Regis Corporation 10-Q Summary: Quarter Ended September 30, 2009
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for Regis Corporation, a global owner, franchisor, and operator of beauty salons, hair restoration centers, and educational institutions. The report covers the three-month period ended September 30, 2009 (Fiscal Q1 2010). As of the period end, the company operated approximately 12,900 locations worldwide, including 9,601 North American salons, 431 international salons, and 95 hair restoration centers. The company divested its "Trade Secret" salon concept in February 2009, which is now reported as discontinued operations.
Key Financial Metrics
| Metric | Q1 2010 (Sep 30, 2009) | Q1 2009 (Sep 30, 2008) |
|---|---|---|
| Total Revenues | $605.6 million | $613.5 million |
| Operating Income | $28.3 million | $34.0 million |
| Net Income | $7.8 million | $14.5 million |
| Diluted EPS | $0.14 | $0.34 |
| Operating Cash Flow | $38.5 million | $27.8 million |
| Total Debt | $478.7 million | $634.3 million (Jun 30, 2009) |
| Cash and Equivalents | $100.6 million | $42.5 million (Jun 30, 2009) |
| Debt-to-Capitalization | 32.4% | 44.1% (Jun 30, 2009) |
Material Changes vs. Prior Period
- Revenue Decline: Consolidated revenues decreased 1.3% year-over-year. This was driven by a 4.5% decline in consolidated same-store sales due to the global economic downturn and lengthening customer visitation patterns. The decline was partially offset by $20.0 million in product sales to the purchaser of the divested Trade Secret concept.
- Profitability Pressure: Operating income decreased 17% to $28.3 million. Net income dropped 46% to $7.8 million. The effective income tax rate for continuing operations was 51.0%, negatively impacted by a $0.4 million adjustment to correct prior year deferred tax balances.
- Debt Restructuring: The company significantly reduced its debt load. In July 2009, it issued $172.5 million in convertible senior notes and sold 13.2 million shares of common stock for net proceeds of $163.5 million. Proceeds were used to repay approximately $297 million of private placement senior term notes. This restructuring incurred $18.0 million in one-time costs (make-whole payments and swap settlements) recorded as interest expense.
- Segment Performance:
- North American Salons: Revenues increased 0.3% to $531.8 million, but operating income fell 3.4% due to legal settlements ($3.6 million) and same-store sales declines.
- International Salons: Revenues plummeted 19.9% to $38.8 million, resulting in an operating loss of $1.1 million. This was driven by a 12.9% negative foreign currency impact (stronger USD) and $3.6 million in lease termination costs for planned UK salon closures.
- Hair Restoration Centers: Revenues were flat (-0.5%), with operating income declining 5.6%.
Guidance, Outlook, and Risks
- Outlook: Management projects fiscal year 2010 consolidated same-store sales to range from negative 3.0% to positive 1.0%. Capital expenditures and acquisitions for fiscal 2010 are expected to be between $90.0 million and $100.0 million. The company plans to construct 125 to 175 new salons in fiscal 2010.
- Goodwill Impairment Risk: The company noted that its stock continues to trade below book value. While no triggering event for impairment was identified as of September 30, 2009, management stated it is "reasonably likely" that the Regis salon concept and Hair Restoration Centers reporting units could become impaired in future periods if adverse economic conditions persist.
- Legal and Contingencies: The company settled two legal claims regarding customer and employee matters for $3.6 million. It remains subject to various wage and hour litigation common to large retail employers.
- Discontinued Operations: The company recorded a $3.0 million income tax benefit in discontinued operations related to the Trade Secret sale, correcting a prior year calculation.
Investor Verification Checklist
- Goodwill Valuation: Verify the assumptions used in the discounted cash flow models for the Regis and Hair Restoration Centers segments, given the stock price trading below book value.
- Debt Covenant Compliance: Confirm continued compliance with the amended credit agreement covenants, specifically the minimum net worth of $800 million and fixed charge coverage ratio of 1.3x.
- UK Closure Costs: Monitor the execution of the plan to close up to 80 underperforming UK salons and the associated lease termination costs.
- Convertible Note Impact: Assess the dilution risk and interest expense impact of the new $172.5 million convertible senior notes (effective interest rate of 8.9%).
- Same-Store Sales Trend: Track the trajectory of same-store sales to determine if the projected -3.0% to +1.0% range for fiscal 2010 is achievable amidst the economic downturn.