Regis Corporation — Form 10-Q Summary
Business Context and Reporting Period
This quarterly filing covers the fiscal quarter and nine months ended March 31, 2011, Regis Corporation’s fiscal third quarter. The filing is unaudited and was reviewed, but not audited, by PricewaterhouseCoopers LLP. Regis operated or held interests in approximately 12,700 worldwide locations, including 9,832 salons, 96 hair restoration centers and approximately 2,760 locations through investments. The company had approximately 55,000 employees.
Key Financial Metrics
| Metric | Three Months Ended March 31, 2011 | Prior Year | Nine Months Ended March 31, 2011 | Prior Year |
|---|---|---|---|---|
| Revenue | $581.3 million | $587.6 million | $1,733.9 million | $1,768.5 million |
| Operating income (loss) | $(59.5) million | $1.2 million | $(3.2) million | $61.5 million |
| Net income (loss) | $(25.3) million | $(1.5) million | $7.5 million | $24.4 million |
| Net income (loss) per diluted share | $(0.45) | $(0.03) | $0.13 | $0.44 |
| Operating margin | (10.2%) | 0.2% | (0.2%) | 3.5% |
| Cash flow from operations | Not separately reported | Not separately reported | $161.3 million | $151.1 million |
Quarterly consolidated same-store sales declined 2.3%; the nine-month decline was 1.7%. Service revenue decreased 1.7% for the quarter and 1.6% for the nine-month period, while product revenue increased 1.1% quarterly but declined 3.2% year to date. Gross margin, excluding depreciation, was 44.3% for the quarter and 44.7% year to date.
At March 31, 2011, cash and cash equivalents were $145.5 million, total debt was $404.3 million, shareholders’ equity was $1.049 billion and the debt-to-capitalization ratio was 27.8%. Fixed-rate debt was $359.3 million and floating-rate debt was $45.0 million. Management stated that the company was in compliance with all financing covenants.
Material Changes Versus the Prior Comparable Period
- Revenue declined 1.1% in the quarter and 2.0% for the nine months, primarily reflecting lower customer visits and negative same-store sales.
- Quarterly operating results were reduced by a $74.1 million non-cash goodwill impairment charge related to the Promenade salon concept. The prior-year comparable period included a $35.3 million impairment charge related to the Regis salon concept.
- General and administrative expense increased 18.8% in the quarter and 8.4% year to date, partly due to a $9.0 million reserve on the Trade Secret purchaser note, senior management restructuring, marketing and strategic-alternatives costs.
- Interest expense declined to $8.3 million for the quarter and $26.0 million year to date, compared with $9.0 million and $45.4 million, respectively, primarily because of lower debt and the absence of prior-year debt refinancing costs.
- The company recorded an $8.7 million other-than-temporary impairment on preferred shares and related premium associated with MY Style following the March 2011 natural disasters in Japan.
- Regis acquired approximately 17% additional ownership in Provalliance for approximately $57 million, increasing its ownership to approximately 47%. The transaction generated an approximately $2.5 million net gain related to the equity put settlement.
- Operating cash flow increased 6.8% year to date, but investing cash use increased substantially to $121.6 million, including the Provalliance investment, acquisitions and capital expenditures.
Guidance, Outlook, Risks and Unusual Items
Management reduced its growth pace because customer visitations had not recovered as expected. For fiscal 2012, management projected approximately 285 constructed salons, approximately $120 million of capital expenditures and approximately $25 million of acquisitions. Franchisees were expected to construct approximately 60 to 70 salons. Fiscal 2012 consolidated same-store sales were projected in a range of negative 1.0% to positive 1.0%. Management’s long-term objective remained annual revenue growth of 6% to 10%, although the filing states that the timing depends on visitation trends, real estate availability, acquisitions and other factors.
The Promenade, Regis and Hair Restoration Centers reporting units were identified as reasonably likely to face additional goodwill impairment in future periods. Estimated fair value exceeded carrying value by approximately 9% for Hair Restoration Centers and 18% for Regis. The Promenade impairment analysis used a 12% discount rate, projected same-store sales ranging from negative 2% to positive 3% and a 2.5% terminal growth rate.
The Trade Secret purchaser emerged from Chapter 11 bankruptcy in October 2010. Regis carried a net note receivable of $22.5 million at March 31, 2011 after recording the $9.0 million reserve; management warned that additional reserves may be required if expected cash flows decline. Regis also guaranteed fewer than 30 operating leases of the purchaser and considered the potential loss reasonably possible.
Other risks include continued negative same-store sales, consumer discretionary spending, competition, labor and benefit costs, minimum-wage and other regulatory changes, litigation, dependence on key relationships including Walmart, franchise and joint-venture performance, foreign currency exposure, interest rates, product distribution decisions and potential dilution or cash requirements associated with the $172.5 million of 5% convertible senior notes due 2014.
Most Important Facts for Investors to Verify
- Whether customer visitation and same-store sales improve, particularly in the Promenade and Regis concepts.
- The sensitivity of remaining goodwill balances to discount rates, same-store sales and revenue-growth assumptions.
- Recoverability of the $22.5 million net Trade Secret note receivable and the company’s lease guarantees.
- Future performance and valuation of Provalliance, including the remaining $22.2 million equity put liability.
- Liquidity after the $57 million Provalliance investment, planned capital expenditures and acquisitions.
- Impact of the expected $21.4 million reversal in the fourth quarter of the tax benefit initially recorded for the goodwill impairment; the filing estimates the annual tax benefit from that impairment at $27.8 million.
- Potential litigation exposure, including wage-and-hour claims and other ordinary-course lawsuits.
- Whether the company maintains compliance with debt covenants as operating performance changes.