Regis Corporation 10-Q Summary
Business context and reporting period
Regis Corporation operates company-owned and franchised beauty salons, hair restoration centers and equity-method affiliates. For the quarter ended September 30, 2011, it had approximately 12,770 worldwide locations, including 9,867 salons, 97 hair restoration centers and approximately 2,800 affiliate locations. The filing presents unaudited results for the three months ended September 30, 2011, compared with September 30, 2010. PricewaterhouseCoopers LLP performed a review, not an audit, of the interim financial statements.
Key financial metrics
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Revenue | $568.7 million | $578.2 million | Down 1.6% |
| Operating income | $13.1 million | $33.4 million | Down 60.9% |
| Operating margin | 2.3% | 5.8% | Down 350 bps |
| Income before taxes and affiliate earnings | $7.0 million | $25.3 million | Down 72.2% |
| Net income | $8.3 million | $18.3 million | Down 54.5% |
| Net margin | 1.5% | 3.2% | Down 170 bps |
| Diluted EPS | $0.15 | $0.30 | Down $0.15 |
| Operating cash flow | $13.5 million | $64.2 million | Down $50.7 million |
| Capital expenditures | $16.8 million | $16.0 million | Up $0.8 million |
Service revenue was $431.7 million, product revenue was $126.9 million and royalties and fees were $10.1 million. Gross margin excluding depreciation and amortization was $252.6 million, or 45.2% of service and product revenues, compared with 45.3% in the prior-year quarter.
At September 30, 2011, cash and cash equivalents were $75.7 million, total debt was approximately $304.0 million, shareholders’ equity was $1.02 billion and the debt-to-capitalization ratio was 23.0%. Current assets were $343.8 million versus current liabilities of $254.6 million. Management stated that the company was in compliance with all financing covenants.
Material changes versus the prior comparable period
- Consolidated same-store sales declined 3.1%, driven by lower customer visits and a slight decline in average ticket.
- North American salon revenue declined 1.8% to $497.9 million, with same-store sales down 3.0%.
- International salon revenue declined 4.5% to $33.5 million, with same-store sales down 9.4% as the United Kingdom retail environment remained challenging.
- Hair restoration revenue increased 3.2% to $37.4 million, but operating income declined 34.4% to $4.1 million due to lower-margin service mix, higher hair-system costs and a favorable state sales-tax ruling in the prior-year period.
- Site operating expenses increased 7.0% to $52.5 million, reflecting higher advertising and salon internet-connectivity costs.
- General and administrative expense increased 6.2% to $78.7 million, primarily due to senior management restructuring costs and professional fees related to a contested proxy.
- Depreciation and amortization increased 31.0% to $34.1 million. This included $8.7 million of accelerated depreciation, or $5.5 million after tax and $0.10 per diluted share, related to the planned replacement of the internally developed point-of-sale system.
- Interest expense decreased 17.5% to $7.4 million, primarily due to lower debt levels. Total debt declined from $313.4 million at June 30, 2011 to $304.0 million at September 30, 2011.
- Equity in affiliate income increased 50.5% to $4.0 million, primarily because Regis increased its Provalliance ownership by approximately 16.7 percentage points in March 2011.
- Cash flow from operations declined materially because of increased inventory purchases and the absence of significant income-tax refunds received in the prior-year quarter.
Guidance, outlook, commentary and risks
- Management’s fiscal 2012 strategy focuses on customer and stylist retention, stronger brand execution, technology and connectivity, and improved financial performance.
- Management targeted cost savings of approximately $25 million to $35 million, including interest-rate renegotiations and lower travel costs.
- Fiscal 2012 plans called for approximately 285 constructed salons, capital expenditures of approximately $110 million and acquisitions of approximately $25 million. Franchisees were expected to open approximately 100 to 120 salons.
- Management projected fiscal 2012 consolidated same-store sales in a range of negative 1.0% to positive 1.0%, versus a 3.1% decline in the reported quarter.
- The existing point-of-sale system was expected to be fully depreciated, with approximately $9.4 million of remaining net balance, during the quarter ending December 31, 2011 as the new third-party system was implemented.
- Regis acquired a 60% interest in Roosters, comprising 31 franchise locations, on July 1, 2011. The transaction includes put and call options that could require or allow future purchases of additional ownership interests.
- Goodwill impairment remains a material risk. The company recorded a $74.1 million Promenade goodwill impairment during fiscal 2011. Management identified Promenade, Regis and Hair Restoration Centers as reporting units that could become impaired in future periods.
- Regis maintains a $21.1 million fair-value liability for the remaining Provalliance equity put, which can require the company to purchase additional equity through 2018.
- The company has guaranteed approximately 30 operating leases associated with the purchaser of Trade Secret and considers the related exposure reasonably possible. The Trade Secret note receivable was fully reserved for principal, and accrued interest is being recognized on a cash basis.
- Risks include continued negative same-store sales, consumer and economic weakness, labor and benefit costs, competition, minimum-wage and regulatory changes, foreign-currency volatility, litigation, supplier or key relationship disruptions, technology implementation failures, data-security incidents and potential covenant pressure.
Most important facts for investors to verify
- Whether same-store sales recover toward management’s fiscal 2012 target and whether customer visits improve.
- Whether the $25 million to $35 million cost-savings program is implemented and offsets wage, advertising, rent and other fixed-cost pressures.
- The cash-flow effect of planned capital expenditures, acquisitions, inventory requirements and debt maturities, including the $172.5 million convertible notes due in 2014.
- Whether the point-of-sale replacement is completed without operational disruption or additional impairment charges.
- Future goodwill impairment exposure for Promenade, Regis and Hair Restoration Centers.
- Potential cash requirements related to the Provalliance and Roosters equity puts, litigation, lease guarantees and affiliate exposures.
- The sustainability of the dividend, which was $0.06 per share for the quarter and was declared again for payment in November 2011.