Regis Corporation Form 10-Q Summary
Business context and reporting period
Regis Corporation owns, franchises, or holds interests in approximately 10,000 salon and other locations worldwide, including 9,311 North American salons, 392 international salons, and approximately 242 locations held through ownership interests. The filing covers the three months ended September 30, 2012, the first quarter of fiscal 2013, although the request labels it 2012 Q1. The financial statements are unaudited and were reviewed, but not audited, by PricewaterhouseCoopers LLP.
Hair Club for Men and Women was classified as a discontinued operation following the July 2012 agreement to sell the business. Regis also completed the sale of its 46.7% interest in Provalliance during the quarter.
Key financial metrics
| Metric | Three months ended September 30, 2012 | Prior comparable period |
|---|---|---|
| Revenue | $505.4 million | $531.3 million |
| Operating income | $9.3 million | $9.0 million |
| Operating margin | 1.8% | 1.7% |
| Income from continuing operations | $24.8 million | $5.6 million |
| Net income | $28.5 million | $8.3 million |
| Diluted EPS | $0.45 | $0.15 |
| Net cash from operating activities | $8.5 million | $13.5 million |
| Capital expenditures | $18.1 million | $16.8 million |
| Cash and cash equivalents at period end | $222.5 million | $75.7 million |
Reported earnings benefited materially from a $24.0 million gain recognized in interest income and other, net, primarily from reclassifying accumulated foreign-currency translation amounts after liquidation of Euro-denominated entities. The effective tax rate was 11.0%, compared with 40.8% in the prior period, principally because the gain was largely non-taxable.
Gross margin on service and product revenues declined to 42.4% from 44.7%. Service margin decreased to 40.9% from 43.2%, and product margin decreased to 48.1% from 50.3%. North American salon operating income was $34.0 million, or 7.2% of segment revenue, versus $50.0 million, or 10.0%. International salon operating income was $0.4 million, or 1.3% of revenue, versus $0.6 million, or 1.6%.
Balance sheet, debt, and liquidity
- Total assets were $1.57 billion and shareholders’ equity was $897.7 million at September 30, 2012.
- Total debt was $280.1 million, including $28.9 million classified as current, compared with $287.7 million at June 30, 2012. Estimated fair value of debt was $298.5 million.
- Debt to capitalization was 23.8%, down from 24.4% at June 30, 2012.
- The company had no borrowings under its $400.0 million revolving credit facility, $51.0 million of standby letters of credit, and $349.0 million of unused availability.
- Regis repaid $8.9 million of long-term debt and paid $3.4 million of dividends during the quarter. The quarterly dividend remained $0.06 per share.
- Cash increased by $110.5 million, primarily because of $103.4 million received from the Provalliance sale, $25.6 million of principal payments from Empire Education Group, and $1.3 million received from Yamano-related notes.
- Management stated that available cash, operating cash flow, and the revolving facility should be sufficient for operations and anticipated growth for at least the next twelve months, subject to continued cash generation and financing access.
Material changes versus the prior comparable period
- Revenue fell 4.9% to $505.4 million. Consolidated same-store sales declined 3.1%, driven by lower guest visits and a marginally lower average ticket, while 439 salons were closed during the preceding twelve months.
- Service revenue decreased 5.2% and product revenue decreased 4.2%; royalties and fees increased 1.1% to $9.7 million.
- Operating income increased slightly despite lower revenue because the prior-year period included significant accelerated depreciation, senior-management restructuring costs, and contested-proxy professional fees. General and administrative expense declined 15.2%, and depreciation and amortization declined 32.8%.
- Underlying salon profitability weakened: North American operating income fell 32.1%, primarily from lower gross margins, higher salon labor costs, and negative leverage on fixed costs.
- Operating cash flow declined 37.1% to $8.5 million, reflecting weaker operating performance and working-capital movements.
- Regis completed the sale of its Provalliance investment for €80 million and recognized the related $24.0 million accumulated other comprehensive income gain in earnings.
- The company constructed 57 corporate locations, closed, converted, or relocated 99 locations, and made no acquisitions during the quarter.
Guidance, outlook, commentary, and risks
Management’s fiscal 2013 strategy focuses on improving the guest and stylist experience, strengthening salon brands in attractive markets, expanding technology and connectivity, and reviewing non-core assets. No specific revenue, earnings, or same-store-sales guidance was provided in the filing.
- Management expects the Hair Club sale to close during fiscal 2013 for cash consideration of $163.5 million, subject to a working-capital adjustment, and anticipates recognizing a gain at closing.
- Promenade and the Hair Restoration Centers reporting unit had relatively narrow goodwill valuation cushions of approximately 14% and 12%, respectively, at the fiscal 2012 annual impairment test. Additional impairment remains reasonably likely under adverse operating conditions.
- Empire Education Group remains exposed to potential impairment because of continued weakness in the for-profit education market. Regis stated that an additional impairment during fiscal 2013 would be more likely if market conditions do not improve.
- Negative same-store sales, consumer spending pressure, competition, labor and benefit costs, minimum-wage and healthcare-related costs, fashion trends, supplier relationships, and foreign-currency movements could adversely affect results.
- The company faces various consumer, wage-and-hour, and other lawsuits, as well as a shareholder derivative action involving executive compensation and related-party transactions. Outcomes cannot presently be determined and could materially affect a particular period.
- Debt agreements include leverage, fixed-charge coverage, minimum-net-worth, and other covenants. Regis was in compliance at September 30, 2012 and obtained a waiver related to the Hair Club sale.
- The company is implementing or evaluating point-of-sale systems. Failure to implement these systems effectively could disrupt operations or adversely affect results.
Most important facts for an investor to verify
- Whether the Hair Club transaction closed as expected and the final consideration and gain recognized.
- Whether negative same-store sales and declining guest visits continued or improved after September 30, 2012.
- The sustainability of reported earnings excluding the $24.0 million foreign-currency-related gain and the unusually low 11.0% effective tax rate.
- Whether Promenade, Hair Restoration Centers, or Empire Education Group required additional impairment charges.
- Compliance with debt covenants, scheduled maturities, and the availability of the revolving credit facility.
- The outcome and potential financial exposure from pending litigation and the shareholder derivative action.
- Whether operating cash flow recovered sufficiently to fund capital expenditures, dividends, debt repayments, and planned strategic initiatives.