Ladies and gentlemen, thank you for standing by. Welcome to the Regis Corporation First Quarter Fiscal 2020 Earnings Call. My name is Cassidy, and I will be your conference facilitator today. At this time, all participants are in a listen-only mode. Following management's presentation, we will conduct a question and answer session. If you would like to ask a question during this time, please press star one on your push-button telephone. If you wish to withdraw your question, please press star two. As a reminder, this call is being recorded for playback and will be available by approximately 12:00 P.M. Central Time today. I'll now turn the conference call over to Kersten Zupfer, Senior Vice President of Finance. Please go ahead.
Thank you, Cassidy. Good morning, everyone, and thank you all for joining us. On the call with me today, we have Hugh Sawyer, our Chief Executive Officer; Andrew Lacko, our Executive Vice President and Chief Financial Officer; Eric Bakken, President of our Franchise Segment; and Amanda Rusin, our General Counsel. Before turning the call over to Hugh, there are a few housekeeping items to address. First, today's earnings release and conference call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of performance and, by their nature, are subject to inherent risks and uncertainties that could cause actual results to differ materially from such forward-looking statements. Please refer to the company's current earnings release and recent SEC filings, including our most recent Form 10-Q and June 30, 2019, Form 10-K for more information on these risks and uncertainties.
The company undertakes no obligation to update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this call. This morning's conference call must be considered in conjunction with the earnings release we issued this morning and our previous SEC filings, including our most recent 10-Q and 10-K. On today's call, we will be discussing non-GAAP, as adjusted financial results that exclude the impact of certain business events and other discrete items. These non-GAAP financial measures are provided to facilitate meaningful year-over-year comparisons, but should not be considered superior to, as a substitute for, and should be read in conjunction with GAAP financial measures for the period. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures can be found in this morning's release, which is available on our website at www.regiscorp.com/investor-relations.
With that, I will now turn the call over to Hugh.
Thank you, Kersten, good day, everyone. As we discussed last quarter, when I joined Regis, my aspiration was to develop a transformational, enduring strategy to reinvigorate our company. My guiding principle has been to generate long-term value for the company's core constituents, our shareholders, our franchise owners, customers, and employees. We are pleased to report this quarter meaningful progress in our ongoing strategic transformation to a capital-light, high-growth, technology-enabled franchise company. As we continue our transformation, we expect to utilize the cash proceeds we are generating from the sale of company-owned salons in various ways to maximize shareholder value. This may include, but not being limited to, investments in the core capabilities we need to facilitate sustainable revenue and earnings growth in the future state as a fully franchised company.
Those investments may include frictionless customer-facing technology, disruptive marketing and advertising, trend-driven merchandise, stylist recruiting and education, franchisor capabilities, and new real estate locations to support future or organic salon openings by our franchisees. We may also utilize our cash in the next 18 months to complete any remaining elements of our multi-year restructuring, including closing non-performing company-owned salons, eliminating or reducing any ongoing lease risk associated with TPG, supporting our ongoing G&A reductions through severance programs, management of our capital structure as we continue to evolve to a franchise platform, and if needed, capital investments in some salon refurbishments and remodels as we consolidate our various brands throughout the portfolio. As you know, in the past, we have utilized cash to repurchase our shares in circumstances where we believed it was in the best interest of our shareholders.
How do we expect to utilize the cash proceeds we generate from the sale of company-owned salons? Consistent with our past practice, investments in the core capabilities needed to facilitate revenue and earnings growth as a franchise company, completing the elements of our multi-year restructuring, and where we believe it's in the best interest of our shareholders, we'll certainly consider share repurchase programs. When I arrived in 2017, approximately 28% of the company's salons were franchised. At the close of this quarter, approximately 64% of our salon portfolio is franchised. Moreover, at this time, approximately 900 company-owned salons or roughly 42% of the remaining company-owned salons are in various stages of negotiation to be purchased by new or existing franchisees. We expect these transactions to close. As you know, given the uncertainty in the external environment and other factors, things could still change.
