REGIS CORP quarterly report, Q2 FY2021

Regis Corporation — Form 10-Q Summary

Business context and reporting period

Regis franchises, owns, and operates beauty salons under brands including Supercuts, SmartStyle, Cost Cutters, First Choice Haircutters, Magicuts, and Roosters. This unaudited Form 10-Q covers the three and six months ended December 31, 2020, Regis’s fiscal second quarter and first six months of fiscal 2021.

As of December 31, 2020, the system included 6,384 locations, comprising 5,269 franchised salons, 1,037 company-owned salons, and 78 locations with a non-controlling ownership interest. The company continued transitioning toward an asset-light, predominantly franchised model.

Key financial metrics

Metric	Three months ended Dec. 31, 2020	Three months ended Dec. 31, 2019	Six months ended Dec. 31, 2020	Six months ended Dec. 31, 2019
Total revenue	$104.3 million	$208.8 million	$215.7 million	$455.8 million
Operating loss	$(26.8) million	$(7.5) million	$(58.3) million	$(17.4) million
Loss from continuing operations	$(32.9) million	$(16.5) million	$(68.1) million	$(30.7) million
Net loss	$(32.9) million	$(16.4) million	$(68.1) million	$(30.2) million
diluted loss per share	$(0.92)	$(0.46)	$(1.90)	$(0.84)

Revenue declined 50.0% year over year in the quarter and 52.7% year to date. Company-owned salon revenue fell 70.6% in the quarter and 71.9% year to date, while franchise revenue declined 16.8% and 14.4%, respectively. Consolidated system-wide same-store sales decreased 32.0% in the quarter and 32.3% year to date.

Service revenue declined 71.5% in the quarter and 73.2% year to date, primarily because of salon sales to franchisees, closures, and COVID-19-related reductions in guest visits.
Royalties and fees declined 32.2% in the quarter and 34.0% year to date, reflecting lower franchisee sales and temporarily reduced cooperative advertising fund contributions.
Cost of service increased to 76.2% of service revenue in the quarter from 66.2% in the prior-year quarter, primarily because of inefficient stylist hours, reduced traffic, and higher minimum wages.
Operating margin was approximately negative 25.7% in the quarter and negative 27.0% year to date, compared with negative 3.6% and negative 3.8% in the prior-year periods.
Long-lived asset impairment charges were $3.2 million in the quarter and $9.0 million year to date, including right-of-use asset impairments of $1.5 million and $6.0 million, respectively.

Cash flow, debt, and liquidity

Cash used in operating activities was $65.5 million for the six months ended December 31, 2020, compared with $19.3 million used in the prior-year period.
Investing activities provided $0.6 million, including $7.1 million of proceeds from salon asset sales and $7.5 million of capital expenditures.
Financing activities used $1.3 million, compared with $60.5 million used in the prior-year period, which included debt repayment and share repurchases.
Cash and cash equivalents were $50.9 million at December 31, 2020, compared with $113.7 million at June 30, 2020. Cash, cash equivalents, and restricted cash totaled $56.7 million.
Outstanding revolving credit borrowings were $177.5 million under a $295.0 million facility maturing in 2023. Unused availability was $98.8 million after consideration of outstanding letters of credit.
Management reported liquidity of $149.7 million, consisting of unrestricted cash and unused credit availability, versus a $75.0 million minimum liquidity covenant. The company stated that it was in compliance with its covenants and expected to remain compliant for at least one year from the filing date.
Total shareholders’ equity declined to $58.4 million from $125.7 million at June 30, 2020. Debt to capitalization increased to 77.8% from 62.0%, primarily because of operating losses.

Material changes versus the prior comparable period

COVID-19-related government closures, including prolonged closures in California and Ontario, significantly reduced salon traffic and revenue. California salons were permitted to reopen on January 25, 2021.
The company sold 145 salons to franchisees in the quarter and 282 year to date, compared with 443 and 988, respectively, in the prior-year periods. During the twelve months ended December 31, 2020, 768 salons were sold to franchisees, net of buybacks.
Company-owned salons decreased to 1,037 from 1,632 at June 30, 2020, while franchised salons increased to 5,269 from 5,209.
Franchise same-store sales declined 31.1% in the quarter and 31.5% year to date. Company-owned same-store sales declined 36.2% and 35.4%, respectively.
General and administrative expense declined 18.4% in the quarter and 27.9% year to date, mainly from lower salaries, headcount reductions, cancellation of the franchise convention, and a benefit from forfeited former-CEO equity awards.
The company recorded $3.2 million of losses on salon asset sales to franchisees in the quarter and $3.9 million year to date, versus $12.4 million and $18.3 million in the prior-year periods. The prior-year amounts included non-cash goodwill derecognition of $27.4 million and $59.5 million, respectively.
Regis revised the previously reported December 31, 2019 results to record an additional $6.7 million loss related to goodwill derecognition and a $1.5 million reduction to a previously reported headquarters-sale gain. The company concluded the errors were not material but revised the comparative amounts.

Outlook, commentary, risks, and unusual items

The filing does not provide quantitative revenue or earnings guidance. Management stated that the duration and severity of COVID-19 remain uncertain and continue to affect salon closures, guest traffic, staffing, franchisee performance, impairment estimates, and rent collections.

Management expects to continue pursuing a predominantly franchised, asset-light model and salon sales to franchisees.
Future impairment charges could be material if salon cash flows, market rents, discount rates, or the pandemic’s severity differ from assumptions used in impairment testing.
The company remains liable for up to approximately $14 million of mall-based salon lease commitments related to 77 open salons associated with the former TBG transaction, before mitigation efforts.
Operating lease liabilities totaled $668.6 million, including $127.6 million current and $540.9 million long term. The company reported $116.8 million of net future rent commitments after expected franchisee sublease income.
A California wage-and-hour class action was preliminarily settled for $2.1 million, which was accrued at December 31, 2020. Other litigation includes a dispute with the company’s point-of-sale technology supplier; any potential loss was not considered probable or reasonably estimable.
On February 3, 2021, Regis filed a shelf registration and prospectus supplement permitting potential at-the-market sales of up to $50 million of common stock. The filing does not state that any shares had been sold under the program.
Regis appointed a new chief executive officer effective October 5, 2020. The filing identifies leadership transition, employee retention, technology implementation, vendor disputes, Walmart relationships, franchisee health, cyber risks, and compliance with credit covenants as material risks.

Investor verification points

Confirm the pace of COVID-19 recovery, salon reopenings, guest traffic, and system-wide same-store sales.
Monitor operating cash burn, unrestricted cash, revolving-credit availability, and compliance with the $75.0 million minimum liquidity covenant.
Assess whether the asset-light transition and further salon sales improve profitability without creating excessive sale losses or franchisee financial stress.
Review future impairment testing for goodwill, salon assets, and right-of-use assets, particularly given the company’s negative equity trend and pandemic-related assumptions.
Track lease obligations, TBG-related contingencies, rent concessions, and the potential impact of additional salon closures.
Evaluate dilution risk from the potential $50 million at-the-market equity program and newly granted CEO-related equity awards.
Review the revised comparative 2019 figures and the unresolved point-of-sale supplier litigation.