Regis Corporation — Fiscal 2022 First-Quarter 10-Q Summary
Business Context and Reporting Period
Regis Corporation franchises technology-enabled hairstyling and hair-care salons in the United States, Puerto Rico and the United Kingdom. The filing covers the three months ended September 30, 2021, with comparative results for the three months ended September 30, 2020. Regis continued its transition toward an asset-light, franchise-focused model and had 5,843 system-wide locations at quarter-end, including 5,587 franchise salons and 179 company-owned salons.
Financial Performance and Position
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Total revenue | $77.8 million | $111.4 million | Down 30.2% |
| Operating loss | $5.8 million | $31.6 million | Improved $25.8 million |
| Net loss | $10.4 million | $35.3 million | Improved $24.9 million |
| Net loss per share | $0.28 | $0.98 | Improved |
| Cash used in operating activities | $12.3 million | $28.9 million | Improved $16.6 million |
| Capital expenditures | $1.5 million | $3.8 million | Down $2.3 million |
Franchise revenue increased to $69.8 million from $64.0 million, supported by higher royalties, fees, advertising contributions and franchise rental income. System-wide same-store sales increased 23.2%, compared with a 32.6% decline in the prior-year quarter.
Revenue from company-owned salons fell to $8.0 million from $47.4 million as salons were sold to franchisees or closed. Company-owned salons declined to 179 from 1,308 a year earlier. The company-owned segment operating loss improved to $1.0 million from $20.7 million.
At September 30, 2021, cash and cash equivalents were $45.5 million, or $56.1 million including restricted cash. Total assets were $968.9 million and shareholders’ equity was $39.8 million. Long-term debt was $195.8 million, compared with $186.9 million at June 30, 2021. The company had $81.8 million of unused revolving-credit capacity and reported total contractual liquidity of $148.2 million, against a $75.0 million minimum liquidity covenant.
The revolving credit facility had $293.3 million of capacity, matures in fiscal 2023, and carried a 5.00% interest rate at quarter-end. Regis was in compliance with its financing covenants.
Material Changes Versus the Prior Comparable Period
- Royalty revenue increased 45.6% to $16.6 million, primarily due to higher franchise system-wide sales and a larger franchise salon base.
- Product sales to franchisees declined 41.6% to $8.0 million as Regis transitioned from wholesale distribution to third-party distribution.
- Company-owned salon revenue declined $39.4 million, largely reflecting the sale and closure of company-owned salons.
- General and administrative expense decreased 16.5% to $21.8 million due primarily to lower salaries, field-management costs and bad-debt expense. The comparison was partly affected by a $2.4 million prior-year benefit from forfeited awards related to the former CEO.
- Rent expense declined 86.4% to $1.8 million, and company-owned salon expense declined 81.6% to $7.9 million, reflecting the reduced company-owned salon base.
- Depreciation and amortization declined 74.7% to $1.9 million, while long-lived asset impairment declined to $0.2 million from $5.8 million.
- Regis issued 8.1 million shares under its at-the-market program for $32.2 million of net proceeds. An additional 1.2 million shares sold on September 29, 2021 settled in October 2021 for $5.0 million of net proceeds.
Guidance, Outlook, Risks and Unusual Items
Management expects product-sales revenue to decrease significantly during fiscal 2022 as the wholesale distribution business is replaced by third-party distribution. The transition is expected to reduce product-sales revenue, cost of product sales and certain general and administrative costs, and is expected to be substantially complete by the end of fiscal 2022.
COVID-19 continued to reduce salon visits and contribute to franchisee staffing challenges. Management stated that the duration and ultimate financial impact of the pandemic, including variants, vaccination trends and government restrictions, cannot currently be estimated. Further long-lived asset impairment charges could result if salon performance or future cash-flow assumptions deteriorate.
Regis recorded $1.3 million of broker fees related to exiting distribution centers and paid $0.9 million to exit distribution-center leases early. It also incurred $0.4 million of costs to exit certain salon leases. The company plans to exit its remaining distribution center in fiscal 2022.
The company has an accrual of $3.0 million related to a settlement and commercial-services agreement with its former point-of-sale system supplier. Regis also faces various lawsuits and claims, including purported consumer and wage-and-hour class actions. The filing states that outcomes are unpredictable and could materially affect results in a particular period.
Other key risks include franchisee financial performance and staffing, reliance on Walmart and external vendors, cyber and information-technology risks, compliance with credit-facility covenants, refinancing risk, minimum-wage and regulatory changes, execution of the asset-light strategy, and potential future salon impairments.
Important Facts for Investors to Verify
- Whether improved franchise same-store sales and royalty growth persist after COVID-19 comparisons normalize.
- The pace and financial effect of completing the transition to third-party product distribution.
- Whether operating cash flow becomes positive and supports debt service and lease-related obligations.
- Remaining borrowing capacity, covenant compliance and refinancing requirements before the revolving facility matures.
- The extent of future salon closures, impairment charges and lease-exit costs.
- The dilution impact of additional at-the-market share issuances and the company’s plan for remaining authorization.
- The timing and potential financial exposure from pending litigation and other contingencies.