Nevertheless, I believe our robust vendition pipeline is an encouraging data point that indicates we have a significant opportunity to complete our transformation within the 18-month period we estimated at the close of 2019. Although the transition to a capital-light franchise model will initially have a dilutive impact on the company's reported adjusted EBITDA, we remain convinced that a fully franchised business has the potential to generate a higher return on its capital, and will ultimately prove to be in the best long-term interests of our shareholders and franchise constituents. We do have more work to do before we finish the transformational phase of our strategy, but we have confidence in our plan, the abilities of our Regis team and our franchise partners to successfully execute the transformation, and that our shared vision for the company will be fully realized.
Andrew, why don't you take us through the numbers?
Sure. Thanks, Hugh. Good morning. As Hugh mentioned, we are very pleased to report significant progress in our transition to a fully franchise model. Before getting into the details of the quarter, I'd like to share with you a quick overview of the changes related to our adoption of these new lease accounting standards that you likely noticed in this morning's release. Historically, we have recorded lease income and expense on a net basis through the rental expense line item on the P&L. With the new lease accounting guidelines, we now record franchise rental revenue and the corresponding rental expense on separate line items in the P&L. While the net impact is a gross up of both revenue and expense line items on the P&L, the new lease standard does not impact overall operating income.
I'd like to also point out that the new lease guidance is accounted for prospectively, and we did not restate for comparative periods. Please consider this in your modeling. In addition to the P&L impact, the new lease accounting guidance also required us to record a lease asset and a lease liability of approximately $990 million on the balance sheet. However, a portion of this long-term lease liability is subleased to our growing portfolio of franchisees. Now turning to the results, we reported this morning consolidated first quarter revenues of $247 million, which represented a decrease of $40.8 million or 14.2% versus the prior year.
The year-over-year decline in revenue was driven primarily by the conversion of 1,143 company-owned salons to the company's franchise portfolio over the past 12 months, and the closure of 147 company-owned salons over the past 12 months, a majority of which were cash flow negative and not essential to our future. These headwinds were partially offset by a $3.1 million revenue increase in our franchise segment and $31.4 million of rent revenue related to the franchise segment that is recorded in connection with the new lease accounting guidance I just mentioned. First quarter consolidated adjusted EBITDA of $29.8 million was $4.7 million, or 18.5% favorable to the same period last year, and was driven primarily by a $26.2 million cash gain, excluding non-cash goodwill recognition related to the sale and conversion of 545 company-owned salons to the franchise portfolio during the quarter.
Excluding this one-time gain, adjusted EBITDA totaled $3.6 million, which was $14.4 million unfavorable year-over-year. The year-over-year unfavorable variance was driven primarily by the elimination of the EBITDA that had been generated in the prior year period from the company-owned salons that have been sold and converted to the company's franchise platform over the past 12 months. First quarter adjusted EBITDA was also unfavorably impacted by a 1.1% decline in consolidated same-store sales, minimum wage increases and strategic investments in technology and marketing. Please note that excluding discrete items and the income from discontinued operations, the company reported increased first quarter 2020 adjusted net income of $13.9 million or $0.37 per diluted share, as compared to adjusted net income of $11.3 million or $0.25 per diluted share for the same period last year.
Looking at segment specific performance and starting with our franchise segment, first quarter franchise royalties and fees of $28 million increased $5.6 million or 25.1% versus the same quarter last year, driven primarily by increased franchise salon counts. Product sales to franchisees decreased to $2.5 million year-over-year to $13.1 million, driven primarily by a $4.2 million decrease in products sold to TVG, partially offset by increased franchise salon counts. Total franchise same-store sales were essentially flat year-over-year. As a reminder, franchise same-store sales are calculated in a manner that is consistent with how we calculate same-store sales in our company-owned salon portfolio and represents the total change in sales for salons that have been a franchise location for more than 12 months.
