Regis Corporation Form 10-Q Summary
Business Context and Reporting Period
Regis Corporation owns, operates and franchises beauty salons, principally under North American Value, North American Premium and International concepts. The filing covers the three and six months ended December 31, 2014, the second quarter and first six months of fiscal 2015. Regis reported 9,388 system-wide salons, including 7,142 company-owned and 2,246 franchised locations, and approximately 47,000 employees.
Financial Performance and Position
| Metric | Three Months Ended Dec. 31 | Six Months Ended Dec. 31 |
|---|---|---|
| Revenue | $455.9 million | $920.4 million |
| Operating loss | $2.2 million | $2.8 million |
| Operating margin | (0.5)% | (0.3)% |
| Net loss | $19.1 million | $28.1 million |
| Net loss per share | $0.35 | $0.51 |
| Operating cash flow | Not separately reported | $37.6 million |
| Capital expenditures | Not separately reported | $22.5 million |
- Revenue declined 2.7% for the quarter and 1.8% year to date. Consolidated same-store sales decreased 0.3% for the quarter and increased 0.2% year to date.
- North American Value produced operating income of $26.4 million for the quarter and $55.7 million year to date. North American Premium remained loss-making, with operating losses of $2.5 million and $7.1 million, respectively.
- Cash and cash equivalents were $195.8 million at December 31, 2014, compared with $378.6 million at June 30, 2014.
- Total debt was $120.0 million at December 31, 2014, versus $293.5 million at June 30, 2014. The decrease primarily reflects repayment of the $172.5 million convertible senior notes in July 2014.
- Regis had no revolver borrowings, $2.1 million of standby letters of credit and $397.9 million of unused revolving availability. The company was in compliance with its financing covenants.
- Debt-to-capitalization declined to 15.3% from 28.9% at June 30, 2014. Regular dividends were discontinued in December 2013.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue decreased $12.5 million, while year-to-date revenue decreased $16.5 million. Service revenue was the primary driver of the decline, partly offset by higher royalties and fees.
- Net loss improved substantially from $109.1 million to $19.1 million for the quarter and from $109.2 million to $28.1 million year to date.
- The prior-year periods included a $34.9 million goodwill impairment charge related to the North American Premium reporting unit and unusually high non-cash tax expense, including a U.S. deferred-tax-asset valuation allowance. Neither comparable charge was repeated in the current period.
- Interest expense declined by $2.7 million for the quarter and $4.1 million year to date following repayment of the convertible notes.
- Operating cash flow declined from $49.2 million to $37.6 million year to date. Financing cash flow changed from $107.8 million provided in the prior period to $196.6 million used, primarily because of debt repayment and $22.9 million of share repurchases.
- General and administrative expense increased $6.5 million for the quarter and $7.2 million year to date, reflecting higher incentive compensation, strategic investments and the absence of prior-period favorable adjustments.
Outlook, Commentary, Risks and Unusual Items
- Management is simplifying the business, focusing on core salon operations, investing in people, training and technology, and pursuing cost reductions and portfolio optimization. Management believes available cash, operating cash flow and borrowing capacity should be sufficient for operations and strategic initiatives, but warns that weaker cash generation could require delaying initiatives.
- The company recorded $11.6 million of equity losses from affiliates year to date, primarily from Empire Education Group, including a $6.9 million share of a deferred tax asset valuation allowance and a $4.7 million non-cash impairment of the investment. Additional impairment could be material.
- Salon asset impairment charges were $7.0 million year to date. A $1.5 million cumulative correction for previously understated self-insurance accruals increased site operating expense and net loss in the current quarter.
- Effective tax rates were unusual: negative 94.9% for the quarter and negative 121.3% year to date, driven principally by non-cash tax expense and valuation allowances. Management expects approximately $9.0 million of related non-cash tax expense for the fiscal year, subject to quarterly variation.
- Risks include negative same-store sales, stylist recruitment and retention, consumer demand, competition, franchisee performance, regulatory and healthcare changes, information-system and data-security risks, foreign exchange, debt-covenant compliance, and the performance of the EEG investment.
- Regis faces ordinary-course litigation, including consumer and wage-and-hour claims. Outcomes are unpredictable and could materially affect a particular period. A shareholder derivative action was dismissed, although a related fee motion remained pending.
- The filing provides no specific quantitative earnings or revenue guidance.
Important Facts for Investors to Verify
- Whether same-store sales and guest visits improve, particularly in North American Premium and the Value concepts.
- The sustainability of operating cash flow after debt repayment, share repurchases and capital expenditures.
- The carrying value and future impairment risk of the $16.8 million EEG investment and remaining goodwill.
- Future non-cash tax expense, valuation allowances and the status of IRS and state tax audits.
- Compliance with the revolving-credit and senior-note covenants and the company’s remaining liquidity.
- Potential exposure from wage-and-hour, consumer, self-insurance and other litigation claims.
- Execution of salon closures, franchise conversions, cost-reduction programs and investments in training and technology.