Business Context and Reporting Period
Regis Corporation owns, operates and franchises hair salons under brands including SmartStyle, Supercuts, MasterCuts, Regis Salons and Cost Cutters. The filing is a Form 10-K for the fiscal year ended June 30, 2017, although the request metadata references 2016 Q4. The company reported 9,008 system-wide locations, including 6,273 company-owned salons, 2,646 franchised salons and 89 locations with non-controlling ownership interests.
Regis reports four segments: North American Value, North American Franchise, North American Premium and International. Service revenue represented approximately 80% of company-owned revenue. The company had approximately 41,000 employees worldwide.
Key Financial Metrics
| Metric | Fiscal 2017 | Fiscal 2016 | Change |
|---|---|---|---|
| Revenue | $1,691.9 million | $1,790.9 million | Down 5.5% |
| Operating income (loss) | $(1.2) million | $17.6 million | Down $18.8 million |
| Net loss | $(16.1) million | $(11.3) million | Loss widened $4.8 million |
| Diluted loss per share | $(0.35) | $(0.23) | Worsened $0.12 |
| Cash flow from operations | $60.1 million | $55.8 million | Up $4.3 million |
| Capital expenditures | $33.8 million | $31.1 million | Up $2.7 million |
| Cash and equivalents | $172.4 million | $147.3 million | Up $25.1 million |
| Long-term debt, net | $120.6 million | $119.6 million | Up $1.0 million |
Operating margin was approximately negative 0.1%, net margin was approximately negative 1.0%, and operating cash flow margin was approximately 3.6% of revenue.
Revenue consisted of $1,307.7 million of service revenue, $335.9 million of product revenue and $48.3 million of royalties and fees. Consolidated same-store sales declined 1.8%, driven by a 5.2% decrease in guest visits, partly offset by a 3.4% increase in average ticket.
Material Changes Versus the Prior Comparable Period
- Company-owned salon locations declined to 6,273 from 6,792, while franchised salons increased to 2,646 from 2,496. Total system-wide locations declined to 9,008 from 9,483.
- The company closed 554 salons, constructed 41 company-owned salons and acquired one company-owned salon through a franchise buyback.
- North American Value revenue declined 2.7% to $1,280.4 million and operating income declined to $83.6 million from $96.2 million.
- North American Premium revenue declined 14.8% to $241.5 million; its operating loss increased to $18.3 million from $12.8 million. Same-store sales declined 5.9%.
- International revenue declined 18.4% to $91.5 million, reflecting foreign currency effects, salon closures and a 5.7% same-store sales decline.
- North American Franchise revenue was broadly stable at $78.5 million, while franchise locations increased by 150 year over year.
- Cost of service increased to 64.1% of service revenue from 62.7%, primarily due to minimum wage increases, lower stylist productivity, a one-time inventory expense and the absence of a prior-year rebate.
- Cash flow from operations improved despite the net loss, primarily because of lower inventory levels and non-cash charges.
Guidance, Outlook, Commentary, Risks and Unusual Items
Management did not provide specific quantitative fiscal 2018 revenue or earnings guidance. Following the April 2017 appointment of Hugh Sawyer as chief executive officer, the company implemented a 120-day plan focused on improving company-owned salon performance, simplifying operations, aligning labor with demand, increasing marketing and expanding franchising. Management stated that initial returns were favorable and expected favorable year-over-year trends to build in fiscal 2018.
Regis announced plans to expand franchising organically and through the sale of company-owned salons. In January 2017, it began franchising SmartStyle throughout the United States and entered agreements to sell 233 company-owned salons to franchisees, although not all transactions had closed by year-end. The strategy may reduce consolidated revenue while increasing royalty revenue and reducing operating costs; management cautioned that benefits are uncertain and execution may disrupt operations.
- Fiscal 2017 included $11.4 million of non-cash fixed-asset impairment charges, $8.4 million of severance expense related to former executives, $7.7 million of non-cash tax expense and a $5.9 million one-time non-cash inventory expense related to salon tools.
- The company maintains a $120.9 million valuation allowance against most deferred tax assets, causing tax expense despite a pretax loss. Future tax benefits depend on achieving sustainable pretax earnings.
- The company fully impaired its Empire Education Group investment in fiscal 2016. EEG generated a $0.9 million net loss in fiscal 2017, and Regis recorded approximately $0.1 million of equity losses.
- Regis held $172.4 million of cash and had no borrowings under its $200.0 million revolving credit facility, with $198.5 million of unused availability, subject to covenants. Its $123.0 million principal amount of 5.5% senior notes matures in fiscal 2020.
- Total contractual obligations were approximately $1.006 billion, including $853.6 million of operating lease obligations. Approximately $243.2 million of the lease obligations related to franchisee premises that are reimbursed by franchisees.
- Material risks include declining guest traffic, stylist recruitment and retention, minimum wage increases, mall and Walmart traffic trends, dependence on Walmart, franchisee performance, cybersecurity, foreign currency exposure, litigation and compliance with debt covenants.
- The company is subject to lawsuits and claims, including purported consumer and wage-and-hour class actions. Outcomes are described as unpredictable and potential losses cannot presently be determined.
Important Facts for Investors to Verify
- Whether the franchising and salon-sale strategy improves operating margins and cash generation without causing a disproportionate decline in consolidated revenue.
- Whether same-store guest visits stabilize, particularly in North American Premium and International salons.
- The renewal or replacement of the $200.0 million revolving credit facility, which expires in June 2018, and ongoing compliance with leverage and fixed-charge coverage covenants.
- The sustainability of $172.4 million of cash against $123.0 million of debt and substantial operating lease commitments.
- The recoverability of goodwill of approximately $417.0 million and deferred tax assets subject to a $120.9 million valuation allowance.
- Progress on the 233 planned salon refranchisings, SmartStyle expansion and the strategic review of company-owned mall locations.
- Exposure from wage-and-hour litigation, self-insurance claims, tax audits and regulatory requirements affecting franchising and Empire Education Group.