Business Context and Reporting Period
Regis Corporation owns, franchises, or holds interests in beauty salons, hair restoration centers, and educational institutions. As of December 31, 2011, it had approximately 12,800 worldwide locations, including 9,453 North American salons, 405 international salons, 97 hair restoration centers, and approximately 2,820 locations held through equity interests. This Form 10-Q covers the three and six months ended December 31, 2011, the second quarter and first six months of fiscal 2012. The interim financial statements are unaudited and were reviewed, but not audited, by PricewaterhouseCoopers LLP.
Financial Performance and Position
| Metric | Three months ended Dec. 31, 2011 | Three months ended Dec. 31, 2010 | Six months ended Dec. 31, 2011 | Six months ended Dec. 31, 2010 |
|---|---|---|---|---|
| Revenue | $563.3 million | $574.4 million | $1,132.0 million | $1,152.6 million |
| Operating income (loss) | $(61.6) million | $22.9 million | $(48.5) million | $56.3 million |
| Net income (loss) | $(57.4) million | $14.5 million | $(49.1) million | $32.8 million |
| Diluted EPS | $(1.01) | $0.24 | $(0.86) | $0.54 |
| Operating margin | (10.9)% | 4.0% | (4.3)% | 4.9% |
| Net margin | (10.2)% | 2.5% | (4.3)% | 2.8% |
- Revenue declined 1.9% in the quarter and 1.8% year to date. Consolidated salon same-store sales declined 3.0% and 3.1%, respectively, reflecting lower customer visits and average ticket.
- Gross margin excluding depreciation and amortization was 44.8% of service and product revenue in the quarter and 45.0% year to date, compared with 44.5% and 44.9% in the prior-year periods.
- The quarter and year-to-date results include a $78.4 million non-cash goodwill impairment charge for the Hair Restoration Centers reporting unit. Accelerated depreciation associated with the replacement of the internally developed point-of-sale system was $6.3 million after tax in the quarter and $15.0 million before tax year to date.
- Net cash provided by operating activities was $61.9 million, down from $102.8 million in the prior-year six-month period. Capital expenditures were $43.0 million versus $30.7 million, and cash used in investing activities was $42.9 million.
- Cash and cash equivalents were $83.1 million at December 31, 2011, compared with $96.3 million at June 30, 2011. Total debt was $292.9 million, including $29.0 million current debt, versus $313.4 million at June 30, 2011.
- The $400.0 million revolving credit facility had no borrowings and $374.0 million of unused availability, subject to covenants; $26.0 million of standby letters of credit were outstanding. The company stated that it was in compliance with all debt covenants.
- Total shareholders’ equity declined to $960.4 million from $1,032.6 million, primarily because of the goodwill impairment and foreign-currency translation losses. Debt-to-capitalization was 23.4% at December 31, 2011.
Material Changes Versus the Prior Comparable Period
- North American salon revenue declined 1.9% in the quarter and 1.8% year to date; same-store sales declined 2.9% and 3.0%. North American operating margin improved to 11.7% in the quarter but was unchanged at 11.5% year to date.
- International salon revenue declined 8.1% in the quarter and 6.3% year to date, with same-store sales down 10.1% and 9.8%. International operating margin fell to 0.6% and 1.1%, respectively.
- Hair restoration revenue increased 3.6% in the quarter and 3.4% year to date, but the segment reported operating losses of $73.6 million and $69.5 million after the impairment charge, compared with operating income of $5.1 million and $11.3 million.
- Depreciation and amortization increased 21.0% in the quarter and 26.0% year to date because the existing point-of-sale system’s useful life was shortened during its replacement.
- Interest expense declined 17.6% in the quarter and 17.5% year to date due primarily to lower debt levels. Equity income from affiliates increased to $5.3 million in the quarter and $9.3 million year to date, partly reflecting the company’s increased ownership in Provalliance.
- Cash flow was pressured by lower earnings, higher inventory purchases, and the absence of significant prior-year income-tax refunds and affiliate dividends.
Guidance, Outlook, Risks, and Unusual Items
- Management’s fiscal 2012 strategy emphasizes customer and stylist retention, brand focus, technology and connectivity, and cost reduction. Gross cost savings are targeted at $35 million to $40 million, with estimated net savings of approximately $25 million after investments and other cost increases.
- Management projects fiscal 2012 consolidated same-store sales of negative 2.5% to negative 3.5%, approximately 285 constructed salons, capital expenditures of about $100 million, and acquisitions of $5 million to $15 million. Franchisees are expected to open approximately 100 to 120 salons.
- The company began reviewing alternatives for non-core assets, including a potential sale of the hair restoration business.
- Management identified possible future goodwill impairment risk for the Promenade, Regis, and Hair Restoration Centers reporting units. The Hair Restoration Centers valuation is sensitive to revenue growth, same-store sales, supply costs, and discount rates.
- Management expects to fully depreciate the remaining approximately $2.0 million balance of the existing point-of-sale system during the quarter ending March 31, 2012.
- Paul D. Finkelstein is expected to step down as chief executive officer in February 2012. President Randy L. Pearce intends to retire effective June 30, 2012, and will serve as interim principal executive officer while the board searches for a successor. The company also reduced its home-office workforce by approximately 120 employees in January 2012 and expects $2.5 million to $3.5 million of severance charges.
- Litigation includes wage-and-hour and consumer claims and a shareholder derivative action involving executive compensation and related-party transactions. Outcomes cannot presently be determined and could materially affect a particular period.
- Key risks include continued negative same-store sales, consumer and economic weakness, labor and benefit cost inflation, competition and price sensitivity, supplier and landlord relationships, currency fluctuations, covenant compliance, execution of the new point-of-sale system, management transition, and potential additional impairment charges.
Important Facts for Investors to Verify
- Whether same-store sales stabilize within management’s fiscal 2012 outlook and whether customer visits and average ticket improve.
- Whether the planned cost savings are achieved without undermining salon traffic, service quality, or growth investments.
- The valuation assumptions and remaining exposure for goodwill at the Hair Restoration Centers, Promenade, and Regis reporting units.
- Cash generation relative to planned capital expenditures, acquisitions, dividends, and scheduled debt repayments.
- Availability under the revolving credit facility and continued compliance with fixed-charge, leverage, and minimum-net-worth covenants.
- The financial and operational effects of the CEO transition, workforce reduction, strategic asset review, and potential sale of the hair restoration business.
- Potential outcomes of pending litigation, tax audits, affiliate put obligations, convertible debt settlement provisions, and guarantees related to Trade Secret and affiliated entities.