Regis Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended March 31, 2013; filed May 7, 2013. The filing is unaudited. Regis owns, operates and franchises beauty salons, with approximately 10,000 worldwide locations and 52,000 employees.
Financial Results and Position
| Metric | Three months ended Mar. 31, 2013 | Prior year | Nine months ended Mar. 31, 2013 | Prior year |
|---|---|---|---|---|
| Revenue | $504.9 million | $535.9 million | $1,516.5 million | $1,593.4 million |
| Operating income | $3.3 million | $23.0 million | $21.3 million | $43.9 million |
| Income from continuing operations | $0.9 million | $(3.9) million | $19.4 million | $13.6 million |
| Net income | $2.4 million | $(1.4) million | $28.5 million | $(50.5) million |
| Diluted EPS | $0.04 | $(0.02) | $0.50 | $(0.88) |
| Operating margin | 0.7% | 4.3% | 1.4% | 2.8% |
- Quarterly revenue declined 5.8%; nine-month revenue declined 4.8%. Consolidated same-store sales decreased 1.4% in the quarter and 2.1% year to date.
- Quarterly operating margin contracted primarily because of lower sales, higher labor costs, increased salon connectivity and repairs expense, product clearance activity, and fixed-cost deleverage.
- Cash provided by operating activities was $81.7 million for the nine months, down from $103.0 million in the prior-year period.
- Capital expenditures were $72.6 million, primarily associated with the point-of-sale system and salon investments.
- Cash and cash equivalents were $180.3 million at March 31, 2013, compared with $111.9 million at June 30, 2012.
- Total debt was $268.6 million, down from $287.7 million at June 30, 2012. Debt-to-capitalization was 23.8%, compared with 24.4% at fiscal year-end.
- The $400.0 million revolving credit facility had no borrowings and $397.8 million of unused availability, subject to covenant compliance. Regis was in compliance with its covenants.
- Cash dividends were $0.06 per share for the quarter and $0.18 per share for the nine-month period. The Board declared another $0.06 quarterly dividend payable May 21, 2013.
Material Changes Versus the Prior Comparable Period
- North American salon revenue decreased 5.5% in the quarter and 4.7% year to date; international salon revenue decreased 10.6% and 6.8%, respectively.
- Regis closed or relocated 456 salons during the twelve months ended March 31, 2013, including 413 company-owned salons, while constructing 226 company-owned salons. Management is optimizing and simplifying the salon portfolio rather than pursuing significant acquisitions.
- Service revenue declined $20.8 million in the quarter and $58.2 million year to date, primarily due to salon closures, fewer selling days, lower guest visits and foreign-currency effects.
- General and administrative expense declined $3.5 million in the quarter and $20.3 million year to date, reflecting prior workforce reductions, lower warehouse costs and the absence of certain prior-year restructuring and proxy-related costs.
- Cost of service as a percentage of service revenue increased 180 basis points in the quarter and 240 basis points year to date, driven by higher labor costs, increased stylist hours, bonuses, health insurance and holiday-pay timing.
- Cost of product as a percentage of product revenue increased 130 basis points in the quarter and 140 basis points year to date because of clearance sales tied to planned product rationalization and plan-o-gram standardization.
- Year-to-date interest income and other, net included a $33.8 million primarily nontaxable foreign-currency translation gain recognized after the sale and liquidation of the European Provalliance-related entities.
- Equity in affiliated companies included a $17.9 million pretax impairment of the Empire Education Group investment recorded in the second quarter. No additional impairment was recorded in the third quarter.
- Prior-year results included a $78.4 million goodwill impairment charge related to Hair Club, causing the significant year-to-date improvement in discontinued-operations income.
- Salon marketing and advertising expenses and certain distribution-center costs were reclassified for presentation purposes; the reclassifications did not affect operating income or net income.
Outlook, Commentary, Risks and Unusual Items
- Management is focused on improving the guest experience, retaining and developing stylists, deploying technology, simplifying operations, optimizing brands and reviewing non-core assets.
- Regis completed the sale of Hair Club on April 9, 2013 for $162.8 million after a preliminary working-capital adjustment and expects to recognize an after-tax gain in the fourth quarter of fiscal 2013. Hair Club results are presented as discontinued operations.
- The Company completed the sale of its 46.7% Provalliance interest for $103.4 million on September 27, 2012 and is evaluating uses for cash received from the Hair Club and Provalliance transactions.
- Management believes operating cash flow, cash balances and revolving-credit availability will fund operations and anticipated initiatives for at least the next twelve months, but notes that lower cash generation or inability to access long-term financing could restrict growth.
- Promenade goodwill had an estimated fair value approximately 14% above carrying value at the fiscal 2012 annual test, and management states that additional impairment is reasonably likely if performance or assumptions deteriorate.
- Empire Education Group’s estimated fair value exceeded carrying value by approximately 5% at March 31, 2013. Further weakness in enrollment, profitability, regulation or the for-profit education market could produce material additional impairment charges.
- Convertible senior notes had a $165.1 million carrying amount and mature in July 2014; the March 31, 2013 conversion price was approximately $15.30 per share.
- Material risks include weak same-store sales, competition, stylist retention, labor and healthcare costs, minimum-wage and other regulatory changes, point-of-sale system implementation, currency movements, legal claims, joint-venture performance and covenant compliance.
- Regis disclosed wage-and-hour and consumer class-action claims and a shareholder derivative action concerning executive compensation and related-party transactions. The outcomes cannot presently be determined and could materially affect a particular period.
Investor Verification Items
- Verify the final consideration and accounting gain from the Hair Club sale in subsequent filings.
- Monitor same-store sales, guest visits, average ticket, salon closures and the effect of operating fewer locations on revenue and margins.
- Assess whether higher stylist hours, labor costs and healthcare expenses translate into improved traffic and profitability.
- Review Promenade goodwill and Empire Education Group valuation sensitivity for potential future impairments.
- Confirm refinancing or repayment plans for the convertible notes due July 2014 and other senior term-note maturities beginning in 2013.
- Track cash deployment, dividends, share repurchases and the Company’s post-divestiture capital structure.
- Follow developments in the disclosed litigation, tax audits and implementation of the North American point-of-sale systems.