Regis Corporation Form 10-Q Summary
Business context and reporting period
Regis Corporation franchises hairstyling and hair-care salons in the United States, Canada, Puerto Rico and the United Kingdom. This filing covers the three and nine months ended March 31, 2022, the third quarter and year-to-date period of fiscal 2022. The request metadata identifies “2021 Q3,” but the filing itself reports fiscal 2022 Q3 results.
As of March 31, 2022, Regis had 5,697 system-wide locations, including 5,504 franchise salons, 117 company-owned salons and 76 locations with a non-controlling ownership interest. The company continued shifting toward an asset-light, franchise-focused model.
Financial metrics
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Total revenue | $64.7 million, down 35.5% | $212.8 million, down 32.7% |
| Operating loss | $25.4 million | $32.4 million |
| Net loss | $27.9 million, or $0.61 per diluted share | $43.2 million, or $1.01 per diluted share |
| Cash used in operating activities | Not provided for the quarter | $34.4 million |
| Capital expenditures | Not provided for the quarter | $4.3 million |
| System-wide same-store sales | 8.6% increase | 17.8% increase |
Quarterly operating margin was approximately negative 39.3%, compared with negative 18.5% in the prior-year quarter. Year-to-date operating margin was approximately negative 15.2%, compared with negative 24.3% in the prior-year period. The filing does not present adjusted EBITDA.
At March 31, 2022, cash and cash equivalents were $25.6 million, and cash, cash equivalents and restricted cash totaled $33.7 million. Total assets were $862.8 million, shareholders’ equity was $11.1 million and accumulated deficit was $62.6 million.
Debt consisted of $193.8 million outstanding under a revolving credit facility bearing interest at 5.125%. The facility had $81.8 million of unused availability and $15.7 million of outstanding standby letters of credit. Reported liquidity under the credit agreement was $128.3 million, compared with a minimum liquidity covenant of $75.0 million. Debt to capitalization increased to 94.6% from 91.6% at June 30, 2021.
Material changes versus the prior comparable period
- Revenue declined primarily because company-owned salons were sold or closed and the company exited its wholesale product-distribution model. Company-owned salon revenue fell 89.2% in the quarter and 85.9% year to date.
- Royalties increased 23.4% in the quarter and 31.1% year to date, supported by higher franchise system-wide sales and franchise salon counts.
- Product sales to franchisees fell 90.1% in the quarter and 71.5% year to date as distribution shifted to third-party suppliers.
- Company-owned salons decreased to 117 from 826 at March 31, 2021; 448 salons were sold to franchisees during the twelve months ended March 31, 2022.
- General and administrative expense decreased 36.6% in the quarter and 31.1% year to date, mainly due to lower compensation and headcount reductions.
- The company recorded a $16.0 million goodwill impairment charge in the third quarter after reducing revenue forecasts, increasing expected salon closures and applying a higher 19.5% discount rate.
- The company recorded a $6.4 million quarterly inventory reserve charge related primarily to distribution-center inventory, including personal protective equipment, and total fiscal-year inventory reserve charges of $9.0 million.
- Operating cash outflow improved from $80.0 million to $34.4 million year to date, while financing activities provided $43.2 million, including $37.2 million of net proceeds from issuing 9.3 million common shares and a $6.9 million net revolving-credit draw.
Guidance, outlook, risks and unusual items
Management expects product-sales revenue to continue declining through fiscal 2022 as Regis completes its transition away from wholesale distribution. Management expects the asset-light franchise model to reduce operating costs, but the transition has produced inventory liquidation losses and may expose the company to supplier, pricing, transportation and product-availability risks.
The company’s projected cash flows do not support repayment of the $193.8 million revolving-credit balance at its March 2023 maturity. Management is working with advisors on refinancing and believes refinancing alleviates substantial doubt about going-concern status. Failure to refinance on acceptable terms could allow the lender to call the debt and pursue other remedies. Additional debt or equity financing may be required and could be more expensive or dilutive.
COVID-19 continued to reduce salon visits and contribute to staffing challenges. Management stated that the duration and ultimate financial impact of the pandemic, variants, government restrictions and related operating effects cannot currently be estimated.
Regis recorded $1.0 million of potential litigation settlement exposure in the quarter and $2.0 million year to date. Litigation includes franchise, lease, consumer and wage-and-hour matters. The company’s accrual for potential settlement fees was $0.9 million at March 31, 2022. A Missouri landlord matter resulted in a $0.5 million attorney-fee judgment that Regis plans to appeal.
Other key risks include dependence on Walmart, franchisee financial performance and staffing, goodwill and long-lived-asset impairment, supplier execution, interest rates, refinancing availability, cybersecurity, technology implementation and potential limits on use of tax net operating losses.
Important facts for investors to verify
- Progress and pricing of refinancing for the $193.8 million debt maturity in March 2023.
- Whether operating cash flow becomes positive without relying on equity issuance or additional borrowing.
- Franchisee health, royalty trends and same-store sales after the reported 8.6% quarterly increase.
- Further goodwill, lease-asset or inventory impairments if recovery or salon-closure assumptions worsen.
- Execution and financial effects of the third-party product-distribution transition.
- Potential dilution from the remaining at-the-market equity capacity and any future financing.
- Developments in litigation and the adequacy of recorded settlement accruals.