Regis Corporation Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended March 31, 2014. The filing is identified as a Form 10-Q for the period ended March 31, 2014, although the request metadata refers to 2013 Q3.
Business Context
Regis owns, operates and franchises beauty salons. At March 31, 2014, it had 9,679 worldwide locations, including 9,460 system-wide salons and 219 locations held through non-controlling ownership interests. The company reported three operating segments: North American Value, North American Premium and International.
Management was executing a turnaround involving a new point-of-sale system and salon workstations, North American field-organization restructuring, standardized product plan-o-grams and a reduced retail assortment. Hair Club was classified as discontinued operations following its April 2013 sale.
Financial Performance
| Metric | Three months ended March 31, 2014 | Three months ended March 31, 2013 | Nine months ended March 31, 2014 | Nine months ended March 31, 2013 |
|---|---|---|---|---|
| Revenue | $471.6 million | $504.9 million | $1,408.5 million | $1,516.5 million |
| Operating income (loss) | $(3.2) million | $3.3 million | $(36.5) million | $21.3 million |
| Net income (loss) | $(9.5) million | $2.4 million | $(118.7) million | $28.5 million |
| Diluted EPS | $(0.17) | $0.04 | $(2.10) | $0.50 |
| Operating margin | (0.7)% | 0.7% | (2.6)% | 1.4% |
- Quarterly revenue declined 6.6%; nine-month revenue declined 7.1%.
- Consolidated same-store sales declined 5.7% in the quarter and 5.8% year to date, driven primarily by lower guest visits. Average ticket increased 1.0% in the quarter and 1.3% year to date.
- North American Value revenue declined 6.2% in the quarter and 6.4% year to date. North American Premium revenue declined 11.0% and 11.2%, respectively. International revenue increased 2.6% in the quarter but declined 3.0% year to date.
- General and administrative expense decreased $13.7 million in the quarter and $40.7 million year to date, partly because field-leader costs were reclassified to operating expense.
- Quarterly depreciation and amortization increased to $28.3 million from $22.7 million. Year-to-date depreciation and amortization was $76.8 million versus $65.3 million.
Cash Flow, Liquidity and Capital Structure
| Metric | Nine months ended March 31, 2014 | Nine months ended March 31, 2013 |
|---|---|---|
| Cash provided by operating activities | $83.7 million | $81.7 million |
| Capital expenditures | $35.0 million | $72.6 million |
| Net cash from investing activities | $(29.9) million | $34.2 million |
| Net cash from financing activities | $106.0 million | $(48.2) million |
| Cash at period end | $360.8 million | $180.3 million |
- Cash increased from $200.5 million at June 30, 2013 to $360.8 million at March 31, 2014.
- Total debt was $293.8 million, including $173.8 million classified as current and $120.0 million of 5.75% senior term notes due December 2017. The company’s 5.0% convertible senior notes had a carrying amount of $170.8 million and were due July 2014.
- The company had no revolver borrowings, $2.0 million of standby letters of credit and $398.0 million of unused revolving credit availability. Management stated that all financing covenants were satisfied.
- Debt-to-capitalization increased to 28.6% from 16.9% at June 30, 2013.
- The board discontinued regular quarterly dividends in December 2013. The company paid $0.12 per share during the first nine months of fiscal 2014 versus $0.18 in the prior-year period.
Material Changes and Unusual Items
- A $34.9 million non-cash goodwill impairment charge was recorded in the second quarter for the Regis salon concept. Remaining net goodwill at March 31, 2014 was $423.7 million and related to North American Value.
- Non-cash long-lived asset impairment charges were $15.3 million year to date, compared with $5.0 million in the prior-year period, primarily due to continued negative same-store sales.
- The company recorded an $84.4 million non-cash valuation allowance against U.S. and U.K. deferred tax assets, including a $1.3 million U.K. charge in the third quarter. The resulting nine-month tax expense was $72.8 million and the effective tax rate was negative 142.0%.
- Prior-year results benefited from a $33.8 million primarily non-taxable foreign-currency translation gain related to the sale of Provalliance and from $17.9 million of impairment on the investment in Empire Education Group.
- During the first quarter, the company recorded a cumulative adjustment for immaterial prior-period errors involving inventory, self-insurance accruals and cash.
- In April 2014, Regis elected to settle its convertible notes due July 2014 with cash up to approximately $183.7 million, with shares potentially used for obligations above a $16.23 conversion price.
Outlook, Risks and Contingencies
Management expects performance to improve over time as the company reverses disruption from its strategic initiatives, but provided no specific numerical revenue or earnings guidance in the filing. The company intends to retain excess cash, preserve balance-sheet flexibility, expand franchised locations and selectively expand company-owned locations, particularly through its Walmart relationship.
- Key risks include continued negative same-store sales, unsuccessful execution of the turnaround, additional impairment charges, stylist retention and recruiting, competition, economic conditions, healthcare and regulatory changes, information-system and data-security risks, and foreign-exchange and interest-rate movements.
- The investment in Empire Education Group had a carrying value of approximately $44.8 million and an estimated fair-value cushion of approximately 5% based on the company’s fiscal 2013 assessment. Further deterioration could result in impairment.
- Regis faces ordinary-course lawsuits and purported consumer and wage-and-hour class claims; outcomes are unpredictable and could materially affect a particular period.
- A shareholder derivative action remains pending, although a Special Litigation Committee concluded in April 2014 that the claims should not be pursued and indicated it would seek dismissal.
- U.S. federal tax years 2010 and 2011 were under IRS audit. Management did not expect the identified issues to have a material financial-statement impact.
Investor Verification Checklist
- Verify the July 2014 convertible-note settlement, including the cash requirement and potential share issuance.
- Monitor same-store sales, guest visits, average ticket and salon closures to assess whether the turnaround is working.
- Assess the sustainability of cash generation after debt service, capital expenditures and the discontinued dividend.
- Review future valuation allowances, goodwill and long-lived-asset impairment testing, particularly for North American Value and the Empire Education Group investment.
- Track litigation, IRS and state tax audits, covenant compliance and available revolver capacity.
- Distinguish recurring operating performance from non-cash tax, goodwill, asset-impairment and prior-year foreign-currency items.