Regis Corporation: Fiscal 2019 Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2019. The supplied filing is a fiscal 2019 annual report, not a 2018 fourth-quarter filing; quarterly data for the June 30, 2019 quarter is included. Regis franchises, owns and operates hairstyling and hair-care salons under brands including SmartStyle, Supercuts and Signature Style.
Business Context
- At June 30, 2019, Regis had 7,145 worldwide locations: 3,951 franchised salons, 3,108 company-owned salons and 86 locations held through noncontrolling ownership interests.
- Franchised salons represented 56.0% of system locations, up from 50.9% in 2018.
- Regis sold 767 company-owned salons to franchisees during fiscal 2019 and announced in August 2019 its intention to transition over time to a fully franchised, capital-light platform.
- The mall-based North American business and substantially all of the former U.K. International segment were sold to The Beautiful Group (“TBG”) in 2017 and are reported as discontinued operations.
Financial Performance and Key Metrics
| Metric | Fiscal 2019 | Fiscal 2018 | Change |
|---|---|---|---|
| Revenue | $1,069.0 million | $1,235.5 million | Down 13.5% |
| Operating loss | $22.1 million | $5.1 million | Loss increased |
| Operating margin | (2.1%) | (0.4%) | Down 170 bps |
| Loss from continuing operations | $20.1 million | Income of $59.6 million | Adverse change |
| Net loss | $14.2 million | Net income of $6.4 million | Adverse change |
| Diluted EPS | $(0.34) | $0.14 | Adverse change |
| Cash used in operating activities | $17.5 million | Cash provided of $2.6 million | Adverse change |
- Service revenue declined 16.6% to $749.7 million, primarily because of salon sales to franchisees and a 0.3% decline in company-owned same-store sales.
- Product revenue declined 12.8% to $225.6 million, while royalties and fees increased 21.1% to $93.8 million as the franchise base expanded.
- Company-owned salon revenue fell to $915.4 million from $1,104.4 million, but segment operating income increased to $58.3 million from $50.5 million. Company-owned same-store sales declined 0.4%, with guest visits down 4.7% and average ticket up 4.3%.
- Franchise revenue increased to $153.7 million from $131.1 million. Franchise operating income excluding TBG increased to $36.4 million from $34.0 million; TBG-related restructuring reduced reported franchise operating income to $16.1 million.
- Retail product margin declined to 50.8% from 52.0%; wholesale product margin declined to 21.2% from 21.6%.
Cash Flow, Liquidity and Capital Structure
- Cash and cash equivalents were $70.1 million at June 30, 2019, compared with $110.4 million a year earlier. The statement of cash flows reports $92.4 million at period-end when restricted cash is included.
- Investing activities provided $87.8 million, including $94.8 million of proceeds from salon sales, $24.6 million of life-insurance proceeds and $31.6 million of capital expenditures.
- Financing activities used $126.7 million, primarily due to $152.7 million of share repurchases. Regis repurchased 8.6 million shares during fiscal 2019 at an average price of $17.94.
- Outstanding revolving-credit borrowings were $90.0 million under a $295.0 million unsecured facility maturing in March 2023. Reported unused availability was $183.5 million after outstanding letters of credit.
- Debt to capitalization increased to 26.8% from 15.6%, primarily because of share repurchases. The company was in compliance with its financing covenants at year-end.
- Operating lease obligations totaled $617.8 million off balance sheet under the accounting in effect at June 30, 2019. Regis expected adoption of the new lease standard in fiscal 2020 to add approximately $1.0 billion of right-of-use assets and lease liabilities.
- Regis does not pay regular dividends.
Material Changes Versus the Prior Comparable Period
- The company accelerated its shift from company-owned salons to franchised salons, selling 767 locations versus 1,581 in fiscal 2018.
- System-wide same-store sales declined 0.5% in fiscal 2019 versus a 0.9% increase in fiscal 2018; excluding TBG mall locations, fiscal 2019 same-store sales declined 0.1%.
- Revenue mix shifted toward royalties and fees, but consolidated revenue and cash generation declined as company-owned salons were sold.
- Rent and depreciation expense decreased substantially because of salon closures, transfers and the prior-year SmartStyle restructuring costs.
- Fiscal 2018 benefited from a $68.1 million tax benefit related primarily to the Tax Cuts and Jobs Act; fiscal 2019 included only a $2.1 million tax benefit.
- Goodwill declined to $345.7 million from $412.6 million, primarily because $67.1 million of goodwill was derecognized in connection with salon sales. No goodwill impairment was recorded; the company-owned reporting unit had approximately 20% estimated headroom.
Outlook, Commentary, Risks and Unusual Items
- Management’s stated strategy is to become a fully franchised, capital-light business while investing in technology, marketing, merchandise, stylist recruiting and franchisor capabilities. The filing does not provide formal numeric revenue or earnings guidance.
- Regis launched the Opensalon booking and check-in platform and established a technology office to improve customer discovery, booking and salon-management capabilities.
- The company recorded a $21.8 million TBG restructuring charge, including reserves for receivables and notes. Under the June 2019 settlement, Regis forgave certain TBG obligations, including approximately $6.6 million of inventory amounts, $1.3 million of continuing fees and specified promissory-note and receivable obligations.
- Regis estimated potential remaining liability of up to approximately $41 million for TBG-related salon leases at June 30, 2019, plus potential operating-expense support of up to approximately $2.2 million over six months. TBG’s financial distress and U.K. insolvency proceedings remain material risks.
- Other principal risks include dependence on franchisee performance, Walmart traffic and approvals, stylist recruitment and retention, minimum-wage increases, competition, consumer traffic and spending, cybersecurity, technology execution, vendor dependence, litigation and compliance with debt covenants.
- Legal proceedings include claims arising in the ordinary course, including purported consumer and wage-and-hour class actions. The filing states that outcomes cannot presently be determined.
Important Facts for Investors to Verify
- Whether the planned full franchising strategy improves recurring royalty income and cash flow enough to offset lower company-owned revenue.
- The pace, pricing and profitability of future salon sales to franchisees, including the effect of goodwill derecognition and one-time gains.
- Actual cash liquidity after considering restricted cash, capital expenditures, share repurchases, letters of credit and TBG-related obligations.
- Compliance with revolving-credit covenants and exposure to variable interest rates.
- Whether company-owned reporting-unit performance deteriorates enough to trigger goodwill impairment; reported headroom was approximately 20%.
- The financial condition of TBG, potential lease liabilities and any further obligations arising from the settlement or U.K. insolvency proceedings.
- The effect of fiscal 2020 lease-accounting adoption, including the expected approximately $1.0 billion of additional lease assets and liabilities and approximately $110 million of annual gross franchise rental revenue and expense.