Regis Corporation — Form 10-Q Summary
Business context and reporting period
Regis Corporation owns, operates and franchises beauty salons. This report covers the three and six months ended December 31, 2016, the second quarter and first half of fiscal 2017, with comparisons to the corresponding fiscal 2016 periods. Regis had 9,207 system-wide salons, 9,388 worldwide locations including non-controlling interests, and approximately 44,000 corporate employees at quarter-end.
Key financial metrics
| Metric | Three months ended Dec. 31, 2016 | Three months ended Dec. 31, 2015 | Six months ended Dec. 31, 2016 | Six months ended Dec. 31, 2015 |
|---|---|---|---|---|
| Revenue | $424.0 million | $450.5 million | $855.1 million | $900.6 million |
| Operating income (loss) | $(0.8) million | $(2.9) million | $6.9 million | $1.4 million |
| Operating margin | (0.2)% | (0.6)% | 0.8% | 0.2% |
| Net income (loss) | $(2.2) million | $(14.0) million | $1.1 million | $(14.8) million |
| Diluted EPS | $(0.05) | $(0.29) | $0.02 | $(0.29) |
| Operating cash flow | Not separately provided | Not separately provided | $27.6 million | $12.6 million |
Quarterly revenue declined 5.9%, while six-month revenue declined 5.1%. Service revenue declined 5.1% and 4.6%, respectively; product revenue declined 9.0% and 7.2%; and royalties and fees declined 2.1% and 0.9%. Consolidated same-store sales decreased 3.6% in the quarter and 2.3% year to date, driven primarily by lower guest visits, partly offset by higher average tickets.
Six-month capital expenditures were $18.4 million, compared with $15.7 million in the prior-year period. Investing cash flow was $(17.3) million. Financing cash flow was $(1.1) million, compared with $(78.4) million in the prior year, when Regis repurchased $77.0 million of stock. Cash increased to $155.6 million from $147.3 million at June 30, 2016.
Long-term debt was $120.1 million, consisting primarily of 5.5% senior term notes. The $200.0 million revolving facility had no borrowings, $1.5 million of outstanding letters of credit and $198.5 million of unused availability. Regis reported compliance with its financing covenants. Debt to capitalization was 19.2% at December 31, 2016.
Material changes versus the prior comparable period
- Operating results improved despite lower sales, principally because of lower site operating expenses, general and administrative expense, rent, depreciation and amortization, and the absence of the prior-year Empire Education Group impairment.
- Net income improved by $16.1 million for the quarter and $15.9 million for the six-month period. The prior-year periods included $13.9 million and $14.8 million, respectively, of equity losses and impairment related to Empire Education Group.
- North American Value revenue decreased 2.9% for the quarter and 2.3% year to date, while North American Premium revenue decreased 13.9% and 12.7%. International revenue decreased 21.5% and 19.4%, affected partly by foreign currency.
- North American Value remained profitable, with operating income of $26.0 million for the quarter and $59.4 million year to date. North American Premium and International remained loss-making.
- Cost of service as a percentage of service revenue increased 100 basis points for the quarter and 70 basis points year to date, reflecting minimum-wage increases, stylist productivity and lapping a prior-year rebate.
- The company closed 306 company-owned salons and sold 27 company-owned salons to franchisees, net, during the twelve months ended December 31, 2016. Franchised locations increased to 2,549 from 2,427 a year earlier.
Guidance, outlook, risks and unusual items
The filing does not provide a specific quantitative earnings or revenue forecast. Management stated that it is investing in people, training and technology, pursuing cost reductions, and expanding the franchise business, including plans to sell additional company-owned salons to franchisees. SmartStyle franchising began in January 2017. Such transfers are expected to reduce consolidated revenue, increase royalty revenue and reduce operating costs, but the filing cautions that the financial benefit is uncertain.
Unusual or significant items included $4.4 million of salon asset impairment charges during the six months, non-cash tax expense of $3.3 million related primarily to the deferred-tax valuation allowance, and an expected approximately $7.8 million of similar tax expense for fiscal 2017. Regis also has an IRS examination involving fiscal 2010–2013 tax returns; management believes its positions will be sustained and does not expect a material financial-position impact.
Material risks include continued declines in same-store visits and sales, stylist recruitment and retention, minimum-wage and other regulatory changes, execution of the franchise expansion, franchisee performance and financial condition, competition, consumer trends, foreign currency, cyber threats, debt covenant compliance, tax matters and unpredictable wage-and-hour and consumer litigation. The company’s investment in Empire Education Group had no remaining carrying value at December 31, 2016, although Regis could remain responsible for certain venture liabilities.
Management concluded that disclosure controls and procedures were effective as of December 31, 2016, and reported no material change in internal control over financial reporting during the quarter.
Investor verification points
- Verify whether the decline in same-store guest visits stabilizes and whether higher average tickets can offset traffic pressure.
- Assess the profitability and cash-flow effects of closing or selling company-owned salons and expanding SmartStyle franchising.
- Monitor North American Premium and International segment losses and any additional salon or goodwill impairment charges.
- Confirm the timing and cash impact of the $123.0 million senior notes, the revolving facility expiration in 2018, and the notes’ stated maturity in the filing.
- Evaluate the recurring effect of the deferred-tax valuation allowance and the pending IRS tax matters.
- Review developments in wage-and-hour, consumer and other litigation, as outcomes are described as unpredictable.