Regis Corporation Form 10-K Summary
Business Context and Reporting Period
Regis Corporation owns, operates and franchises beauty salons under brands including SmartStyle, Supercuts, MasterCuts, Cost Cutters and Regis Salons. The filing covers the fiscal year ended June 30, 2016, rather than 2015 Q4. Regis operated or franchised 9,483 locations worldwide, including 6,792 company-owned salons, 2,496 franchised salons and 195 locations with non-controlling ownership interests. Reportable segments were North American Value, North American Premium and International.
Financial Performance and Key Metrics
| Metric | Fiscal 2016 | Fiscal 2015 |
|---|---|---|
| Revenue | $1.791 billion | $1.837 billion |
| Operating income | $17.6 million | $3.5 million |
| Operating margin | Approximately 1.0% | Approximately 0.2% |
| Net loss | $11.3 million | $33.8 million |
| Net loss per diluted share | $0.23 | $0.62 |
| Cash flow from operations | $55.0 million | $94.0 million |
| Capital expenditures | $31.1 million | $38.3 million |
| Cash and equivalents | $147.3 million | $212.3 million |
| Long-term debt | $120.4 million | $120.0 million |
- Revenue declined 2.5%; service revenue fell 3.2%, product revenue fell 1.0%, and royalties and fees increased 6.5%.
- Consolidated same-store sales increased 0.2%, reflecting a 3.1% increase in average ticket offset by a 2.9% decline in guest visits.
- Operating improvement reflected lower depreciation and amortization, rent, site operating expenses and general and administrative expense, as well as the absence of the prior-year goodwill impairment charge.
- Cost of service increased to 62.7% of service revenue from 61.8%, driven primarily by minimum-wage increases, lower stylist productivity, higher health insurance costs and service mix.
- Fiscal 2016 operating cash flow covered capital expenditures by approximately 1.8 times, but operating cash flow declined $38.9 million year over year.
- At June 30, 2016, the company had $200.0 million of revolving credit capacity, with no borrowings and approximately $198.4 million available after letters of credit.
- Debt consisted primarily of $123.0 million principal amount of 5.5% senior notes due December 2019, carried at $120.4 million net of discount. The company was in compliance with its debt covenants.
Material Changes Versus the Prior Comparable Period
- Revenue decreased by $46.4 million, while operating income improved by $14.1 million.
- Net loss narrowed by $22.5 million, primarily because fiscal 2015 included higher impairment and other charges and fiscal 2016 had stronger operating results.
- Operating cash flow fell from $94.0 million to $55.0 million, principally due to higher inventory, incentive payments and lower tax refunds.
- The company closed 297 salons, opened 66 company-owned salons net of relocations and acquired one company-owned salon through a franchise buyback. Total system locations declined from 9,556 to 9,483.
- Franchised locations increased by 172, supporting higher royalty and fee revenue and increasing the company’s dependence on franchisee performance.
- In December 2015, Regis exchanged $120.0 million of 5.75% notes due 2017 for $123.0 million of 5.5% notes due 2019. In January 2016, revolving credit capacity was reduced from $400.0 million to $200.0 million.
- Regis repurchased 7.6 million shares for $101.0 million, reducing shares outstanding and contributing to the increase in debt-to-capitalization to 18.8% from 16.1%.
Outlook, Commentary, Risks and Unusual Items
Management emphasized stylist recruitment, training and retention, operational simplification, technology, guest experience and cost reduction. The filing does not provide a specific quantitative fiscal 2017 revenue, earnings or margin forecast.
- Regis recorded a $13.0 million non-cash impairment charge in fiscal 2016, fully impairing its investment in Empire Education Group, in which it holds a 54.6% equity interest. Empire reported a $5.6 million net loss, continued enrollment and revenue declines, and operates 89 cosmetology schools.
- Regis recorded $10.5 million of salon fixed-asset impairment charges. No goodwill impairment was recorded in fiscal 2016; $417.4 million of goodwill remained in the North American Value reporting unit.
- The effective tax rate was 72.3%, largely because valuation allowances limited recognition of deferred tax assets and approximately $7.9 million of tax expense was non-cash.
- Fiscal 2016 included quarterly corrections for prior-period errors involving interest, insurance, telephone and depreciation expense. The filing states that the errors were not material to prior periods, individual quarters or the fiscal year.
- Key risks include declining guest visits, stylist shortages and wage inflation, competition, mall and consumer traffic trends, franchisee performance, dependence on Walmart and other landlords, cybersecurity, information-system failures, tax exposures, foreign exchange volatility and debt-covenant compliance.
- The company faces various lawsuits and claims, including alleged consumer and wage-and-hour violations. Outcomes are described as unpredictable, and potential future judgments or settlements could materially affect a particular period.
- Operating lease commitments totaled approximately $930.3 million, including $232.4 million related to franchisee leases that are generally reimbursed by franchisees. The company also reported $23.1 million of estimated interest payments on long-term debt.
- The company discontinued regular dividends and paid no dividend during fiscal 2016. The board had $60.0 million remaining under its share-repurchase authorization at year-end.
Investor Verification Checklist
- Verify whether the modest 0.2% same-store sales improvement is sustainable, particularly given the 2.9% decline in guest visits.
- Assess whether higher labor, health-care and service costs can be offset by pricing, productivity and salon closures.
- Review the performance and potential liabilities associated with Empire Education Group after the full impairment of Regis’s investment.
- Reconcile cash usage from the $101.0 million share repurchase with the decline in cash and the company’s future liquidity needs.
- Review the $417.4 million North American Value goodwill balance and sensitivity to future operating performance.
- Examine debt covenants, the 2019 senior-note maturity and the reduced $200.0 million revolving facility.
- Evaluate the economic exposure from long-term operating leases, franchisee subleases and potential lease-related liabilities.
- Monitor wage-and-hour litigation, tax audits, deferred tax valuation allowances, cybersecurity matters and the effects of Brexit-related currency volatility.