Regis Corporation FY2015 Form 10-K Summary
Business context and reporting period
Regis Corporation owns, operates and franchises beauty salons under brands including SmartStyle, Supercuts, MasterCuts, Regis and Cost Cutters. The filing covers the fiscal year ended June 30, 2015; it is not a filing for calendar 2014 Q4. Regis reported three operating segments: North American Value, North American Premium and International.
- System-wide locations declined to 9,556 from 9,674, including 7,025 company-owned and 2,324 franchised salons.
- Company-owned guest visits declined to approximately 76 million from 79 million.
- Regis had approximately 47,000 employees worldwide and operated primarily in the United States, Canada, Puerto Rico and the United Kingdom.
Financial performance and liquidity
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Revenue | $1,837.3 million | $1,892.4 million | (2.9%) |
| Operating income (loss) | $3.5 million | $(35.0) million | Improved |
| Operating margin | 0.2% | (1.8%) | Improved |
| Net income (loss) | $(33.8) million | $(138.5) million | Improved |
| Net loss per diluted share | $(0.62) | $(2.45) | Improved |
| Cash flow from operations | $94.0 million | $116.8 million | (19.5%) |
| Capital expenditures | $38.3 million | $49.4 million | Lower |
- Service revenue was $1,429.4 million, product revenue was $363.2 million and royalties and fees were $44.6 million.
- Consolidated same-store sales declined 0.3%, consisting of a 1.9% decline in guest visits partly offset by a 1.6% increase in average ticket. North American Value same-store sales increased 0.3%, while Premium declined 3.0% and International increased 0.6%.
- Operating expenses declined faster than revenue, including lower rent, site operating expense and depreciation and amortization. Cost of service increased to 61.8% of service revenue from 61.3%, primarily due to minimum-wage increases, higher field incentives and lapping a prior-year rebate.
- Income tax expense was $14.6 million despite a pretax loss from continuing operations, producing an unusual effective tax rate of negative 293.4%. Key factors included a $2.1 million Canadian deferred-tax valuation allowance and $8.9 million of non-cash tax expense related to indefinite-lived assets.
- Cash and cash equivalents were $212.3 million at June 30, 2015, down from $378.6 million. Regis had no borrowings under its $400.0 million revolving credit facility and $397.9 million of unused availability, subject to covenants.
- Total debt was $120.0 million, down from $293.5 million, following the cash settlement of $172.5 million of convertible notes. The remaining principal obligation is principally $120.0 million of 5.75% senior notes due in fiscal 2018.
- Debt-to-capitalization improved to 16.1% from 29.1%. Management stated that all debt covenants were satisfied at year-end.
- Regis repurchased 3.1 million shares for $47.9 million during FY2015 and increased the authorized repurchase program to $350.0 million; $60.9 million remained available at year-end. Regular quarterly dividends were discontinued in December 2013.
Material changes versus the prior comparable period
- Revenue decline moderated to 2.9% from 6.3%, and same-store sales improved substantially from a 4.8% decline to a 0.3% decline.
- Operating results improved from a $35.0 million loss to $3.5 million of operating income, primarily because FY2015 did not include FY2014’s $34.9 million goodwill impairment charge and because of lower operating expenses.
- Net loss improved by $104.7 million, although FY2014 included an $86.6 million valuation allowance against U.S. and U.K. deferred tax assets.
- North American Premium remained loss-making but improved to a $14.2 million operating loss from a $46.4 million loss. North American Value operating income increased to $122.6 million from $117.8 million.
- Company-owned salons declined by 252 locations, reflecting 266 closures and 91 newly constructed locations, while franchised salons increased by 145 to 2,324.
- Cash from operations decreased by $22.8 million, and cash declined by $166.3 million after debt repayment and share repurchases.
- The financial statements were revised for deferred-rent and other prior-period errors. The deferred-rent balance had been understated by $5.3 million, including $4.3 million relating to fiscal 2010 and prior periods.
Guidance, outlook, risks and unusual items
The filing does not provide quantified fiscal 2016 revenue or earnings guidance. Management stated that it expected operating cash flow, existing cash and available credit to fund operations, anticipated capital expenditures and required debt repayments for at least the next twelve months, while acknowledging that cash generation and access to financing are not assured.
- Management’s strategy focuses on stylist recruitment, training and retention; guest loyalty; operational simplification; technology and point-of-sale systems; and cost reduction.
- Fiscal 2015 included $14.6 million of salon fixed-asset impairment charges, $4.7 million of impairment of the Empire Education Group investment and Regis’s $6.9 million share of EEG’s deferred-tax valuation allowance.
- Empire Education Group, in which Regis held a 54.6% economic interest, generated a $16.7 million net loss in FY2015. Regis’s investment carrying value was $14.8 million, and additional impairment charges remain possible.
- Regis identified a material weakness in internal control over financial reporting related to lease accounting. Management was implementing enhanced controls, monitoring, software evaluation, training and supervision; remediation was not complete at June 30, 2015. The auditor therefore concluded that internal control over financial reporting was not effective.
- Material business risks include continued negative same-store sales, stylist shortages and labor-cost inflation, competition, minimum-wage and overtime changes, healthcare costs, cyber and information-system failures, vendor and Walmart dependence, franchisee performance, foreign exchange, tax audits, lease obligations and impairment risk.
- Operating lease commitments totaled $937.5 million, including $294.5 million due within one year. Total contractual obligations were $1.10 billion, including debt, interest, other long-term liabilities and operating leases.
- Regis is involved in ordinary-course litigation, including consumer and wage-and-hour claims. Outcomes are unpredictable and potentially material in a particular period. IRS and payroll-tax examinations were ongoing, although management did not expect a material financial-position impact.
Most important facts for an investor to verify
- Whether the improvement in same-store sales continues and converts into sustainable positive guest-visit growth.
- Progress and effectiveness of remediation of the lease-accounting material weakness.
- Ability to refinance or repay the $120.0 million senior notes due in fiscal 2018 while maintaining liquidity.
- Future impairment exposure related to the $419.0 million North American Value goodwill balance, salon assets and the EEG investment.
- Impact of wage, overtime, healthcare, tax and franchise-related regulatory changes on margins and cash flow.
- Whether salon closures, franchising growth and reduced company-owned locations improve returns without weakening brand performance or royalty income.