Ladies and gentlemen, thank you for standing by. Welcome to Regis Corporation's SmartStyle Restructuring call. My name is Tracy, 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. Eastern today. I will now turn the conference call over to Paul Dunn, Vice President of Finance and Investor Relations. Please go ahead.
Thank you, Tracy. Good morning, everyone. Thank you all for joining us. On the call with me today are Hugh Sawyer, our Chief Executive Officer, Andrew Lacko, our Chief Financial Officer, and Amanda Rusin, our new General Counsel. Before I turn the call over to Hugh, there are a couple of housekeeping items I would like to address. First, today's announcement 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 today's press release in our SEC filings 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 today's call. Second, today's announcement and call notwithstanding, we are in our official quiet period for the second quarter. We will not be commenting on the financial impact of today's announcement as it relates to the quarter, nor will we provide any updates on the company's financial results or conditions. We will remain in this quiet period until we release the results of our second quarter for the fiscal period ended December 31st, 2017. With that, I will turn the call over to Hugh.
Thank you, Paul. Good morning, everyone. Thanks as well for your interest in Regis Corporation. Today's announcement to close 597 cash flow negative company-owned SmartStyle salons is consistent with our previously disclosed multi-year strategy to establish a platform for longer-term revenue and earnings growth in our company-owned salons. Restructuring the non-performing elements of our salon portfolio in order to focus on the performing core has been a key element of our strategy. When combined with our previously announced sale and subsequent refinancing of our mall-based and international salons, we believe we have delivered on our commitment during the first year of our strategic and operational transformation. We have now removed approximately 1,450 non-performing or underperforming non-strategic, non-core salons since April of 2017 in essentially two major transactions. Our decision related to the SmartStyle salons and the franchise of our mall locations and international operations.
You may have heard me say that I have been weeding the garden at Regis. This was an intentional use of the phrase to depict how non-performing cash flow negative salons were absorbing value and valuable resources and masking the true health of the company's company-owned operating platform. We expect by removing these salons from our portfolio, it will also enable management to focus time and attention on the growth of our better-performing salons and brands. On this morning's call, we thought it might be helpful to provide some additional insights regarding today's announcement. Despite past efforts to improve operating performance, the 597 salons impacted by today's decision continued to be non-performing in virtually every possible definition of the word. In fact, the trailing 12-month service sales comps in these salons were roughly 220 basis points below the average of the remaining SmartStyle portfolio.
The low sales volumes of these salons when required with required hours of operation within a Walmart store location, significantly limited our ability to manage costs in a manner that would have improved financial performance. Over 60% of the impacted salons had an EBITDA loss, meaning that they were losing money before we paid rent on these locations, or more specifically, an EBITDAR loss over the trailing 12 months. The remaining group of impacted salons posted a combined EBITDA loss during the same trailing 12-month period. 60% had an EBITDAR loss, and the remaining had a combined EBITDA loss during the same trailing 12-month period. We also believe that our results in these locations might erode in the months and years ahead, given the various conditions that were impacting these specific operations. In other words, we judged that these salons were not viable turnaround candidates, and we acted.
The closure of these salons was certainly not a function of desperation. In fact, we reached this decision after a thoughtful diagnostic process based on data and our careful analysis. A process where we determine that due to a number of factors, the performance of this specific group of salons could not reasonably be improved. Moreover, we acted from a position of balance sheet strength and in a manner that is clearly aligned with the strategy we published in our most recent 10-K. We believe that today's announcement is another step forward in the company's financial renewal and in our strategic transformation. As you know, well-managed retailers often adjust their portfolio of locations to address changing conditions, and that is essentially what we are doing. At Regis, any decision that impacts our associates is carefully considered and given the full attention of our leadership team before any action is taken.
Our stylists, salon managers, field leaders, and support teams are critical to our success, and our people are at the center of who we are and what we do. To the extent possible, we want to keep our talented team members within the Regis family. To that end, we intend to offer many of our impacted stylists and salon managers comparable positions in other SmartStyle or Regis family of brand salons, including with our local franchise partners. We are also investing in our stylists by launching initiatives to improve stylist education and helping them grow their book of business by investing in guest-facing technologies to drive traffic. We intend to further improve customer service experience in SmartStyle and throughout our family of salon brands. I want to emphasize that our relationship with Walmart remains strong.
