Regis Corporation Form 10-Q Summary
Business Context and Reporting Period
Regis Corporation owns, operates and franchises mass-market beauty salons. This filing covers the quarter ended December 31, 2018, the second quarter of fiscal 2019, and the six months then ended. The company had 8,021 system-wide locations and approximately 24,000 corporate employees at quarter-end.
The mall-based North American business and International segment were classified as discontinued operations following their 2017 sale to The Beautiful Group (TBG). Continuing operations comprise company-owned and franchise salons.
Key Financial Metrics
| Metric | Three Months Ended Dec. 31, 2018 | Three Months Ended Dec. 31, 2017 | Six Months Ended Dec. 31, 2018 | Six Months Ended Dec. 31, 2017 |
|---|---|---|---|---|
| Revenue | $274.7 million | $313.8 million | $562.5 million | $629.3 million |
| Operating income (loss) | $(1.6) million | $(38.5) million | $1.9 million | $(22.9) million |
| Operating margin | (0.6%) | (12.3%) | 0.3% | (3.6%) |
| Net income | $6.5 million | $35.5 million | $5.8 million | $10.2 million |
| Net margin | 2.4% | 11.3% | 1.0% | 1.6% |
| Diluted EPS | $0.15 | $0.75 | $0.13 | $0.22 |
| Cash used in operating activities | Not provided for the quarter | Not provided for the quarter | $(11.0) million | $(12.4) million |
Quarterly revenue declined 12.5%, while six-month revenue declined 10.6%. Company-owned same-store sales increased 0.5% in both periods, supported by higher average ticket prices but offset by lower guest transactions.
At December 31, 2018, cash and cash equivalents were $97.0 million and total cash, cash equivalents and restricted cash were $120.5 million. Total assets were $789.2 million and shareholders’ equity was $425.0 million.
Debt consisted of $90.0 million outstanding under a $295.0 million revolving credit facility, with $182.0 million of unused availability after outstanding letters of credit. The facility matures in March 2023. The company also reported a $17.6 million long-term lease-related financial liability from a distribution-center sale-and-leaseback transaction.
Six-month investing cash flow was positive $31.9 million, including $24.6 million from company-owned life insurance settlements and $24.1 million from salon asset sales, partly offset by $16.8 million of capital expenditures. Financing cash flow was negative $49.0 million, primarily because of $65.1 million in share repurchases.
Material Changes Versus the Prior Comparable Period
- Company-owned salon revenue declined $45.8 million in the quarter and $84.8 million year to date, primarily due to salon closures and the sale of company-owned salons to franchisees.
- The company sold 133 salons to franchisees in the quarter and 257 year to date. It sold 520 company-owned salons, net of buybacks, during the twelve months ended December 31, 2018.
- Company-owned salon operating income improved to $14.5 million from a $20.1 million loss in the quarter and to $34.1 million from $3.3 million year to date, mainly reflecting the absence of prior-year SmartStyle restructuring and impairment costs and the closure of underperforming salons.
- Franchise revenue increased 19.6% in the quarter and 29.9% year to date, primarily from a larger franchise base. Franchise operating income was $8.2 million in the quarter and $18.0 million year to date.
- Rent expense declined $30.8 million in the quarter and $37.3 million year to date as prior-year lease termination and closure costs did not recur.
- General and administrative expense decreased $2.8 million in the quarter but increased $9.8 million year to date. The year-to-date increase reflects the absence of a prior-year $8.0 million life-insurance gain, higher professional fees and stock compensation expense.
- Net income was lower in the quarter despite improved operating results because the prior-year period included an $80.8 million income-tax benefit related largely to the Tax Cuts and Jobs Act. The current quarter included only $0.5 million of income-tax expense.
- Discontinued operations generated $6.1 million of income in the quarter and $5.8 million year to date, primarily from tax benefits associated with winding down the TBG transaction. The prior-year periods included losses of $6.6 million and $40.4 million, respectively.
- The company repurchased 2.9 million shares for $48.9 million in the quarter and 4.0 million shares for $68.3 million year to date. The remaining authorization was approximately $167.0 million at quarter-end.
- Goodwill declined to $393.8 million from $412.6 million at June 30, 2018, primarily because of $17.6 million of goodwill derecognition related to salon sales. No interim goodwill impairment analysis was required.
Accounting, Outlook, Risks and Unusual Items
Regis adopted ASC Topic 606 revenue recognition on July 1, 2018 using the full retrospective method, which adjusted prior-period presentations. The company also retrospectively adopted restricted-cash and cash-flow presentation guidance. It expects adoption of the new lease standard in fiscal 2020 to materially increase reported assets and liabilities.
No quantitative earnings or revenue guidance is provided in the filing. Management emphasizes salon-to-franchise conversions, cost reduction, improved company-owned salon performance and franchise expansion. Future performance remains sensitive to salon traffic, average ticket prices, staffing and stylist retention, minimum-wage increases, franchisee performance, competition and consumer trends.
TBG remains a significant contingency. Regis estimated potential lease exposure of up to $75 million as of December 31, 2018, subject to mitigation. Net receivables and notes due from TBG totaled $16.4 million. TBG’s United Kingdom business entered a voluntary insolvency proceeding, and landlords challenged the related company voluntary arrangement. TBG payment defaults or business failure could result in additional reserves, lease obligations, litigation and cash-flow pressure.
The company is subject to ordinary-course litigation, including purported class-wide consumer and wage-and-hour claims. Outcomes are not presently determinable and could materially affect results in a particular period. Goodwill impairment also remains a risk if company-owned salon performance, strategy, market multiples or cash flows deteriorate.
Important Facts for Investors to Verify
- Whether improved company-owned salon profitability can persist as the company continues closing and selling salons.
- The effect of declining guest transactions despite higher average ticket prices.
- TBG’s liquidity, payment performance, United Kingdom insolvency process and potential lease-related exposure.
- The sustainability of cash balances and liquidity after substantial share repurchases and negative operating cash flow.
- Future goodwill impairment risk, particularly for the company-owned reporting unit, which had approximately 24% headroom at the last annual assessment.
- The impact of the upcoming lease-accounting adoption on balance-sheet leverage and debt-to-capitalization measures.
- Potential exposure from wage-and-hour, consumer, employment and other litigation.