Regis Corporation Form 10-Q Summary
Business context and reporting period
Regis Corporation franchises, owns and operates beauty salons under brands including SmartStyle, Supercuts and Signature Style. This filing covers the fiscal quarter and six months ended December 31, 2019, the Company’s second fiscal quarter. Regis had 7,152 system-wide locations, including 4,790 franchised salons, 2,277 company-owned salons and 85 locations with a non-controlling ownership interest.
The Company continued its rapid transition from company-owned salons to an asset-light, substantially franchised model. During the six months, Regis sold 988 company-owned salons to franchisees for $69.4 million of cash proceeds.
Financial performance and liquidity
| Metric | Three months ended Dec. 31, 2019 | Three months ended Dec. 31, 2018 | Six months ended Dec. 31, 2019 | Six months ended Dec. 31, 2018 |
|---|---|---|---|---|
| Total revenue | $208.8 million | $274.7 million | $455.8 million | $562.5 million |
| Operating income (loss) | $(7.5) million | $(1.6) million | $(17.4) million | $1.9 million |
| Net income (loss) | $(9.4) million | $6.5 million | $(23.2) million | $5.8 million |
| Diluted EPS | $(0.26) | $0.15 | $(0.64) | $0.13 |
| Cash used in operating activities | Not separately presented | $(19.3) million | $(10.6) million |
- Quarterly revenue declined 24.0%; six-month revenue declined 19.0%. Service revenue fell $88.6 million in the quarter and $154.5 million year to date, primarily because of salon sales and weaker company-owned same-store performance.
- Royalty and fee revenue increased 29.8% in the quarter to $29.3 million and 27.5% year to date to $57.4 million, reflecting the larger franchised base.
- Franchise rental income and matching franchise rent expense of $33.6 million in the quarter and $65.1 million year to date were newly presented gross following adoption of lease accounting guidance. The presentation increased reported revenue and expenses without a corresponding operating profit benefit.
- Operating margin was approximately negative 3.6% in the quarter versus negative 0.6% in the prior-year quarter, and approximately negative 3.8% for the six months versus positive 0.3% previously. Net margin was approximately negative 4.5% and negative 5.1%, respectively.
- Company-owned salon operating income declined to a loss of $1.1 million in the quarter from income of $14.5 million, and to $4.3 million year to date from $34.1 million. Franchise salon operating income increased to $12.1 million in the quarter and $22.3 million year to date.
- Consolidated system-wide same-store sales decreased 2.3% in the quarter and 1.7% year to date, compared with increases of 0.9% and 0.8% in the comparable periods. Company-owned same-store sales decreased 3.6% and 2.7%, respectively.
Balance sheet, cash flow and capital structure
- Cash and cash equivalents were $49.8 million at December 31, 2019, compared with $70.1 million at June 30, 2019. Cash, cash equivalents and restricted cash totaled $71.9 million versus $92.4 million.
- Operating activities used $19.3 million during the six months, while investing activities provided $59.3 million. Investing inflows included $69.4 million from salon sales and $9.0 million from the sale of the corporate headquarters, partly offset by $17.6 million of capital expenditures.
- Financing activities used $60.5 million, including $30.0 million of debt repayment, $28.2 million of share repurchases and $1.8 million of taxes paid for shares withheld.
- Outstanding revolving debt was $60.0 million under a $295.0 million facility maturing in March 2023. Available credit was $213.5 million, after $21.5 million of standby letters of credit. The Company was in compliance with its financing covenants at December 31, 2019.
- Lease accounting added a $911.9 million right-of-use asset and $923.8 million of lease liabilities at December 31, 2019. Total liabilities were $1.224 billion, including $60.0 million of debt, $28.5 million of financing liabilities and $923.8 million of operating lease liabilities.
- The reported debt-to-capitalization ratio was 24.3%, excluding operating lease liabilities, versus 26.8% at June 30, 2019.
Material changes versus the prior comparable period
- Regis adopted ASC Topic 842 on July 1, 2019 using the modified retrospective method. Franchise rental income and expense are now reported gross, materially increasing both revenue and operating expenses.
- The franchised portfolio expanded to 4,790 locations from 3,951 at June 30, 2019, while company-owned salons declined to 2,277 from 3,108. The shift reflects continued salon sales and closures.
- Salon sales produced a net loss of $5.7 million in the quarter and $11.6 million year to date, including non-cash goodwill derecognition of $20.7 million and $52.8 million, respectively.
- Goodwill declined to $293.0 million from $345.7 million, primarily because of goodwill derecognized on salon sales. Management reported no interim goodwill impairment requirement, but the Company-owned reporting unit had only approximately 20% headroom in the most recent annual assessment.
- TBG transferred 207 mall-based salons to Regis on December 31, 2019. These locations were not included in current-period operating results. Regis remained liable for up to approximately $30.0 million of related lease commitments before mitigation efforts.
Outlook, risks and unusual items
The filing does not provide formal revenue, earnings or same-store-sales guidance. Management described continued restructuring toward a fully franchised model, including cost reductions, infrastructure re-engineering and additional salon conversions. The Company reduced headcount in January 2020 in response to the smaller company-owned salon base.
- Management expects the transition to create near-term financial pressure and noted that future franchisee development, support investments and product purchases may not meet expectations.
- Regis stated that it expects it may not comply with certain financial covenants in future quarters and is seeking alternative or replacement debt financing. Failure to comply could restrict credit availability or accelerate repayment obligations.
- The Company faces risks from weak salon traffic, minimum-wage and commission increases, competition, franchisee performance, employee and stylist retention, technology investments, cyber threats and dependence on Walmart and other partners.
- Legal proceedings include consumer and wage-and-hour claims. The filing states that outcomes are unpredictable and potentially material.
- In January 2020, Regis borrowed $30.0 million under its revolving credit facility and signed an agreement to sell its investment in Empire Education Group. The expected gain was described as immaterial, with an anticipated income tax benefit.
Most important facts for investors to verify
- Whether the fully franchised strategy improves recurring royalty economics sufficiently to offset declining company-owned revenue and near-term restructuring costs.
- Future compliance with debt covenants, the timing and terms of replacement financing, and remaining availability under the revolving facility.
- The operating performance, lease exposure and potential disposition strategy for the 207 salons transferred from TBG.
- Whether same-store sales and guest transactions stabilize, particularly in the company-owned and SmartStyle businesses.
- The sensitivity of goodwill and other long-lived assets to further salon closures, weaker cash flows or changes in the pace of salon sales.
- The cash impact of continued share repurchases, capital expenditures, lease obligations and possible litigation or TBG-related contingencies.