RGS

Business Context and Reporting Period

Company: Regis Corporation (RGS)
Filing Type: Form 10-K (Annual Report)
Period Ended: June 30, 2009
Business Overview: Regis Corporation owns, operates, and franchises hair and retail product salons and hair restoration centers. As of June 30, 2009, the Company operated over 12,900 worldwide locations, including 10,026 system-wide salons and 95 hair restoration centers. Operations are segmented into North American Salons, International Salons, and Hair Restoration Centers.

Key Financial Metrics

Material Changes vs. Prior Period

• Discontinued Operations: The Company sold its "Trade Secret" salon concept (655 company-owned and 57 franchise salons) on February 16, 2009. This resulted in a pre-tax impairment charge of $183.3 million and a net loss from discontinued operations of $131.4 million.
• Goodwill Impairment: A $41.7 million non-cash goodwill impairment charge was recorded for the United Kingdom salon division due to performance challenges and stock price declines.
• Investment Impairments: The Company recorded "other-than-temporary" impairment charges of $25.7 million for its investment in Provalliance (European joint venture) and $7.8 million for its investment in Intelligent Nutrients, LLC.
• Revenue Decline: Consolidated revenues decreased 2.1% primarily due to a 3.1% decline in same-store sales driven by reduced customer visitation during the global economic downturn, partially offset by acquisitions and product sales to the Trade Secret purchaser.
• Asset Reduction: Total assets decreased by $343.4 million (15.4%) year-over-year, largely due to non-cash impairments and the divestiture of Trade Secret.

Guidance, Outlook, and Risks

• Same-Store Sales 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: Expected to be approximately $90.0 to $100.0 million in fiscal 2010, including $55.0 to $60.0 million for capital expenditures.
• Salon Development: Outlook for constructed salons in fiscal 2010 is between 125 and 175 units. The Company plans to resume historical trends of building/acquiring 700 to 1,000 salons annually once the economy normalizes.
• Key Risks:
  • Economic Sensitivity: Continued recession could further decrease demand for discretionary services.
  • Goodwill Impairment: The Regis salon concept and Hair Restoration Centers remain at risk for future impairment if stock prices remain below book value or operating results deteriorate.
  • Joint Ventures: Performance of Provalliance is sensitive to European economic conditions and debt levels.

Investor Verification Checklist

• Discontinued Operations Impact: Verify the extent to which the $131.4 million loss from discontinued operations obscures the underlying performance of continuing operations.
• Goodwill Valuation: Review the sensitivity analysis for the Regis and Hair Restoration Centers goodwill balances, as they trade below book value and are sensitive to same-store sales assumptions.
• Debt Covenants: Confirm compliance with financial covenants (Fixed Charge Coverage Ratio, Leverage Ratio) given the recent reduction in net income and equity.
• Subsequent Financing: Note the July 2009 issuance of $172.5 million in convertible senior notes and common stock, which was used to repay $267 million of private placement debt, significantly altering the capital structure post-fiscal year-end.
• UK Operations: Assess the plan to close up to 80 underperforming UK salons in fiscal 2010 and the associated lease termination costs.