Regis Corporation Form 10-Q Summary
Reporting period: Quarter and nine months ended March 31, 2017. The request identifies “2016 Q3,” but the filing is for Regis Corporation’s fiscal 2017 third quarter. The financial statements are unaudited.
Business context
Regis owns, operates and franchises beauty salons, primarily in North American Value, North American Premium and International segments. At March 31, 2017, the company had 9,036 system-wide salons, including 6,475 company-owned and 2,561 franchised locations, plus 181 locations held through non-controlling interests. Regis reported approximately 44,000 corporate employees worldwide.
Financial performance and position
| Metric | Three months ended March 31, 2017 | Three months ended March 31, 2016 | Nine months ended March 31, 2017 | Nine months ended March 31, 2016 |
|---|---|---|---|---|
| Revenue | $412.6 million | $442.6 million | $1,267.7 million | $1,343.2 million |
| Operating income (loss) | $(12.8) million | $5.6 million | $(5.9) million | $7.0 million |
| Net income (loss) | $(18.5) million | $(2.1) million | $(17.4) million | $(16.9) million |
| Net loss per diluted share | $(0.40) | $(0.04) | $(0.38) | $(0.34) |
| Operating margin | (3.1)% | 1.3% | (0.5)% | 0.5% |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $46.8 million | $39.6 million |
Third-quarter revenue declined 6.8%, while nine-month revenue declined 5.6%. The company reported a consolidated same-store sales decrease of 2.9% for the quarter and 2.5% year to date, driven primarily by lower guest visits, partly offset by higher average ticket prices. Gross profit before site operating, general and administrative, rent and depreciation expenses, calculated as revenue less cost of service and product, was approximately $164.1 million, or 39.8% of revenue, compared with approximately $182.5 million, or 41.2%, in the prior-year quarter.
- Quarterly service revenue declined $24.6 million to $319.5 million; product revenue declined $5.2 million to $81.5 million; royalties and fees declined $0.1 million to $11.6 million.
- North American Value revenue declined 3.7% for the quarter and 2.8% year to date. North American Premium revenue declined 17.7% and 14.3%, respectively. International revenue declined 19.3% and 19.4%, respectively.
- Quarterly cost of service increased to 65.1% of service revenue from 63.1%, primarily due to lower stylist productivity, state minimum wage increases and a prior-year non-recurring rebate.
- General and administrative expense increased $7.2 million in the quarter, primarily due to severance for former executive officers, legal settlements, higher professional fees and strategic investments in technical education.
- Salon asset impairment charges were $3.2 million for the quarter and $7.6 million year to date, compared with $2.6 million and $7.6 million, respectively, in the prior-year periods.
Cash flow, debt and liquidity
- Cash and cash equivalents were $168.7 million at March 31, 2017, compared with $147.3 million at June 30, 2016. Approximately $153.5 million was held in the United States, $8.7 million in Canada and $6.5 million in Europe.
- Nine-month operating cash flow was $46.8 million, up from $39.6 million in the prior-year period.
- Investing cash outflow was $23.0 million, including $25.4 million of capital expenditures.
- Financing cash outflow was $1.7 million, compared with $98.4 million in the prior-year period, when Regis repurchased $97.0 million of common stock.
- Long-term debt was $120.4 million net, consisting of $123.0 million of 5.5% senior term notes due in fiscal 2020. The company had no borrowings under its $200 million revolving credit facility and approximately $198.5 million of unused availability, subject to $1.5 million of outstanding letters of credit.
- The company was in compliance with its debt covenants. Debt to capitalization was 19.6%, up from 19.1% at June 30, 2016, primarily because of reduced shareholders’ equity from net losses and foreign currency translation adjustments.
Material changes, outlook and unusual items
- Revenue pressure reflected a 2.9% quarterly same-store sales decline, salon closures, foreign currency effects and reduced company-owned salon counts. Same-store guest visits declined 5.7% for the quarter and 5.8% year to date, while average ticket increased 2.8% and 3.3%, respectively.
- During the preceding twelve months, the company constructed 56 and closed 402 company-owned salons, net of relocations, and sold 35 company-owned salons to franchisees.
- Regis is expanding its franchise strategy and began offering SmartStyle franchises in January 2017. Management expects conversions to reduce consolidated revenue while increasing royalty revenue and reducing operating costs, but stated that the financial benefit is uncertain.
- Income tax expense was $3.9 million for the quarter and $7.3 million year to date, despite pretax losses. The company attributed much of the expense to non-cash tax charges associated with a valuation allowance against deferred tax assets and expects approximately $7.7 million of such expense for fiscal 2017.
- Regis holds a 54.6% ownership interest in Empire Education Group, Inc. and has no remaining recorded investment value after a prior impairment. Management stated that potential liabilities associated with the venture are not currently expected to materially affect financial position.
- On April 17, 2017, Hugh E. Sawyer became President and Chief Executive Officer, replacing Daniel J. Hanrahan. Regis granted Mr. Sawyer performance-based restricted stock units and stock appreciation rights.
- The company adopted updated accounting guidance for stock compensation and debt issuance costs. It expects future lease accounting adoption to materially increase reported assets and liabilities, while revenue recognition adoption is not currently expected to materially affect the financial statements.
Risks and contingencies
- Regis faces ongoing lawsuits and claims, including purported class-wide consumer and wage-and-hour matters. Outcomes are unpredictable and could materially affect results in a particular period.
- Key operating risks include declining same-store visits, stylist attraction and retention, competition, consumer trends, minimum wage and healthcare costs, economic conditions, foreign currency movements, cyber threats and reliance on information systems and external vendors.
- The franchise expansion strategy may require additional costs, create legal and compliance exposure, disrupt operations or fail to offset lost company-owned revenue.
- Franchisee financial distress, weak franchisee performance, failure to renew agreements or inability to support new franchisees could reduce royalties and product revenue and affect brand standards.
- The company’s federal tax returns for fiscal 2010 through 2013 remain subject to unresolved IRS proposed adjustments in Appeals. Regis believes its positions will be sustained and does not expect final resolution to materially affect financial position.
Investor verification checklist
- Verify the continuing trend in same-store sales, guest visits, average ticket and salon closures.
- Assess whether North American Premium and International losses improve and whether North American Value margins stabilize.
- Monitor cash generation against capital expenditures, debt maturity requirements and the June 2018 revolving facility expiration.
- Evaluate the economics and execution of company-owned salon sales and SmartStyle franchising.
- Review the effect of executive turnover, severance, legal settlements and strategic investments on recurring G&A expense.
- Confirm the impact of deferred tax valuation allowances, pending IRS matters and future lease accounting adoption.