Regis Corporation — Form 10-Q Summary
Reporting period: Three months ended September 30, 2020, compared with the three months ended September 30, 2019. The filing is unaudited. Regis franchises, owns and operates beauty salons and had 6,614 system-wide locations at quarter-end, including 5,226 franchise salons and 1,308 company-owned salons.
Financial performance and position
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Total revenue | $111.4 million | $247.0 million | Down 54.9% |
| Operating loss | $(31.6) million | $(9.9) million | Declined $21.7 million |
| Loss from continuing operations | $(35.3) million | $(14.2) million | Worsened $21.1 million |
| Net loss | $(35.3) million | $(13.8) million | Worsened $21.5 million |
| Basic and diluted loss per share | $(0.98) | $(0.38) | Worsened $0.60 |
| Cash used in operating activities | $(28.9) million | $(13.5) million | Use increased $15.4 million |
| Capital expenditures | $3.8 million | $4.9 million | Down $1.1 million |
Revenue included $36.4 million of service revenue, $24.7 million of product revenue, $18.0 million of royalties and fees, and $32.3 million of franchise rental income. The operating margin was approximately negative 28.4%, compared with negative 4.0% in the prior-year quarter.
At September 30, 2020, cash and cash equivalents were $85.0 million, or $93.5 million including restricted cash. The company had $177.5 million outstanding under its $295.0 million revolving credit facility, $18.7 million of standby letters of credit, and $98.8 million of unused borrowing capacity. Reported liquidity, consisting of unrestricted cash and unused revolver capacity, was $183.8 million. The facility matures in 2023 and has a $75 million minimum liquidity covenant; the company stated that it was in compliance with its covenants.
Total assets were $1.25 billion and shareholders’ equity was $89.5 million at quarter-end, compared with $125.7 million at June 30, 2020. Debt to capitalization increased to 69.6% from 62.0%, primarily because of the quarterly loss. Lease liabilities totaled $759.0 million, including $129.6 million current and $629.3 million long-term.
Material changes versus the prior comparable period
- COVID-19 materially reduced salon traffic and revenue. All California salons were closed for most of the quarter; approximately 95% of system-wide salons were open at September 30.
- System-wide same-store sales declined 32.6%, including declines of 31.9% for franchise salons and 34.8% for company-owned salons. Company-owned same-store guest transactions fell 48.2%, partly offset by a 13.4% increase in average ticket prices.
- Company-owned salon revenue fell $127.1 million to $47.4 million, and the segment shifted from $5.4 million of operating income to a $20.7 million operating loss. Franchise salon revenue declined $8.5 million to $64.0 million, while franchise operating income declined to $6.3 million from $10.2 million.
- Service revenue declined 74.3%, primarily due to salon sales and closures and lower COVID-19-related guest visits. During the quarter, Regis sold 137 company-owned salons to franchisees, compared with 545 in the prior-year quarter.
- The company recorded $5.8 million of long-lived asset impairment, including $4.6 million for right-of-use assets and $1.2 million for salon property and equipment. No comparable right-of-use impairment was recorded in the prior-year quarter.
- Rent expense declined to $13.2 million from $24.3 million, but included $5.6 million of lease termination expense, partly offset by $6.1 million of lease liability benefits. The company terminated leases for 131 company-owned salons.
- Interest expense increased to $3.8 million from $1.4 million because of additional borrowings and a higher interest rate.
- General and administrative expense declined 35.6%, aided by lower staffing costs, cancellation of the annual franchise convention, and a $2.4 million reversal of stock compensation following the former CEO’s departure.
- No shares were repurchased during the quarter. Approximately $54.6 million remained available under the repurchase authorization.
Cash flow, liquidity and unusual items
Operating cash use increased because of lower revenue, margins and same-store sales. Management partially mitigated cash pressure by delaying $6.5 million of first-quarter rent and $4.8 million of fiscal 2020 bonus payments until December 2020, along with reducing administrative costs. Investing cash use was $0.2 million, including $3.7 million of proceeds from salon asset sales. Financing cash use was $0.4 million, versus $30.3 million in the prior-year quarter, when the company repurchased shares.
The company’s transition toward an asset-light, predominantly franchised model continued. Over the twelve months ended September 30, 2020, 1,056 salons were sold to franchisees, while 729 system-wide salons were closed. The filing states that salon sales and closures reduced current-quarter consolidated revenue by approximately $98.7 million.
The company recorded a $0.7 million loss on salon asset sales, compared with a $5.9 million loss in the prior-year period. The prior-year amount included $32.1 million of non-cash goodwill derecognition. No goodwill impairment analysis was required during the quarter, but management noted that future adverse events could result in a material non-cash goodwill charge.
Outlook, management commentary and risks
- Management did not provide quantitative revenue, earnings or same-store-sales guidance in the filing.
- Management is evaluating the future of salons that remained closed, including potential additional closures. The duration and severity of COVID-19 and its effect on guest visits, employees, suppliers and franchisees remain uncertain.
- Future results depend on reopening and traffic recovery, successful execution of the asset-light franchise strategy, salon sales to franchisees, cost reductions, rent concessions and continued access to the revolving credit facility.
- As of September 30, 2020, Regis remained liable for up to approximately $18 million of lease commitments related to 104 mall-based salons transferred from The Beautiful Group, before mitigation efforts.
- A California wage-and-hour class action was preliminarily settled for $2.1 million pending court and class approval; the amount was accrued. A separate California action is expected to be subsumed if the settlement proceeds.
- A point-of-sale technology supplier dispute involves ownership and development of certain technology systems. The company has asserted counterclaims, but the outcome and potential loss are not currently estimable.
- Effective October 5, 2020, a new CEO began employment. Management identified leadership transition, technology implementation, vendor disputes, franchisee performance, labor costs, Walmart relationships, cybersecurity and covenant compliance as additional risks.
Investor verification points
- Verify the pace of salon reopenings, permanent closures and sales to franchisees, together with the resulting effect on consolidated revenue and cash flow.
- Monitor system-wide same-store sales, guest traffic, average ticket trends and franchisee financial health as COVID-19 effects continue.
- Reconcile unrestricted cash, restricted cash, revolver availability and the $75 million minimum liquidity covenant.
- Assess future impairment risk for right-of-use assets, salon assets and goodwill using updated operating and lease assumptions.
- Track lease obligations, rent concessions, TBG-related commitments and the outcome of pending litigation.
- Review the impact of the CEO transition and the company’s progress toward its asset-light franchise strategy.