Regis Corporation Fiscal 2022 Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2022. The request metadata references “2021 Q4,” but the filing is an annual Form 10-K for fiscal 2022. Regis franchises and owns hairstyling and hair-care salons under brands including Supercuts, SmartStyle, Cost Cutters, First Choice Haircutters and Roosters. At year-end, the system included 5,576 locations worldwide: 5,395 franchised salons, 105 company-owned salons and 76 locations with non-controlling ownership interests. Franchisees operated 98.1% of franchise and company-owned salons.
Financial performance and condition
| Metric | Fiscal 2022 | Fiscal 2021 | Change |
|---|---|---|---|
| Total revenue | $276.0 million | $411.7 million | Down 33.0% |
| Operating loss | $28.9 million | $94.7 million | Improved by $65.8 million |
| Loss from continuing operations | $46.5 million | $103.2 million | Improved by $56.7 million |
| Loss from discontinued operations | $39.4 million | $10.1 million | Increased by $29.3 million |
| Net loss | $85.9 million | $113.3 million | Improved by $27.5 million |
| Net loss per share | $1.97 | $3.15 | Improved |
| Cash used in operating activities | $38.6 million | $99.9 million | Improved by $61.2 million |
| Cash provided by investing activities | $7.7 million | Cash used of $2.1 million | Improved |
| Cash provided by financing activities | $29.4 million | $7.8 million | Increased |
Revenue mix: Royalties increased to $65.8 million from $52.4 million; fees increased to $11.6 million from $10.2 million; advertising fund contributions increased to $32.6 million from $22.0 million; and franchise rental income increased to $130.8 million from $127.4 million. These increases were more than offset by the transition away from wholesale product distribution, which reduced product sales to franchisees to $15.1 million from $56.7 million, and the reduction in company-owned salons, which reduced company-owned salon revenue to $20.2 million from $143.0 million.
Margins and segment results: The filing does not present a conventional consolidated gross margin because advertising fund contributions and corresponding expenses, as well as franchise rental income and franchise rent expense, are reported gross. The consolidated operating margin improved to approximately negative 10.5% from negative 23.0%. Franchise salon operating loss improved to $11.8 million from $24.6 million, while company-owned salon operating loss improved to $9.5 million from $70.0 million. System-wide same-store sales increased 14.8% in fiscal 2022, compared with a 25.8% decline in fiscal 2021.
Liquidity and debt: Cash and cash equivalents were $17.0 million at June 30, 2022, and cash, cash equivalents and restricted cash totaled $27.5 million. Borrowings under the revolving credit facility were $180.0 million, with $81.9 million of unused availability. Total liquidity under the credit agreement was $119.8 million versus a $75.0 million minimum liquidity covenant. Debt-to-capitalization increased to 120.8% from 91.6%, primarily because of the reduction in shareholders’ equity. Shareholders’ deficit was $31.0 million at year-end, compared with positive equity of $17.0 million in the prior year.
Material changes versus the prior comparable period
- Regis substantially completed its transition to an asset-light, franchise-focused model. Company-owned salons declined from 276 to 105, while franchised salons declined from 5,563 to 5,395 primarily because of closures and conversions.
- The company exited its wholesale product distribution business and adopted a third-party distribution model. Product sales to franchisees declined 73.4%, and the company expects further declines in fiscal 2023. A $7.7 million inventory reserve was recorded, primarily for personal protective equipment and other distribution-center inventory.
- Regis sold its Opensalon Pro software business to Soham Inc. for $20.0 million in cash plus up to $19.0 million of contingent consideration. It received $13.0 million at closing and recorded a $39.4 million after-tax loss from discontinued operations, including goodwill derecognition and software and hardware write-downs.
- The company issued 9.3 million shares under its at-the-market program for $37.2 million of net proceeds. No shares were repurchased, and no dividends were paid or expected.
- General and administrative expense decreased 32.3% to $65.3 million, primarily because of lower compensation and distribution-center costs. Depreciation and amortization declined 71.4% to $6.2 million.
- Goodwill impairment of $13.1 million was recorded in continuing operations, while total fiscal 2022 goodwill impairment, including discontinued operations, was $16.0 million.
Guidance, outlook, risks and unusual items
Management expects company-owned salon losses to continue declining as remaining salons are closed, sold or exited at lease expiration. The company expects product-sales revenue to decrease further in fiscal 2023 and capital expenditures to decline following the OSP sale. It also expects approximately $4.0 million of additional OSP proceeds in the first quarter of fiscal 2023, subject to release of purchase-price holdbacks.
In August 2022, after year-end, Regis amended and extended its credit agreement to August 2025. The facility was converted into a $180.0 million term loan and a $55.0 million revolving facility. The minimum liquidity covenant was reduced to $10.0 million, but the amendment added minimum EBITDA, leverage and fixed-charge coverage requirements. Interest costs are scheduled to increase materially, including cash and payment-in-kind interest increases beginning March 2023 and March 2024. The amendment also requires certain excess cash flow to be used for debt prepayments.
- COVID-19 continued to affect guest traffic, stylist availability, franchisee performance and salon profitability. The duration and ultimate effects of the pandemic were not estimable.
- Regis remains exposed to $501.3 million of residual real-estate lease liability for company-owned and franchised salons where it is the tenant, sublandlord or lease guarantor. Franchisee defaults could increase cash obligations and reduce royalty collections.
- The company disclosed that it was not in compliance with certain NYSE continued-listing standards as of June 30, 2022, including minimum share-price and market-capitalization requirements. Failure to regain compliance could lead to suspension or delisting.
- Regis relies heavily on franchise royalties and the financial health of independently operated franchisees, over which it has limited day-to-day control.
- Other significant risks include labor shortages and wage inflation, dependence on Walmart for SmartStyle locations, competition, cybersecurity and technology migration risks, vendor and supply-chain disruptions, litigation, tax uncertainties and possible additional asset impairments.
- Legal proceedings include franchise, rent, wage-and-hour and consumer claims. The company recorded $2.2 million of litigation expense in fiscal 2022 and had $0.5 million accrued for potential settlement liability at year-end.
Investor verification points
- Verify the execution and covenant compliance of the amended credit agreement, including the scheduled increases in cash and payment-in-kind interest and required excess-cash-flow prepayments.
- Monitor operating cash use, franchisee royalty collections, lease-guarantee exposure and the ability to maintain the revised $10.0 million minimum liquidity covenant.
- Assess whether franchisee same-store sales, salon closures, stylist staffing and franchisee financial health support continued royalty growth.
- Review the remaining 105 company-owned salons, associated lease exits and potential future impairment or termination costs.
- Confirm the timing and amount of contingent OSP sale proceeds and whether the planned Zenoti migration supports the company’s technology and digital-marketing objectives.
- Track the company’s remediation of NYSE listing deficiencies and the potential effects of any suspension or delisting.
- Evaluate the sensitivity of the $174.4 million remaining goodwill balance and other asset values to revenue, salon-count, discount-rate and recovery assumptions.