Regis Corporation: Fiscal 2023 Third-Quarter Form 10-Q Summary
Reporting period: Quarterly and year-to-date periods ended March 31, 2023. The filing is an unaudited Form 10-Q; the supplied metadata refers to “2022 Q3,” but the filing itself covers fiscal 2023 third quarter. Regis operates a primarily franchise-based salon platform with 5,203 system-wide locations and 486 employees at quarter-end.
Financial performance and key metrics
| Metric | Three months ended March 31, 2023 | Prior comparable period | Nine months ended March 31, 2023 | Prior comparable period |
|---|---|---|---|---|
| Total revenue | $55.8 million | $63.8 million | $177.6 million | $209.9 million |
| Operating income (loss) | $2.0 million | $(22.2) million | $5.2 million | $(27.6) million |
| Operating margin | 3.6% | (34.8)% | 2.9% | (13.1)% |
| Net income (loss) | $(1.6) million | $(27.9) million | $(2.6) million | $(43.2) million |
| Net margin | (2.9)% | (43.7)% | (1.5)% | (20.6)% |
| Segment adjusted EBITDA | $4.2 million | $(0.3) million | $15.8 million | $(2.8) million |
| Cash used in operating activities | Not separately reported | Not separately reported | $(8.5) million | $(34.4) million |
System-wide revenue increased 2.9% in the quarter to $299.3 million and 0.8% year to date to $918.7 million. Consolidated system-wide same-store sales increased 6.0% in the quarter and 5.0% year to date, although the filing states that 338 net franchise salons closed during the nine-month period, reducing the future royalty base.
Quarterly royalties increased 1.3% to $16.0 million, while franchise revenue declined 11.0% to $53.6 million because of lower franchise rental income and reduced product sales. Company-owned salon revenue declined 37.1% to $2.2 million. Franchise adjusted EBITDA improved to $4.8 million from $2.9 million, and company-owned salon adjusted EBITDA improved to a loss of $0.6 million from a loss of $3.3 million.
Financial condition, cash flow, debt and liquidity
- Cash and cash equivalents were $8.8 million at March 31, 2023, compared with $17.0 million at June 30, 2022. Cash, cash equivalents and restricted cash totaled $20.5 million.
- Total assets declined to $640.9 million from $769.3 million, primarily reflecting lower right-of-use assets and other assets.
- Shareholders’ deficit increased to $(32.7) million from $(31.0) million. The debt-to-capitalization ratio was 122.0%, compared with 120.8% at June 30, 2022.
- Long-term debt, net, was $174.7 million, consisting primarily of a $172.9 million term loan and $9.0 million drawn on the revolving facility, net of deferred financing fees.
- The amended credit agreement extends maturity to August 2025, converts $180.0 million of the former revolving facility into a term loan, and provides a $55.0 million revolving facility. Unused available revolver capacity was $34.3 million and total liquidity under the agreement was $43.0 million.
- The minimum liquidity covenant is $10.0 million. Management reported compliance with applicable debt covenants at March 31, 2023.
- Interest expense increased to $4.8 million in the quarter and $13.1 million year to date, driven by higher borrowing costs and amortization of financing fees. The applicable margin increased effective March 27, 2023, with a portion payable as paid-in-kind interest.
- Operating cash use improved to $8.5 million from $34.4 million year to date. Investing cash flow was positive $4.2 million, primarily from additional proceeds on the OSP sale. Financing cash flow was negative $2.6 million, including $4.4 million of debt refinancing fees.
- Future operating lease payments totaled $458.4 million, substantially offset by $444.8 million of expected sublease income from franchisees, leaving disclosed net rent commitments of $13.6 million.
Material changes versus the prior comparable period
- Revenue declined 12.5% in the quarter and 15.4% year to date, despite improved same-store sales, primarily because of salon closures, the shift from wholesale product sales to third-party distribution, lower franchise rental income and fewer company-owned salons.
- Product sales to franchisees decreased 53.8% in the quarter and 81.2% year to date as Regis transitioned to a third-party distribution model. Management expects product sales and related costs to remain lower in fiscal 2023.
- General and administrative expense declined 11.5% in the quarter and 22.7% year to date, reflecting lower compensation, legal and professional costs, and distribution-center wind-down costs.
- Inventory reserve expense declined to zero in the quarter and $1.2 million year to date, compared with $7.5 million and $9.0 million, respectively, in the prior-year periods.
- No goodwill impairment was recorded in fiscal 2023 through March 31, compared with a $13.1 million charge in the prior-year quarter and year-to-date period. Long-lived asset impairment also declined to $0.04 million year to date from $0.5 million.
- The company recorded $4.0 million of income from discontinued operations year to date, versus a $5.3 million loss, primarily from additional proceeds related to the sale of the Opensalon Pro business.
- Regis did not issue shares under its at-the-market program or repurchase shares during the nine months ended March 31, 2023. The filing states that $11.6 million remained available under the share issuance program and $54.6 million remained under the repurchase authorization.
Outlook, commentary, risks and unusual items
Management stated that it believes available cash, operating cash flows and borrowing capacity are sufficient to meet obligations for the next twelve months and beyond. The filing does not provide formal revenue, earnings or EBITDA guidance.
- Management is pursuing a capital-light, franchise-focused model, including continued reliance on franchise royalties and third-party product distribution.
- Franchise salon sales and staffing remain below pre-pandemic levels in many locations. Franchisees may have difficulty paying royalties or rent, reduce operating hours, or close salons, which could reduce Regis revenue and increase lease-related cash outflows.
- The company remains exposed to rising interest rates, debt covenant compliance, refinancing risk and the possibility of accelerated debt repayment if covenant or other financing requirements are breached.
- Regis faces ordinary-course litigation involving franchise practices, master leases, consumer claims, wage-and-hour matters and other allegations. Litigation outcomes are described as unpredictable; the company recorded $0.9 million of litigation expense year to date.
- Other unusual items included a $2.6 million accelerated depreciation charge related to corporate office consolidation, $1.1 million of North Carolina COVID-19 relief, $0.6 million of employee retention credits, and $4.4 million of debt refinancing fees.
- Potential future impairment losses remain a risk because salon long-lived asset valuations depend on estimated cash flows, market rents and discount rates.
Important facts for investors to verify
- Whether improved same-store sales can offset the continuing decline in salon count and preserve the royalty base.
- The sustainability of positive franchise adjusted EBITDA and whether company-owned salon losses continue to improve after additional closures.
- Cash generation, minimum liquidity compliance and the effect of higher cash and paid-in-kind interest rates on debt balances.
- The pace and financial impact of franchisee salon closures, rent delinquencies and master-lease obligations.
- Whether the third-party distribution strategy produces the expected franchisee benefits without further weakening reported revenue or margins.
- Potential litigation settlements, covenant developments and future goodwill or long-lived asset impairments.