First quarter franchise adjusted EBITDA of $11.9 million improved approximately $2 million year-over-year, driven by growth in the franchise salon portfolio, partially offset by planned strategic G&A investments to further enhance our franchisor capabilities and to support the increased volume and cadence of transactions and conversions into the franchise portfolio. Excluding the impact of TVG, franchise adjusted EBITDA was $2.5 million favorable year-over-year. I would like to point out that with the revenue recognition and lease accounting guidance we have adopted over the last two years, as well as historical sales of product to TBG at cost, our franchise segment EBITDA margin percentage is not comparable year-over-year.
After adjusting for the non-contributory revenue associated with ad fund revenue, franchisee rent revenue, and TBG product sales, our pro forma franchise segment EBITDA margin was approximately 40.4%, which was approximately 20 basis points favorable year-over-year and in line with our expectations. Looking now at company-owned salon segment, fourth quarter revenue decreased $75.3 million or 30.2% versus the prior year to $174.5 million. This year-over-year decline is driven by and consistent with the decrease of 1,271 company-owned salons over the past 12 months, which can be bucketed into two main categories. First, the conversion of 1,188 company-owned salons to our asset-light technology-enabled franchise platform over the course of the past 12 months, of which 545 were sold during the first quarter.
Second, the closure of approximately 147 company-owned salons over the course of the last 12 months, most of which were unprofitable and, as I noted earlier, not essential to our future strategy. These net company-owned salon reductions were partially offset by 45 salons that were bought back from our franchisees over the last year and 19 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 $16.1 million year-over-year to $11.5 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 has 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.
The quarter was also unfavorably impacted by a 2% decline in same-store sales, increases in stylist minimum wages and commissions, and our investments in a new Supercuts advertising campaign, which launched during the MLB playoff season and World Series. Turning now to corporate overhead, first quarter adjusted EBITDA of $6.4 million is driven primarily by the $26.2 million of net gains, excluding non-cash goodwill recognition from the sale and conversion of company-owned salons, the net impact of management initiatives to eliminate non-core, non-essential G&A expenses, and lower year-over-year incentive expenses. These were partially offset by the timing of the company's annual franchise convention that occurred in the first quarter of this year compared to the second quarter in the prior year.
Lastly, I want to point out that the cash proceeds received during the first quarter for the salons we venditioned were approximately $70,000 per unit, compared to approximately $125,000 per unit for the full year of FY 2019. The decline in year-over-year per-unit vendition cash proceeds is driven primarily by the increased mix in Signature and SmartStyle salon venditions during the quarter, as both of these typically have lower transaction multiples than salons in our Supercuts portfolio. Looking now at the balance sheet, as expected, we have maintained our strong overall liquidity position while providing optimal balance sheet flexibility to fund the elements of the company's transformational strategy. On the liquidity front, net quarter-end cash equals $58.9 million. As Hugh mentioned, we expect to utilize our vendition cash proceeds in various ways to maximize shareholder value. Our quarter-end cash may fluctuate in the quarters ahead.
During the first quarter, we repurchased 1.5 million shares, or approximately 4.2% of the total shares outstanding, for $26.3 million. As of September 30th, we had $90 million drawn on our existing credit facility, which was equivalent to our FY 2019 year-end levels. Turning now to cash flow, I thought it might be helpful to provide a high-level reconciliation of how we see adjusted EBITDA flow through to cash from operations and/or free cash flow. When looking at first quarter cash flow statement, the single largest use of cash is approximately $12 million use of working capital. This net use of cash is significantly impacted by cash outlays associated with the wind-down of company-owned salons as we convert to a fully franchised platform. Specifically, in the first quarter, the working capital use is primarily driven by three items.