We believe it is a privilege to be associated with Walmart, and we appreciate their support in helping us weed our garden. SmartStyle remains an important and vital part of our portfolio. It is our largest brand, and we expect to invest in SmartStyle's growth in the years ahead. We also hope to test new concepts and services at Walmart store locations in the months ahead, where it meets our strategic imperative and the imperatives of our partners at Walmart. Further, we expect that in some circumstances, we will continue to open company-owned salons, as well as transfer certain company-owned salons to our franchise partners, where it supports our financial growth and our long-term strategic plan. In the not too distant future, we expect to achieve a balanced portfolio of performing company-owned salons, supported by the ongoing growth of our franchise portfolio. In other words, a balanced portfolio.
We believe this action substantially completes the restructuring of our non-performing company-owned salon portfolio, and we accomplished it during the first year of our strategic and operational transformation. Before turning the call over to Andrew to discuss a few more financial matters, I want to reinforce some key points of today's call. This decision is fully aligned with our published strategy. The Regis garden needed to be weeded in order to grow, and the impacted salons were non-performing, cash flow negative locations, and any additional resources invested in these locations would come at the expense of our performing salons and brands, and opportunities to support the growth of our franchise portfolio. We remain deeply committed to our associates and expect to offer comparable positions in other SmartStyle or Regis family of brand salons, including with our franchise partners to many of our impacted employees.
SmartStyle will remain a core component of our portfolio, and we intend to continue to invest in the SmartStyle guest experience and opportunities for growth of this brand. Our relationship with Walmart remains strong and highly collaborative, and we are grateful for their support. With that, I will now turn the call over to Andrew to discuss the financial information provided in today's Form 8-K. Andrew?
Thanks, Hugh, and good morning, everyone. Thank you for joining us on such short notice this morning. As Hugh mentioned in his opening comments, today's announcement is another important step in the restructuring and strengthening of the Regis portfolio. We believe this transaction and the actions taken to date deliver on the commitment we have made to restructure the salon portfolio or weed the garden to improve shareholder value and position Regis for long-term growth. It is important to reinforce that all of the salons impacted by today's announcements were non-performing, cash flow negative salons, and that they were diluting the overall performance of both the larger SmartStyle portfolio and the overall performance of the company.
Looking at today's announced restructuring transaction, we anticipate that the total net one-time impact of the charges related to the closure of 597 salons on January 31st, 2018, to be approximately $38 million, all of which will be recorded as discrete items in our financial reporting, with roughly $36 million in cash expense and the remaining $2 million in net non-cash expenditures. Of the $36 million in cash expense, approximately $35 million is directly related to lease termination costs and expense associated with returning the vacated salons back to pre-occupancy or white box conditions. The remaining $1 million is driven primarily by severance-related charges. The approximately $2 million of net non-cash expense is driven by $5 million of impairment and write-off related charges, primarily due to inventory and fixtures, partially offset by $3 million of non-cash benefit related to deferred rent balances associated with the impacted salons.
To help you with your timing of these charges, we expect to record approximately $35 million of the expense during the second fiscal quarter, which includes cash expenditures of approximately $27 million. We anticipate that the remainder of the cash and non-cash expenditures will occur during the third fiscal quarter of 2018. Looking at the benefits of the transaction, the 597 non-performing impacted salons generated negative cash flow, which we define as four-wall EBITDA plus a charge for field overhead of approximately $15 million during the 12 months ended September 30th, 2017. Based on our analysis, the forward-looking trajectory of these salons was not positive. Additionally, as a result of the transaction, we expect to eliminate an additional estimated $2 million-$4 million of annualized G&A in both field and corporate overhead related costs.
Lastly, the average age of the impacted salons is slightly over 10 years, with trailing 12-month revenue that has decreased to approximately $100,000 per salon. We believe that the age and relatively low sales volumes of the impacted salons is a driving factor to their non-performance, and that it is not symptomatic of a larger issue in the overall SmartStyle portfolio, and, like other well-run retailers, it is prudent for us to adjust our portfolio accordingly. As Hugh had mentioned upfront, these decisions were the result of a thoughtful, data-driven diagnostic process.
