RGS - NASDAQ

Good morning, and thank you for joining the Regis Second Quarter 2025 Earnings Conference Call. I am your host, Kersten

Thank you, and good morning, everyone. On today's call, I will discuss our recent acquisition of the Alline Salon Group in more detail, review our quarterly financial results and provide updates on our key initiatives. During the second quarter, we acquired our largest franchisee, the Alline Salon Group, in a move that has significant strategic and financial benefits and furthers our efforts to position the company for future growth. Taking a step back for a minute, this transaction is another milestone on the journey we've been on stabilizing and growing the company, and we are in a significantly stronger position today than just a short while ago. Around one year ago from the time of the Alline transaction, we're putting efforts towards trying to stay listed on a national securities exchange and strengthen our balance sheet. Since then, pro forma for the Alline transaction on a trailing 12-month basis from December, we have grown adjusted EBITDA by 35%, cut our debt and leverage ratios in approximately half and have line of sight to consistent cash flow generation versus what has been consistent cash use. Now turning back to Alline. I always had a belief that the optimal salon mix for Regis would include a strategic portfolio of company-owned salons to complement our franchise business. While this was not possible given the corporate salons we've had over the past several years we're in wind-down mode due to their performance. Once we have the ability to allocate capital post our June 2024 refinancing, the idea of buying back a portfolio of salons began to surface as a potential growth initiative. I certainly do not think it would come to fruition as quickly as it did, but it just so happened that the right opportunity presented itself and we pursued it opportunistically. Alline is the right portfolio at the right time. And quite frankly, it is one of the few portfolios that made sense given the size, scale and turnkey operating infrastructure Alline had built over the years. Due to our strong familiarity with this group of salons having supported Alline as franchisor and previously owned and operated the salons that we acquired, we were able to get comfortable quickly with the risk and have a clear path and a defined path towards strong EBITDA and cash flow growth. Digging a bit deeper into what made this the right portfolio. At 314 acquired salons, this portfolio has significant scale but also preserves our fully franchised footprint strategy with 92% of salons in our system operated by our franchisees. The three brands acquired, Supercuts, Cost Cutters and Holiday Hair are strong representations of our system. The portfolio has exposure to multiple geographies and attractive concentration. The salons are nicely contiguous around Pennsylvania, Ohio and Michigan, which enables operating leverage, and they are in states with favorable rent and wage dynamics. Additionally, while the portfolio has been cash flowing, we still see significant opportunity to drive results, leading to even more potential upside, and we are very excited about executing and driving what could be significant value creation. As we look forward, I could not be more excited about the composition of Regis and strategic position we are in. I spoke previously about the ability to finally go on offense, and I cannot think of a better mix of corporate and franchised salons. Adding the Alline portfolio provides us a diversified way to grow as we have added several revenue, profit and cash generation drivers that can have a material impact to Regis as part of our corporate segment, such as driving same-store sales, salon level operating expenses and margin, closure of unprofitable locations and strengthening those that will remain open, corporate salon G&A and new unit development. These now complement our existing levers of the franchise business of profitable sales growth, G&A and new unit development, all of which continue to remain in place. Equally important from a strategic perspective, this acquisition gets us closer to the business and provides us a testing ground to further enhance the broader system and our brands. While Regis has a rich history of operating, we've not operated in a dynamic and changing environment our franchisees have been facing for the last several years. And with ownership and operational responsibility for hundreds of salon locations across multiple brands and geographies, we are now directly immersed in the day-to-day business of operating salons. This hands-on experience will provide us a greater appreciation of the opportunities and challenges facing our franchisees in addition to a controlled proven ground where we can develop and test guest and stylist initiatives, which we believe will improve our relationship and trust within the franchise system. Regarding the financials of the transaction, Regis acquired Alline for initial consideration of $22 million. Consideration for the transaction included $19 million in cash, which was paid at closing and roughly 140,000 shares of our common stock valued at $3 million. The cash was sourced from $4 million of cash on hand and $15 million in additional borrowings from an amendment to our existing term loan. I do want to take a moment to acknowledge and once again thank our lenders, TCW and Midcap Financial for being supportive partners on this transaction. For the 12 months ended October 31, 2024, Alline as an entity reported unaudited revenue of $83 million, $11.1 million of 4-wall EBITDA and $5.8 million in corporate EBITDA. Based on our purchase