Regis Corporation Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended March 31, 2024. The request labels the period “2023 Q3,” but the filing is for the quarter ended March 31, 2024.
Business Context
Regis operates a primarily capital-light salon franchising business under brands including Supercuts, SmartStyle, Cost Cutters, Roosters and First Choice Haircutters. At March 31, 2024, the company had 4,537 franchised salons, 20 company-owned salons and 296 employees. Management continues shifting product distribution from a wholesale model to third-party distribution.
Financial Results and Key Metrics
| Metric | Three months ended March 31, 2024 | Three months ended March 31, 2023 | Nine months ended March 31, 2024 | Nine months ended March 31, 2023 |
|---|---|---|---|---|
| Total revenue | $49.2 million | $55.8 million | $153.6 million | $177.6 million |
| Operating income | $4.1 million | $2.0 million | $16.3 million | $5.2 million |
| Operating margin | 8.3% | 3.6% | 10.6% | 2.9% |
| Loss from continuing operations | $2.4 million | $2.2 million | $2.2 million | $6.5 million |
| Net loss | $2.3 million | $1.6 million | $0.1 million | $2.6 million |
| Net loss per share | $1.00 | $0.71 | $0.06 | $1.12 |
| Adjusted EBITDA | $5.0 million | $4.2 million | $18.5 million | $15.8 million |
Revenue declined 11.8% in the quarter and 13.5% year to date. Franchise revenue declined to $47.9 million from $53.6 million in the quarter and to $148.6 million from $169.7 million year to date. Franchise adjusted EBITDA increased to $5.8 million from $4.8 million in the quarter and to $20.1 million from $17.3 million year to date.
System-wide same-store sales increased 0.5% in the quarter and 1.4% year to date, compared with increases of 6.0% and 5.0% in the comparable prior-year periods. System-wide revenue was $286.8 million in the quarter and $885.4 million year to date.
Cash and cash equivalents were $5.9 million at March 31, 2024, compared with $9.5 million at June 30, 2023. Including restricted cash, total cash, cash equivalents and restricted cash was $14.8 million, down from $21.4 million. Current liabilities were $109.1 million, and shareholders’ deficit was $35.8 million.
Net cash used in operating activities was $7.1 million for the nine months ended March 31, 2024, compared with $8.5 million in the prior-year period. Investing activities provided $1.6 million, including $2.0 million of proceeds related to the discontinued OSP business. Financing activities used $1.1 million.
Debt consisted of a $169.8 million term loan, $4.1 million of paid-in-kind interest and $14.0 million drawn on the revolving facility, partially offset by $8.1 million of deferred financing fees. The debt carried a 9.69% interest rate at March 31, 2024. Total long-term debt, net, was $179.7 million. The company reported $36.7 million of total liquidity and $30.9 million of available revolving credit, and stated that it was in compliance with its covenants.
Material Changes Versus the Prior Comparable Period
- Franchise salon count declined to 4,537 from 5,057 reported for the comparable segment period; total locations declined to 4,557 from 4,863 at June 30, 2023.
- During the nine months, a net 258 franchise salons closed. Over the twelve months ended March 31, 2024, franchisees opened 10 salons and closed 540, while purchasing 10 salons from the company.
- Company-owned salons declined to 20 from 68 at June 30, 2023, reducing company-owned salon revenue by 38.9% in the quarter and 36.2% year to date.
- Advertising fund contributions declined 25.9% in the quarter and 17.5% year to date, primarily because of fewer franchise salons and lower contribution rates. Corresponding advertising fund expenses declined by similar amounts.
- Franchise rental income declined 10.7% in the quarter and 15.5% year to date, primarily because of fewer franchise salons and franchisees signing their own leases.
- General and administrative expense declined 14.1% in the quarter and 13.9% year to date, reflecting lower headcount, compensation, legal, insurance and professional fees.
- Interest expense increased 28.5% in the quarter and 41.2% year to date because of higher borrowing costs. The debt margin increased effective March 27, 2024, with 3.00% of the margin paid in kind.
- Income from discontinued operations declined because the prior-year periods included larger proceeds from the OSP sale. The company received $2.0 million of previously withheld OSP proceeds during fiscal 2024 and does not expect additional proceeds during fiscal 2024.
Guidance, Outlook, Risks and Unusual Items
- Management expects product sales to franchisees and related costs to remain immaterial for the remainder of fiscal 2024 because of the third-party distribution model.
- The Board’s strategic review, announced November 1, 2023, is evaluating capital structure and other strategic alternatives. There is no set timetable and no assurance that the review will result in a transaction or other action. The company expects related costs to continue to affect cash usage.
- Management stated that available liquidity, cash and borrowing capacity should be sufficient for obligations through the August 2025 credit facility maturity, but the company is using excess cash to pay interest and periodically borrowing to cover costs.
- The company adopted a Tax Benefits Preservation Plan to protect approximately $645 million of U.S. federal net operating losses and other tax attributes. The plan generally deters acquisitions of 4.95% or more of the outstanding shares without Board approval.
- Regis owns a majority interest in Empire Education Group. EEG had $10.8 million of Title IV liabilities at March 31, 2024. New gainful-employment rules become effective July 1, 2024, and a loss of Title IV eligibility could create material operating and contingent liability risks. No accrual was recorded because management did not consider a material liability probable.
- The company’s stock moved to Nasdaq’s Global Market tier after failing to regain compliance with the NYSE minimum market capitalization requirement. Management estimated that market value of publicly held shares had been below Nasdaq’s $15.0 million threshold since April 15, 2024; continued noncompliance could lead to delisting.
- Goodwill totaled $173.3 million. A November 30, 2023 impairment analysis found fair value exceeded carrying value by 6%, but future declines in operating performance, market value or valuation assumptions could result in impairment.
- The company faces ordinary-course litigation involving franchise matters, rent, consumer claims and wage-and-hour matters. Outcomes are unpredictable and could materially affect a particular period.
Investor Verification Items
- Verify the company’s ability to generate positive operating cash flow while servicing high-cost debt and meeting the $10.0 million minimum liquidity covenant.
- Monitor franchise closures, royalty trends, same-store sales and the effect of declining salon count on future revenue.
- Track the strategic review, potential capital structure actions and related advisory costs.
- Assess Nasdaq listing compliance and the risk of reduced trading liquidity or delisting.
- Evaluate potential EEG Title IV liabilities and the effect of gainful-employment rules beginning July 1, 2024.
- Review goodwill sensitivity, particularly the reported 6% fair-value cushion, and the risk of future impairment.
- Confirm the status of the proposed sale of Regis’s 55.1% EEG ownership interest and required regulatory, accreditation, surety bond and letter-of-credit approvals.