In looking at the transaction total, we believe that the removal of these loss-making salons, over half of which did not cover rent expense, along with the projected downward performance trajectory of the impacted salons, the field support and corporate G&A savings associated with these salons, and the ability to redeploy both financial and human capital to drive growth initiatives in the remaining company-owned and franchise portfolio, makes this transaction an efficient and appropriate use of capital that will position the company for improved performance as we continue our strategic transformation. Lastly, given the nature of the transaction, we do not intend to issue pro forma adjustments to prior year results, nor will our future published financial statements remove the results of these salons from prior year comparisons. With that, I'd like to turn the call back to Tracy for questions. Tracy?
Thank you. If you would like to ask a question, please signal by pressing *1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow for a signal to reach our equipment. Again, press *1 to ask a question. I will pause for just a moment to allow everyone the opportunity to signal for questions. We'll go first to Stephanie Wissink with Jefferies.
Hi, good morning, everyone, and thanks for all the detail. Andrew, I missed the cash flow loss of the combined 597 stores. Could you just repeat that for us?
Yeah, we estimate that as roughly cash flow loss of $15 million on a trailing 12-month basis at the end of this-
Okay
fiscal quarter.
Again, the first fiscal quarter. Should we assume going forward, once the portfolio is reaching your objective of being more balanced, that the cash flow contribution from the two sides of the house, franchise and owned, should be more consistent? Looking at those salons that you closed, was there a view that even a franchise opportunity wouldn't have been the best option, just given the performance delta that you were seeing relative to the benchmark salons?
Steph, it's Hugh. You may also recall that I had previously stated that I had reached a strategic conclusion that we would not transfer non-performing company-owned salons into the franchise portfolio. I just didn't think that was wise, and we have other alternatives to address non-performing salons, and one of those alternatives is to close them. We want to make certain that we're building a world-class franchise business, and transferring problems into the franchise organization just simply was unwise to me. The more specific answer to your question is, we concluded that they were not viable candidates either for our franchise portfolio or for a company-led operating turnaround. They were so underperforming that the best option was to simply exit the locations and get it behind us.
Okay, that's helpful. Just curious, maybe as we think about those sites, is the plan for Walmart then to re-utilize that space, or is there a competitive risk of another salon operator coming in and taking on some of those sites? What's the plan for the exited spaces?
I suppose there's always some risk that a competitor could assume these locations. To mitigate that risk, we took on the commitment to white box every single one of these locations, and by returning them to their original state, we think it lessens the probability that a competitor would simply step into our shoes.
Okay. Just final question for us is just on the cost of inventory and transfer. What is typically the plan when you close a site? Do you often repackage that inventory and redistribute it to other salons in the area, or is that truly a liquidation event that we should be thinking about that might drift into kind of the latter part of this month still?
I'll take the first part of that and then turn it over to Andrew. Because we've been working on this initiative for so many months, with a cross-functional project team here at Regis We took aggressive steps to draw down the local market inventory before the announcement date so that we mitigated the risk that we would have a material write-off related to that inventory. Typically, Steph, you would be right in these circumstances, if we were closing one or two salons, we would package up the product, ship it back to one of our two distribution centers, and then either put it back into circulation again or liquidate it.
In this specific instance, because there were so many locations involved, we took a different approach to draw down the inventory to run specials over the holidays on two-for-one sales, to ensure that we weren't faced with a problem post-close. I'll let Andrew give you the details.
Right. Ultimately, if there is any remaining inventory, we will package it, put it back into the system. We'll do the analysis, does it make sense to enter it back into the system? Because there's breakage associated with that. Transportation cost, packaging cost. In some instances, it makes sense just to either liquidate or destroy the product. We'll do what's in the best financial interest of the company and our shareholders.
Okay. Thanks, guys, for the detail. Appreciate it.
You bet, Steph.
We'll go next to Jason Ware with KeyBank.
Okay. Good morning, guys.
Hey, Jason.
Hey. I guess two questions. One on the stores, the roughly 600 stores. Can you just talk about maybe some of the characteristics of the store, like what type of region they were located in, and again, was this more of a macro, the region around where they were located, as opposed to just micro execution inside? Just wondering, I know it's probably widespread around the country, but I was just wondering what type of commonalities some of these stores might have had, why they underperformed so greatly versus some of the other ones that did work or were and still are successful.
