Regis Corporation: Q1 FY2020 Form 10-Q Summary
Business context and reporting period
Regis Corporation franchises, owns and operates mass-market beauty salons. This report covers the three months ended September 30, 2019, the first quarter of fiscal 2020. At quarter-end, the system included 7,092 locations, including 4,456 franchise salons, 2,551 company-owned salons and 85 locations with minority ownership interests. The company continued its transition toward an asset-light franchise platform, selling 545 company-owned salons to franchisees during the quarter.
Financial performance and position
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Revenue | $247.0 million | $287.8 million | Down 14.2% |
| Operating income (loss) | $(9.9) million | $3.4 million | Declined $13.3 million |
| Loss from continuing operations | $(14.2) million | $(0.5) million | Increased loss |
| Net loss | $(13.8) million | $(0.7) million | Increased loss |
| Net loss per share | $(0.38) | $(0.02) | Worsened |
| Cash used in operating activities | $(13.5) million | $(17.2) million | Improved $3.7 million |
| Cash provided by investing activities | $32.0 million | $25.8 million | Increased $6.2 million |
| Cash used in financing activities | $(30.3) million | $(21.3) million | Increased use of $9.0 million |
- Revenue included $141.9 million of service revenue, $45.7 million of product revenue, $28.0 million of royalties and fees, and $31.4 million of franchise rental income.
- Franchise revenue increased to $72.5 million from $38.0 million, primarily from higher franchise royalties and the adoption of lease accounting, which added $31.4 million of franchise rental income and an equal amount of franchise rent expense.
- Company-owned salon revenue fell to $174.5 million from $249.8 million, mainly because of salon sales and closures. Company-owned salon operating income declined to $5.4 million from $19.6 million.
- Consolidated system-wide same-store sales declined 1.1%, compared with growth of 0.8% in the prior-year quarter. Company-owned same-store sales declined 2.0%, while franchise same-store sales declined 0.1%.
- Cost of service increased to 63.7% of service revenue from 58.5%, reflecting higher minimum wages, commissions and health insurance claims. Product cost increased to 57.7% of product revenue from 55.9%.
- Cash and cash equivalents were $58.9 million at September 30, 2019, with total cash, cash equivalents and restricted cash of $80.6 million.
- The company had $90.0 million outstanding under its $295.0 million revolving credit facility, $183.5 million of unused availability and $21.5 million of standby letters of credit. The facility matures in March 2023, and the company reported compliance with financing covenants.
- Total debt and financing liabilities were approximately $118.7 million, excluding lease liabilities. Debt to capitalization was 29.5%, compared with 26.8% at June 30, 2019.
- Operating lease liabilities totaled $942.5 million, consisting of $161.4 million current and $781.1 million long-term liabilities, following adoption of ASC Topic 842.
Material changes versus the prior comparable period
- Service revenue decreased $65.9 million and product revenue decreased $11.9 million, primarily because the company sold 1,143 company-owned salons, net of buybacks, and closed 147 salons during the preceding twelve months.
- Royalty and fee revenue increased $5.6 million as franchised locations increased. Franchised locations totaled 4,456 at September 30, 2019, compared with 4,205 one year earlier.
- The company sold 545 salons during the quarter and received $37.9 million of proceeds, compared with $12.4 million from 124 salon sales in the prior-year quarter.
- The company recorded a $5.9 million net loss on salon asset sales, including $32.1 million of non-cash goodwill derecognition. Goodwill declined to $313.3 million from $345.7 million at June 30, 2019.
- General and administrative expense declined $7.1 million, while rent expense declined $11.7 million, primarily due to the smaller company-owned salon base and lower administrative costs.
- Lease accounting adoption on July 1, 2019 added $930.8 million of right-of-use assets and $942.5 million of lease liabilities at September 30, 2019. The adoption changed the presentation of franchise rental income and expense but generally did not affect operating income or net income for those pass-through amounts.
- The company repurchased 1.5 million shares for $26.3 million during the quarter. Approximately $54.6 million remained available under the repurchase authorization at quarter-end.
Guidance, outlook, commentary and risks
- The filing does not provide quantitative earnings or revenue guidance. Management emphasized continued execution of the transition to a franchise-oriented, asset-light model and investment in franchisor capabilities.
- Management expects results to be increasingly influenced by system-wide sales and franchise performance rather than company-owned salon revenue.
- The company recorded $1.5 million of TBG restructuring charges to help mitigate potential lease-default exposure related to The Beautiful Group.
- As of September 30, 2019, Regis estimated potential liability of up to $35 million for remaining TBG salon lease commitments if TBG failed to perform. Based on information received in October 2019, the company expected TBG to default on obligations and anticipated making arrangements concerning approximately 225 U.S. store leases.
- Regis filed notices in October 2019 relating to administration proceedings involving TBG’s United Kingdom business. The company indicated that approximately 200 U.K. stores could potentially revert to Regis, be transitioned to other operators or be subject to lease termination and settlement negotiations.
- Goodwill impairment was not required in the quarter, but the company-owned reporting unit had approximately 20% headroom at the latest annual assessment. Weak operating performance, reduced salon traffic, increased competition, restructuring or changes in salon strategy could trigger a future impairment charge.
- Other material risks include wage and hour and consumer litigation, minimum-wage increases, franchisee performance, salon traffic, employee retention, Walmart relationships, cybersecurity, economic conditions, interest rates, foreign exchange and compliance with debt covenants.
Important facts for investors to verify
- Whether the anticipated TBG defaults and potential reversion of U.S. and U.K. salons result in additional operating costs, lease liabilities, restructuring charges or cash requirements.
- Whether declining same-store sales and lower guest transactions stabilize as the company-owned salon base becomes smaller.
- The sustainability of cash proceeds from salon sales as a source of liquidity and the effect of continued share repurchases on cash balances and equity.
- The company’s ability to maintain covenant compliance and sufficient availability under the revolving credit facility.
- Whether future goodwill impairment testing is triggered and whether the company-owned reporting unit’s approximately 20% headroom is maintained.
- The effect of the new lease accounting presentation on comparability, reported assets and liabilities, and future lease commitments, including the $13.5 million headquarters lease expected to commence October 1, 2019.
- The ultimate financial exposure from pending lawsuits, wage and hour claims and other contingencies, for which outcomes were not determinable from the filing.