Regis Corporation — Form 10-Q Summary
Business context and reporting period
This filing covers the three and nine months ended March 31, 2018, Regis Corporation’s fiscal third quarter and year-to-date period. Regis owns and franchises beauty salons, with 8,228 system-wide locations and approximately 28,000 corporate employees at quarter-end. Following the October 2017 sale of substantially all mall-based North American salons and the International segment to The Beautiful Group (TBG), the continuing business is reported in two segments: Company-owned salons and Franchise salons.
Key financial metrics
| Metric | Q3 FY2018 | Q3 FY2017 | 9M FY2018 | 9M FY2017 |
|---|---|---|---|---|
| Revenue | $300.8 million | $313.5 million | $919.2 million | $947.6 million |
| Operating income (loss) | $5.9 million | $(6.2) million | $(14.7) million | $6.5 million |
| Income (loss) from continuing operations | $4.8 million | $(11.8) million | $54.9 million | $(5.1) million |
| Net income (loss) | $(5.8) million | $(18.5) million | $3.9 million | $(17.4) million |
| Diluted EPS | $(0.12) | $(0.40) | $0.08 | $(0.38) |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $(22.6) million | $46.8 million |
Q3 revenue declined 4.0%, while nine-month revenue declined 3.0%. Company-owned salon revenue decreased 7.6% in Q3 and 5.5% year to date, primarily because of salon closures, refranchising and the discontinued mall-based and International operations. Franchise revenue increased 50.9% in Q3 and 36.4% year to date, aided by product sales to TBG and a larger franchise base.
Consolidated same-store sales increased 1.6% in Q3 and 0.4% year to date, driven by higher average ticket prices but reduced guest visits. Management estimates the Easter calendar shift favorably affected Q3 same-store sales by approximately 0.9%.
Q3 operating margin was approximately 2.0%, compared with negative 2.0% in the prior-year quarter. Year-to-date operating margin was negative 1.6%, compared with positive 0.7% in the prior-year period. The nine-month effective tax rate was 389.9%, primarily reflecting a provisional $68.9 million tax benefit from the Tax Cuts and Jobs Act, including deferred-tax remeasurement and a partial valuation allowance release.
At March 31, 2018, cash and cash equivalents were $105.2 million, compared with $171.0 million at June 30, 2017. Total assets were $857.2 million and shareholders’ equity was $513.3 million. Debt was $90.0 million, consisting of borrowings under a new revolving credit facility. Available capacity was $168.4 million after $1.6 million of standby letters of credit; the facility was increased to $295.0 million in April 2018.
Material changes versus the prior comparable period
- Regis redeemed its 5.5% senior term notes for $124.2 million, funded with $90.0 million of revolving borrowings and $34.2 million of cash. The repayment generated approximately $1.7 million of additional interest expense from debt discount and issuance-cost write-offs.
- Regis closed 597 underperforming Company-owned SmartStyle salons in January 2018. Nine-month restructuring costs totaled $38.4 million, including lease termination costs, asset retirement obligations, impairments, severance and inventory reserves.
- Company-owned salon operating income increased $2.7 million in Q3 but declined $34.3 million year to date, with the year-to-date decline primarily attributable to SmartStyle restructuring charges and related costs.
- Franchise operating income increased $1.7 million in Q3 and $4.5 million year to date. Franchise locations increased to 4,012 from 2,646 at June 30, 2017, while Company-owned locations declined to 4,128 from 6,273.
- Operating cash flow shifted from $46.8 million provided in the prior-year nine-month period to $22.6 million used, primarily due to SmartStyle closure payments and lower cash generation from salon operations.
- Regis repurchased 585,967 shares for $9.6 million during the nine months, with $50.4 million remaining under the authorized repurchase program.
Outlook, risks, contingencies and unusual items
- Management expects the SmartStyle closures to improve the portfolio by eliminating salons that generated approximately $15 million of negative cash flow during the twelve months ended September 30, 2017, while reallocating resources to remaining salons.
- Regis is pursuing a greater franchise mix and expects refranchising to reduce consolidated revenue while increasing royalty revenue and reducing operating costs. The actual benefit remains uncertain.
- TBG’s transition and financial performance remain significant risks. Regis fully reserved $11.7 million of working capital and prepaid-rent amounts associated with the TBG transaction and reclassified $8.0 million of TBG receivables to other assets because collection is expected more than twelve months in the future.
- Regis remains liable under certain leases for divested salons and may face additional reserves, litigation or other costs if TBG experiences further cash-flow problems. Transition-services income is expected to end in the fourth quarter of fiscal 2018.
- The company faces risks from labor shortages, minimum-wage increases, stylist retention, consumer traffic trends, Walmart-related traffic, competition, information-technology and cybersecurity issues, franchisee performance, debt-covenant compliance and economic conditions.
- Various lawsuits and claims, including purported consumer and wage-and-hour class actions, are pending. Outcomes cannot presently be determined and could materially affect a future period.
- The company expects to adopt the new revenue-recognition standard in fiscal 2019 using the full retrospective method. Advertising-fund activity, initial franchise fees and gift-card breakage could materially change reported revenue, expenses and net income presentation.
Important facts for investors to verify
- Whether same-store sales and guest visits improve without relying on favorable calendar effects or price increases.
- Whether SmartStyle restructuring savings exceed the $38.4 million of recorded nine-month costs and whether additional closure liabilities arise.
- TBG’s ability to meet payment obligations, operate the divested salons successfully and avoid additional Regis reserves or lease liabilities.
- The sustainability of the franchise expansion and its ability to offset lower Company-owned revenue and corporate overhead.
- The final accounting impact of the Tax Cuts and Jobs Act and the resulting cash-tax profile, given the provisional nature of the $68.9 million benefit.
- Liquidity and covenant compliance following the debt refinancing, share repurchases and negative year-to-date operating cash flow.