Regis Corporation 10-Q Summary
Business Context and Reporting Period
Regis Corporation operates a primarily franchise-based salon platform under brands including Supercuts, SmartStyle, Cost Cutters, First Choice Haircutters, Magicuts and Roosters. As of December 31, 2022, the company had 5,347 system-wide locations, including 5,196 franchise salons, 75 company-owned salons and 76 equity-interest locations, and 545 employees. The filing covers the three and six months ended December 31, 2022, the second quarter and first half of fiscal 2023.
Financial Performance and Position
| Metric | Three months ended Dec. 31, 2022 | Six months ended Dec. 31, 2022 |
|---|---|---|
| Total revenue | $60.0 million | $121.8 million |
| Operating income | $0.7 million | $3.2 million |
| Operating margin | Approximately 1.2% | Approximately 2.6% |
| Loss from continuing operations | $2.5 million | $4.4 million |
| Net loss | $2.4 million, or $0.05 per diluted share | $0.9 million, or $0.02 per diluted share |
| Net margin | Approximately (4.0%) | Approximately (0.8%) |
| Segment adjusted EBITDA | $7.8 million | $11.7 million |
| Cash used in operating activities | $6.9 million for the six-month period |
- Consolidated system-wide same-store sales increased 4.5% in both the quarter and year-to-date period, compared with increases of 22.1% and 22.6% in the prior-year periods.
- Franchise adjusted EBITDA was $7.5 million for the quarter and $12.5 million year to date, versus $5.7 million and $2.3 million, respectively, in the prior-year periods.
- Cash and cash equivalents were $9.4 million at December 31, 2022; cash, cash equivalents and restricted cash totaled $22.5 million.
- Total assets were $687.7 million, while total liabilities were $719.3 million and shareholders’ deficit was $31.6 million.
- Debt consisted of a $173.8 million term loan and $9.0 million drawn on the revolving facility, with debt reported net of financing fees at $174.8 million.
- Total liquidity under the credit agreement was $43.7 million, including $34.3 million of available revolving credit. The company reported compliance with its covenants.
- Operating lease liabilities totaled $446.2 million on a present-value basis, including $93.9 million current and $352.2 million long term.
Material Changes Versus the Prior Comparable Period
- Revenue declined 13.4% for the quarter and 16.6% year to date. The primary drivers were lower franchise rental income, reduced company-owned salon revenue and the transition from wholesale product sales to a third-party distribution model.
- Product sales to franchisees fell 54.2% for the quarter and 84.6% year to date, to $1.1 million and $1.6 million, respectively. Management expects this revenue and related cost to remain lower following the merchandising transition.
- Franchise rental income decreased 14.5% for the quarter and 12.3% year to date, primarily because of a lower franchise salon count.
- Company-owned salon revenue declined 48.0% for the quarter and 56.2% year to date, reflecting salon closures and lower product sales. Company-owned salons decreased to 75 from 150 a year earlier.
- General and administrative expense decreased 22.5% for the quarter and 27.3% year to date, primarily due to lower compensation, reduced distribution-center-related costs and a favorable actuarial adjustment.
- Operating income improved from a $0.5 million loss to $0.7 million of income for the quarter and from a $5.4 million loss to $3.2 million of income year to date.
- Interest expense increased $1.2 million for the quarter and $1.9 million year to date because of higher borrowing costs and amortization of fees related to the credit agreement amendment.
- Net loss improved from $4.9 million to $2.4 million for the quarter and from $15.3 million to $0.9 million year to date. The year-to-date improvement includes a $3.4 million gain from discontinued operations related primarily to additional proceeds from the sale of Opensalon Pro.
- Cash used in operations improved from $24.3 million to $6.9 million year to date. Investing activities provided $3.6 million, primarily from Opensalon Pro sale proceeds, while financing activities used $1.6 million, including $4.4 million of debt refinancing fees.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide formal revenue, earnings or same-store-sales guidance. Management stated that it expects sufficient liquidity, cash on hand and borrowing capacity to meet obligations for the next twelve months and beyond.
- In August 2022, Regis amended its credit agreement, converting $180.0 million of revolving debt to a term loan, reducing the revolver commitment to $55.0 million and extending the facility maturity to August 2025. The minimum liquidity covenant was reduced to $10.0 million.
- The current term-SOFR margin is 3.875%; it is scheduled to increase to 6.25% in March 2023, including 2.00% of payment-in-kind interest, and to 7.25% in March 2024, including 3.00% payment-in-kind interest.
- Unusual or non-recurring items included a $2.6 million accelerated depreciation charge related to corporate-office consolidation, a $1.2 million inventory reserve, a $1.1 million North Carolina COVID-19 relief grant, and $3.4 million of year-to-date discontinued-operation gains.
- The company incurred litigation expense of $0.4 million in the quarter and $0.9 million year to date. Management states that litigation outcomes are unpredictable and future judgments or settlements could materially affect results in a particular period.
- Key risks include franchisee financial health, salon closures, labor availability and wage increases, consumer spending, reliance on Walmart and franchise royalties, third-party distribution arrangements, technology migration and cybersecurity, debt covenant compliance, rising interest rates, lease obligations, impairment of long-lived assets or goodwill, and litigation.
- Management identified triggering events for long-lived-asset impairment testing but recorded no related impairment charge in the current quarter or year-to-date period. Future impairment losses remain possible if salon performance or assumptions deteriorate.
Important Facts for Investors to Verify
- Whether same-store sales growth can offset the effects of continued salon closures and the structurally lower product-sales revenue model.
- The company’s ability to maintain at least $10.0 million of required liquidity as interest margins increase and payment-in-kind interest accumulates.
- Franchisee rent collections, franchise salon closures and the sustainability of improved franchise adjusted EBITDA.
- Future cash generation, including the effect of lease payments, working-capital needs, litigation payments and debt service.
- Potential impairment charges for goodwill, right-of-use assets and other long-lived assets.
- The status and financial effect of pending litigation, technology migration, third-party vendor dependencies and other contingencies.
- That the financial statements are unaudited and interim results are not necessarily indicative of full-year performance.