, first-quarter revenues of $111 million which represented a 55% decrease from the prior year.
The decrease is the natural result of the transition to an asset-light franchise model, coupled with the negative continued impact of COVID-19.
We estimate that we lost roughly $44 million of revenue in the first quarter due to the reduced traffic in-store closures associated with COVID-19.
As of today, approximately 95% of our solon systemwide are open, and management is evaluating the future of unopened corporate salons which may include keeping some salons permanently closed.
We reported an operating loss of $31 million during the quarter.
The economic disruption caused by the pandemic was the key driver of this loss as it has been in the last quarter of our prior fiscal year.
First-quarter consolidated adjusted EBITDA loss of $19 million was $48 million unfavorable to the same period last year.
And was driven primarily by the decrease in the gain associated with the sale of company-owned salon of $27 million and the planned elimination of the EBITDA that had been generated in the prior period from the net 1,056 company-owned salons that has since been sold and converted to the franchise portfolio over the past 12 months.
The COVID-19 pandemic also significantly contributed to the decline in the first-quarter adjusted EBITDA.
Looking at the segment-specific performance and starting with our franchise segment, first-quarter franchise royalties and fees of $18 million decreased $10 million or 36% versus the same quarter last year.
A substantial part of the year-over-year decline was due to a $6 million reduction in cooperative advertising funds which we would have typically charged to and collected from franchisees, but which the company temporarily reduced as part of the COVID-19 pandemic relief effort to help ease the financial burden, the pandemic placed on our franchisees.
This decline is offset in-site operating expense, and it has no impact on operating income.
Royalties also declined approximately $7 million primarily due to COVID-19, certain state mandatory salon closures, state-mandated operating restrictions and pandemic-related customer behavior changes which we believe to be temporary.
Offsetting these declines with the growth in our franchise fees which now represents 80% of our portfolio.
Product sales to franchisees increased $1 million year over year to $14 million driven by the increase in the franchise fees.
As Felipe mentioned, we plan to use our technology capabilities to make better data-driven business decisions, leading to higher franchise profitability.
We believe product attachment strategies can be created through better use of transactional data from our salon.
First-quarter franchise adjusted EBITDA of $7 million declined approximately $5 million year over year driven primarily by reduced royalties as a result of the COVID-19 pandemic and the associated activities, as previously noted partially offset by a decline in G&A.
Looking now at the company-owned salon segment.
First-quarter revenue was $47 million, a decrease of $127 million or 73% versus the prior year.
The multifaceted reach and the impact of COVID-19 including increased governmental regulations, along with the year-over-year decrease of 1,243 company-owned salons over the past 12 months were the drivers of the decline.
The decrease in the company-owned salons can be bucketed into three main categories: First, the successful conversion of 1,067 company-owned salons to our asset-light franchise platform over the course of the past 12 months, of which 137 were sold during the first quarter; second, the holder of approximately 400 company-owned salons over the course of the last 12 months, most of which were underperforming salons at lease expiration and not essential to our future strategy nor did we believe would be well suited within the current franchisee portfolio; and third, these net company-owned salon reductions were partially offset by 218 salons that were taken back from franchisees over the last year and six new company-owned organic salon openings during the last 12 months which we expect to transition to our franchise portfolio in the months ahead.
First-quarter company-owned salon segment adjusted EBITDA decreased $22 million year-over-year to a loss of $11 million.
Consistent with the total company consolidated results, the unfavorable year-over-year variance was driven primarily by 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.
As it relates to corporate overhead, first-quarter adjusted EBITDA decreased $21 million to a loss of $15 million and is driven primarily by the $27 million decline in net gains excluding noncash goodwill derecognition in the prior year from the sale and conversion of company-owned salon partially offset by the net impact of management initiatives to eliminate non-core, non-essential G&A expense.
There is still work to be done in taking out non-core, non-essential G&A expense.
And as Felipe mentioned, we have recently initiated a zero-based budgeting and organization process which will ensure expenses are aligned with our new franchise business model.
Turning now to the cash flow and balance sheet.
As you heard from Felipe, our top priority is to finish the refranchising process at an accelerated pace.
In addition, cash proceeds during the first quarter were $3.7 million or approximately $27,000 per salon.
We continue to maintain our strong overall liquidity position.
As of September 30, we have liquidity of $184 million.
This includes $99 million of availability under our revolver and $85 million of cash.
In the first quarter, we used $29 million of cash, operating the business.
As you may recall, at the end of the third quarter and during fourth quarter, we utilized cash management strategies, such as modifying payment terms on vendor payables and renegotiating rent payments which actions have now impacted cash used in the first quarter and will also impact second-quarter cash use as some of these actions delayed payments into the second quarter.
Additionally, we used $2.5 million in the first quarter to buy out of underperforming salons early at a discount that will improve future cash flows.
We expect additional cash to be utilized in the second quarter as bonus payments that are typically paid in first quarter will be paid in the second quarter in addition to certain CEO-transition and onboarding expenses.
We believe our largest uses of cash will occur in the first half of this year with cash utilization improving in the back half of the fiscal year.
We've had a number of investors ask about the lease liability on our balance sheet.
So I thought it would be worth mentioning that these lease liabilities on our balance sheet represent liabilities for both our corporate and franchise locations, of which approximately 80% of our liability is service and personally guaranteed by our franchisees.
Additionally, the liability on our balance sheet includes the lease payments for the current term of the leases, plus one option period for all leases we expect to renew at our discretion which overstates the rent payments that Regis has committed to.
Excluding the option period, the lease liability would be approximately $460 million which is $300 million, less than the $760 million on our balance sheet.
So to take that one step further, only 20% of the $460 million or $92 million is release exposure on the company-owned salon.
Before wrapping up, I thought I would spend a few minutes on what we are seeing with the business and related traffic trends.
As a reminder, government-mandated closures started impacting the business in March, and we fully started reopening with a few locations in late April, with more opening in May and June.
Even with these reopenings, most states impose onerous operating limitations including reduced salon capacity.
We sign an initial reopening surge lasting about a week post reopen and the normalized traffic patterns reported this quarter.
We saw our lowest traffic levels in August which was further impacted by significantly reduced back-to-school traffic.
The business was also impacted by states and provinces that were mandated to reclose again.
The West Coast, specifically California, where we have over 500 locations was largely impacted by reclosures mandated in mid-July, lasting through most of August.
The island of Oahu also reclosed in September and El Paso, Texas recently announced another two reclosure.
We have seen some improvement in traffic across the brands in September and October.
The best performance has come out of the middle of the country where there has been relatively less disruption post reopening.
We are seeing better performance in the South and Southeast as well, likely as these areas have been less restrictive.
The Northeast states in Canada primarily Ontario as well as the West Coast, post reclosure disruption continue to struggle with building traffic back up.

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estimates it lost approximately $44 million in revenue due to reduced traffic and store closures associated with covid-19 pandemic.

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