Sure, Jason. You may remember that I've discussed on other calls that the company had undertaken a granular stratification analysis of all of the company-owned salons. I was actually surprised when we completed the analytical work that such a small number of salons were so devastating to the company-owned portfolio. It's a little around 10%-12% of the total company-owned portfolio was impairing performance. It just simply hadn't been dealt with over the years and for any number of reasons. When we began to look at the background data, it was no one common factor. I think Andrew had the right highlights that the age of the salons themselves, the depleted revenue streams within the salons of less than $100,000.
We looked at past efforts that have been made and past investments that have been made to try to fix these specific salons, and none of those efforts have been successful. They are located literally across the entire geographic U.S. They're not in Canada, but they're across many markets in the U.S. Originally, Jason, I thought, well, perhaps they'd be located in one region of the country, but they're not. Typically, when retailers prune their portfolio, they look at local market conditions, competitive conditions, trailing 12 revenues, efforts that have been made to fix the salons, what's been done with advertising, what's been done with pricing. We looked at all of those factors when reaching this conclusion, and then finally decided that they just weren't good candidates for us to continue to spend our time and effort and money on.
We have far better opportunities in the performing portfolio and far better opportunities to support the growth of our franchise business. This just wasn't a prudent longer-term investment for Regis to make. My natural instincts, Jason, are go to fix it. As a turnaround executive, you think you can fix anything. Strategy is deciding what to do, and it's also deciding what not to do. This is a case where it would clearly have not been wise to continue to put shareholder money into an effort to fix these locations. We've got better places to put our money.
Okay. No, I appreciate that. I guess the follow-up question I have is, it sounds based on what you're saying in the press release, that now you're largely done with the restructuring. I guess my thought is when you look at some of the other brands that you have out there, such as Supercuts, and you go through the same type of process, are there any larger closings ahead or are those would be just here and there type of things as you go through and open new stores, close new stores? But is this it in terms of the restructuring that gets you to that, I guess that optimal 50/50 mix corporate franchise over time?
Let me preface my comment by saying, I haven't yet concluded that 50/50 is in fact the right and appropriate mix. As Jason, you may recall that in other times I've said I don't yet know how high up is in the company-owned salon side. By weeding the garden, I'm now in a position to ascertain how good performance might be, could be in the company-owned salons. Then at some point in the future, I'll make a determination as to what the right balance and mix could be. As to the rest of the portfolio, the phrase non-performing was intentional. These were clearly the worst-performing salons in the entire company-owned salon portfolio. We have salons that I would characterize as underperforming, in other words, not meeting our expectations. We'll decide here and there what we do with those salons.
I don't currently expect any other major restructuring effort related to non-performing salons. We think we have cleaned the portfolio of non-performing salons, both with this action and the actions that we took to exit non-core, non-strategic mall locations in the international business. That's about 1,450 salons out of the company-owned salon portfolio since April. That achieves within company-owned and franchise at this moment, roughly a 50/50 balance. It's a little different than that, but that's about right. It's pretty close to 50/50. Then we'll wait and see how the rest of the company-owned portfolio performs, and we'll consider efforts to continue to move salons out of the company-owned portfolio and into franchise, where it makes financial sense to do it, and where it supports our long-term strategic plan.
Okay.
As I've said pretty consistently, I like the company-owned portfolio. When it performs well, it throws off a lot of cash. The problem at Regis was we had so many salons that were performing poorly that it masked the underlying strength of the company-owned portfolio. Now by weeding that garden, we have a chance to see how well it can grow. It'll throw off cash, and we can take that cash and reinvest back into the future of our business. You should expect that we will continue to pick our places to move company-owned salons into franchise because it supports our strategic imperatives, and there will be opportunities where it makes financial sense to do it.
No, that's terrific. I appreciate all the color. Thank you.
Sure. You bet.
This does conclude today's question and answer session. At this time, I would like to turn the conference back to Hugh for any additional or closing remarks.
In closing, we thank all of you for your interest in Regis. We look forward to speaking with you again at the close of the quarter. Best wishes for a great week. Thanks, everyone.
This does conclude today's conference. We thank you for your participation. You may now disconnect.