Business Context and Reporting Period
Company: Regis Corporation (Regis Corp)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three and six months ended December 31, 2009
Business Overview: Regis Corporation owns, franchises, or holds ownership interests in approximately 12,800 worldwide locations, including beauty salons (Regis, Supercuts, SmartStyle, etc.), hair restoration centers (Hair Club for Men and Women), and educational institutions. The company operates three reportable segments: North American Salons, International Salons, and Hair Restoration Centers.
Key Financial Metrics
| Metric | Three Months Ended Dec 31, 2009 | Six Months Ended Dec 31, 2009 |
|---|---|---|
| Total Revenues | $575.4 million | $1,180.9 million |
| Net Income (Continuing Ops) | $18.2 million | $22.8 million |
| Net Income (Total) | $18.2 million | $25.9 million |
| Diluted EPS (Total) | $0.30 | $0.45 |
| Operating Cash Flow (6mo) | $77.3 million | |
| Cash and Equivalents (Dec 31, 2009) | $114.5 million | |
| Total Debt (Dec 31, 2009) | $470.3 million | |
| Debt to Capitalization Ratio | 31.7% |
Material Changes vs. Prior Period
- Revenue Decline: Consolidated revenues decreased 2.1% for the quarter and 1.7% for the six-month period compared to the prior year. This was driven by a 3.7% decline in consolidated same-store sales due to the global economic downturn and lengthening customer visitation patterns.
- Profitability Improvement: The company returned to profitability from continuing operations ($18.2M net income for the quarter) compared to a net loss of $143.3 million in the prior year quarter. The prior year loss was significantly impacted by a $41.7 million goodwill impairment charge in the UK and a $117.5 million loss from discontinued operations (Trade Secret).
- Discontinued Operations: The Trade Secret salon concept was sold in February 2009. Results for this segment are reported as discontinued operations. The six-month 2009 period included a $3.0 million tax benefit related to the disposition.
- Debt Restructuring: In July 2009, the company issued $172.5 million in convertible senior notes and $163.5 million in common stock. Proceeds were used to repay approximately $297 million of existing debt, significantly reducing interest expense and improving the debt-to-capitalization ratio from 44.1% to 31.7%.
- Goodwill Impairment: No goodwill impairment was recorded in the current period. The company performed an interim test on the Regis salon concept due to negative same-store sales (-10.0%), but fair value remained 14% above carrying value.
Guidance, Outlook, and Risks
- Outlook: Management projects fiscal year 2010 consolidated same-store sales to be in the range of negative 3.0% to positive 1.0%. Capital expenditures and acquisitions are expected to be $90.0 to $100.0 million for fiscal 2010.
- Goodwill Risk: The company notes that the Regis salon concept and Hair Restoration Centers are "reasonably likely" to become impaired in future periods if economic conditions do not improve or if stock prices remain below book value. A 1.0% increase in the discount rate or a 1.0% decrease in same-store sales could materially impact fair value.
- Investment Risks: The company holds significant equity investments in Provalliance (European salons) and Empire Education Group. Provalliance recorded a $25.7 million impairment in the prior fiscal year due to economic conditions in Europe.
- Litigation: The company settled two legal claims regarding customer and employee matters for $3.6 million in the first quarter of fiscal 2010. Ongoing wage and hour litigation remains a risk.
- Convertible Notes: The issuance of $172.5 million in convertible notes introduces dilution risk and requires amortization of debt discount, increasing reported interest expense.
Investor Verification Checklist
- Same-Store Sales Trends: Verify if the projected negative 3.0% to positive 1.0% same-store sales growth for fiscal 2010 is being met, as this is a primary driver of goodwill impairment risk.
- Goodwill Valuation Assumptions: Review the sensitivity of the Regis salon concept's fair value to changes in discount rates and revenue growth assumptions.
- Debt Covenants: Confirm continued compliance with the amended credit agreement covenants, specifically the minimum net worth of $800 million and fixed charge coverage ratio of 1.3x.
- International Exposure: Monitor the performance of the Provalliance joint venture and the impact of foreign currency fluctuations (British Pound, Euro) on international segment results.
- Legal Reserves: Track the status of remaining wage and hour litigation and potential future settlements.