Regis Corporation

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 p.m. Central Time today. I'll now turn the conference call over to Kirsten 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 Russin, 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. Second, 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 10Q and 10K. 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 slash investors dash relations. With that, I will now turn the call over to Hugh.

Thank you, Kirsten, and good day, everyone. As we discussed last quarter, When I joined Regus, 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-like 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 be 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 organic salon openings by our franchisees. We may also utilize our cash in the next 18 months to complete any remaining elements of our multiyear 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 and some salon refurbishments and remodels as we consolidate our various brands throughout the portfolio. And as you know, in the past, we've utilized cash to repurchase our shares in circumstances where we believed it was in the best interest of our shareholders. So 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, but as you know, given the uncertainty in the external environment and Other factors, things could still change. Nevertheless, I believe our robust condition 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. As we have previously disclosed, although the transition to a capital-like 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 interest 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 Regus 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, and good morning. As Hugh mentioned, we are very pleased to report significant progress in our transition to a fully franchised model. Before getting into the details of the quarter, I'd like to share with you a quick overview of the changes we've 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. However, 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. So 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 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 derecognition, 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 had 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 were 25.1% versus the same quarter last year, driven primarily by increased franchise salon counts. Product sales to franchisees decreased $2.5 million year over year to 13.1 million, driven primarily by a $4.2 million decrease in products sold to TBG, 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 TBG, 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 segments, 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-like technology-enabled franchise platform over the course of the past 12 months, of which 545 were sold during the first quarter. And 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 stylus 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 derecognition 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 Salonsville Venditions were approximately $70,000 per unit compared to approximately $125,000 per unit for the full year of FY19. The decline in year-over-year per unit Vendition cash proceeds is driven primarily by the increased mix in signature and smart-style 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 net quarter in cash equals $58.9 million. As Hugh mentioned, we expect to utilize our vendition cash proceeds in various ways to maximize shareholder value, so 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 FY19 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 FY19 performance. And 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 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, We just had a number of reasons to pursue the original TVG transaction back in October 2017. First, the transaction provided us an opportunity to transfer mall based police risk to a third party and enabled us to exit the malls and focus on growth in the value sector rather than premiums loans. Second, with this transaction, we were able to substantially avoid the continuing operating losses associated with these loans. Third, We created optionality if the buyer was able to improve the performance of this portfolio. And 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. And 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. And 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 TBG 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 UK. As a reminder, the UK 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 UK 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, exit co, and pro forma franchise new co 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, ExitCo 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 new co-component is intended to reflect the 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 lines 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 NUCO portion of the business and a multiple more in line with other publicly traded pure franchise companies. Conversely, for the EXICO 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 having multiple applied against it. Lastly, as a reminder, while what we have presented today reflects actual results for the last 12 months and it's September 30th, 2019, when thinking about the overall sum of the parts for valuation purposes, it is necessary to consider future period EXICO cash flow items including EBITDA, and Cash Cap X net of sale proceeds, along with Franchise New Co. Cash Cap X. 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 we'll 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 1 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 1 to ask a question. Our first question comes from Stephanie Wissick of Jefferies.

Hi, this is Ashley Helgens on for Seth with Think. Thanks for taking our question. You guys had a nice strong level of benditions 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. So, hey, Ashley. Good morning. So as you look forward from a cash gain, I would use as a good proxy our results today. So last year, FY19 in the first quarter, because, again, we intended to provide additional disclosure last October with the first quarter of FY19 that clearly lays out number of salons on addition, cash proceeds, the net gain. So you can see kind of the assumed PPE and inventory that's included. We then have the goodwill due recognition to get to what the net gains are. So because it is a very fluid process with which we're selling, depending on whether it's a smart style, a signature style, or super cuts salon that gets an addition, I would just use kind of 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. And 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. And again, that's a function of the mix of salons that we sold with the smart style and signature style salons, those portfolios, typically receiving a slightly lower cash flow multiple than super cuts. And 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 we have the majority of the venditions to remain are in the smart style and signature style portfolio. So 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-like, cost-effective way to effectuate our brand consolidation.

Great. Thank you. And if I could just squeeze in one more, how has the response been to the tech and product enhancements you've made to date?

Hugh, 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. It doesn't mean that we won't embrace our branded apps as well. Travel companies can live in the same heat as the Delta Airlines app. So 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. And so in combination, that opens up a portal to customers that we may have never done business with in the history of the company. But at the same time, you'll see Regus continue to support our branded apps like 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 We're 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. So we're optimistic about it. We feel good about it.

