Regis Corporation Form 10-Q Summary
Reporting period: Three and nine months ended March 31, 2020. The provided filing is a fiscal 2020 third-quarter report, despite request metadata identifying “2019 Q3.” Financial statements are unaudited and should be read with the fiscal 2019 Form 10-K.
Business Context and Reporting Period
Regis franchises, owns and operates mass-market beauty salons. As of March 31, 2020, the system included 7,026 locations, comprising 5,126 franchise salons, 1,815 company-owned salons and 85 locations with non-controlling ownership interests. Franchise locations represented 73.9% of franchise and company-owned salons, up from 56.0% at June 30, 2019.
The company continued transitioning toward a fully franchised, asset-light model. During the nine months ended March 31, 2020, it sold 1,363 company-owned salons to franchisees. The quarter was materially affected by COVID-19, including the closure of all company-owned salons and almost all franchise locations during March 2020.
Key Financial Metrics
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Total revenue | $153.8 million, down 40.5% | $609.6 million, down 25.7% |
| Operating loss | $64.3 million | $81.7 million |
| Loss from continuing operations | $75.3 million | $99.0 million |
| Net loss | $75.0 million, or $2.10 per diluted share | $98.2 million, or $2.73 per diluted share |
| Operating margin | (41.8%), versus (8.6%) | (13.4%), versus (2.5%) |
| Cash used in operating activities | Not separately disclosed | $51.0 million |
| Capital expenditures | Not separately disclosed | $32.3 million |
Service revenue declined to $78.4 million from $181.8 million for the quarter and to $322.1 million from $580.1 million year to date. Product revenue declined to $34.9 million from $53.8 million for the quarter and to $124.5 million from $173.0 million year to date. Franchise rental income of $31.8 million for the quarter and $96.9 million year to date was newly presented on a gross basis following adoption of lease accounting guidance; corresponding franchise rent expense was also recorded.
Consolidated system-wide same-store sales declined 5.4% in the quarter and 2.7% year to date. Company-owned same-store sales declined 7.9% and 3.9%, respectively; franchise same-store sales declined 4.1% and 1.8%.
Cash, Debt and Liquidity
- Cash and cash equivalents were $241.0 million at March 31, 2020, compared with $70.1 million at June 30, 2019. Cash, cash equivalents and restricted cash totaled $255.8 million.
- Regis had $273.0 million outstanding under its $295.0 million revolving credit facility, with $21.5 million of standby letters of credit and only $0.5 million of unused availability at March 31, 2020.
- The company drew $183.0 million on the revolving facility in March 2020 to preserve liquidity during the COVID-19 disruption.
- Long-term debt increased to $273.0 million from $90.0 million. Debt-to-capitalization increased to 60.4% from 26.8% at June 30, 2019.
- Operating lease liabilities totaled $876.7 million, including $149.5 million current and $727.2 million long term. These liabilities are generally excluded from debt covenant calculations.
- Cash provided by investing activities was $62.7 million, primarily from $87.9 million of salon-sale proceeds and $9.0 million from the headquarters sale, partially offset by capital expenditures.
- Cash provided by financing activities was $152.1 million, principally reflecting borrowings, partially offset by $28.2 million of share repurchases.
Material Changes Versus the Prior Comparable Period
- Revenue decreased $104.6 million in the quarter and $211.3 million year to date, driven by salon sales and closures, weaker same-store sales and COVID-19 shutdowns.
- Company-owned salon operating results deteriorated from income of $10.7 million to a loss of $55.6 million in the quarter and from income of $44.8 million to a loss of $51.3 million year to date.
- Franchise salon operating income improved to $11.1 million in the quarter and $33.4 million year to date, principally because of the larger franchise base and lower TBG-related costs. Results were partly offset by COVID-19 closures and a $14.9 million refund of previously collected cooperative advertising contributions.
- The company recorded a $44.5 million goodwill impairment charge related to the company-owned reporting unit, which was fully impaired following COVID-19-driven reductions in projected cash flows.
- Net loss increased from $14.6 million to $75.0 million for the quarter and from $8.8 million to $98.2 million year to date.
- Cash used in operating activities increased from $20.3 million to $51.0 million year to date.
- Regis adopted ASC Topic 842 on July 1, 2019, adding substantial right-of-use assets and lease liabilities and changing the presentation of franchise rental income and expense.
- The company sold or transferred 1,363 company-owned salons to franchisees during the nine-month period, compared with 502 in the prior-year period. Net loss from salon sales was $21.8 million, compared with a $10.4 million gain, largely because of goodwill derecognition and lower proceeds per salon.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal financial guidance. Management stated that COVID-19 is expected to continue negatively affecting revenue and profitability. As of June 15, 2020, approximately 76% of franchise salons and 45% of company-owned salons were open. The company furloughed a substantial majority of its corporate, field-support and distribution-center workforce and reduced executive and employee pay.
In May 2020, Regis amended its revolving credit facility after it was not in compliance with the prior covenants at March 31, 2020. The amendment provided covenant relief, required minimum liquidity of $75.0 million, increased interest and facility-fee margins, added guarantors and secured the facility with liens on substantially all company and guarantor assets. Management stated that the amendment alleviated substantial doubt about the company’s ability to continue as a going concern and that Regis was in compliance with the amended covenants as of the filing date.
- COVID-19 could cause prolonged closures, reduced customer demand, additional safety costs, franchisee failures, royalty reductions, further asset impairments and liquidity pressure.
- Management may delay or alter the target of converting to a fully franchised model by the end of calendar 2020.
- Regis retained approximately $26 million of potential lease obligations related to 190 mall-based salons transferred back from The Beautiful Group. The salons were described as unprofitable, and lease renegotiations were uncertain.
- Goodwill, long-lived assets and right-of-use assets remain subject to further impairment testing as COVID-19 and economic conditions develop.
- A California wage-and-hour class action had preliminarily settled for $2.1 million, with $2.1 million accrued at March 31, 2020.
- The company recorded a $2.5 million net gain on the sale of its former headquarters, including a $1.5 million out-of-period adjustment that management concluded was not material.
- The CARES Act resulted in tax-related changes, including a $14.7 million tax expense from establishing a valuation allowance on certain net operating losses and a $0.4 million valuation allowance on Canadian deferred tax assets.
- Regis disclosed ongoing litigation involving its technology systems and a third-party point-of-sale supplier, with the outcome uncertain.
Most Important Facts for Investors to Verify
- Whether salon reopening rates, customer traffic and same-store sales recovered after June 15, 2020, and whether additional COVID-19 closures occurred.
- Compliance with the amended credit facility’s $75.0 million minimum-liquidity covenant and other revised requirements, including the new security interests and higher borrowing costs.
- The pace, proceeds and profitability of further company-owned salon sales or closures and the timing of the fully franchised transition.
- Potential additional impairment charges for goodwill, long-lived salon assets and right-of-use assets.
- Regis’s ability to fund operating losses, lease commitments and residual obligations related to franchise and mall-based salons.
- The financial condition of franchisees, potential royalty concessions or defaults, and the impact on franchise revenue and cash collections.
- Resolution and financial exposure from wage-and-hour litigation, TBG-related obligations and the technology supplier dispute.