Regis Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended March 31, 2019; filed April 30, 2019. The request metadata identifies “2018 Q3,” but the filing is for fiscal 2019 third quarter. Regis owns and franchises mass-market beauty salons and had 7,838 system-wide locations and approximately 22,000 corporate employees at quarter-end.
Financial performance and liquidity
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Revenue | $258.3 million, down 15.5% | $820.8 million, down 12.2% |
| Operating income (loss) | $(22.2) million | $(20.3) million |
| Continuing operations income (loss) | $(14.8) million | $(14.9) million |
| Net income (loss) | $(14.6) million; $(0.36) diluted EPS | $(8.8) million; $(0.21) diluted EPS |
| Operating cash flow | Not separately reported for the quarter | $(20.3) million |
| Capital expenditures | Not separately reported for the quarter | $23.2 million |
Quarterly revenue consisted of $181.8 million of service revenue, $53.8 million of product revenue and $22.8 million of royalties and fees. The implied operating margin was approximately negative 8.6% for the quarter and negative 2.5% year to date. Company-owned salon revenue was $221.2 million for the quarter, while franchise revenue was $37.1 million.
Cash and cash equivalents were $71.1 million at March 31, 2019, or $94.8 million including restricted cash, compared with $110.4 million and $148.8 million, respectively, at June 30, 2018. The company had $90.0 million of revolving debt outstanding under a $295.0 million facility, $182.0 million of unused availability and $23.0 million of standby letters of credit. The facility matures in March 2023, and Regis reported compliance with its financing covenants.
Shareholders’ equity declined to $375.8 million from $486.4 million at June 30, 2018. Debt to capitalization increased to 22.3% from 15.6%, primarily due to share repurchases and the sale-leaseback liability. Long-term debt was $90.0 million, and the sale-leaseback financial liability was $17.5 million.
Material changes versus the prior comparable period
- Quarterly revenue declined $47.4 million, primarily because of company-owned salon sales to franchisees, salon closures, weaker same-store sales and the timing of Easter. Year-to-date revenue declined $114.2 million.
- Company-owned same-store sales decreased 2.5% for the quarter and 0.4% year to date, driven primarily by lower guest transactions, partly offset by higher average ticket prices.
- Franchise royalties and fees increased $3.9 million for the quarter and $11.3 million year to date as franchised locations increased. Franchise same-store sales declined 2.2% for the quarter and 0.5% year to date.
- Regis sold 245 company-owned salons to franchisees during the quarter and 502 year to date. It received $30.6 million and $54.6 million of related proceeds, respectively.
- Operating results included a $20.7 million TBG mall-location restructuring charge for reserves against TBG notes and receivables. The charge materially reduced franchise segment profitability.
- Rent expense decreased $7.1 million for the quarter and $44.3 million year to date, while depreciation and amortization decreased $0.9 million and $19.0 million, respectively, reflecting the smaller company-owned salon base and the lapping of prior restructuring costs.
- Interest expense declined to $1.4 million from $5.1 million for the quarter and to $3.4 million from $9.4 million year to date.
- Regis repurchased 2.1 million shares for $37.9 million during the quarter and 6.0 million shares for $106.3 million year to date. Approximately $129.1 million remained authorized for repurchases at March 31, 2019.
Cash flow, strategy and unusual items
Operating activities used $20.3 million of cash year to date. Investing activities provided $56.1 million, including $54.6 million from salon asset sales and $24.6 million from company-owned life insurance settlements, partially offset by capital expenditures. Financing activities used $89.7 million, principally because of share repurchases, partly offset by $18.1 million of sale-leaseback proceeds.
Management continued transitioning Regis toward a more asset-light franchise platform. The filing attributes weaker company-owned revenue to the sale and closure of salons, while franchise royalties and fees benefited from a larger franchise base. The company adopted ASC 606 retrospectively on July 1, 2018; the filing states that the adoption changed presentation and timing of certain revenue items but did not materially change consolidated cash flows.
Regis entered a ten-year lease for a new corporate headquarters and classified its existing Edina, Minnesota headquarters land and buildings as held for sale. It also completed a sale-leaseback of its Salt Lake City distribution center, producing a $17.5 million long-term financial liability.
Outlook, risks and contingencies
- The filing does not provide a specific quantitative revenue, earnings or cash-flow forecast.
- TBG continues to experience operational and liquidity difficulties. Regis fully reserved amounts invoiced to TBG, including approximately $8.0 million of notes, $12.7 million of accounts receivable, $11.6 million of inventory and $1.1 million of unpaid royalties.
- Regis estimated potential exposure of up to $64.8 million for remaining salon lease commitments guaranteed in connection with TBG, before any mitigation efforts.
- TBG’s United Kingdom business entered a voluntary insolvency proceeding, and landlords challenged the arrangement in the U.K. High Court. Failure of the restructuring could lead to bankruptcy or administrative proceedings and additional financial, operational or reputational exposure for Regis.
- Goodwill totaled $378.6 million at March 31, 2019, including $151.1 million for the company-owned reporting unit. The company-owned reporting unit had approximately 24% impairment headroom at its latest annual assessment; future underperformance, higher discount rates or strategic changes could result in a material non-cash impairment.
- Regis faces ordinary-course litigation, including purported consumer and wage-and-hour class actions. Outcomes are inherently unpredictable and could materially affect a particular reporting period.
- The company expects adoption of the new lease accounting standard in fiscal 2020 to materially increase reported assets and liabilities, but not materially affect net income, cash flows or debt covenant compliance.
Most important facts for investors to verify
- Whether the franchise transition can offset declining company-owned salon revenue and negative same-store sales.
- The pace and economics of future salon sales to franchisees, including cash proceeds, gains and goodwill derecognition.
- TBG’s ability to remain solvent and meet obligations, including the potential $64.8 million lease-guarantee exposure.
- Whether continuing operating cash outflows and substantial share repurchases are sustainable given cash balances and available credit.
- Future goodwill impairment risk if company-owned salon performance, transaction volumes or valuation assumptions deteriorate.
- The effect of minimum-wage increases, stylist retention, competition, consumer traffic, Walmart relationships, litigation and upcoming lease-accounting changes.