Regis Corporation 10-Q Summary
Business Context and Reporting Period
Regis Corporation operates technology-enabled hairstyling and hair-care salons through franchised, company-owned and partially owned locations in the United States, Canada, Puerto Rico and the United Kingdom. The filing covers the quarter and six months ended December 31, 2021, the second quarter of fiscal 2022. The system included 5,779 locations, including 5,553 franchise salons and 150 company-owned salons. The company continued transitioning toward an asset-light, franchise-focused model.
Financial Performance and Key Metrics
| Metric | Three Months Ended December 31 | Six Months Ended December 31 |
|---|---|---|
| Total revenue | $70.3 million, down 32.6% | $148.0 million, down 31.4% |
| Operating loss | $1.1 million; approximately (1.6%) margin | $6.9 million; approximately (4.7%) margin |
| Net loss | $4.9 million, or $0.11 per diluted share; approximately (7.0%) margin | $15.3 million, or $0.37 per diluted share; approximately (10.3%) margin |
| Cash flow from operations | $24.3 million used in the six-month period | |
| Capital expenditures | $2.9 million in the six-month period | |
| Cash and cash equivalents | $35.4 million at December 31, 2021 | |
| Long-term debt | $194.2 million outstanding |
Quarterly royalty revenue increased 26.8% to $16.1 million, fees increased to $4.9 million, advertising fund contributions increased 70.2% to $8.0 million, and franchise rental income increased 4.6% to $33.8 million. Product sales to franchisees fell 83.1% to $2.4 million. Company-owned salon revenue fell 86.8% to $5.0 million.
Consolidated system-wide same-store sales increased 22.1% in the quarter and 22.6% year to date, compared with declines of 32.0% and 32.3%, respectively, in the prior-year periods. Franchise segment operating income was $2.1 million for the quarter and an operating loss of $2.7 million year to date. The company-owned segment reported operating losses of $3.2 million and $4.2 million, respectively.
As of December 31, 2021, total liabilities were $887.9 million and shareholders’ equity was $38.3 million. The debt-to-capitalization ratio was 83.5%, compared with 91.6% at June 30, 2021. Lease liabilities totaled $568.5 million, including current and long-term obligations.
Material Changes Versus the Prior Comparable Period
- Revenue declined primarily because 560 company-owned salons were sold to franchisees during the preceding twelve months, additional salons were closed, and the company exited third-party logistics activities.
- Company-owned salons decreased to 150 from 1,037 at December 31, 2020, while franchise salons increased to 5,553 from 5,269.
- The shift from wholesale product distribution to third-party distributors reduced product-sales revenue substantially; management expects product-sales revenue to decline significantly during fiscal 2022.
- Operating and net losses improved materially because of the franchise-focused model, lower general and administrative costs, reduced rent, lower depreciation and impairment charges, and the exit of loss-making company-owned salons.
- Operating cash use improved from $65.5 million in the prior-year six-month period to $24.3 million, but remained negative.
- The company issued 9.3 million shares under its at-the-market program for $37.2 million of net proceeds during the six months, increasing shares outstanding to approximately 45.5 million from 35.8 million at June 30, 2021.
Liquidity, Outlook, Risks and Unusual Items
The company had $81.8 million of unused revolving-credit availability, $15.7 million of outstanding letters of credit and total liquidity under the credit agreement of $138.1 million. The facility matures in March 2023 and carries a $75.0 million minimum-liquidity covenant. Regis was in compliance with its covenants at December 31, 2021 and stated that it expects to remain compliant for at least one year from the filing date. Management expects to refinance the facility before maturity, but warns that COVID-19-related uncertainty could reduce borrowing options or increase interest costs.
COVID-19 continued to reduce salon visits and contribute to franchisee staffing challenges. The duration and financial impact of the pandemic, including new variants and changing government restrictions, remained uncertain. The company received Canadian wage and rent subsidies during fiscal 2022 that partially offset expenses.
A goodwill impairment trigger occurred because of a sustained share-price decline and a change in the chief operating decision maker. The Franchise reporting unit’s $229.0 million of goodwill was not impaired; estimated fair value exceeded carrying value by 15%, down from 30% at the prior annual test. The analysis used an 18.5% discount rate, compared with 14% previously.
Long-lived asset impairment was $0.1 million for the quarter and $0.2 million year to date, versus $3.2 million and $9.0 million in the prior-year periods. The company recorded $1.0 million of settlement and legal fees during the quarter. It also reported a $0.6 million quarterly loss and $1.7 million year-to-date loss from salon-asset sales to franchisees.
Other risks include refinancing and covenant risk, potential additional equity dilution, franchisee financial performance and staffing, litigation, cybersecurity and technology execution, dependence on Walmart and external vendors, wage and regulatory changes, consumer trends, and possible future impairment charges.
Important Facts for Investors to Verify
- Whether the franchise-focused model can generate sustainable positive operating and free cash flow after the major reduction in company-owned salons.
- The timing and terms of refinancing the $194.2 million revolving-credit balance due in March 2023.
- Whether the Franchise reporting unit’s reduced goodwill headroom could lead to a future impairment charge if operating performance or market valuation weakens.
- The effect of the third-party distribution strategy on franchisee economics, fee revenue and consolidated margins.
- The continuing impact of COVID-19, staffing constraints, consumer visits and government restrictions.
- The potential financial exposure from litigation, lease commitments and franchisee rent obligations.
- The dilution from the 9.3 million shares issued and the remaining $11.6 million capacity under the ATM offering.