Regis Corporation — Fiscal 2017 First Quarter Form 10-Q
Reporting period: Three months ended September 30, 2016, compared with the three months ended September 30, 2015. The interim financial statements are unaudited. Regis owns, operates and franchises beauty salons; it reported 9,260 system-wide salons and approximately 45,000 corporate employees at quarter-end.
Financial highlights
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Revenue | $431.0 million | $450.1 million | Down 4.2% |
| Operating income | $7.7 million | $4.3 million | Up $3.4 million |
| Operating margin | 1.8% | 0.9% | Up approximately 80 bps |
| Income before taxes and affiliate losses | $6.0 million | $2.9 million | Up $3.2 million |
| Net income (loss) | $3.3 million | $(0.8) million | Improved $4.1 million |
| Diluted EPS | $0.07 | $(0.02) | Improved $0.09 |
| Cash flow from operations | $12.3 million | $12.5 million | Down $0.2 million |
| Capital expenditures | $10.9 million | $8.6 million | Up $2.3 million |
Revenue and operating performance
- Service revenue was $335.5 million, down $14.6 million; product revenue was $83.5 million, down $4.5 million; royalties and fees were $12.0 million, approximately flat.
- Consolidated same-store sales declined 1.0%, driven by a 5.1% decrease in guest visits, partly offset by a 4.1% increase in average ticket.
- North American Value revenue declined 1.7% to $343.2 million, while segment operating income increased to $33.4 million from $30.5 million.
- North American Premium revenue declined 11.6% to $64.7 million, and its operating loss increased to $3.9 million from $2.4 million.
- International revenue declined 17.3% to $23.2 million and moved to a $0.3 million operating loss from $0.1 million of operating income.
- Operating expense reductions included lower site operating expenses, general and administrative costs, rent, and depreciation and amortization. These savings were partly offset by higher cost of service as a percentage of service revenue, primarily from state minimum-wage increases, and higher product costs as a percentage of product revenue due to inventory write-offs.
Cash flow, liquidity and capital structure
- Cash and cash equivalents were $148.5 million at September 30, 2016, compared with $147.3 million at June 30, 2016. Approximately $131.5 million was held in the United States, $6.6 million in Canada and $10.4 million in Europe.
- Operating cash flow of $12.3 million, less $9.6 million of investing cash usage, resulted in a $1.2 million increase in cash during the quarter. Financing cash usage was $1.1 million, primarily for employee taxes on shares withheld.
- Long-term debt, net, was $119.9 million, consisting primarily of $123.0 million principal amount of 5.5% senior term notes due December 2019.
- The $200.0 million unsecured revolving credit facility had no borrowings, $1.5 million of standby letters of credit and $198.5 million of unused available credit at September 30, 2016.
- Regis was in compliance with all financing covenants. Debt to capitalization was 19.1%, unchanged from June 30, 2016.
- No shares were repurchased during the quarter. The company had $60.0 million remaining under its authorized repurchase program.
Material changes versus the prior comparable period
- Revenue decreased $19.1 million, primarily because of salon closures and conversions, lower same-store sales and unfavorable foreign currency effects.
- Despite lower revenue, operating income improved $3.4 million, reflecting cost reductions, lower depreciation and amortization, and lower corporate expenses.
- Net income improved from a loss of $0.8 million to income of $3.3 million. The prior-year period included a $0.9 million equity loss from Empire Education Group; no equity loss was recorded in the current period.
- Cash flow from operations was broadly stable, while capital expenditures increased by $2.3 million.
- Weighted-average basic shares declined to 46.2 million from 52.8 million, reflecting prior-period share repurchases.
Guidance, outlook, risks and unusual items
- The filing does not provide specific revenue, earnings or same-store-sales guidance. Management describes ongoing investments in people, training, technology and guest experience, alongside cost-reduction initiatives and salon portfolio changes.
- Income tax expense was $2.7 million, representing a 45.5% effective tax rate. The company stated that approximately $2.0 million was non-cash expense related to tax benefits that could not be recognized because of a deferred-tax valuation allowance; similar expense is expected to total approximately $7.8 million for fiscal 2017.
- Long-lived asset impairment charges were $1.9 million, compared with $2.7 million in the prior-year quarter.
- Regis owns a 54.6% interest in Empire Education Group, which had no remaining investment value following a prior full impairment. Management does not currently expect associated liabilities to have a material financial impact.
- The company faces ordinary-course litigation, including purported class-wide consumer and wage-and-hour claims. Outcomes are unpredictable and could materially affect results in a particular period.
- Federal tax examinations for fiscal years 2010 through 2013 remain in the IRS Appeals Division. Management believes its positions will be sustained and does not expect final resolution to materially affect financial position.
- Key stated risks include stylist recruitment and retention, consumer demand and competition, franchisee performance, wage and healthcare costs, cyber threats, foreign currency and interest rates, tax exposure, legal matters, debt covenant compliance and execution of operating initiatives.
- The company expects adoption of the new lease standard in fiscal 2020 to significantly increase reported assets and liabilities. It does not expect the new revenue-recognition standard to materially affect its financial statements, although disclosures and the adoption method remain under evaluation.
Investor verification checklist
- Verify whether the decline in guest visits and same-store sales stabilizes, particularly in North American Premium and International operations.
- Assess whether operating-margin improvement is sustainable or primarily reflects timing, cost savings, lower salon counts and favorable comparisons.
- Monitor the deferred-tax valuation allowance and its expected approximately $7.8 million fiscal 2017 non-cash tax expense.
- Review salon closures, conversions, franchise transfers and capital expenditures for their effect on future revenue and cash generation.
- Track impairment charges, goodwill valuation and the performance and potential liabilities of Empire Education Group.
- Evaluate litigation, wage-and-hour claims, IRS matters and other contingencies as additional information becomes available.
- Confirm debt maturities, covenant compliance, revolver availability and the company’s future capital allocation decisions, including share repurchases.