Regis Corporation Form 10-Q Summary
Business context and reporting period
Regis Corporation operates a primarily franchise-based salon business under brands including Supercuts, SmartStyle, Cost Cutters, Roosters and First Choice Haircutters. This filing covers the quarter and six months ended December 31, 2023, the second quarter of fiscal 2024. At quarter-end, Regis had 4,709 salons, including 4,651 franchised and 58 company-owned locations, and 397 employees.
The company continues transitioning to a capital-light, third-party product distribution model. Product sales to franchisees are expected to remain immaterial for the remainder of fiscal 2024. Management is also conducting a strategic review of the company’s capital structure and other strategic alternatives, with no stated timetable or assurance of an outcome.
Financial performance and key metrics
| Metric | Three months ended Dec. 31, 2023 | Three months ended Dec. 31, 2022 | Six months ended Dec. 31, 2023 | Six months ended Dec. 31, 2022 |
|---|---|---|---|---|
| Total revenue | $51.1 million | $60.0 million | $104.4 million | $121.8 million |
| Operating income | $4.8 million | $0.7 million | $12.2 million | $3.2 million |
| Operating margin | 9.4% | 1.2% | 11.7% | 2.6% |
| Income from continuing operations | $(1.0) million | $(2.5) million | $0.2 million | $(4.4) million |
| Net income (loss) | $1.0 million | $(2.4) million | $2.2 million | $(0.9) million |
| Net margin | 2.0% | (4.0)% | 2.1% | (0.8)% |
| Diluted EPS | $0.43 | $(1.04) | $0.93 | $(0.41) |
Revenue declines primarily reflected fewer franchise and company-owned salons. Franchise revenue fell 14.1% in the quarter and 13.3% year to date. Franchise same-store sales increased 1.9% in the quarter and 1.8% year to date, but 144 franchise salons closed on a net basis during the six months.
Operating income improved substantially because of lower product-related costs, the absence of the $1.2 million inventory reserve recorded in the prior-year period, lower depreciation and amortization, reduced company-owned salon costs and lower general and administrative expense year to date. These benefits were partly offset by increased interest expense and a $0.2 million long-lived asset impairment charge.
Franchise adjusted EBITDA was $6.4 million in the quarter versus $7.5 million previously, and $14.3 million year to date versus $12.5 million. Company-owned salon adjusted EBITDA was $(0.3) million in the quarter and $(0.8) million year to date.
Cash flow, debt and liquidity
- Operating cash flow was $(6.9) million for the six months ended December 31, 2023, broadly consistent with $(6.9) million in the prior-year period.
- Investing cash flow was $(0.3) million, primarily for salon capital improvements, compared with $3.6 million of inflow in the prior year that included proceeds from the OSP sale.
- Financing cash flow was $2.3 million, primarily reflecting net revolver borrowings of approximately $3.5 million, compared with $(1.6) million in the prior year.
- Cash and cash equivalents were $7.2 million at December 31, 2023, while cash, cash equivalents and restricted cash totaled $16.6 million, down from $21.4 million at June 30, 2023.
- Debt consisted of a $171.8 million term loan, $14.0 million drawn on the revolving facility and $3.0 million of paid-in-kind interest, resulting in $181.7 million of net long-term debt after deferred financing fees.
- The credit facility matures in August 2025 and carries a $10.0 million minimum liquidity covenant. Total liquidity was $38.1 million, including $31.0 million of available revolving credit, and the company reported compliance with its covenants at quarter-end.
- Interest expense increased to $6.2 million in the quarter and $12.4 million year to date, primarily because of higher borrowing rates. The applicable interest margin is scheduled to increase again on March 27, 2024.
- Future operating lease payments totaled $388.7 million before interest, substantially offset by $377.5 million of expected franchisee sublease income; reported lease liabilities totaled $343.4 million.
Material changes versus the prior comparable period
- Total revenue decreased $8.9 million, or 14.9%, in the quarter and $17.4 million, or 14.3%, year to date.
- Franchise salon count declined to 4,651 from 5,196 in the prior-year comparison presented in the segment discussion; total locations declined to 4,709 from 4,863 at June 30, 2023.
- Company-owned salons declined to 58 from 75 in the prior-year comparison, reducing company-owned revenue but improving certain operating costs.
- Depreciation and amortization decreased $3.1 million in the quarter and $4.0 million year to date, partly because the prior-year period included a $2.6 million accelerated depreciation charge related to corporate office consolidation.
- Interest expense increased $1.7 million in the quarter and $4.1 million year to date due to higher effective borrowing rates.
- The company recognized $2.0 million of income from discontinued operations related to previously withheld proceeds from the 2022 sale of Opensalon Pro; the proceeds were received in January 2024. Excluding this item, continuing operations remained slightly unprofitable for the quarter.
- A quantitative goodwill impairment test was triggered by the decline in the company’s stock price. No impairment was recorded because the Franchise reporting unit’s estimated fair value exceeded carrying value by only 6%, leaving sensitivity to changes in valuation assumptions.
- Regis effected a one-for-20 reverse stock split on November 29, 2023. Historical share and per-share information was adjusted retrospectively.
Guidance, outlook, commentary and risks
Management did not provide formal earnings or revenue guidance in the filing. It expects product sales to franchisees and related costs to remain immaterial for the balance of fiscal 2024. Management believes available liquidity, cash and borrowing capacity are sufficient for obligations through the August 2025 credit facility maturity, but notes that excess cash is being used to service debt and that additional revolver borrowings may be required to cover interest costs.
- The strategic review may result in strategic alternatives, capital structure changes or other initiatives, but there is no assurance that any transaction or outcome will occur. The process may also generate costs without a completed transaction.
- Franchise closures reduce future royalty and rental income, and the business remains dependent on franchisee performance, consumer spending, salon traffic, stylist retention and relationships with key partners including Walmart.
- The company faces substantial interest-rate, debt-service, covenant and refinancing risk. Failure to maintain covenants or liquidity could restrict access to the revolver or accelerate repayment obligations.
- Goodwill of $173.8 million remains exposed to potential future impairment if revenue growth, market conditions, discount rates or other valuation assumptions deteriorate.
- Regis owns a majority interest in Empire Education Group. EEG had $10.1 million of Title IV liabilities at December 31, 2023, and the company could potentially be responsible for some or all of those liabilities. New gainful-employment rules become effective July 1, 2024.
- Various franchise, rent, consumer and wage-and-hour claims are pending; potential outcomes cannot presently be determined.
- Following a January 2024 move from the NYSE to Nasdaq, continued listing compliance remains a risk.
- The board adopted a Tax Benefits Preservation Plan intended to protect approximately $646 million of U.S. federal net operating losses and other tax attributes. The plan generally deters acquisitions of 4.95% or more without board approval and may discourage certain takeover activity.
Important facts for investors to verify
- Whether franchise closures continue and whether positive same-store sales can offset the shrinking salon base.
- The company’s ability to generate positive operating cash flow while funding interest payments and meeting the $10.0 million minimum liquidity covenant.
- Refinancing or strategic-review outcomes before the August 2025 credit facility maturity.
- Changes in borrowing rates, paid-in-kind interest and total debt balances.
- The sensitivity of the $173.8 million goodwill balance, given only 6% excess fair value at the latest test.
- EEG’s compliance with gainful-employment requirements and any potential liability to the Department of Education.
- Whether the $2.0 million OSP proceeds are non-recurring and should be excluded from ongoing earnings analysis.
- Future Nasdaq listing compliance and the effect of the Tax Benefits Preservation Plan on ownership or strategic transactions.