Business Context and Reporting Period
Regis Corporation owns, operates and franchises beauty salons under brands including SmartStyle, Supercuts and Signature Style. This Form 10-K covers the fiscal year ended June 30, 2018, rather than “2017 Q4.” Results for the mall-based salon business and substantially all of the former International segment were classified as discontinued operations following their October 2017 sale to The Beautiful Group (TBG).
- 8,168 system-wide locations at June 30, 2018: 3,966 company-owned, 4,114 franchised and 88 locations with non-controlling ownership interests.
- Approximately 27,000 employees worldwide.
- The Company is shifting toward a larger franchise footprint and improving the performance of remaining company-owned salons.
Financial Performance and Liquidity
| Metric | Fiscal 2018 | Fiscal 2017 | Change |
|---|---|---|---|
| Revenue | $1,214.1 million | $1,268.5 million | (4.3%) |
| Operating income | $0.3 million | $14.1 million | Down $13.8 million |
| Income from continuing operations | $61.9 million | $(0.9) million | Improved $62.8 million |
| Net income | $8.7 million | $(16.1) million | Improved $24.8 million |
| Diluted EPS | $0.18 | $(0.35) | Improved $0.53 |
| Cash flow from operations | $2.3 million | $60.1 million | Down $57.7 million |
- Revenue mix: service revenue of $899.1 million, product revenue of $258.7 million and royalties and fees of $56.4 million.
- Company-owned salon revenue fell to $1,104.0 million from $1,189.5 million; company-owned operating income fell to $50.1 million from $78.3 million.
- Franchise revenue increased to $110.1 million from $78.9 million, and franchise operating income increased to $41.4 million from $34.5 million.
- Consolidated operating margin was approximately 0.02%, compared with 1.11% in fiscal 2017. Net margin was approximately 0.72%.
- Same-store sales increased 0.5%, reflecting a 3.4% increase in average ticket offset by a 2.9% decline in guest visits.
- The $61.9 million income from continuing operations was substantially affected by a $68.1 million provisional tax benefit from the Tax Cuts and Jobs Act. The Company reported a $53.2 million loss from discontinued operations, including $43.0 million of asset impairment charges.
- Cash and cash equivalents were $110.4 million at year-end, compared with $171.0 million at June 30, 2017.
- Capital expenditures were $30.7 million, including $29.6 million related to continuing operations.
- Debt was $90.0 million, consisting of borrowings under a new revolving credit facility. The Company had $203.5 million of available capacity, including the effect of outstanding letters of credit.
- The Company redeemed $123.0 million of 5.5% senior term notes for $124.2 million, including a $1.2 million premium, using $90.0 million of revolver borrowings and cash.
- Debt-to-capitalization declined to 15.2% from 19.5%. Operating lease obligations totaled $688.5 million, including approximately $316.4 million related to franchisee leases that are generally reimbursed by franchisees.
Material Changes Versus the Prior Comparable Period
- In October 2017, Regis sold substantially all of its North American mall-based business, representing 858 salons, and approximately 250 former International salons in the United Kingdom to TBG. These operations are presented as discontinued operations.
- In January 2018, Regis closed 597 non-performing company-owned SmartStyle salons. The salons had generated approximately $15 million of negative cash flow during the twelve months ended September 30, 2017.
- The SmartStyle restructuring generated approximately $41.2 million of expenses, including $27.3 million of lease termination and closure costs, $13.1 million of asset retirement and impairment costs, inventory reserves and severance.
- Regis sold 1,581 company-owned salons to franchisees during fiscal 2018, including 1,132 salons associated with the mall-based and International businesses. Excluding the TBG transactions, 448 company-owned salons were sold to franchisees.
- Franchised locations increased by 1,468 year over year, to 4,114, and represented 50.9% of company-owned and franchised salons versus 29.7% in fiscal 2017.
- Operating cash generation deteriorated sharply because of SmartStyle closure payments and lower cash generated by salon operations.
- The Company repurchased 1.5 million shares for $24.8 million during fiscal 2018. In August 2018, the Board authorized an additional $200.0 million for repurchases.
Outlook, Management Commentary, Risks and Unusual Items
Management is pursuing a multi-year transformation centered on accelerating franchising, simplifying operations, improving stylist productivity, using variable labor management, increasing digital marketing and enhancing the guest experience. The filing does not provide formal fiscal 2019 revenue, earnings or cash flow guidance.
- Management expects franchising to reduce consolidated revenue and operating expenses while increasing royalty revenue; the resulting financial benefit remains uncertain.
- TBG has experienced payment and working-capital difficulties, and its transition of the divested salons has taken longer than expected. In August 2018, receivables were restructured into promissory notes totaling approximately $11.7 million of working-capital receivables and $8.0 million of accounts receivable. Regis recorded a full reserve against the working-capital notes because of the expected future forgiveness provisions.
- Regis remains liable under certain salon leases associated with TBG and could face losses if TBG defaults or if divested salons revert to Regis.
- Other key risks include dependence on Walmart traffic and lease relationships, stylist recruitment and retention, minimum-wage increases, franchisee financial performance, competition, cybersecurity and information-technology disruptions, tax uncertainty, litigation and compliance with debt covenants.
- The Company maintained a partial valuation allowance of $67.9 million against deferred tax assets at June 30, 2018. Future tax benefits depend on generating sufficient sustainable taxable income.
- Goodwill totaled $412.6 million. The Company-owned reporting unit had approximately 24% estimated headroom in its fiscal 2018 impairment analysis; deterioration in salon traffic, cash flow or operating performance could result in future impairment charges.
- The Company is self-insured for significant workers’ compensation, employment-practice, general-liability and healthcare claims and faces lawsuits involving alleged consumer and wage-and-hour violations.
- The new lease accounting standard is expected to materially increase reported assets and liabilities when adopted in fiscal 2020.
Investor Verification Items
- Verify the recurring earnings profile excluding the $68.1 million tax benefit, discontinued-operation losses and SmartStyle restructuring costs.
- Assess whether same-store guest visits stabilize or continue to decline despite higher average ticket prices.
- Track the profitability and cash generation of the remaining company-owned salons after the SmartStyle closures.
- Review franchisee unit growth, royalty collections and franchisee financial health, particularly TBG’s ability to meet its obligations.
- Confirm available revolver capacity, compliance with leverage and fixed-charge covenants, and exposure to variable interest rates.
- Evaluate the cash impact of lease obligations, lease guarantees and potential TBG-related liabilities.
- Monitor goodwill headroom, deferred-tax-asset realizability and the effect of future accounting-standard adoption.
- Review the sustainability of share repurchases given the sharp decline in operating cash flow during fiscal 2018.