Business Context and Reporting Period
Regis Corporation operates beauty salons, hair restoration centers and related investments. As of March 31, 2012, it had approximately 12,700 worldwide locations, including 9,380 North American salons, 402 international salons, 98 hair restoration centers and approximately 2,780 locations through equity investments. The filing is an unaudited Form 10-Q for the quarter and nine months ended March 31, 2012, representing fiscal 2012 third-quarter results.
Key Financial Metrics
| Metric | Three Months Ended March 31 | Nine Months Ended March 31 |
|---|---|---|
| Revenue | $573.6 million, down 1.3% | $1.706 billion, down 1.6% |
| Operating income (loss) | $25.2 million; 4.4% margin | $(23.3) million; (1.4)% margin |
| Income (loss) from continuing operations | $(2.5) million | $(51.6) million |
| Net income (loss) | $(1.4) million; $(0.02) diluted EPS | $(50.5) million; $(0.88) diluted EPS |
| Operating cash flow | Not provided for the quarter | $103.0 million |
| Capital expenditures | Not provided for the quarter | $65.6 million |
Gross margin excluding depreciation and amortization was 44.2% for the quarter and 44.7% year to date. Service margin was 41.8% for the quarter and 42.4% year to date; product margin was 52.0% and 52.2%, respectively. Consolidated same-store sales declined 3.4% in the quarter and 3.2% year to date.
Cash and cash equivalents were $97.6 million at March 31, 2012, compared with $96.3 million at June 30, 2011. Total debt was $292.3 million, including $28.9 million current, versus $313.4 million at June 30, 2011. The company had no revolving-credit borrowings, $26.1 million of standby letters of credit and $373.9 million of unused revolving availability. Debt-to-capitalization was 23.3%, and the company reported compliance with all debt covenants.
Total assets declined to $1.666 billion from $1.806 billion at June 30, 2011, while shareholders’ equity declined to $963.7 million from $1.033 billion. Dividends declared were $0.06 per share for the quarter and $0.18 per share year to date.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue declined from $581.3 million to $573.6 million, primarily reflecting lower customer visits, lower average ticket and salon closures. Hair restoration revenue increased 5.0%, but North American salon revenue declined 1.3% and international salon revenue declined 8.3%.
- Quarterly operating income improved from a $59.5 million loss to $25.2 million of income because the prior-year quarter included a $74.1 million Promenade goodwill impairment charge. Excluding that unusual item, underlying operating performance remained pressured by negative same-store sales and international weakness.
- Year-to-date operating loss widened from $3.2 million to $23.3 million, primarily due to a $78.4 million Hair Restoration Centers goodwill impairment charge and higher depreciation from accelerated write-off of the legacy point-of-sale system.
- Year-to-date net results shifted from $7.5 million of income to a $50.5 million loss. Equity in affiliated companies changed from $4.3 million of income to a $5.7 million loss, including the Provalliance-related impairment described below.
- Operating cash flow fell from $161.3 million to $103.0 million, reflecting lower cash earnings, higher inventory purchases and the absence of prior-year tax refunds and affiliate dividends. Investing cash outflow improved to $65.1 million from $121.6 million, principally because the prior year included a large Provalliance investment.
- General and administrative expense declined 14.0% in the quarter, partly due to the prior-year $9.0 million Trade Secret note reserve and current cost reductions. The company reduced its home-office workforce by approximately 120 employees and recorded $2.5 million of severance in the quarter.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Management projected fiscal 2012 same-store sales of negative 2.5% to negative 3.5%, versus a 3.2% decline for the first nine months. The long-term objective remains low-single-digit annual consolidated same-store sales growth.
- Fiscal 2012 construction guidance was approximately 285 salons, with capital expenditures of approximately $95 million and acquisitions of up to $5 million. Franchisees were expected to open approximately 100 to 120 salons.
- Management targeted $35 million to $40 million of gross cost savings, or approximately $25 million net of investments and other cost increases, including workforce reductions, lower travel spending and financing savings.
- The company recorded a $78.4 million goodwill impairment for Hair Restoration Centers, reducing related goodwill to $74.4 million. Management stated that additional impairment remains reasonably possible for the Regis, Promenade and Hair Restoration Centers reporting units.
- On April 9, 2012, Regis agreed to sell its 46.7% Provalliance interest for €80 million, subject to buyer financing and expected closing by September 30, 2012. The company recorded a $37.0 million investment impairment, partially offset by a $20.2 million reduction in the related equity-put liability, for a net $16.8 million charge. Failure to close could leave the equity-put arrangement in effect, although exercise rights would be delayed until September 30, 2014.
- The potential Provalliance transaction may require reclassification of some or all of the $62.6 million cumulative foreign-currency translation balance from accumulated other comprehensive income into earnings.
- The legacy point-of-sale system is expected to be fully depreciated by June 30, 2012. Accelerated depreciation was $16.2 million year to date and $1.1 million in the quarter.
- Risks include continued negative same-store sales, consumer and fashion trends, labor and benefit costs, competition, lease and landlord issues, franchise and regulatory changes, foreign exchange, execution of the new point-of-sale system, management turnover, strategic-asset sales, debt covenants, joint-venture and affiliate performance, and pending litigation.
- The company is defending consumer, wage-and-hour and shareholder derivative claims. Outcomes cannot presently be determined, and material judgments or settlements could affect results in a future period.
Most Important Facts to Verify
- Whether same-store sales stabilize within management’s fiscal 2012 outlook and whether customer visits and average ticket improve.
- Whether the Provalliance sale closes by September 30, 2012, at the €80 million price, and the resulting treatment of foreign-currency translation balances.
- Whether additional goodwill or affiliate impairments are required, particularly for Regis, Promenade and Hair Restoration Centers.
- Whether operating cash flow remains sufficient to fund approximately $95 million of planned capital expenditures, dividends and debt obligations.
- Execution and financial impact of the new point-of-sale system, including completion of accelerated depreciation by fiscal year-end.
- Progress toward the stated cost-savings plan, management succession and the strategic review of non-core assets, including the potential sale of the hair restoration business.
- Debt maturity and covenant requirements, including the convertible senior notes and senior term notes, and the company’s continued access to its revolving facility.
- The filing is unaudited and was subject only to a review by PricewaterhouseCoopers LLP; investors should reconcile these interim results with the subsequent 10-K and later filings.