Regis Corporation Fiscal 2011 Form 10-K Summary
Business context and reporting period
This filing is a Form 10-K for the fiscal year ended June 30, 2011, not a 2010 fourth-quarter filing. Regis owns, operates and franchises mass-market hair salons and hair restoration centers. At year-end, it owned, franchised or held interests in approximately 12,700 worldwide locations, including 9,819 salons, 96 hair restoration centers and 2,786 locations held through affiliates. The company had approximately 55,000 employees and served approximately 91 million customer visits at company-owned salons during fiscal 2011.
Regis reports three operating segments: North American salons, International salons and Hair Restoration Centers. Its principal brands include Regis, MasterCuts, SmartStyle, Supercuts, Cost Cutters and Sassoon. Trade Secret operations are presented as discontinued operations.
Financial performance and key metrics
| Metric | Fiscal 2011 | Fiscal 2010 | Change |
|---|---|---|---|
| Revenue | $2.326 billion | $2.358 billion | Down 1.4% |
| Operating income | $3.9 million | $97.2 million | Down $93.3 million |
| Income from continuing operations | $(8.9) million | $39.6 million | Declined to a loss |
| Diluted continuing-operations EPS | $(0.16) | $0.71 | Declined $0.87 |
| Net cash provided by operating activities | $229.2 million | $192.2 million | Up $37.0 million |
| Capital expenditures | $71.5 million | $57.8 million | Up $13.6 million |
| Total debt and capital lease obligations | $313.4 million | $440.0 million | Down $126.6 million |
| Debt-to-capitalization | 23.3% | 30.3% | Improved 700 basis points |
| Cash and cash equivalents | $96.3 million | $151.9 million | Down $55.6 million |
Revenue mix was 75.8% service revenue, 22.5% product revenue and 1.7% royalties and fees. Gross margin excluding depreciation was 44.8% of service and product revenue, unchanged from fiscal 2010. Service margin declined to 42.5% from 43.1%, while product margin improved to 52.2% from 50.6%.
Segment revenue and operating income were: North American salons revenue of $2.030 billion and operating income of $166.7 million; International salons revenue of $150.2 million and operating income of $6.7 million; and Hair Restoration Centers revenue of $145.7 million and operating income of $18.2 million.
Consolidated same-store sales declined 1.7%, reflecting lower customer visits partly offset by higher average ticket prices. North American salon same-store sales declined 1.8%, International salon same-store sales declined 3.1%, and Hair Restoration Centers same-store sales increased 1.2%.
Cash flow, debt and liquidity
- Operating cash flow was $229.2 million. Investing activities used $144.3 million, including $71.5 million of capital expenditures, $18.0 million for business and salon acquisitions, and $72.3 million of disbursements for loans and investments.
- Financing activities used $148.4 million, primarily reflecting $137.7 million of debt repayments and $11.5 million of dividends.
- Regis repaid an $85.0 million term loan during fiscal 2011. At June 30, 2011, all reported debt was fixed-rate debt, and no borrowings were outstanding under the revolving credit facility.
- The amended revolving credit facility provides $400.0 million of capacity, with $374.0 million of unused committed availability at year-end. Standby letters of credit totaled $26.0 million.
- Contractual obligations totaled $1.481 billion, including $1.065 billion of operating lease obligations and $343.1 million of on-balance-sheet obligations. These commitments exclude certain self-insurance and deferred-compensation payment estimates.
Material changes versus the prior comparable period
- Operating income fell sharply as revenue declined, general and administrative expense rose $47.9 million, and a $74.1 million Promenade goodwill impairment was recorded.
- General and administrative expense increased 16.4%, primarily due to the Trade Secret note receivable reserve, senior management restructuring, strategic alternatives work, information technology projects, legal costs and salon re-imaging.
- Service margin declined because of unusually large health insurance claims and higher payroll taxes. Product margin improved due primarily to product cost management and mix.
- Interest expense decreased $20.0 million to $34.4 million because fiscal 2010 included $18.0 million of make-whole payments and related fees, and debt levels declined.
- Regis acquired approximately 17% of additional Provalliance equity for $57.3 million, increasing its ownership to approximately 46.7%. The company recognized a net gain of approximately $2.4 million related to the transaction and retained a $22.7 million Provalliance equity-put liability.
- Investment in and loans to affiliates increased to $261.1 million from $195.8 million, primarily reflecting the Provalliance acquisition and equity-method activity.
- Regis constructed 213 salons, acquired 105 company-owned salons and closed 305 salons during fiscal 2011. Company-owned salons ended the year at 7,883 versus 7,909, while franchise salons declined to 1,936 from 2,020.
Guidance, outlook, risks and unusual items
Management expected fiscal 2012 consolidated same-store sales in a range of negative 1.0% to positive 1.0%, approximately 285 constructed salons, approximately 100 to 120 franchisee openings, $95 million of capital expenditures and $25 million of acquisitions. Management also targeted $20 million to $30 million of cost savings and expected to close approximately 160 company-owned salons.
- The company planned to replace its proprietary point-of-sale system during fiscal 2012. Approximately $20 million of existing capitalized POS software was expected to be fully amortized during fiscal 2012.
- Promenade goodwill was reduced by $74.1 million. Management stated that Promenade, Regis and Hair Restoration Centers remained reasonably likely to incur future impairment charges. Estimated fair value exceeded carrying value by approximately 9% for Hair Restoration Centers and 18% for Regis.
- A $31.2 million valuation reserve fully reserved the Trade Secret purchaser note receivable after missed interest payments, declining collateral values and weaker projections. Regis also guaranteed approximately 40 leases operated by the purchaser; the filing characterizes potential loss on those guarantees as reasonably possible.
- Regis recorded a $9.2 million other-than-temporary impairment related to Yamano preferred shares and the associated MY Style investment. The company also settled a Hair Club legal claim for $1.7 million.
- Risks include weak consumer spending, continued negative same-store sales, competition and pricing pressure, labor and benefit cost inflation, dependence on Walmart and other key relationships, franchise regulation, lease commitments, litigation, joint-venture performance, foreign currency exposure, debt covenant compliance, impairment of goodwill and long-lived assets, and successful implementation of the new POS system.
- The company was in compliance with its debt covenants at June 30, 2011. Management stated that operating cash flow and available credit should fund anticipated capital expenditures, acquisitions and debt repayments for the foreseeable future.
Most important facts for investors to verify
- Reconcile the requested “2010 Q4” period with this filing’s actual fiscal year ended June 30, 2011 and review the fiscal 2011 fourth-quarter results separately.
- Verify the sustainability of operating cash flow given the fiscal-year net loss, substantial lease commitments and planned fiscal 2012 capital spending.
- Assess whether the projected same-store sales recovery and $20 million to $30 million cost-savings plan can offset labor, rent and other fixed-cost pressure.
- Review sensitivity of Promenade, Regis and Hair Restoration Centers goodwill to same-store sales, discount-rate and cash-flow assumptions.
- Evaluate collectability and remaining exposure related to the fully reserved Trade Secret note and approximately 40 guaranteed leases.
- Review debt maturities, especially the $178.2 million scheduled fiscal 2014 maturity, the convertible notes and applicable covenant requirements.
- Confirm the financial condition and obligations associated with Provalliance, including the $22.7 million equity-put liability and potential future purchase requirements.
- Monitor pending wage-and-hour and other litigation, self-insurance reserves, tax audits and the $13.5 million liability for uncertain tax positions.