First, transition-related payroll and vacation payments, including severance payments related to restructuring our field teams to better align with our future state. We anticipate these types of outlays will likely continue as we transition to the fully franchised platform. Secondly, both short-term and long-term bonus and incentive payments related to FY 2019 performance. Third, we saw normal course inventory build during the quarter as we lead up to the upcoming holiday season. However, I want to point out that we expect the company's merchandise inventory levels to stabilize and materially decrease in the months ahead as we continue to convert to the wholesale inventory model needed to support our franchisees.
In addition to a change in working capital, when reconciling the adjusted EBITDA to operating cash flow, you'll need to take into account the fact that the $26.2 million net gain from the conversion of our company-owned salons to the franchise platform are included in our net income and adjusted EBITDA, but not included in cash from operations, as the cash proceeds are reported as inflows in the investing activities section of the cash flow statement. Turning now to other operational items, I thought it would be helpful to provide a brief update on TVG. As we have discussed in the past, Regis had a number of reasons to pursue the original TVG transaction back in October of 2017.
The transaction provided us an opportunity to transfer mall-based lease risk to a third party and enabled us to exit the malls and focus on growth in the value sector rather than premium salons. With this transaction, we were able to substantially avoid the continuing operating losses associated with these salons. We created optionality if the buyer was able to improve the performance of this portfolio. Finally, the TVG transaction has enabled us to focus on our franchise conversion strategy. As we had previously disclosed, although we have provided some ongoing support, the buyer of this business has not performed as well as we had hoped. In fact, the business has struggled and continues to be challenged.
Nevertheless, we have worked hard to reduce the ongoing lease risk. Today we estimate that in the worst-case scenario, our all-in remaining risk is approximately $35 million, prior to any mitigation efforts that may be available to us. This is a significant decline from the original lease liability of approximately $140 million when we entered into this transaction over two years ago. Looking forward, should TVG destabilize further, we believe we have multiple options to minimize our cash risk, including negotiating with the landlords to buy out of the leases at potentially reduced amounts or negotiated reduced rents. We could bring back a number of these salons into our OpCo portfolio and operate them, and/or we could transfer the salons where we have ongoing lease risk to a new operator.
As a contingency plan, we have these options under a continuing review but have not concluded the best option for our business. You may have also read recently that an administrative action has been filed in the U.K. As a reminder, the U.K. transaction with TVG was done as a stock deal, and we do not believe that Regis has any liability associated with this transaction or these salons. However, we will continue to review and monitor this matter and determine what the best course of action related to the U.K. salons, particularly Supercuts. Lastly, before turning the call back to Cassidy for questions, as we discussed on last quarter's call, we have provided a recast view of our actual results for the last 12 months ended September 30th, 2019, bifurcated between our modeled recast ExCo and pro forma franchise NewCo components of the business.
We believe this recast will help you model how we're thinking about the future state fully franchised business. While the numbers presented are subject to material change, in providing this, ExCo is intended to represent our company-owned salons modeled as though they were a standalone business with cost allocations related to product sales and distribution expenses, corporate overhead, and other one-time and stranded G&A costs. The pro forma franchise NewCo component is intended to reflect a scenario in which we were to snap a line at the end of the first quarter, what our company may look like as a fully franchised business based on our last 12 months of actual results. This also represents our existing and projected new franchise salons with allocations for product sales and distribution expenses, long-term strategic technology investments, and corporate overhead G&A.
This pro forma view should make any sum of the parts analysis work simpler and enables one to value the modeled franchise NewCo portion of the business at a multiple more in line with other publicly traded pure franchise companies. Conversely, for the ExCo component of the business, given the fact that this is anticipated to have a relatively short life cycle and not continue in perpetuity, we believe it should be valued at its nominal or absolute value and not have a multiple applied against it. Lastly, as a reminder, while what we have presented today reflects actual results for the last 12 months ended September 30th, 2019, when thinking about the overall sum of the parts for valuation purposes, it is necessary to consider future period ExCo cash flow items, including EBITDA and cash CapEx, net of sale proceeds, along with franchise NewCo cash CapEx.
