Regis Corporation Form 10-Q Summary
Business Context and Reporting Period
Regis Corporation operates a primarily asset-light salon franchise platform, including Supercuts, SmartStyle, Cost Cutters, First Choice Haircutters, Magicuts and Roosters. The filing covers the three months ended September 30, 2022, the first quarter of fiscal 2023. The company franchised, owned or held interests in 5,494 locations, including 5,323 franchise salons and 95 company-owned salons, and had 608 employees.
Regis continued shifting its product business from wholesale distribution to a third-party distribution model. The company also completed the sale of its Opensalon Pro solution in fiscal 2022, which is reported as discontinued operations.
Financial Results and Key Metrics
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Total revenue | $61.9 million | $76.8 million | Down 19.4% |
| Operating income (loss) | $2.5 million | $(4.9) million | Improved $7.4 million |
| Operating margin | 4.0% | (6.4)% | Improved approximately 1,040 basis points |
| Loss from continuing operations | $(1.8) million | $(9.3) million | Improved $7.4 million |
| Net income (loss) | $1.5 million | $(10.4) million | Improved $11.8 million |
| Net income (loss) per diluted share | $0.03 | $(0.28) | Improved $0.31 |
| System-wide same-store sales | 4.5% | 23.2% | Growth moderated |
Royalty revenue increased 3.6% to $17.2 million, fees increased 13.0% to $2.6 million, and advertising fund contributions increased 2.5% to $8.3 million. Product sales to franchisees fell 95.0% to $0.4 million, while company-owned salon revenue declined 61.3% to $3.1 million. Franchise rental income decreased 10.4% to $30.3 million.
General and administrative expense decreased 30.8% to $14.4 million, primarily because of lower compensation and reduced distribution-center-related costs. No long-lived asset impairment charge was recorded, compared with $0.2 million in the prior-year quarter. Interest expense increased to $3.8 million from $3.1 million because of higher borrowing costs and amortization of fees related to the amended credit agreement.
Cash used in operating activities was $5.1 million, compared with $12.3 million used in the prior-year period. Investing activities provided $3.3 million, primarily from $3.5 million of net proceeds from the OSP sale. Financing activities used $3.8 million, including $4.3 million of debt refinancing fees.
Cash and cash equivalents were $9.5 million at September 30, 2022, compared with $17.0 million at June 30, 2022. Including restricted cash, total cash, cash equivalents and restricted cash were $21.8 million. Total assets were $722.0 million and shareholders' deficit was $29.9 million.
Debt consisted of a $175.6 million term loan, net of $8.7 million of deferred financing fees, and $5.0 million drawn on the revolving facility. Total long-term debt, net, was $171.9 million. The amended credit agreement provides a $55.0 million revolving facility, with $38.3 million of unused available credit and $47.8 million of total liquidity under the agreement. The company reported compliance with all financing covenants.
Material Changes Versus the Prior Comparable Period
- Revenue declined primarily because product sales to franchisees shifted to third-party distributors and because the company-owned salon base was reduced.
- The product strategy reduced both product revenue and related cost, but product gross margin was adversely affected by discounting to liquidate remaining distribution-center inventory.
- Franchise operating income improved to $4.1 million from a $3.9 million operating loss, supported by higher royalties and lower general and administrative expense.
- Company-owned salon operating loss increased to $1.6 million from $1.0 million, partly because the prior-year period included Canadian COVID-19 rent and wage relief.
- The company-owned salon count decreased to 95 from 179 a year earlier; total franchise salons decreased to 5,323 from 5,587.
- Net income benefited from $3.3 million of discontinued-operations income, including a $3.9 million gain related to the OSP sale and receipt of previously held-back proceeds.
- The capital structure changed materially in August 2022: $180.0 million of the former revolving facility was converted to a term loan, the revolving commitment was reduced to $55.0 million, and maturity was extended to August 2025.
Outlook, Risks, Contingencies and Unusual Items
Management expects the third-party distribution strategy to reduce product sales and related costs in fiscal 2023 while generating distributor rebates recorded in fees. Management stated that available cash, operating cash flows and borrowing capacity are sufficient to meet obligations for the next twelve months and beyond. The company expects to pay $2.5 million of deferred Social Security contributions in the second quarter of fiscal 2023.
Borrowing costs are expected to rise under the amended credit agreement. The applicable term SOFR margin was 3.875% at September 30, 2022 and is scheduled to increase to 6.25% in March 2023, with a further increase to 7.25% in March 2024, including portions payable in kind.
Key risks include franchisee financial performance, salon closures, labor and minimum-wage costs, consumer demand, inflation and economic conditions, COVID-19 effects, reliance on Walmart and other vendors, execution of the third-party merchandising strategy, migration to the Zenoti technology platform, cybersecurity, compliance with debt covenants, interest-rate and foreign-currency exposure, litigation, and potential future impairment of goodwill or salon-related long-lived assets.
Regis recorded $0.5 million of litigation expense and paid $0.5 million during the quarter. It had $0.5 million remaining to pay under a technology supplier settlement. The company is also subject to various franchise, rent, consumer and wage-and-hour claims whose outcomes cannot presently be determined.
Important Facts for Investors to Verify
- Whether the transition to third-party product distribution improves franchisee economics and produces sustainable fee and royalty growth despite lower reported revenue.
- The durability of positive franchise same-store sales, which were 4.6%, and the impact of continued salon closures on the royalty base.
- Liquidity trends, covenant compliance and the effect of scheduled interest-margin increases on cash flow and leverage.
- The extent to which reported net income depends on the nonrecurring OSP discontinued-operations gain.
- Future cash requirements from lease obligations, deferred Social Security contributions, litigation, settlement payments and debt service.
- Potential impairment charges related to underperforming salons, goodwill or right-of-use assets if operating performance deteriorates.
- Execution of technology migration, vendor relationships and the company’s ability to retain franchisees, stylists and salon leaders.