Regis Corporation Q1 FY2015 Form 10-Q Summary
Business context and reporting period
Regis Corporation owns, operates and franchises beauty salons. The filing covers the unaudited three months ended September 30, 2014, compared with the three months ended September 30, 2013. As of September 30, 2014, the company had 9,652 worldwide locations, including 9,432 system-wide salons and 220 locations held through non-controlling investments, and approximately 48,000 corporate employees.
Reportable segments were North American Value, North American Premium and International. Management continues to simplify the business, focus on core salon operations, improve profitability and maximize shareholder value.
Key financial metrics
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Revenue | $464.6 million | $468.6 million | Down 0.9% |
| Operating income (loss) | $(0.6) million | $1.4 million | Declined $2.0 million |
| Loss before taxes and affiliate income | $(3.8) million | $(2.5) million | Worsened $1.3 million |
| Net loss | $(9.1) million | $(0.1) million | Worsened $8.9 million |
| Basic and diluted loss per share | $(0.16) | $(0.00) | Declined |
| Cash flow from operations | $16.0 million | $15.8 million | Up $0.3 million |
| Capital expenditures | $11.6 million | $11.4 million | Up $0.2 million |
Revenue consisted of $364.7 million of service revenue, $88.8 million of product revenue and $11.0 million of royalties and fees. Consolidated same-store sales increased 0.6%, driven by a 1.8% increase in average ticket, partly offset by a 1.2% decline in guest visits.
Operating margin declined to approximately negative 0.1% from 0.3%. Cost of service increased to 61.3% of service revenue from 60.5%, primarily due to higher field incentives, minimum wage increases and stylist productivity. General and administrative expense increased 2.0% to $45.2 million, while rent declined 1.9% to $77.5 million. Depreciation and amortization declined to $22.2 million, but included $4.1 million of long-lived asset impairment charges.
The effective tax rate was negative 146.5%, compared with 15.2% in the prior-year quarter. The unusual tax expense primarily reflected non-cash tax expense related to tax benefits on certain indefinite-lived assets and valuation allowances against U.S. and U.K. deferred tax assets. Management indicated expected fiscal-year tax expense of approximately $9.0 million related to this matter, subject to quarterly variation.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $186.3 million at September 30, 2014, down from $378.6 million at June 30, 2014.
- Operating activities provided $16.0 million; investing activities used $11.6 million; financing activities used $195.3 million.
- The company paid $172.5 million in cash to settle its convertible senior notes in July 2014.
- Total debt was $120.0 million, consisting primarily of 5.75% senior term notes. Debt to capitalization declined to 14.9% from 28.9% at June 30, 2014.
- The $400.0 million revolving credit facility had no borrowings, $2.0 million of standby letters of credit and $398.0 million of unused availability.
- The company repurchased 1.46 million shares for $21.5 million, or $14.76 per share on average. Remaining authorization was $37.2 million.
- No dividend was declared or paid in the quarter. Regis discontinued regular quarterly dividends in December 2013.
- Management stated that cash, operating cash flow and borrowing capacity should be sufficient to sustain operations and finance strategic initiatives, although future cash generation is not assured.
Material changes versus the prior comparable period
- Revenue declined modestly despite improvement in same-store sales; service revenue fell $7.0 million, while product revenue rose $2.0 million and royalties and fees rose $0.9 million.
- North American Value revenue declined to $354.4 million from $355.3 million, while North American Premium revenue declined to $79.0 million from $84.2 million. International revenue increased to $31.1 million from $29.1 million.
- North American Premium operating loss increased to $4.5 million from $1.2 million, primarily because of long-lived asset impairment charges. North American Value operating income declined to $29.3 million from $30.0 million.
- Interest expense declined $1.4 million because the convertible notes were settled, partly offset by interest on the $120.0 million senior term notes.
- Equity income from affiliates declined to $0.4 million from $2.0 million because the prior-year period included a $1.0 million recovery associated with Yamano Holding Corporation and higher earnings from EEG.
- Foreign currency translation produced a $4.6 million other comprehensive loss, compared with $3.0 million of income in the prior-year quarter.
- Shares outstanding declined following the repurchase program, with 55.25 million shares outstanding at September 30, 2014, compared with 56.65 million at June 30, 2014.
Guidance, outlook, risks and unusual items
The filing does not provide formal revenue or earnings guidance. Management expects to continue investing in people, training, technology, asset protection and human resources while pursuing cost reduction and portfolio simplification initiatives.
- EEG, a 54.6%-owned affiliate, generated lower revenue, gross profit, operating income and net income year over year. Regis reported a $28.8 million carrying value for the investment. Management noted that EEG's estimated fair value exceeded carrying value by approximately 10%, leaving limited cushion; a full valuation allowance on EEG's deferred tax assets could result in Regis recognizing approximately $7.6 million of expense.
- The company recorded $4.1 million of long-lived asset impairment charges, primarily affecting the North American Premium segment.
- Federal tax audits for fiscal 2010 and 2011 remain ongoing. The company believes its tax positions will be sustained and does not expect final resolution to materially affect financial position, but state tax audits also remain open for multiple years.
- Regis faces ordinary-course lawsuits and allegations involving consumer and wage-and-hour matters. Outcomes are unpredictable and could materially affect results in a particular period. A shareholder derivative action was dismissed in September 2014.
- Key operating risks include negative same-store sales, stylist retention and productivity, wage and healthcare costs, competition, economic conditions, franchisee performance, information-system and data-security risks, regulatory changes, foreign exchange, debt covenant compliance and the performance of EEG.
- Management reported that disclosure controls and procedures were effective as of September 30, 2014, with no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether same-store sales improvement can persist and translate into higher guest visits rather than relying mainly on ticket increases.
- The sustainability of profitability in North American Value and the turnaround or further impairment risk in North American Premium.
- The expected timing and cash impact of tax-audit resolutions, valuation allowances and the unusually high effective tax rate.
- EEG's operating performance, valuation cushion and potential for additional impairment or deferred-tax-asset charges.
- Cash requirements following the convertible-note repayment, share repurchases and ongoing capital expenditures.
- Compliance with debt covenants and the company's ability to preserve liquidity while funding strategic initiatives.
- Potential exposure from wage-and-hour, consumer, lease-guarantee and other legal contingencies.