RGS

Regis Corporation 10-Q Summary: Quarter Ended September 30, 2004

Business Context and Reporting Period

This filing is a Quarterly Report (Form 10-Q) for Regis Corporation, a global owner, operator, and franchisor of hair salons and beauty career schools. The report covers the three-month period ended September 30, 2004 (First Quarter of Fiscal Year 2005). As of the period end, the company operated 10,251 system-wide salons (8,236 in North America, 2,015 internationally) and 11 beauty career schools.

Key Financial Metrics

Note: Debt figures include fair value adjustments for interest rate swaps.

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenues increased 9.9% year-over-year. This was driven by acquisitions (5.4%), organic growth (4.0%), and favorable foreign currency translation (1.3%).
• Segment Performance:
  • North American Salons: Revenues rose 8.2% to $448.4 million. Same-store sales increased 0.5%. Growth was negatively impacted by hurricanes in the southeast U.S., which closed nearly 650 salons for at least one day.
  • International Salons: Revenues surged 19.9% to $51.7 million, driven by a 11.2% favorable currency impact and 10.3% organic growth.
  • Beauty Career Schools: Revenues nearly doubled (98.8% increase) to $6.1 million, primarily due to the acquisition of six Blaine Beauty Career Schools in the prior quarter.
• Profit Margins: Total company-owned salon gross margin decreased slightly by 20 basis points to 44.7%. Service margins declined 60 basis points to 42.9%, largely due to the decision to compensate employees while salons were closed during hurricanes. Product margins improved 80 basis points to 48.9% due to favorable supplier terms.
• Cash Flow: Operating cash flow decreased to $35.4 million from $52.6 million, primarily due to a $15.5 million increase in inventory levels (stocking for holiday promotions) and timing of payments.

Guidance, Outlook, and Risks

• Outlook: Management projects annual consolidated same-store sales increases in the low single digits for Fiscal Year 2005. The long-term objective remains 10-14% annual revenue growth, achieved through a mix of organic construction and acquisitions.
• Dividends: The quarterly dividend was increased to $0.04 per share (from $0.03). A subsequent dividend of $0.04 was declared on October 28, 2004.
• Share Repurchases: No shares were repurchased in the quarter. Approximately $46.6 million remains available under the $100 million repurchase program.
• Tax Legislation: A subsequent event noted the reinstatement of Work Opportunity and Welfare-to-Work Credits. Management expects a catch-up tax adjustment of approximately $0.3 million in the next quarter and an annual benefit of $0.9 million for Fiscal 2005.
• Risks: Key risks include the impact of hurricanes on operations, foreign currency exchange rate fluctuations, availability of real estate for expansion, and potential wage and hour litigation (specifically a collective action under the Fair Labor Standards Act).

Investor Verification Checklist

• Hurricane Impact: Verify the extent of revenue loss and operational disruption caused by hurricanes in the southeast U.S. and the cost of compensating employees during closures.
• Inventory Build: Confirm the necessity of the $15.5 million inventory increase and its impact on future working capital requirements.
• Acquisition Integration: Assess the profitability and integration progress of the newly acquired Blaine Beauty Career Schools and franchise buybacks.
• Foreign Currency Sensitivity: Monitor the impact of the strengthening U.S. dollar on future international revenue translation, as Q1 results benefited significantly from a weaker dollar.
• Legal Contingencies: Review the status of the Fair Labor Standards Act (FLSA) collective action lawsuit and potential settlement exposure.