Regis Corporation Fiscal 2012 Form 10-K Summary
Business context and reporting period
This filing is a Form 10-K for the fiscal year ended June 30, 2012, not a quarterly filing for “2011 Q4.” Regis owns, operates and franchises hair salons and hair restoration centers. At year-end, it had approximately 12,600 worldwide locations, including 9,738 company-owned and franchise salons, 98 hair restoration centers and 2,811 locations associated with non-controlling investments. The company employed approximately 52,000 people.
Reportable segments were North American salons, International salons and Hair Restoration Centers. Regis began reviewing non-core assets and entered into agreements to sell its 46.7% interest in Provalliance and, after year-end, its Hair Club business.
Financial performance and key metrics
| Metric | Fiscal 2012 | Fiscal 2011 | Change |
|---|---|---|---|
| Revenue | $2.274 billion | $2.326 billion | Down 2.2% |
| Operating income (loss) | $(67.3) million | $3.9 million | Declined $71.3 million |
| Net income (loss) | $(114.1) million | $(8.9) million | Loss increased $105.2 million |
| Continuing operations diluted EPS | $(2.02) | $(0.16) | Lower by $1.86 |
| Operating margin | (3.0%) | 0.2% | Down 3.2 percentage points |
| Gross margin on service and product revenue | 44.7% | 44.8% | Down 10 basis points |
| Cash flow from operations | $153.7 million | $229.2 million | Down $75.5 million |
| Total debt and capital lease obligations | $287.7 million | $313.4 million | Down $25.7 million |
| Cash and cash equivalents | $111.9 million | $96.3 million | Up $15.7 million |
Service revenue was $1.713 billion, down 2.9%; product revenue was $520.5 million, down 0.5%; and royalties and fees were $40.6 million, up 2.3%. Consolidated same-store sales declined 3.1%, primarily because of lower guest visits and modestly lower average tickets.
Segment revenue was $1.981 billion for North American salons, down 2.4%; $141.1 million for International salons, down 6.1%; and $151.6 million for Hair Restoration Centers, up 4.0%. Segment operating income was $165.4 million, $2.5 million and $(62.6) million, respectively.
Capital expenditures totaled $85.8 million, while investing cash outflows were $90.9 million. Financing cash outflows were $43.5 million, including $29.7 million of debt repayments and $13.9 million of dividends. The debt-to-capitalization ratio was 24.4%, compared with 23.3% in fiscal 2011.
Liquidity included $111.9 million of cash and $373.9 million of unused availability under a $400 million revolving credit facility, net of outstanding standby letters of credit. The company was in compliance with its debt covenants at June 30, 2012.
Material changes versus the prior comparable period
- Revenue declined for the third consecutive fiscal year, and same-store sales deterioration worsened from a 1.7% decline in fiscal 2011 to a 3.1% decline in fiscal 2012.
- Goodwill impairment increased to $146.1 million from $74.1 million, consisting of $67.7 million for the Regis salon concept and $78.4 million for Hair Restoration Centers. Long-lived asset impairments were $6.6 million.
- Equity in affiliated companies changed from $7.2 million of income to $30.0 million of loss, principally because of a $17.2 million net Provalliance impairment and a $19.4 million EEG investment impairment. Regis also recorded its $8.7 million share of an EEG intangible-asset impairment.
- General and administrative expense declined 11.0% to $302.6 million, partly because fiscal 2011 included a $31.2 million reserve on the Trade Secret note receivable. Fiscal 2012 nevertheless included $9.8 million of senior-management restructuring and severance charges, $2.8 million of other restructuring costs and $4.9 million of professional fees related to a contested proxy and strategic alternatives.
- The company reduced its home-office workforce by approximately 120 employees and recorded $16.2 million of accelerated depreciation related to the transition from its internally developed point-of-sale system.
- Regis constructed 319 new salons, acquired 13 company-owned salons and closed 384 salons. Total salons declined to 9,738 from 9,819, while franchise salons increased to 2,016 from 1,936.
- Shareholders’ equity declined 13.9% to $889.2 million, principally because of impairment charges and foreign-currency translation losses. Total assets declined 13.0% to $1.572 billion.
Guidance, outlook, risks and unusual items
Management’s fiscal 2013 strategy focused on improving the guest experience, prioritizing guests and stylists, strengthening the company’s best brands and markets, increasing technology and connectivity, and reviewing non-core assets. The filing does not provide a clear consolidated revenue or earnings forecast.
- Regis agreed to sell its 46.7% Provalliance interest for €80 million, subject to buyer financing and expected closing by September 30, 2012. The transaction would terminate the related equity put if completed.
- After year-end, Regis agreed to sell Hair Club to Aderans for $163.5 million, excluding closing adjustments and transaction fees. Management expected an after-tax gain of approximately $8 million to $12 million and anticipated closing in the first half of fiscal 2013.
- Management stated that approximately $260 million could be received from the Provalliance and Hair Club transactions during the first half of fiscal 2013 and that the company was evaluating the use of those proceeds.
- Additional impairment risk remained for the Promenade salon concept and Hair Restoration Centers. Their estimated fair values exceeded carrying values by approximately 14% and 12%, respectively, at June 30, 2012.
- Key operating risks include continued negative same-store sales, consumer weakness, competition, labor and benefit-cost inflation, dependence on Walmart and other landlords, changing fashion trends, regulatory and healthcare costs, franchisee and joint-venture performance, information-system implementation, foreign currency movements and potential debt-covenant pressure.
- Contractual obligations included $287.7 million of debt and capital lease obligations, approximately $1.026 billion of operating lease obligations, and $50.6 million of estimated interest on debt and capital leases.
- Regis was involved in ordinary-course litigation, including purported consumer and wage-and-hour class actions and a shareholder derivative action involving current and former directors and officers. The outcomes were described as uncertain and could be material in a particular period.
- The filing states that management and PricewaterhouseCoopers LLP concluded internal control over financial reporting was effective as of June 30, 2012.
Most important facts for investors to verify
- Confirm the actual closing, proceeds and accounting treatment of the Provalliance and Hair Club divestitures.
- Track same-store sales, guest visits and average ticket trends, especially in North American salons and Promenade.
- Assess remaining goodwill and the sensitivity of future impairment risk, particularly for Promenade and Hair Restoration Centers.
- Review liquidity after scheduled debt maturities, including the $180.2 million debt maturity scheduled for fiscal 2015 and the $172.5 million principal amount of convertible notes due July 2014.
- Verify whether the $400 million revolving facility and minimum net worth covenant remain accessible after asset sales, impairments and any further operating losses.
- Evaluate the recoverability of the EEG investment, related loans and the company’s $9 million guarantee exposure.
- Monitor lease commitments, self-insurance reserves, litigation outcomes and the effects of healthcare and minimum-wage regulation.