Regis Corporation Form 10-Q Summary
Business Context and Reporting Period
Regis Corporation owns, operates and franchises beauty salons, with approximately 9,352 system-wide salons and 47,000 corporate employees worldwide as of March 31, 2015. The filing covers the fiscal quarter and nine months ended March 31, 2015. Although the request identifies “2014 Q3,” the filing is for fiscal 2015 third quarter, with comparable periods ended March 31, 2014.
Key Financial Metrics
| Metric | Three Months Ended March 31, 2015 | Nine Months Ended March 31, 2015 |
|---|---|---|
| Revenue | $454.0 million | $1.374 billion |
| Operating income | $5.3 million | $2.4 million |
| Loss from continuing operations | $3.7 million | $31.8 million |
| Net loss | $3.7 million | $31.8 million |
| Basic and diluted loss per share | $0.07 | $0.58 |
| Cash flow from operations | Not separately provided | $72.3 million |
| Capital expenditures | Not separately provided | $29.7 million |
Revenue consisted of service revenue of $352.0 million, product revenue of $91.1 million and royalties and fees of $10.8 million in the quarter. The operating margin was approximately 1.2% for the quarter and 0.2% for the nine-month period. Cash and cash equivalents were $213.0 million at March 31, 2015, compared with $378.6 million at June 30, 2014.
Total debt was $120.0 million at March 31, 2015, consisting primarily of 5.75% senior term notes. The $172.5 million convertible senior notes were repaid in cash in July 2014. The company had no revolver borrowings, $2.1 million of standby letters of credit and $397.9 million of unused revolving credit capacity. Debt-to-capitalization was 15.7%, down from 28.9% at June 30, 2014.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue declined 3.7% and nine-month revenue declined 2.4%, primarily because of salon closures, sales of company-owned salons to franchisees, negative same-store sales and unfavorable foreign currency effects.
- Consolidated same-store sales decreased 0.7% in the quarter and 0.1% year to date, an improvement from decreases of 5.7% and 5.8% in the prior comparable periods. Guest visits declined, partly offset by higher average tickets.
- Quarterly operating income improved from a $3.2 million loss to $5.3 million of income. Nine-month operating results improved from a $36.5 million loss to $2.4 million of income, primarily reflecting the absence of the $34.9 million goodwill impairment charge recorded in the prior year.
- Interest expense declined to $2.3 million for the quarter and $7.8 million year to date, primarily because the convertible notes were repaid.
- Operating cash flow declined from $83.7 million to $72.3 million for the nine-month period, while financing cash flow shifted from a $106.0 million inflow to a $206.6 million outflow due mainly to debt repayment and share repurchases.
- Regis repurchased 2.1 million shares for $32.9 million during the nine months. The board subsequently increased total repurchase authorization from $300.0 million to $350.0 million.
Guidance, Outlook, Risks and Unusual Items
Management stated that cash from operations, cash on hand and borrowing arrangements are expected to be sufficient to sustain operations and finance strategic initiatives, while noting that lower-than-expected cash generation could require limiting or delaying those initiatives. No specific revenue or earnings guidance was provided.
- The company is simplifying its portfolio, focusing on core salon operations, cost reduction and investments in people, training and technology.
- Income tax expense was unusually high relative to pretax income: $6.8 million for the quarter and $15.9 million for the nine months. This included non-cash tax expense related to deferred tax valuation allowances and a $2.0 million valuation allowance against most Canadian deferred tax assets.
- The company recorded $11.9 million of equity losses related to affiliates for the nine months, including a $4.7 million impairment of its investment in Empire Education Group and its share of a $6.9 million deferred tax asset valuation allowance recorded by that affiliate. Additional impairment charges could be material.
- Long-lived asset impairment charges totaled $2.4 million for the quarter and $9.3 million for the nine months.
- The company faces lawsuits and claims, including purported consumer and wage-and-hour class actions. Outcomes are described as unpredictable and could materially affect results in a particular period.
- IRS audits cover fiscal years 2010 through 2014, with proposed adjustments for fiscal years 2010 and 2011. Management does not expect final resolution to materially affect financial position.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether improved same-store sales and operating profitability are sustainable despite declining guest visits and continued salon closures.
- The future financial performance and impairment risk associated with Empire Education Group.
- The company’s ability to generate sufficient operating cash flow while funding capital expenditures, repurchases and strategic investments.
- The impact of deferred tax valuation allowances and the unusually high effective tax rates on future earnings and cash taxes.
- Potential costs from wage-and-hour, consumer, tax and other legal contingencies.
- Terms, maturity and covenant requirements of the remaining $120.0 million senior term notes and the $400.0 million revolving credit facility.