Regis Corporation Form 10-Q Summary
Reporting period: Quarterly and year-to-date periods ended March 31, 2016, representing the third quarter and first nine months of fiscal 2016. The filing is unaudited. The request metadata identifies “2015 Q3,” but the filing itself reports fiscal 2016 results and compares them with revised fiscal 2015 results.
Business Context
Regis owns, operates and franchises beauty salons. As of March 31, 2016, the company had 9,310 system-wide salons, including 6,856 company-owned and 2,454 franchised locations, plus 198 locations held through noncontrolling investments. Regis reported approximately 46,000 corporate employees worldwide.
Financial Performance and Liquidity
| Metric | Three Months Ended March 31, 2016 | Prior Year | Nine Months Ended March 31, 2016 | Prior Year |
|---|---|---|---|---|
| Revenue | $442.6 million | $454.0 million | $1,343.2 million | $1,374.4 million |
| Operating income | $5.6 million | $5.4 million | $7.0 million | $4.0 million |
| Operating margin | 1.3% | 1.2% | 0.5% | 0.3% |
| Net loss | $2.1 million | $4.8 million | $16.9 million | $31.3 million |
| Net loss per share | $0.04 | $0.09 | $0.34 | $0.57 |
| Cash flow from operations | Not separately provided | Not separately provided | $38.9 million | $72.3 million |
Consolidated revenue declined 2.5% in the quarter and 2.3% year to date. Service revenue fell to $344.1 million in the quarter and $1,034.8 million year to date, while product revenue declined to $86.7 million and $273.0 million, respectively. Royalties and fees increased to $11.8 million in the quarter and $35.4 million year to date.
Consolidated same-store sales decreased 0.4% in the quarter but increased 0.8% year to date. Guest visits declined 3.0% in the quarter and 2.1% year to date, partly offset by higher average tickets. North American Value same-store sales increased 1.0% in the quarter and 1.9% year to date, while North American Premium declined 6.2% and 3.4%, respectively.
At March 31, 2016, cash and cash equivalents were $141.1 million, down from $212.3 million at June 30, 2015. Total debt was $120.2 million, consisting primarily of $123.0 million principal amount of 5.5% senior term notes due December 2019, net of discount. Debt-to-capitalization was 18.9%, compared with 16.1% at fiscal year-end.
Regis had no revolver borrowings, $1.6 million of standby letters of credit and $198.4 million of unused availability under its $200.0 million revolving credit facility. The company stated that it was in compliance with its debt covenants.
Material Changes Versus the Prior Comparable Period
- Revenue decreased $11.4 million in the quarter and $31.2 million year to date, primarily because of salon closures, foreign currency effects and weaker premium and international performance.
- Operating income improved modestly despite lower revenue, reflecting lower site operating expenses, rent, depreciation and amortization, and general and administrative expense.
- Cost of service increased to 63.1% of service revenue in the quarter and 63.0% year to date, driven by higher health insurance costs, minimum wages, stylist productivity, incentives and Easter Sunday pay.
- Net loss improved primarily because the prior year included larger affiliate-related losses and higher tax expense. The nine-month 2016 results included a $13.0 million non-cash impairment of the company’s investment in Empire Education Group.
- Operating cash flow declined $33.4 million year to date, primarily due to higher inventory purchases, enhanced incentive payouts and accounts-payable timing.
- Regis repurchased 7.4 million shares for $97.0 million during the first nine months, reducing shares outstanding to approximately 46.5 million at March 31, 2016. $64.0 million remained available under the repurchase authorization.
- The company exchanged $120.0 million of 5.75% senior notes due 2017 for $123.0 million of 5.5% senior notes due 2019, extending maturity and reducing the revolving facility capacity from $400.0 million to $200.0 million.
Outlook, Risks and Unusual Items
Management stated that operating cash flow, existing cash and borrowing capacity should be sufficient for operations and strategic initiatives for the next twelve months, while cautioning that lower future cash generation could require delaying or limiting initiatives. No specific earnings or revenue guidance was provided.
- Income tax expense remained unusually high relative to pre-tax income because of a valuation allowance against most deferred tax assets. Management expects approximately $8.0 million of related tax expense for fiscal 2016, much of it non-cash.
- Empire Education Group experienced continued declines in enrollment, revenue and profitability. Regis recorded a full impairment of its investment, which had no remaining investment value at March 31, 2016, but noted potential liabilities associated with the venture.
- The company recorded $7.6 million of salon asset impairment charges during the first nine months, compared with $9.3 million in the prior year.
- Prior-period financial statements were revised for deferred rent and self-insurance items. Regis also recorded a current-quarter cumulative correction that reduced net loss by approximately $0.8 million.
- Management concluded that disclosure controls remained ineffective because a previously reported material weakness in lease accounting had not been fully remediated. Additional remediation actions were underway, but material misstatements in deferred rent and related accounts remain possible.
- Regis faces lawsuits and claims, including purported consumer and wage-and-hour class actions. Outcomes cannot presently be determined and could adversely affect results in a particular period.
- Federal income tax audits for 2010–2013 were moving to the IRS Appeals Division, and the company was under IRS payroll tax examination for calendar years 2012–2014.
- Key operating risks include stylist recruitment and retention, staffing shortages, competition, consumer trends, franchisee performance, cyber threats, foreign currency, regulatory changes, debt covenant compliance and continued weakness at Empire Education Group.
Investor Verification Priorities
- Verify the filing period and revised prior-year comparatives, particularly the impact of lease-accounting and self-insurance revisions.
- Assess whether same-store sales, guest traffic and salon closures indicate stabilization or continued structural pressure.
- Monitor the unresolved lease-accounting material weakness and the effectiveness of remediation efforts.
- Reconcile cash usage from share repurchases with declining operating cash flow and available liquidity.
- Review the tax valuation allowance, IRS audit status and expected non-cash tax expense.
- Evaluate potential liabilities and operating deterioration associated with Empire Education Group and related litigation.