Regis Corporation Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2013; filed August 27, 2013. Although the request references 2012 Q4, the source is an annual Form 10-K covering fiscal 2013, with comparative fiscal 2012 and 2011 data.
Business context
Regis owns, operates and franchises beauty salons in North America and the United Kingdom. At June 30, 2013, the company had 9,763 system-wide locations, including 7,435 company-owned salons, 2,082 franchised salons and 246 locations associated with non-controlling ownership interests. Core brands included SmartStyle, Supercuts, MasterCuts, Regis and Promenade.
Management continued a strategic effort to simplify the portfolio, focus on company-owned and franchised salon operations, improve margins and monetize non-core assets. Regis sold its 46.7% interest in Provalliance for $103.4 million in September 2012 and sold Hair Club for approximately $165 million in April 2013.
Financial performance and key metrics
| Metric | Fiscal 2013 | Fiscal 2012 | Change |
|---|---|---|---|
| Revenue | $2.019 billion | $2.122 billion | Down 4.9% |
| Operating income (loss) | $12.3 million | $(2.2) million | Improved by $14.5 million |
| Income (loss) from continuing operations | $4.2 million | $(51.7) million | Improved by $55.9 million |
| Net income (loss) | $29.2 million | $(114.1) million | Improved by $143.3 million |
| Diluted EPS | $0.51 | $(2.00) | Improved by $2.51 |
| Cash flow from operations | $69.1 million | $153.7 million | Down $84.6 million |
| Capital expenditures | $105.9 million | $85.8 million | Up $20.1 million |
Calculated margins were approximately 0.6% for operating income and 1.4% for net income in fiscal 2013, compared with approximately negative 0.1% and negative 5.4%, respectively, in fiscal 2012. Continuing-operations diluted EPS was $0.07 versus $(0.91).
- Service revenue was $1.564 billion, down $80.0 million, and product revenue was $415.7 million, down $24.3 million. Royalties and fees increased $0.8 million to $39.1 million.
- Consolidated same-store sales declined 2.4%, reflecting a 3.0% decline in guest visits partially offset by a 0.6% increase in average ticket.
- Cost of service increased to 59.5% of service revenue from 57.3%, primarily because of higher stylist hours, compensation during coupon promotions and higher health insurance costs.
- Cost of product increased to 55.0% of product revenue from 50.4%, including a $12.6 million noncash inventory reserve related to retail assortment simplification and liquidation.
- General and administrative expense declined $22.9 million to $226.7 million, reflecting corporate reorganization and cost savings.
- No goodwill impairment was recorded in fiscal 2013, compared with a $67.7 million Regis impairment in fiscal 2012. Fixed-asset impairment charges were $8.2 million versus $6.6 million.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $200.5 million at June 30, 2013, compared with $111.9 million a year earlier. The company also reported a $33.3 million income tax receivable.
- Regis had no borrowings under its $400 million unsecured revolving credit facility, which expires in June 2018. After $2.2 million of standby letters of credit, unused availability was $397.8 million.
- Total debt and capital lease obligations were $174.8 million, down from $287.7 million. The reduction primarily reflected repayment of $89.3 million of senior term notes.
- The remaining principal balance of the 5.0% convertible senior notes was $172.5 million, with a $166.5 million net carrying amount. The notes mature in July 2014 and were classified as current debt because holders may convert beginning April 15, 2014.
- Debt-to-capitalization declined to 16.9% from 24.4%. Management stated that the company was in compliance with all debt covenants at June 30, 2013.
- Operating cash flow declined substantially, while investing activities provided $165.1 million, primarily from asset sales and affiliate-related proceeds. Financing activities used $146.8 million, including debt repayments, dividends and $14.9 million of share repurchases.
- The company paid quarterly dividends of $0.06 per share, or $0.24 for the fiscal year, and had $58.7 million remaining under its authorized repurchase program.
Material changes versus the prior period
- Revenue declined because of negative same-store sales, 492 salon closures and the absence of comparable acquisitions. Company-owned salons decreased to 7,435 from 7,722.
- Franchised salons increased to 2,082 from 2,016, supporting a modest increase in royalty and fee revenue.
- Operating results improved primarily because fiscal 2012 included a $67.7 million goodwill impairment charge and higher restructuring and affiliate impairment costs. Fiscal 2013, however, included significant restructuring, inventory and debt-prepayment charges.
- Fiscal 2013 included a $33.8 million foreign-currency translation gain associated with the Provalliance sale, a $17.9 million impairment of the Empire Education Group investment, $7.4 million of restructuring charges and a $10.6 million debt make-whole payment.
- Hair Club was reported as discontinued operations. Fiscal 2013 included $25.0 million of income from discontinued operations, including an after-tax gain of approximately $17.8 million on the sale.
- The company implemented new point-of-sale systems and salon workstations in more than 95% of North American salons, reorganized its field organization and reduced its retail product assortment.
Outlook, risks and unusual items
No formal revenue or earnings guidance is provided in the filing. For early fiscal 2014, same-store service sales were down 3.4% and product sales were down 14.9% as of August 25, 2013. Management reported improvement in August service sales, but stated that product trends had not yet improved following salon resets. Management expected performance to improve as field teams completed the reorganization and the company optimized its POS systems.
- The Regis salon concept had only an approximately 9% cushion between estimated fair value and carrying value at the annual goodwill test. Management stated that additional impairment was reasonably likely if operating performance deteriorated.
- Further negative same-store sales could reduce profitability, require additional asset impairments and place pressure on financing covenants.
- Additional impairment charges related to the Empire Education Group investment remain possible; the estimated fair value exceeded carrying value by approximately 5% at year-end.
- Key operating risks include stylist recruitment and retention, competition, consumer spending, labor and healthcare costs, regulatory changes, information-system disruptions, data security, foreign exchange and dependence on relationships such as Walmart.
- The company had approximately $956.9 million of operating lease obligations, including franchisee-related leases, and total contractual obligations of approximately $1.162 billion.
- Regis faces ordinary-course litigation, including wage-and-hour and consumer claims and a stayed shareholder derivative action. The company stated that outcomes cannot presently be determined and could materially affect results in a particular period.
- Management and PricewaterhouseCoopers concluded that internal control over financial reporting and disclosure controls were effective as of June 30, 2013.
Investor verification checklist
- Verify the maturity, conversion terms and potential cash or equity settlement of the $172.5 million convertible notes due July 2014.
- Assess whether same-store sales, guest visits and product sales improved after the fiscal 2013 field reorganization, POS rollout and retail assortment reset.
- Review the sensitivity of Regis goodwill and the Empire Education Group investment to further operating deterioration or valuation changes.
- Separate recurring operating performance from the Provalliance foreign-currency gain, Hair Club sale gain, inventory reserve, affiliate impairment and debt make-whole payment.
- Evaluate the decline in operating cash flow relative to capital expenditures, dividends, share repurchases and near-term debt obligations.
- Review the scale and renewal profile of operating leases, self-insurance liabilities, pending litigation and uncertain tax positions.