Regis Corporation Fiscal 2020 Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2020. The requested “2019 Q4” period does not match this filing; the filing is the fiscal 2020 annual report, with quarterly data separately presented for the quarter ended June 30, 2020.
Business Context
Regis franchises, owns and operates technology-enabled hairstyling and hair-care salons under brands including SmartStyle, Supercuts, Cost Cutters, First Choice Haircutters and Roosters. At June 30, 2020, the system included 6,923 locations: 5,209 franchised salons, 1,632 company-owned salons and 82 locations with non-controlling ownership interests.
Management is transitioning to a fully franchised, asset-light model. During fiscal 2020, the Company sold 1,475 salons to franchisees, including 1,448 net salon conversions, and planned to sell approximately 800 to 1,000 additional salons over the following 12 months, subject to COVID-19 conditions.
COVID-19 materially disrupted operations. Government mandates closed all company-owned salons and almost all franchise salons beginning in March 2020. At June 30, 2020, approximately 87% of franchise salons and 54% of company-owned salons were open.
Key Financial Metrics
| Metric | Fiscal 2020 | Fiscal 2019 | Change |
|---|---|---|---|
| Total revenue | $669.7 million | $1,069.0 million | Down 37.4% |
| Operating loss | $(145.3) million | $(22.1) million | Loss increased |
| Loss from continuing operations | $(172.2) million | $(20.1) million | Loss increased |
| Net loss | $(171.4) million | $(14.2) million | Loss increased |
| Diluted loss per share | $(4.77) | $(0.34) | Worsened |
| Cash used in operating activities | $(86.4) million | $(17.5) million | Use increased |
| Capital expenditures | $37.5 million | $31.6 million | Increased |
| Cash proceeds from salon sales | $91.6 million | $94.8 million | Down $3.2 million |
| Cash and cash equivalents | $113.7 million | $70.1 million | Increased |
| Debt under revolving credit facility | $177.5 million | $90.0 million | Increased $87.5 million |
Revenue consisted of $331.5 million of service revenue, $137.6 million of product revenue, $73.4 million of royalties and fees, and $127.2 million of franchise rental income. The rental income and corresponding franchise rent expense reflect the adoption of ASC 842 and are largely a gross presentation change rather than a comparable increase in economic activity.
Service revenue declined 55.8%, and product revenue declined 39.0%, primarily because of salon conversions, closures and COVID-19 shutdowns. Franchise same-store sales declined 4.4%; company-owned same-store sales also declined 4.4%.
Cost of service was 67.1% of service revenue, compared with 60.4% in fiscal 2019. Cost of product was 61.6% of product revenue, compared with 57.1%. The reported deterioration reflected higher minimum wages and commissions, inefficient stylist hours, COVID-19 effects and a greater mix of lower-margin wholesale product sales.
Material Changes Versus Fiscal 2019
- System-wide locations shifted substantially toward franchising: franchised locations increased from 3,951 to 5,209, while company-owned locations declined from 3,108 to 1,632.
- Company-owned salon revenue fell from $915.4 million to $416.7 million, and the segment moved from $58.3 million of operating income to a $96.1 million operating loss.
- Franchise segment operating income, including TBG-related activity, increased from $16.1 million to $32.9 million, although royalties and fees declined because of COVID-19 closures and refunds of cooperative advertising contributions.
- The Company recorded a $40.2 million non-cash goodwill impairment charge, a $22.6 million long-lived asset impairment charge, and a $27.3 million net loss on salon sales to franchisees.
- Cash used in operations increased to $86.4 million, while the Company drew on its revolving credit facility to preserve liquidity during the pandemic.
- The Company adopted ASC 842, recognizing a $786.2 million right-of-use asset and $817.7 million of present-value lease liabilities at June 30, 2020. Operating lease payment obligations totaled $933.1 million before sublease income.
- The Company repurchased 1.5 million shares for $26.4 million during fiscal 2020. No dividends were paid.
Liquidity, Debt and Contingencies
At June 30, 2020, cash, cash equivalents and restricted cash totaled $122.9 million, including $113.7 million of unrestricted cash and cash equivalents. The Company had $96.5 million of unused availability under its $295.0 million revolving credit facility, after $177.5 million of borrowings and $21.0 million of standby letters of credit.
In May 2020, the credit facility was amended to provide covenant relief, impose a minimum liquidity covenant of $75.0 million, increase interest margins and fees, add a 1.25% LIBOR floor, and secure the facility with substantially all Company assets. Management reported compliance with the amended covenants at June 30, 2020 and expected compliance for at least one year from the filing date.
The Company retains significant lease exposure because it is the primary tenant for most company-owned and franchised locations. Management disclosed residual real-estate lease liability of approximately $817.7 million, including franchise-related leases. COVID-19-related rent deferrals, landlord disputes, evictions and franchisee defaults could materially affect liquidity.
Outlook, Management Commentary and Risks
- Management remains committed to completing the transition to a fully franchised, capital-light model, but COVID-19 may delay salon sales, reduce transaction proceeds and require additional closures or alternative dispositions.
- Future results depend heavily on franchisee financial health, royalty collections, product purchases, staffing, customer traffic and the ability of franchisees to resume operations.
- The Company is investing in OpenSalon and OpenSalon Pro technology, mobile applications, booking capabilities, loyalty programs and digital marketing. The new back-office system launched in fiscal 2021, but benefits may be delayed or reduced.
- Regis is involved in litigation with its existing third-party point-of-sale and back-office system supplier. The outcome is uncertain and could increase costs or delay technology migration.
- Regis reacquired 207 North American mall salons from The Beautiful Group’s insolvency process and had 166 TBG salons with approximately $23 million of remaining lease liability at June 30, 2020. The salons were described as unprofitable, and lease renegotiations were unresolved.
- Walmart is a major landlord and traffic source for approximately 2,068 SmartStyle and Cost Cutters salons. Walmart’s pandemic-related entrance closures materially reduced traffic and revenue at affected salons.
- COVID-19 created substantial uncertainty regarding closures, customer and stylist willingness to return, safety costs, supply-chain disruption, rent obligations, franchisee defaults and future impairment charges.
- The Company identified a material weakness in interim-period controls over goodwill derecognition related to salon sales. The weakness was remediated after the remaining company-owned goodwill was fully impaired, and management and the auditor concluded controls were effective at June 30, 2020.
- The filing identifies wage-and-hour claims, including a California class action preliminarily settled for $2.1 million, as well as other ordinary-course litigation and contingencies.
Most Important Facts to Verify
- Whether salon reopening levels, same-store sales and franchisee royalty collections recovered after June 30, 2020.
- Compliance with the $75.0 million minimum liquidity covenant and availability under the amended revolving credit facility.
- Progress, pricing and cash proceeds from the planned sale or closure of remaining company-owned salons.
- Actual exposure to lease defaults, rent deferrals, landlord litigation and residual obligations for franchised and TBG-related locations.
- Resolution and financial impact of the technology supplier litigation and the adoption of OpenSalon Pro.
- Potential additional goodwill, right-of-use asset or other long-lived asset impairments if COVID-19 effects persist.
- Financial condition of franchisees, including allowance for doubtful accounts, which increased to $6.9 million from $2.0 million.
- Walmart’s future decisions regarding store access, salon locations and approvals for franchising company-owned salons.