As discussed during our August earnings call, in terms of modeling future G&A expenses, while not intended to be used as forward-looking guidance, we believe it is reasonable to model G&A of approximately $12,500 per salon in the fully franchised future state business, split roughly evenly between franchise direct G&A, which would include distribution center costs and corporate G&A. With that, I'd like to thank you for your continued support and interest in Regis, and would like to now turn the call back to Cassidy for questions. Go ahead, Cassidy.
Thank you, Hugh and Andrew. The question and answer session will begin at this time. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. Our first question comes from Stephanie Wissink of Jefferies.
Hi, this is Ashley Helgans on to Stephanie Wissink. Thanks for taking our question. You guys had a nice strong level of additions in the quarter. How should we model the average gain when we look at the carrying value of your remaining salons relative to the average multiple you're getting for sale?
Andrew, you want to take that?
Yeah, sure. Hey, Ashley. Good morning. As you look forward from a cash gain, I would use as a good proxy our results to date, so last year, FY 2019 and the first quarter, because again, we intended to provide additional disclosure last October with the first quarter of FY 2019 that clearly lays out number of salons on addition, cash proceeds, the net gains. You can see the assumed PP&E and inventory that's included. We have the goodwill derecognition to get to what the net gains are. Because it is a very fluid process with which we're selling, depending on whether it's a SmartStyle, a Signature Style, or Supercuts salon that gets an addition, I would just use those rough averages based on the experience to date to calculate on a per unit basis, what the proceeds or what the net gain could be.
Then in my prepared remarks, I also talked about the fact that on a per unit basis, cash received per unit was lower this quarter. Again, that's a function of the mix of salons that we sold with the SmartStyle and Signature Style salons, those portfolios, typically receiving a slightly lower cash flow multiple than Supercuts. If you look at the total balance of the portfolio at the end of this quarter, you can see we're largely through the Supercuts portfolio, and the majority of the venditions to remain are in the SmartStyle and Signature Style portfolios. From a cash proceeds per unit, it's probably going to be lower than the average transaction history to date, especially as you consider we're using the Signature Style venditions as a very capital light, cost-effective way to effectuate our brand consolidation.
Great. Thank you. If I could just squeeze in one more, how has the response been to the tech and product enhancements you've made to date?
Thank you. We've actually been encouraged. If you think about Open Salon, a good simple way to think about Open Salon is it's an aggregator. That doesn't mean that we won't embrace our branded apps as well. Travel companies can live in the same ecosystem as the Delta Air Lines app. You should expect us going forward to continue to drive adoption of Open Salon. We like the technology because it gives us access to Google's user base, to the Facebook Messenger user base, and to the Alexa user base. In combination, that opens up a portal to customers that we may have never done business with in the history of the company.
At the same time, you'll see we just continue to support our branded apps, whether it's Supercuts and SmartStyle and Cost Cutters for the Fab Five, so that these two concepts live in the same world together and give us access to longtime loyal customers and new consumers who may never have experienced service at one of our salons. We've been encouraged by both adoption of customers, and adoption of our franchisees as we continue to migrate through the technology-enabled world we need to all exist in today. We're optimistic about it. We feel good about it.
Great. Thanks.
Yeah. Sure.
Good luck with all of you.
Our next question comes from Laura Champine of Loop Capital.
Good morning. Thanks for taking my questions. The comps, we were hoping for a flatter comp than what we got, and particularly in Supercuts, given the advertising on MLB and elsewhere. What's driving that comp lower year-on-year?
I'll take the first. You want to take that, Andrew?
No, go ahead.
Yeah, I'll take it. I'll take the first part. Andrew, you can weigh in or others. Please recall Andrew's earlier point that on the year-over-year comparative may not always be relevant or accurate. It's going to take some time for the dust to settle on the comp analysis as we continue to convert to a franchise platform in order to get an accurate comparative view on a quarter-to-quarter basis. I actually am continuing to be optimistic about the future comps of the business. As you know, Laura, one of the reasons we embrace the franchise strategy is although these are national brands, they're local market businesses. When you have owners put their own capital to work in a local market business, they tend to be proactive and enthusiastic about growing the businesses.
