Regis Corporation Form 10-Q Summary
Reporting period: Quarter and nine months ended March 31, 2021. The request metadata identifies “2020 Q3,” but the filing is Regis Corporation’s fiscal 2021 third-quarter Form 10-Q, filed May 6, 2021. Results are unaudited and should be read with the fiscal 2020 Form 10-K.
Business Context
Regis franchises, owns and operates beauty salons. At March 31, 2021, the system included 6,221 locations, including 5,317 franchise salons, 826 company-owned salons and 78 locations with a non-controlling ownership interest. The company continued transitioning toward an asset-light, primarily franchised model and sold 126 company-owned salons during the quarter and 408 during the nine-month period.
COVID-19 continued to reduce guest visits and caused government-mandated closures, including prolonged closures in California and Ontario. Management also began exiting its wholesale product distribution business and plans to outsource product distribution to third parties.
Financial Highlights
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Total revenue | $100.3 million, down 34.8% | $316.0 million, down 48.2% |
| Operating loss | $18.5 million, versus $59.4 million loss | $76.9 million, versus $76.8 million loss |
| Net loss | $10.8 million, or $0.30 per share | $79.0 million, or $2.20 per share |
| Cash used in operating activities | Not separately provided | $80.0 million |
| Capital expenditures | Not separately provided | $9.6 million |
Revenue mix: Quarterly service revenue was $24.6 million, product revenue was $20.8 million, royalties and fees were $23.5 million, and franchise rental income was $31.3 million. Nine-month amounts were $90.0 million, $68.7 million, $61.4 million and $95.9 million, respectively.
Margins: The quarterly operating margin was approximately negative 18.5%, compared with negative 38.6% in the prior-year quarter. The nine-month operating margin was approximately negative 24.3%, versus negative 12.6% in the prior-year period. The filing does not present a consolidated gross margin.
Segment performance: Franchise salon operating income was $12.0 million in the quarter and $28.7 million year to date. Company-owned salons reported an operating loss of $12.6 million in the quarter and $50.7 million year to date. Franchise same-store sales declined 19.3% in the quarter and 27.6% year to date; company-owned same-store sales declined 28.8% and 33.8%, respectively.
Liquidity, Debt and Balance Sheet
- Cash and cash equivalents were $34.5 million at March 31, 2021, compared with $113.7 million at June 30, 2020. Cash, cash equivalents and restricted cash totaled $40.4 million.
- Total assets were $1.05 billion and shareholders’ equity was $49.5 million, down from $125.7 million at June 30, 2020.
- Outstanding revolving credit borrowings were $177.5 million under a $295.0 million facility maturing in 2023. The interest rate was 5.0%.
- Unused revolver availability was $98.8 million after $18.7 million of standby letters of credit. Management reported total liquidity of $133.3 million, consisting of unrestricted cash and unused availability.
- The company reported compliance with its financing covenants and a $75.0 million minimum liquidity covenant as of March 31, 2021. Beginning with periods ending June 30, 2021, management expects the applicable minimum liquidity requirement to be adjusted to approximately $53 million to $55 million based on historical salon-sale proceeds.
- Long-term lease liabilities were $536.2 million, and current lease liabilities were $123.2 million. The company reported a debt-to-capitalization ratio of 78.2%, up from 62.0% at June 30, 2020.
Material Changes Versus Prior Comparable Period
- Revenue declined sharply because of COVID-19-related traffic reductions, closures, salon sales to franchisees and salon closures. The company estimated that salon sales and closures reduced revenue by $44.9 million in the quarter and $214.0 million year to date.
- Company-owned salon revenue fell 67.0% in the quarter and 70.7% year to date, while franchise salon revenue increased 21.7% in the quarter but declined 4.8% year to date.
- The prior-year periods included a $40.2 million goodwill impairment charge and substantial non-cash goodwill derecognition related to salon sales. No goodwill impairment was recorded in 2021.
- General and administrative expense declined 22.9% in the quarter and 26.4% year to date, primarily due to lower salaries and headcount. The year-to-date comparison also benefited from a $2.4 million benefit related to forfeited awards from the former CEO’s departure.
- Rent expense declined 57.1% in the quarter and 46.2% year to date as the company reduced company-owned salon locations and terminated leases.
- The company recorded $0.8 million of long-lived asset impairment in the quarter and $9.8 million year to date, including $6.3 million of right-of-use asset impairment.
- A $5.3 million quarterly and $6.9 million year-to-date inventory reserve was recorded as the company exited its product sales and distribution business.
- The company recognized a $14.9 million gain from converting the distribution-center sale-and-leaseback accounting, following its decision to exit the leased spaces.
Cash Flow and Capital Allocation
Cash used in operating activities was $80.0 million for the nine months ended March 31, 2021, compared with $51.0 million in the prior-year period. Management attributed the outflow to lower revenue and margins, $14.0 million of payments to catch up on prior-year payables and a $2.5 million CEO sign-on bonus, partly offset by cost reductions and a Canadian COVID-19 payroll relief payment.
Investing cash flow was a use of $0.9 million, including $9.6 million of capital expenditures and $7.7 million of proceeds from salon sales. Financing cash flow was a use of $1.6 million, compared with $152.1 million of financing inflows in the prior-year period, which included net debt borrowings and share repurchases.
No shares were repurchased during the quarter or nine-month period. The company had $54.6 million remaining under its authorized repurchase program and had not issued shares under its newly established $50 million at-the-market offering program.
Outlook, Risks and Unusual Items
- Management did not provide quantitative earnings or revenue guidance in the filing.
- The duration and severity of COVID-19, future salon closures, customer traffic and the ability of stylists and customers to return remain significant uncertainties.
- The new third-party product distribution model could reduce revenue, product costs and related general and administrative expense, but exposes the company to distributor performance, supply-chain disruptions and product availability risks.
- The company may incur additional long-lived asset or right-of-use asset impairments if salon cash flows or operating conditions deteriorate.
- Regis remains liable for approximately $12 million of mall-based salon lease commitments related to 62 open salons formerly associated with The Beautiful Group, before mitigation efforts.
- A California wage-and-hour class action has been preliminarily settled for $2.1 million, subject to court and class approval; the amount was accrued. A separate point-of-sale supplier dispute involves technology ownership and related counterclaims, with an uncertain outcome and no recorded damages liability.
- The company’s new CEO began employment in October 2020. Management identified leadership transition, franchisee performance, Walmart relationships, technology implementation, cyber threats, minimum-wage changes and covenant compliance as additional risks.
- Controls and procedures were reported effective as of March 31, 2021, with no material changes in internal control over financial reporting during the quarter.
Investor Verification Items
- Verify the filing period and compare the reported fiscal 2021 third-quarter results with the revised fiscal 2020 comparative amounts.
- Assess whether cash burn, negative operating results and the $133.3 million reported liquidity remain consistent with the company’s minimum liquidity covenant after June 30, 2021.
- Monitor COVID-19 recovery, same-store sales, salon closures and the pace and economics of salon sales to franchisees.
- Evaluate the financial effect of exiting wholesale product distribution, including inventory liquidation, future revenue reductions and third-party supply-chain dependence.
- Review potential additional lease, impairment, litigation and TBG-related obligations not fully reflected in current-period earnings.
- Reconcile reported debt, lease liabilities and the 78.2% debt-to-capitalization ratio when assessing balance-sheet leverage.