Regis Corporation Form 10-Q Summary
Business Context and Reporting Period
Regis Corporation owns, operates, franchises and holds interests in beauty salons. The filing covers the three months ended September 30, 2013, the first quarter of fiscal 2014. The company owned, franchised or held interests in 9,752 worldwide locations, including approximately 50,000 employees. Hair Club was sold in April 2013 and is presented as a discontinued operation.
Financial Results and Key Metrics
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Revenue | $468.6 million | $505.4 million | Down 7.3% |
| Operating income | $1.4 million | $9.3 million | Down $7.8 million |
| Operating margin | 0.3% | 1.8% | Down approximately 150 bps |
| Loss from continuing operations | $0.1 million | Income of $34.6 million | Unfavorable change |
| Net loss | $0.1 million | Net income of $38.4 million | Unfavorable change |
| Diluted EPS | $0.00 loss | $0.59 income | Unfavorable change |
| Cash flow from operations | $15.8 million | $8.5 million | Up $7.3 million |
| Capital expenditures | $11.4 million | $18.1 million | Down $6.6 million |
- Service revenue was $371.7 million, product revenue was $86.7 million, and royalties and fees were $10.1 million.
- Consolidated same-store sales declined 5.4%, driven by a 7.2% decrease in guest visits, partly offset by a 1.8% increase in average ticket. North American same-store sales declined 5.6% and international same-store sales declined 1.4%.
- Cash and cash equivalents were $203.7 million at September 30, 2013, compared with $200.5 million at June 30, 2013.
- Total debt was $174.5 million, virtually all current, including $167.9 million of 5.0% convertible senior notes due in fiscal 2015 as presented in the balance sheet financing table. The filing also states that the notes are due July 2014.
- The company had no borrowings under its $400.0 million revolving credit facility, $2.2 million of standby letters of credit, and $397.8 million of unused availability. It was in compliance with all debt covenants.
- Debt-to-capitalization was 16.9% at September 30, 2013.
- The company paid a quarterly dividend of $0.06 per share and declared another $0.06 dividend payable November 19, 2013. No shares were repurchased during the quarter.
Material Changes Versus the Prior Comparable Period
- Revenue declined primarily because of lower same-store sales and the closure of 393 company-owned salons during the preceding 12 months. Product revenue fell 15.2%, while service revenue fell 5.5%; royalties and fees increased 4.7%.
- Operating income declined despite lower general and administrative, rent and product costs. Depreciation and amortization increased because of the new point-of-sale system, salon workstations and accelerated depreciation related to headquarters consolidation.
- Interest expense decreased to $4.5 million from $6.8 million, reflecting lower debt levels.
- The prior-year period included a $33.8 million non-taxable foreign currency translation gain associated with the sale of Provalliance. The prior year also included $3.8 million of income from discontinued Hair Club operations.
- Equity income from affiliates increased to $2.0 million from $0.6 million, primarily from improved results at Empire Education Group and a $1.0 million recovery of a previously impaired Yamano investment.
- The company recorded a cumulative prior-period correction that increased net income by $0.6 million; management stated that the errors were not material to prior periods or the current quarter.
- Field-leader costs were reclassified from general and administrative expense to cost of service and site operating expense. Management stated that this reclassification did not affect operating income, net income or operating cash flow.
Outlook, Risks, Contingencies and Unusual Items
Management stated that significant transformational initiatives implemented during the prior fiscal year, including a new point-of-sale system, salon workstations, field-organization restructuring, standardized plan-o-grams and a reduced retail assortment, negatively affected first-quarter performance. Management is focused on stabilizing trends and expects business performance to improve over time, but the filing provides no quantified earnings or revenue guidance.
- The fair value cushion for the Regis salon concept reporting unit was approximately 9% above carrying value at the fiscal 2013 annual goodwill test. A meaningful shortfall against projections, a reduced outlook or higher carrying value could result in a future goodwill impairment. No interim impairment-triggering event was identified through September 30, 2013.
- The company’s investment in Empire Education Group had an estimated fair value approximately 5% above carrying value. A reversal of favorable performance or industry trends could require an impairment; the company’s share of Empire’s goodwill was approximately $16 million.
- U.S. net deferred tax assets were approximately $54.7 million, excluding certain deferred tax liabilities. Continued adverse financial trends could lead to a valuation allowance.
- Federal tax years 2010 and 2011 were under audit, and various state tax years remained open or under audit.
- The company faces ordinary-course litigation, including purported consumer and wage-and-hour class claims and a shareholder derivative action involving executive compensation and related-party transactions. Outcomes cannot presently be determined and could materially affect results in a particular period.
- Other identified risks include continued negative same-store sales, execution of restructuring initiatives, stylist retention, healthcare costs, competition, economic conditions, management information systems, convertible-note provisions, joint-venture performance, data security, interest rates and foreign currency movements.
Important Facts for Investors to Verify
- Verify the maturity date and refinancing or repayment plan for the convertible senior notes, because the filing’s financing table and narrative contain different fiscal-year descriptions.
- Track same-store sales, guest visits, average ticket and salon closures to assess whether the turnaround initiatives are improving operating trends.
- Monitor the Regis goodwill reporting unit and Empire Education Group investment for impairment risk given their limited valuation cushions.
- Assess whether the company can sustain dividends and fund capital expenditures while nearly all reported debt is classified as current.
- Follow tax audits, potential deferred-tax valuation allowances and pending litigation for possible cash or earnings impacts.