You're right, we are supplementing that and working in collaboration with them to upgrade the marketing and advertising in the company, both with retaining two disruptive agencies like Barclay and Tribe A, Barclay for SmartStyle and Cost Cutters, and Tribe A for Supercuts. We're continuing to invest in influencers and digital and the other campaigns that we think will be necessary to facilitate growth in the future years. The most important component of this, and then I'll toss it back to Andrew, is it will take some time for the dust to settle so that we get an accurate year-over-year view of the comps, since we measure this in the same way we do any other comp sale for OpCo. Andrew, you want to tag on there?
Well, actually, Eric wants a few comments on franchise.
Yeah
I'll take some time.
Sure.
Hey, Laura, it's Eric Bakken. If you look at the business, particularly Supercuts, obviously the vast majority now are on the franchise side. When you factor in the number of locations that we have deals on, we're down to 126 corporate Supercuts locations, and that number will go down in the near term as well. If you look at it from a comp perspective in the quarter, Supercuts franchise was up 1.6% service for the quarter, down in retail and up 1.1 overall, and we were gaining momentum as we moved through the quarter. We're making good progress. We don't release the traffic numbers on that or transaction numbers, but that number is obviously far better on the franchise side. We're focused heavily on all of our businesses, but in particular on Supercuts.
You mentioned the marketing and advertising, and Hugh touched on that as well, but we're also very actively involved in improving our ability to attract, recruit, and hire the best stylists. We have a significant focus on that, and that is starting to pay dividends as we go forward for all of our businesses, but in particular for Supercuts. We always want it to be better, but it's positive in the quarter, and we're seeing some improvement as we move ahead as well.
Yeah. The only thing I would add is, Laura, it's Andrew. On the company-owned salons with Supercuts, the remaining portfolio at the end of the quarter was just north of 300 salons. While it is a negative 3.4% in service comps, total down 3.9%, the impact is relatively de minimis now, just given the small size of the portfolio. Inevitably, as we're going through this transition, there is likely to be some disruption on the OpCo side, just given the uncertainty with the transition to a fully franchised model that we think Jim Lain and the field leadership team has done an excellent job of minimizing and managing through. It'd be remiss for us not to acknowledge that there's at least a small amount of disruption happening just because of the transition that's going on.
That's why it's imperative that we move quickly to move to the fully franchised model.
Yeah, just to add to that, I would say that disruption exists overall throughout the entire organization. We're managing it on all sides, of course, but we're transitioning a lot of stores, and that takes the time, energy, and effort of the entire field team, both on the OpCo and franchise side.
Andrew, in the OpCo portfolio, isn't it correct to say that historically, we utilized pricing to offset minimum wage increases?
That is correct.
That impacts comps as well, right?
That is correct.
If the OpCo portfolio continues to be a melting ice cube.
Yep.
Got it. I appreciate all that, and also the comments about how the mix shift in the venditions is impacting your take per salon. Is it fair to say that what you're left with at the corporate level would be your less productive salons, and therefore that price per vendition should stay compressed, and we shouldn't expect much comp improvement on the company-owned side?
I don't think that's a fair statement. I think it's more of a function of the portfolio mix. The fact that just, per our publicly disclosed FDD disclosures, Supercuts tends to be a higher performing, higher margin piece of the business. It tends to have higher average unit revenue. As we have substantially venditioned fully through the Supercuts portfolio, now we're getting into the SmartStyle and the Signature Style portfolio. One would expect that the average multiple that we get, and we've been fully transparent in that disclosure, tends to be a little less than Supercuts. Then again, with the Signature Style portfolio, with many of these salons, we are using this process to convert the salons into one of the, as Hugh calls them, the Fab Five brands for the brand consolidation effort that we have undergoing.
