Regis Corporation: Fiscal 2014 Form 10-K Summary
Reporting period: The filing is an annual report for the fiscal year ended June 30, 2014, not a standalone 2013 fourth-quarter filing. Fiscal 2013 and fiscal 2012 comparisons are presented. Regis owns, operates and franchises beauty salons under brands including SmartStyle, Supercuts, MasterCuts, Regis Salons and Cost Cutters.
Business Context
- Regis had 9,674 system-wide locations at June 30, 2014, including 7,277 company-owned salons, 2,179 franchised salons and 218 locations held through non-controlling ownership interests.
- The company reorganized its North American field structure and now reports North American Value, North American Premium and International segments.
- Regis employed approximately 49,000 people worldwide and operated primarily in the United States, Canada, Puerto Rico and the United Kingdom.
- Management continued a strategic program focused on simplifying operations, standardizing processes, improving stylist training and retention, expanding franchising and growing Walmart-based locations.
Financial Performance and Key Metrics
| Metric | Fiscal 2014 | Fiscal 2013 | Change |
|---|---|---|---|
| Revenue | $1,892.4 million | $2,018.7 million | Down 6.3% |
| Operating income (loss) | $(34.0) million | $12.3 million | Declined $46.3 million |
| Loss from continuing operations | $(137.1) million | $4.2 million | Declined $141.2 million |
| Net income (loss) | $(135.7) million | $29.2 million | Declined $164.9 million |
| Net loss per diluted share | $(2.40) | $0.51 | Down $2.91 |
| Cash flow from operations | $117.4 million | $69.1 million | Up $48.3 million |
| Capital expenditures | $49.4 million | $105.9 million | Down $56.4 million |
- Service revenue was $1,480.1 million, product revenue was $371.5 million and royalties and fees were $40.9 million.
- Consolidated same-store sales declined 4.8%, driven by a 6.1% decline in guest visits, partly offset by a 1.3% increase in average ticket.
- North American Value revenue declined 5.6% to $1,430.1 million; North American Premium revenue declined 10.7% to $333.9 million; International revenue declined 0.6% to $128.5 million.
- Cost of service increased to 61.3% of service revenue from 59.5%, partly because field-leader costs were reclassified into operating expenses. Cost of product improved to 50.4% of product revenue from 55.0%, primarily because fiscal 2013 included a $12.6 million inventory write-down.
- Cash and cash equivalents were $378.6 million at year-end, compared with $200.5 million in 2013.
- Total debt and capital lease obligations were $293.5 million, compared with $174.8 million in 2013. Debt represented 28.9% of capitalization, up from 16.9%.
- Total assets were $1.416 billion and shareholders’ equity was $720.8 million at June 30, 2014.
Material Changes Versus the Prior Comparable Period
- Revenue decreased 6.3%, following a 4.9% decrease in fiscal 2013. Salon closures, negative same-store sales and lower product sales were the primary drivers.
- The company closed 322 locations during fiscal 2014, including 259 company-owned salons and 63 franchised salons, while constructing 127 company-owned salons and acquiring two company-owned salons through franchise buybacks.
- North American Premium operating loss increased to $46.3 million from $13.9 million, while North American Value operating income declined to $118.9 million from $141.1 million.
- General and administrative expense declined $53.9 million, principally because of the field-organization cost reclassification, lower incentive compensation and cost-reduction initiatives.
- Operating cash flow improved despite the operating loss, primarily because of income-tax refunds and favorable working-capital changes.
- In November 2013, Regis issued $120.0 million of 5.75% senior unsecured notes due December 2017. The company had no borrowings under its $400.0 million revolving credit facility at year-end and had $397.8 million of unused availability.
- The company discontinued regular quarterly dividends after paying $0.06 per share in each of the first two quarters of fiscal 2014.
Guidance, Outlook, Risks and Unusual Items
- Management stated that foundational initiatives and organizational changes disrupted fiscal 2014 performance but were intended to support a turnaround and longer-term growth and profitability. The filing does not provide quantitative fiscal 2015 revenue or earnings guidance.
- Regis recorded a $34.9 million non-cash goodwill impairment charge related to the Regis salon concept. No goodwill remained for the North American Premium reporting unit at June 30, 2014.
- The company recorded $18.3 million of long-lived asset impairment charges and recognized its share of $21.2 million of impairment charges recorded by Empire Education Group.
- Regis established an $84.4 million valuation allowance against U.S. and U.K. deferred tax assets, producing a reported income tax expense of $71.1 million despite a pretax loss from continuing operations.
- Empire Education Group, in which Regis holds a 54.5% economic interest, reported a $26.7 million net loss and recorded a $28.6 million goodwill impairment. Regis identified the investment as vulnerable to further impairment if enrollment, profitability or valuation trends deteriorate.
- The $172.5 million principal amount of 5.0% convertible senior notes was settled for $172.5 million in cash in July 2014, after the fiscal year-end.
- Total contractual obligations were $1.287 billion, including $952.0 million of operating lease obligations. The company also had significant self-insurance reserves and lease obligations associated with franchised salons.
- Risks include continued negative same-store sales, stylist recruitment and retention, wage and healthcare cost increases, competition, franchisee performance, dependence on Walmart and other landlords, cybersecurity and information-system failures, debt-covenant compliance, foreign currency exposure and litigation.
- The company is involved in wage-and-hour, consumer and other ordinary-course litigation. Outcomes are described as unpredictable and could materially affect results in a particular period. An IRS examination of fiscal 2010 and 2011 returns remained ongoing; Regis paid $9.5 million to the IRS during fiscal 2014 in anticipation of resolution.
- Management and PricewaterhouseCoopers concluded that internal control over financial reporting and disclosure controls were effective as of June 30, 2014.
Most Important Facts for Investors to Verify
- Whether same-store sales and guest visits stabilize after the field reorganization and other foundational initiatives.
- Whether North American Premium performance improves and whether additional salon asset or goodwill impairments are required.
- The company’s ability to fund the July 2014 convertible-note repayment while maintaining adequate liquidity and complying with debt covenants.
- Whether the $83.9 million ending deferred-tax-asset valuation allowance can be reversed after sustained pretax profitability.
- Empire Education Group’s enrollment, cash flow, debt, regulatory exposure and risk of further impairment.
- The effect of discontinued dividends, franchise expansion and Walmart-related growth on shareholder returns and financial flexibility.
- Potential cash exposure from litigation, self-insurance claims, tax audits and approximately $952.0 million of operating lease commitments.