Regis Corporation 10-Q Summary
Business context and reporting period
Regis Corporation owns, operates and franchises mass-market beauty salons. This unaudited Form 10-Q covers the three months ended September 30, 2018, the first quarter of fiscal 2019, compared with the three months ended September 30, 2017. The company had 8,115 system-wide locations and approximately 24,000 corporate employees at quarter-end.
Regis continued shifting its portfolio from company-owned salons toward franchised locations. The mall-based North American business and International segment sold to The Beautiful Group (TBG) in October 2017 are classified as discontinued operations.
Key financial metrics
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Revenue | $287.8 million | $315.5 million | Down 8.8% |
| Operating income | $3.4 million | $15.6 million | Down $12.2 million |
| Loss from continuing operations | $0.5 million | Income of $8.4 million | Declined $8.9 million |
| Net loss | $0.7 million | $25.3 million | Improved $24.6 million |
| Basic and diluted loss per share | $0.02 | $0.54 | Improved $0.52 |
| Cash used in operating activities | $17.5 million | Cash provided of $9.0 million | Declined $26.5 million |
| Capital expenditures | $11.3 million | $6.1 million | Increased $5.1 million |
Consolidated operating margin was approximately 1.2%, compared with 4.9% in the prior-year quarter. Same-store sales increased 0.5%, reflecting a 4.2% increase in average ticket partially offset by a 3.7% decline in same-store guest visits.
- Service revenue was $207.8 million, down $27.8 million, primarily due to salon closures and sales to franchisees.
- Product revenue was $57.6 million, down $3.4 million.
- Royalties and fees increased to $22.4 million from $18.9 million, primarily due to more franchised locations.
- General and administrative expense increased to $47.7 million from $35.2 million, partly due to the prior-year $8.0 million life-insurance gain, higher stock compensation and professional fees.
- Interest expense decreased to $1.0 million from $2.1 million.
- The company recorded a $4.0 million net loss on salon asset sales, including $11.1 million of non-cash goodwill derecognition.
Financial position, debt and liquidity
| Balance-sheet item | September 30, 2018 | June 30, 2018 |
|---|---|---|
| Cash and cash equivalents | $115.7 million | $110.4 million |
| Total cash, cash equivalents and restricted cash | $136.5 million | $148.8 million |
| Total assets | $820.6 million | $856.7 million |
| Long-term debt | $90.0 million | $90.0 million |
| Shareholders’ equity | $468.4 million | $486.4 million |
Regis had $90.0 million outstanding under its $295.0 million unsecured revolving credit facility, with $182.0 million of unused availability after standby letters of credit. The facility matures in 2023, and the company was in compliance with its debt covenants. Debt to capitalization was 16.1%, compared with 15.6% at June 30, 2018.
Operating cash flow was negative because of incentive compensation payments and a holiday inventory build. Investing cash flow was positive $25.8 million, supported by $24.6 million of life-insurance proceeds and $12.4 million of salon-sale proceeds. Financing cash flow was negative $20.9 million, primarily reflecting $19.3 million of share repurchases.
Material changes versus the prior comparable period
- Revenue declined primarily because 682 company-owned salons were closed and approximately 477 to 478 company-owned salons were sold to franchisees during the preceding twelve months. Regis sold 124 company-owned salons to franchisees during the quarter, compared with 92 in the prior-year quarter.
- Company-owned salon revenue fell to $249.8 million from $288.9 million, while company-owned operating income declined to $19.6 million from $23.4 million.
- Franchise revenue increased to $38.0 million from $26.6 million, and franchise operating income increased to $9.7 million from $8.5 million. The increase included product sold to TBG.
- Franchised locations increased to 4,205 from 2,743 at September 30, 2017, while company-owned salons declined to 3,822 from 4,966 in the comparable prior-year presentation.
- Discontinued-operations loss decreased to $0.3 million from $33.8 million. The prior-year loss included $30.5 million of asset-impairment charges related to the TBG transaction.
- Regis adopted ASC 606 revenue recognition using the full retrospective method. Franchise fees are generally deferred until salon opening and then recognized over the franchise agreement term.
- Regis repurchased 1.1 million shares for $19.3 million, leaving $216.0 million available under the repurchase authorization.
Guidance, outlook, commentary and risks
The filing does not provide specific quantitative earnings or revenue guidance. Management emphasized continued salon closures and sales to franchisees, cost-reduction initiatives, franchise expansion and efforts to improve operating performance. The company-owned reporting unit had approximately 24% goodwill impairment headroom at the latest annual assessment; a 100-basis-point increase in the weighted average cost of capital would reduce that headroom to approximately 17%.
- TBG exposure: TBG has experienced cash-flow and working-capital issues and has been delinquent on certain payments. In August 2018, approximately $11.7 million of working-capital receivables and $8.0 million of accounts receivable were converted into promissory notes maturing August 2, 2020. The working-capital notes were fully reserved because they may be forgiven subject to conditions. Regis remains liable under certain salon leases and could face additional reserves or costs if TBG fails to perform.
- TBG insolvency: TBG’s United Kingdom business entered a voluntary insolvency proceeding in October 2018. Regis stated that it did not currently expect a direct adverse impact and that TBG’s obligations remained intact, but further restructuring remains possible.
- Goodwill and impairment: Reduced salon traffic, weaker industry trends, increased competition, economic deterioration, changes in salon strategy or lower cash flow could trigger material non-cash impairment charges.
- Tax uncertainty: The company recorded a provisional $68.1 million net tax benefit related to the Tax Cuts and Jobs Act through fiscal 2018. Finalization of the analysis could materially affect future effective tax rates.
- Litigation: Regis faces lawsuits and claims, including purported class-wide consumer and wage-and-hour matters. Outcomes are unpredictable and could materially affect results in a particular period.
- Lease accounting: The company expects adoption of the new lease standard in fiscal 2020 to materially increase reported assets and liabilities.
- Other risks include stylist recruitment and retention, minimum-wage increases, competition, consumer traffic, cyber and information-technology risks, Walmart relationships, franchisee performance, foreign exchange and economic conditions.
Most important facts for investors to verify
- Whether franchise growth and salon sales can offset the declining revenue and profitability of the company-owned salon base.
- TBG’s liquidity, payment performance, ability to satisfy the promissory notes and potential impact of its United Kingdom insolvency proceeding.
- The likelihood and potential magnitude of additional TBG receivable, lease or goodwill impairment charges.
- Whether same-store traffic stabilizes, given the 3.7% decline in same-store guest visits despite higher average ticket prices.
- Cash generation after capital expenditures, share repurchases and working-capital requirements.
- The final tax accounting effects of the Tax Cuts and Jobs Act and the effective date impact of the new lease standard.
- Potential exposure from pending litigation and wage-and-hour claims.