price of $22 million, this represents an attractive purchase valuation of approximately 0.3x revenue, roughly 2x store level EBITDA and 3.8x corporate EBITDA. Ahead of closing the transaction, we identified several synergies, which we believe we can quickly improve operational efficiency that can deliver $1.5 million in savings. Most of those synergies and savings should be phased in by the time we enter calendar 2026. And to be clear, no G&A other than the corporate infrastructure acquired from Alline is required to be added to support the business. And when factoring in synergies and our current capital structure, not only are the effective multiples more attractive, but also the transaction represents a 4.8x multiple on cash flow. Again, not only does this represent an attractive financial and strategic transaction on the results that have been delivered, but I want to reiterate the opportunity we have to execute and generate additional profitability and cash flow. To wrap up on Alline before turning to our results, Alline has a strong culture and team who will continue to operate the business with our oversight. In partnership, we believe we can combine the best practices with our operational expertise to create a winning combination to drive further growth, profitability and incremental value. We do not plan on acquiring other salons in our system in the foreseeable future as we are pleased with the composition and opportunity with this portfolio. And we have plenty of work to do to integrate, further operationalize and grow this business. I will touch a bit more on the current state of this portfolio and our key initiatives later during the call. Turning now to our second quarter results. Our second quarter results were largely in line with our expectations. Importantly, we have grown year-over-year across operating income, net income, earnings per share, adjusted EBITDA and cash flow and have returned to generating positive cash from operations despite the persistently challenging sales environment. Same-store sales declined 1.6% in the second quarter. Same-store sales is a key operating metric that we are keenly focused on and invested in improving. For the second quarter, there were several factors that drove the decline. Perhaps most notably was a challenge December due to a smaller window between Thanksgiving and Christmas versus a year ago. With the gap between Thanksgiving and Christmas, almost a full week less versus last year, given the timing of haircut cycles, we saw less of a build into the end of the year as pre-Thanksgiving holiday services likely carried through to the new year. There has also been a disparity amongst our brands as it relates to sales performance. While Supercuts, which represents a little less than half of our system from a store count perspective and approximately 60% of our royalties was positive 0.5% for the quarter. Our SmartStyle brand, which represents our captive brand within Walmart has continued to see softer sales with a 6.4% decline versus the last year's quarter. SmartStyle is a brand that we and our franchisees believe in. However, our recent focus there between ourselves and our franchise partners has been closing unprofitable locations and remodeling the remaining fleet. As we enter fiscal 2026, the large-scale closures and remodels have largely been worked through, and we look forward to advancing that brand with a smaller, more viable footprint. Regarding the broader store closures across all of our brands, the salons that have closed and those that we have slated to close during the remainder of the fiscal year are impacting the same-store sales as well. Our previous guidance of closures during the fiscal year approximating the number of closures from last year still holds, and the salons that have closed during the second quarter and those that are projected to close had a roughly 130 basis points drag on overall comps for the second quarter. I will provide additional detail regarding sales drivers later when discussing our initiatives, but I can say that even flat to slightly positive sales comps are not what we're aiming for, but rather the outsized growth that we believe is achievable over time. As I stated before, we are fully cognizant that we ultimately need to drive traffic to our salons, especially new guest traffic and find more ways to increase frequency. But at the same time, I do need to be realistic about the work that is continued to be required in the road ahead to unlock this growth from where we are today. Our adjusted EBITDA for the second quarter was up 12.7% year-over-year to $7.1 million versus $6.3 million a year ago. Earnings per diluted share was $2.71 versus $0.43 in the prior year quarter. I do need to call out that our earnings per share includes income from discontinued operations of $7.4 million, which is driven largely by $7.5 million of proceeds we received from our sale of OpenSalon Pro to

