Regis Corporation — Form 10-Q Summary
Business Context and Reporting Period
Regis Corporation owns and franchises mass-market beauty salons. This filing covers the three and six months ended December 31, 2017, compared with the corresponding periods in 2016. As of December 31, 2017, the company had 8,883 worldwide locations, including 4,865 company-owned salons and 3,929 franchise salons.
In October 2017, Regis sold substantially all of its North American mall-based salons and International segment to The Beautiful Group, which will operate the locations as franchises. These businesses are presented as discontinued operations for all periods shown. Regis now reports two operating segments: Company-owned salons and Franchise salons.
Financial Metrics
| Metric | Three Months Ended Dec. 31, 2017 | Three Months Ended Dec. 31, 2016 | Six Months Ended Dec. 31, 2017 | Six Months Ended Dec. 31, 2016 |
|---|---|---|---|---|
| Revenue | $308.5 million | $315.2 million | $618.4 million | $634.1 million |
| Operating income (loss) | $(37.3) million | $2.4 million | $(20.6) million | $12.7 million |
| Operating margin | (12.1%) | 0.8% | (3.3%) | 2.0% |
| Income from continuing operations | $39.3 million | $1.0 million | $50.1 million | $6.7 million |
| Net income (loss) | $32.7 million | $(2.2) million | $9.7 million | $1.1 million |
| Diluted EPS | $0.69 | $(0.05) | $0.21 | $0.02 |
| Cash flow from operating activities | Not separately provided | Not separately provided | $(12.3) million | $27.6 million |
Revenue declined 2.1% in the quarter and 2.5% year to date. Same-store sales declined 0.7% and 0.2%, respectively. Same-store guest visits fell 3.2% in both periods, partly offset by higher average ticket prices.
Cash and cash equivalents were $163.3 million at December 31, 2017, compared with $171.0 million at June 30, 2017. Capital expenditures totaled $14.9 million for the six months, including $1.2 million related to discontinued operations.
Debt consisted primarily of $123.0 million principal amount of 5.5% senior notes, reported at $121.1 million net of discount and issuance costs. The $200.0 million unsecured revolving credit facility had no borrowings and $198.5 million of unused availability, net of letters of credit. The company reported compliance with its debt covenants. Debt to capitalization was 18.9% at December 31, 2017.
Material Changes Versus the Prior Comparable Period
- Operating results deteriorated substantially: quarterly operating income of $2.4 million became an operating loss of $37.3 million; six-month operating income of $12.7 million became a loss of $20.6 million.
- Company-owned salon revenue decreased $16.2 million in the quarter and $26.9 million year to date, primarily from salon closures, sales to franchisees and modestly negative same-store sales.
- Franchise revenue increased $9.5 million in the quarter and $11.2 million year to date, driven by product sales to The Beautiful Group and growth in franchised locations. Franchise operating income increased to $9.7 million for the quarter and $19.4 million year to date.
- Rent expense increased $20.4 million in the quarter and $16.6 million year to date, while depreciation and amortization increased $12.3 million and $12.5 million, respectively. These increases primarily reflected the SmartStyle restructuring and related lease and asset costs.
- Operating cash flow declined by $39.9 million year over year to a use of $12.3 million, primarily because of SmartStyle restructuring payments.
- The company-owned salon count fell to 4,865 from 6,273 at June 30, 2017, while franchise salons increased to 3,929 from 2,646, reflecting the mall-based and International transaction and continued refranchising.
Guidance, Outlook, Risks and Unusual Items
- Regis committed to close 597 non-performing company-owned SmartStyle salons in January 2018. The salons generated approximately $15 million of negative cash flow during the twelve months ended September 30, 2017.
- The SmartStyle restructuring generated $37.5 million of recorded costs, including $27.3 million of lease termination and closure costs, $7.5 million of asset retirement obligations, $5.4 million of fixed-asset impairment and $0.6 million of inventory reserves, partly offset by $3.3 million of deferred rent. Regis expected an additional $1.0 million of severance expense in the third quarter of fiscal 2018.
- The Tax Cuts and Jobs Act produced a provisional $68.9 million tax benefit in continuing operations, primarily from the lower federal corporate tax rate and partial release of a valuation allowance. The company stated that the estimate remained subject to refinement and could materially affect future effective tax rates.
- Discontinued operations produced losses of $6.6 million in the quarter and $40.4 million year to date. The six-month loss included $29.1 million of asset impairments, $6.2 million of foreign-currency translation losses, $5.8 million of transaction-related professional fees and $2.8 million of operating losses.
- Hurricanes Harvey, Irma and Maria reduced estimated six-month revenue by $2.6 million and expenses by $0.8 million.
- Key risks include execution of the new strategy and refranchising program, dependence on The Beautiful Group as the largest franchisee, potential lease obligations if that franchisee fails to perform, labor and minimum-wage pressures, stylist retention, consumer traffic trends, Walmart-related traffic, litigation, tax uncertainty, information technology and cybersecurity risks, and compliance with debt covenants.
- The filing provides no specific consolidated revenue or earnings guidance.
Most Important Facts to Verify
- Whether the SmartStyle closures produce the expected cash-flow improvement and whether additional restructuring charges arise.
- The financial performance, liquidity and lease compliance of The Beautiful Group, including Regis’s continuing lease exposure.
- The final accounting for the Tax Cuts and Jobs Act benefit and resulting valuation allowance, deferred tax balances and effective tax rate.
- Whether negative guest-visit trends improve and offset the effects of salon closures and refranchising.
- Refinancing or repayment plans for the senior notes and the revolving credit facility as their stated maturities approach.
- Potential exposure from wage-and-hour, consumer and other litigation, for which outcomes cannot presently be determined.