In doing so, we offset some of the remodel and refurb costs with the purchase price. It gets recorded as relatively low, if not zero purchase price. On the other side, the new franchisee has funded a substantial amount of conversion, and it's a brand new Supercuts, Cost Cutters, First Choice Haircutters, or whatever the ending salon is. That's really the dynamics of what's driving the lower cash proceeds per unit this quarter and likely going forward. We don't think it's a function of being left with a bunch of dogs and cats and underperforming salons, because we do believe that the remaining portfolio is actually a strong-performing portfolio.
If it's not strong, we'll deal with it in a different way. If it's a non-performing salon, we're going to close it, we're not going to condition it or sell it. I think I would also highlight, Laura, I know you know this, but it bears mentioning that these OpCo comps become meaningfully less important to the financial performance of the company with each passing month. As the clock runs and we continue our vendition process, the OpCo comps, while we monitor them, and as Andrew mentioned, Jim Lain and our team have done wonderful work in running our OpCo business during this transformation. The comps become, at some point, far less relevant to the financial performance of the company.
Right. Got it. Last question, and something that should be relevant to NewCo. You mentioned, Hugh, that part of the thesis is that you're converting to an asset-light, higher returns, high growth model. Is the growth you expect to see comp growth, or do you expect that as franchisees take ownership of territories, that they will expand the salon count in their territories?
I'll let Eric tag onto this too. I'll speak for myself. I'm very optimistic that we have a great group of franchisees, and I think they will grow organically within the four walls of their businesses, within that local salon. Because that's what entrepreneurs do. When they put capital to work, they go grow their businesses. They hug their stylists every day, and they hug their customers when they come through the door, and thank you so much for visiting our Supercuts. At the same time, we think there is, Laura, a meaningful opportunity for organic openings. We are pursuing a real estate strategy where we pre-position those assets in advance of organic salon openings by our franchisees. I think the answer to your question is both. We expect same-store sales comp increases from our franchisees on both the service and merchandise side.
We also expect that our great franchisees are going to want to pursue new organic openings in the years ahead, and that's why we're out ahead of that and investing so that when they're ready to grow, we're ready to provide them with a lease location. Eric, you can add to that too, if you'd like.
Sure, yes. I agree with all of that. We obviously need to grow the businesses that we're selling, we need to get comp growth, but we also need to add additional organic locations. Laura, as you might recall, as part of these deals that we build in a store opening requirement to all of the transactions. Generally, if they buy three, they need to open one additional location. As Hugh mentioned, we're securing real estate ahead of that, and you'll see the organic numbers improve significantly as we get through the vendition process. What's happening is you have the vast majority of our owners, existing owners who were growing previously, and the new owners are obviously buying the vendition location. They're quite busy in shoring up the operations and making enhancements and improvements, both to the physical plant and to the employee base in the salon.
They're busy doing that, right? As they get that process to a point where they're comfortable, you'll see them go into the market and work with us to add additional locations. We'll be well-positioned to help them with that as we secure real estate, in many instances ahead of having a franchisee to take those locations.
Understood. Thank you.
You're welcome.
This concludes the Q&A portion of the call. I will now turn the conference back to Hugh.
Well, thanks, Cassidy. I would be remiss if I just didn't take a moment to express our heartfelt appreciation to our shareholders for their continued support. To our franchisees and employees for the awesome work they do every single day on behalf of our customers and our shareholders. Thank you, everyone, and we look forward to talking to you again at the close in the next quarter. Thanks and goodbye.
Ladies and gentlemen, this concludes our conference call for today. If you wish to access the replay for this presentation, you may do so by visiting regiscorp.com in the investor relations section of the website, or by dialing 1-888-203-1112. Access code 3231103. Thank you all for participating, and have a nice day. All parties may now disconnect.