Regis Corporation: Fiscal 2011 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
Regis Corporation operates beauty salons, hair restoration centers and related investments. As of September 30, 2010, it owned, franchised or held interests in approximately 12,750 worldwide locations, including 9,527 North American salons, 401 international salons, 95 hair restoration centers and approximately 2,735 locations held through investments. The filing covers the three months ended September 30, 2010, compared with the three months ended September 30, 2009. The interim financial statements are unaudited and were reviewed, but not audited, by PricewaterhouseCoopers LLP.
Financial Performance and Position
| Metric | Q1 FY2011 | Q1 FY2010 | Change |
|---|---|---|---|
| Revenue | $578.2 million | $605.6 million | Down 4.5% |
| Operating income | $33.4 million | $28.3 million | Up 18.3% |
| Operating margin | 5.8% | 4.7% | Up 110 basis points |
| Income from continuing operations | $18.3 million | $4.6 million | Up $13.7 million |
| Net income | $18.3 million | $7.8 million | Up 135.8% |
| Diluted EPS | $0.30 | $0.14 | Up $0.16 |
| Net cash from operating activities | $64.2 million | $38.5 million | Up $25.7 million |
- Service revenue declined 2.2% to $439.5 million, while product revenue declined 12.0% to $128.6 million. Royalties and fees were essentially unchanged at $10.1 million.
- Consolidated same-store sales declined 1.5%, primarily from fewer customer visits, partly offset by higher average ticket prices. Service same-store sales declined 2.4%; product same-store sales increased 1.7%.
- Gross margin on service and product revenue improved to 45.3% from 43.7%, supported by service payroll control, lower supply costs and the absence of low-margin product sales to the former Trade Secret business.
- General and administrative expense increased 2.1% to $74.1 million, while rent declined 0.8% to $85.1 million. No lease termination costs were recorded in the current quarter versus $3.6 million in the prior-year quarter.
- Cash and cash equivalents were $194.8 million at September 30, 2010, up from $151.9 million at June 30, 2010. Total current assets were $450.8 million versus current liabilities of $270.4 million.
- Total debt was $439.7 million, including $381.2 million of long-term debt and capital lease obligations and $58.4 million due within one year. Debt represented 29.6% of capitalization, compared with 30.3% at June 30, 2010.
- Shareholders’ equity increased to $1.05 billion from $1.01 billion, primarily due to net income and foreign-currency translation.
- Capital expenditures were $16.0 million and salon acquisitions were $3.9 million. The company paid $2.3 million in dividends, or $0.04 per share.
Material Changes Versus the Prior Comparable Period
- Revenue fell principally because the prior-year quarter included approximately $20.0 million of product revenue from the transitional supply agreement with the purchaser of Trade Secret; that agreement was substantially complete by September 30, 2009.
- Profitability improved substantially because the prior-year quarter included $18.0 million of make-whole payments, debt-related fees and interest-rate swap settlement costs. The current quarter also benefited from the absence of $3.6 million of lease termination costs and $3.6 million of legal-claim expense recorded in the prior-year period.
- Interest expense declined to $8.9 million from $27.3 million. The prior-year amount included the $18.0 million debt refinancing and swap-settlement costs.
- North American salon revenue declined 4.7% to $506.9 million, but operating income increased slightly to $62.8 million. International salon revenue declined 9.6% to $35.1 million, while operating income improved to $2.2 million from a $1.1 million loss. Hair restoration revenue increased 3.7% to $36.3 million and operating income increased 11.1% to $6.2 million.
- Operating cash flow increased largely because the company received income-tax refunds, including a $28.4 million favorable change in income tax receivables.
Guidance, Outlook, Commentary and Risks
- Management targets long-term annual revenue growth of 6% to 10%, with organic and acquisition growth expected to contribute roughly equally once economic conditions normalize.
- For fiscal 2011, management expected approximately 160 constructed salons, $95 million of capital expenditures and $25 million of acquisitions. Consolidated same-store sales were projected in a range of negative 1.0% to positive 2.0%.
- Management stated that cash generated from operations and available debt facilities should fund anticipated capital expenditures, acquisitions and required debt repayments. The company reported compliance with its financing covenants at September 30, 2010.
- In August 2010, the company retained financial and legal advisers to explore strategic alternatives, potentially including a sale of the company. No transaction was assured, and the process could disrupt operations, increase expenses or affect acquisitions and employee retention.
- The purchaser of Trade Secret filed for Chapter 11 bankruptcy on July 6, 2010. Regis held a $31.6 million net receivable, which management believed was fully collateralized, but acknowledged that declining collateral could require additional reserves.
- Goodwill totaled $741.0 million. The filing highlights potential future impairment risk for the Regis and Promenade concepts; Promenade’s estimated fair value exceeded carrying value by approximately 10%. A $35.3 million Regis goodwill impairment charge had been recorded in the third quarter of fiscal 2010, not in the current quarter.
- The company remains exposed to consumer discretionary spending, same-store sales weakness, competition, labor and benefit costs, fashion trends, foreign exchange, interest rates, franchise and landlord relationships, legal claims, tax audits and the performance of affiliates and joint ventures.
- Regis had $172.5 million of 5.0% convertible senior notes due 2014. Conversion, potential cash settlement and refinancing requirements could affect liquidity, leverage and shareholder dilution.
- Legal proceedings include wage-and-hour and other claims. A $4.3 million liability remained at September 30, 2010 related to two settlements recorded during fiscal 2010.
Most Important Facts for Investors to Verify
- Whether same-store sales stabilize within management’s fiscal 2011 outlook and whether customer visitation improves.
- The sustainability of the reported margin improvement after excluding prior-year debt refinancing, legal, lease and Trade Secret transition effects.
- The collectability and collateral value of the $31.6 million Trade Secret-related receivable following the purchaser’s bankruptcy.
- Potential additional goodwill or long-lived-asset impairments, particularly for the Regis and Promenade concepts.
- Developments in the strategic-alternatives review and any associated costs, transaction terms or effects on operations.
- Compliance with debt covenants, scheduled debt maturities and the potential dilution or cash-liquidity impact of the convertible notes.
- Future legal settlements, tax-audit outcomes and changes in the company’s affiliate and joint-venture exposures.