Thanks, Matt. As a reminder, our fiscal 2025 second quarter results include the results of the 314 salons that we acquired from Alline, which closed on December 19, 2024. The acquired salons contributed $2.7 million in revenue and $0.5 million in EBITDA in the less than two weeks post-acquisition. Pro forma financial information related to the Alline acquisition are included in Footnote 13 of the Form 10-Q we filed earlier today. Additional pro forma financial information will be filed on Form 8-K in early March. Our second quarter results were largely in line with our expectations. Total second quarter revenues were $46.7 million, a decline of $4.3 million or 8.5% compared to the prior year. This decline was primarily due to a reduction in no margin franchise rental income and advertising fund revenue and royalty revenue. It was partially offset by $2.7 million of revenue from the acquired Alline salons. The overall decline was expected due to the closure of unprofitable franchise locations and is a key element of our strategy to drive improvements in the overall health of our franchise portfolio. Royalty and fee revenue, which represents sales from our core business was down $555,000 to $17.8 million versus $18.3 million in the prior year second quarter due to a lower number of franchise salons and a decline of 1.6% in same-store sales, partly offset by the recognition of deferred revenue associated with the acquired Alline salons. We have a net 726 fewer franchise locations than a year ago, December 31. The 118 net franchise closures in the quarter had an average trailing 12-month sales volume of $151,000. This compares to a top quartile salon average sales volume over the same period of $460,000 with the top quartile sales outperforming the closed salons by $309,000. This demonstrates the high-performance potential within our system as well as how large the gap of underperformance in these closure salons. As discussed in the call last quarter, we continue to expect calendar 2025 to be the last year of closures in the order of magnitude that we've been seeing. The pace should slow down in the years ahead. We posted GAAP operating income of $5.5 million in the second quarter, an improvement of $718,000 compared to $4.8 million in the prior year quarter. This year-over-year increase was driven by the Alline acquisition and lower operating expenses, primarily lower G&A expense, which was partially offset by franchise bad debt rent expense, Alline acquisition costs, and royalty revenue. We again produced an operating profit in the second quarter of fiscal year 2025, and we expect that to continue. We reported income from continuing operations of $206,000 compared to a loss from continuing operations of $1 million a year ago -- in the year ago quarter. This improvement was driven by improved profitability resulting from lower operating expenses as well as lower interest expense. During the second quarter, the company received $7.5 million of proceeds related to its divestiture of OpenSalon Pro, which was completed in 2022. This gain, which is reflected in discontinued operations, resulted in net income for the quarter of $7.4 million or $2.63 per diluted share. This was the final payment related to the OpenSalon Pro divestiture. Turning to our adjusted results. As a reminder, in the first quarter of fiscal year 2025, we made a change to our methodology to exclude stock-based compensation expense when presenting our adjusted results. All adjusted results in the current year and prior years have been adjusted to reflect this presentation. We believe our adjusted results are more representative view of the business. Reconciliations of our GAAP results to our adjusted non-GAAP results can be found in our press release. On an adjusted basis, second quarter consolidated EBITDA was $7.1 million compared to $6.3 million in the prior year quarter. The $845,000 improvement was primarily due to a lower G&A, sublease revenue and the Alline acquisition, offset by lower royalty revenue, franchise bad debt and foreign currency loss. Our adjusted G&A was $9.6 million, a decrease of $1.9 million compared to the prior year period. We remain committed to diligent management of our corporate G&A expenses and continue to expect our fiscal year 2025 adjusted G&A, excluding Alline, to be in the range of $39.5 million and our run rate G&A to be closer to $38 million. As a reminder, the run rate range represents close to $5.5 million of savings versus fiscal year 2024. While the $39.5 million represents additional investments in our business that offset savings to the extent we see opportunity to invest further in our initiatives, this could change. The acquisition of Alline adds $4.5 million to $5 million of incremental annual G&A expense. Our fiscal year 2025 G&A adjusted for Alline is expected to be in the range of $42 million and the run rate G&A to be $42.5 million to $43 million. Our core franchise business adjusted EBITDA was $6.4 million in the quarter, a $218,000 decrease compared to $6.6 million in the prior year quarter. This decline is primarily explained by lower franchise revenue, franchise bad debt rent and foreign currency loss, offset by lower G&A and sublease revenue. Our company-owned segment adjusted EBITDA was $725,000 for the quarter, an improvement of $1.1 million from the same quarter last year primarily related to the addition of salons from the Alline acquisition. As previously mentioned, the Alline salons contributed $0.5 million of EBITDA in the second quarter. During the three months ended December 31, 2024, we generated $2.1 million in cash from operations, which is an improvement of $6.2 million from the prior year 3-month period. During the six months ended December 31, we generated $780,000 in cash from operations, which is an improvement of $7.6 million from the prior year 6-month period. Improvements in cash generated from operations is primarily due to less cash used for working capital purposes and lower cash interest. We continue to believe that we will generate cash for the remainder of fiscal year 2025. And now that we are generating cash after years of using cash, we are evaluating strategies including building a balance in the interim and look to deploy capital in areas that we believe will drive the highest value taking into account all key stakeholders. Additionally, in the second quarter, we received approximately $7.5 million of proceeds related to