Regis Corporation Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2021. The filing was dated August 26, 2021. Regis franchises, owns and operates technology-enabled hairstyling and hair-care salons under brands including SmartStyle, Supercuts, Cost Cutters, First Choice Haircutters and Roosters.
Business Context
- Regis had 5,917 locations worldwide at year-end: 5,563 franchised salons, 276 company-owned salons and 78 locations held through non-controlling ownership interests.
- Franchised locations represented 95.3% of company-owned and franchised salons, compared with 76.1% in fiscal 2020 and 56.0% in fiscal 2019.
- The company continued its multi-year transition to an asset-light, fully franchised model, selling 748 salons to franchisees during fiscal 2021 and closing 613 company-owned salons.
- Regis expects to sell approximately 130–150 remaining company-owned salons in fiscal 2022 and close the remainder as leases expire.
- COVID-19 caused mandated closures, particularly in California and Canada, reduced guest traffic and increased operating, safety and staffing costs.
Key Financial Metrics
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Total revenue | $415.1 million | $669.7 million | Down 38.0% |
| Service revenue | $108.1 million | $331.5 million | Down 67.4% |
| Product revenue | $91.5 million | $137.6 million | Down 33.5% |
| Royalties and fees | $88.1 million | $73.4 million | Up 20.0% |
| Franchise rental income | $127.4 million | $127.2 million | Up 0.1% |
| Operating loss | $(104.2) million | $(145.3) million | Improved $41.2 million |
| Net loss | $(113.3) million | $(171.4) million | Improved $58.0 million |
| Net loss per share | $(3.15) | $(4.77) | Improved |
| Cash used in operating activities | $(99.9) million | $(86.4) million | Use increased $13.5 million |
| Capital expenditures | $11.5 million | $37.5 million | Down $26.0 million |
Margins, Liquidity and Capital Structure
- Operating margin was approximately negative 25.1%, compared with negative 21.7% in fiscal 2020. Net margin was approximately negative 27.3%, compared with negative 25.6%.
- System-wide same-store sales declined 25.8%, including declines of 26.7% for SmartStyle, 25.8% for Supercuts and 24.8% for Portfolio Brands.
- Franchise segment operating income increased to $40.7 million from $32.9 million, while company-owned salon operating loss improved to $70.0 million from $96.1 million.
- Cash and cash equivalents were $19.2 million at June 30, 2021, compared with $113.7 million a year earlier. Including restricted cash, total cash, cash equivalents and restricted cash were $29.2 million.
- The company had $186.9 million outstanding under a $294.4 million revolving credit facility, with $88.8 million of unused availability and total covenant liquidity of $128.9 million.
- The revolving credit facility expires in March 2023 and requires minimum liquidity of $75.0 million. The facility is secured by substantially all of the company’s assets.
- Debt-to-capitalization increased to 91.6% from 62.0%, primarily because of the fiscal 2021 loss and increased borrowings.
- Total lease liabilities were $635.3 million, including $518.9 million of long-term lease liabilities. Regis disclosed residual real-estate lease liability of approximately $603.4 million for company-owned and nearly all franchised salons.
- Regis paid no dividends and made no share repurchases during fiscal 2021. It had $54.6 million remaining under its authorized repurchase program and had not issued shares under its $50 million at-the-market offering.
Material Changes Versus Fiscal 2020
- Revenue fell primarily because salons were sold to franchisees or closed, compounded by COVID-19-related reductions in guest visits and mandated closures.
- Franchise royalties and fees increased partly because fiscal 2020 included a $14.9 million refund of previously collected cooperative advertising fees.
- Cost of product increased to 86.6% of product revenue from 61.6%, primarily because of a $12.1 million excess and obsolete inventory reserve and the transition away from wholesale distribution.
- General and administrative expense decreased 19.5% to $105.4 million due mainly to lower headcount and reduced field and administrative costs.
- Fiscal 2021 included $13.0 million of long-lived asset impairment, a $16.7 million loss on salon asset sales and a $15.0 million gain related to the reclassification of distribution-center transactions as sale-and-leasebacks.
- Fiscal 2020 included $40.2 million of goodwill impairment and $2.3 million of TBG restructuring charges; no comparable goodwill impairment or TBG restructuring charge was recorded in fiscal 2021.
- Regis exited its wholesale distribution model and plans to close or sublease its Chattanooga and Salt Lake City distribution facilities. Franchisees are expected to source products through third-party distributors, with Regis receiving royalties based on purchases.
- The company adopted a more conservative lease estimate, reducing lease liabilities and right-of-use assets by $72.9 million without affecting net income.
Outlook, Commentary and Risks
- Management stated that it believed liquidity was adequate to operate the business and support growth initiatives based on its liquidity position and forecast, but also identified substantial uncertainty from COVID-19 and the Delta variant.
- Management expects to refinance debt before the March 2023 maturity but warned that refinancing may be unavailable or may occur at higher interest rates or with reduced capacity.
- Key strategic priorities include completing the shift to franchising, reducing corporate and field infrastructure costs, expanding technology capabilities and using Opensalon Pro to improve operating data, promotions and franchisee support.
- Regis remains dependent on the financial performance of its franchisees, which independently control staffing, wages, pricing, hours and day-to-day salon operations. Franchisee defaults could reduce royalties and expose Regis to lease obligations.
- Walmart is a significant landlord and strategic relationship. Regis had 1,757 SmartStyle or Cost Cutters salons in Walmart locations, and Walmart may close up to 100 salons annually subject to contractual provisions.
- The company faces risks from stylist shortages, wage inflation, changing consumer behavior, competition, supply-chain disruptions, cybersecurity incidents, technology implementation, franchise regulation, litigation and potential future impairment charges.
- Regis retained approximately $9 million of lease liability related to 43 salons transferred back from The Beautiful Group and was attempting to renegotiate leases and refranchise locations.
- The company agreed to pay its former point-of-sale supplier between $3.0 million and $5.0 million over two years under a settlement and transition-services arrangement; $3.0 million was accrued in fiscal 2021.
- The sale of Regis’s 55.1% interest in Empire Education Group remained subject to state approvals and was expected to close in fiscal 2022, with an anticipated immaterial non-operating gain.
- The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. The critical audit matter involved impairment testing of right-of-use assets for company-owned salons.
Investor Verification Priorities
- Verify the pace and economics of remaining company-owned salon sales and closures in fiscal 2022, including cash proceeds and any additional losses.
- Monitor cash burn, franchisee payment performance, covenant liquidity and the ability to refinance the March 2023 revolving credit facility.
- Assess whether franchisee same-store sales, stylist staffing and royalty collections recover from the 25.8% fiscal 2021 system-wide same-store sales decline.
- Review the full extent of residual lease obligations, franchisee defaults, lease termination costs and liabilities related to former TBG salons.
- Evaluate the financial impact of exiting wholesale distribution, including reduced revenue, supplier execution, inventory liquidation and future royalty economics.
- Test assumptions supporting goodwill and right-of-use asset valuations, particularly projected sales, discount rates, salon closures and the continuing effects of COVID-19.
- Track litigation and employment, franchise, cybersecurity and technology-transition matters, including the $3.0–$5.0 million point-of-sale supplier obligation.