Great. Thanks. Yeah, sure. All of you.

And our next question comes from Laura Champine of Loop Capital.

Good morning. Thanks for taking my questions. So 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.

You know, I'll take the first part, and then, 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. So 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. So I actually continue to be optimistic about the future comps. As you know, Lauren, one of the reasons we embrace the franchise strategy is, although these are national brands, they're local market businesses. And when you have owners put their own capital to work in a local market business, they tend to be proactive and enthusiastic about growing their businesses. And if 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 Chiat Day. Barclay for cost cutters and Chiat Day for super cuts. And 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. But 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 they're not – we measure this in the same way we do any other comp sale for Optum. Andrew, you want to tag on there?

Well, actually, Eric wants a few comments on franchise, and I'll take some of them.

Hey, Laura. It's Eric Bach. And so if you look at the business, particularly super cuts, obviously the vast majority now are on the franchise side. And when you factor in the number of locations that we have deals on, you know, we're down to, you know, 126 corporate super cuts locations, and that number will go down significantly. in the near term as well. But 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. So 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. So You know, we're focused heavily on all of our businesses, but in particular on Supercuts. And 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. And so that's, you know, 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. So we're, you know, 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, and the only thing I would add is, Lawrence, Andrew, on the company-owned salons with Supercuts, the remaining portfolio at the end of the quarter was just north of 300 salons. So 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. And inevitably, as we're going through this transition, there is likely to be some disruption on the APCO side, just given the uncertainty with the transition to a fully franchised model that we think Jim Lane and the field leadership team has done an excellent job of minimizing and managing through. but 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, and just to add to that, you know, I would say that disruption exists overall throughout the entire organization, and so we're managing it on all sides, of course, but we're transitioning, you know, a lot of stores, and that takes the time, energy, and effort of the entire field team, both on the Opco and franchise side.

And Andrew, in the Opco portfolio, isn't it correct to say that historically, we utilized pricing to offset minimum wage increases?

That is correct.

And that impacts comps as well, right?

That is correct.

As 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. But 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 own side.

I don't think that's a fair statement. I think it's it's more of a function of the portfolio mix. The fact that just I mean, per our public disclose FDD disclosures, super cuts tends to be a higher performing higher margin piece of the business. that tends to have higher unit, average unit revenue. So as we have substantially benditioned fully through the Supercuts portfolio, and now we're getting into the Smart Style and the Signature Style portfolio, one would expect that the average multiple that we get, and we've been fully transferring that disclosure, tends to be a little less than Supercuts. And then again, with the Signature Style portfolio, portfolio, with many of these salons, we are using this process to convert the salons into one of the, as he calls them, the Fab Five brands, or the brand consolidation effort that we have undergoing. And in doing so, we offset some of the remodel and refurb costs with the purchase price. So it gets recorded as relatively low, if not zero purchase price. But on the other side, The new franchisee has funded a substantial amount of conversion, and it's a brand new super cuts, cost cutters, first choice air cutters, or whatever the ending salon is. So 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.

And if it's not strong, Laura, we'll deal with it in a different way. Well, if it's a non-performance loan, we're going to close it. We're not going to condition it or sell it. And I think I would also highlight, and Laura, I know you know this, but it bears mentioning that these opcode comps become meaningfully less important to the financial performance of the company with each passing month. As the clock runs, and we continue our rendition process, the OPCO comps, while we monitor them. And as Andrew mentioned, Jim Lane 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.

Got it. So last question and something that should be relevant to NUCO. I mean, 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?

You know, and I'll let Eric tag onto this, too, but I think We are actually – 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. You know, 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. But at the same time, we think there is, Laura, a meaningful opportunity for organic openings. And we are pursuing a real estate strategy where we pre-position those assets in advance of organic salon openings by our franchisees. So 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. And 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 investing in so that when they're ready to grow, we're ready to provide them with the lease location. And Eric, you can add to that too, if you'd like.

Sure. Yes, I agree with With all of that, we obviously need to grow the businesses that we're selling. So we need to get comp growth, but we also need to add additional organic locations. And 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. So 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 locations. So 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. So they're busy doing that, right? And as they get that process to a point where they're comfortable, then you'll see them go into the market and work with us to add additional locations. And 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. So I would be remiss if I just didn't take a moment to express our heartfelt appreciation to our shareholders for their continued support and to our franchisees and employees for the awesome work they do every single day on behalf of our customers and our shareholders. So 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.