Regis Corporation — Form 10-Q Summary
Business Context and Reporting Period
Regis Corporation owns, operates and franchises beauty salons. The filing covers the quarter and six months ended December 31, 2015, the second quarter of fiscal 2016. The company reported 9,355 system-wide salons, including 6,928 company-owned and 2,427 franchised locations, plus 206 locations with non-controlling ownership interests.
Financial Performance and Position
| Metric | Three Months Ended Dec. 31, 2015 | Six Months Ended Dec. 31, 2015 |
|---|---|---|
| Revenue | $450.5 million | $900.6 million |
| Operating income (loss) | $(2.9) million | $1.4 million |
| Net loss | $(14.0) million | $(14.8) million |
| Basic and diluted loss per share | $(0.29) | $(0.29) |
| Operating cash flow | Not separately provided | $11.9 million |
- Quarterly revenue declined 1.2% year over year; six-month revenue declined 2.2%.
- Consolidated same-store sales increased 2.2% in the quarter and 1.4% year to date, driven by higher average tickets but reduced guest visits.
- North American Value revenue increased to $349.3 million for the quarter, while North American Premium and International revenue declined to $73.0 million and $28.2 million, respectively.
- Quarterly operating expenses were $453.4 million, producing an operating loss margin of approximately 0.6%. Six-month operating expenses were $899.2 million, producing an operating margin of approximately 0.2%.
- Cash and cash equivalents were $130.2 million at December 31, 2015, down from $212.3 million at June 30, 2015.
- Long-term debt was $120.1 million, with no borrowings under the revolving credit facility. Debt-to-capitalization increased to 18.4% from 16.1% at June 30, 2015, primarily because of share repurchases.
- Capital expenditures were $15.7 million, and financing cash use included $77.0 million of common-stock repurchases.
Material Changes Versus the Prior Comparable Period
- Net loss improved from $16.7 million to $14.0 million for the quarter and from $26.5 million to $14.8 million for the six-month period. Comparisons reflect revised 2014 amounts.
- Operating results improved year to date from a $1.4 million operating loss to $1.4 million of operating income, but quarterly operating loss widened from $0.7 million to $2.9 million.
- Service revenue declined $9.8 million for the quarter and $24.4 million year to date, primarily because of salon closures, sales of company-owned salons to franchisees and foreign-currency effects.
- Product revenue increased $3.6 million for the quarter and $2.8 million year to date. Royalties and fees increased $0.8 million and $1.7 million, respectively.
- Cost of service increased as a percentage of service revenue by 100 basis points in both reported periods, primarily due to stylist productivity and state minimum-wage increases.
- Depreciation and amortization declined $2.6 million for the quarter and $6.9 million year to date, partly because of reduced salon asset impairments and prior salon closures.
- Operating cash flow declined from $37.6 million to $11.9 million, primarily because of higher inventory purchases and enhanced incentive payouts.
- The company repurchased approximately 6.0 million shares during the six months for $77.0 million. The board authorized an additional $50.0 million for repurchases in January 2016.
Guidance, Outlook, Risks and Unusual Items
- Management stated that cash, operating cash flow and borrowing arrangements are expected to be sufficient for the next twelve months, while cautioning that weaker cash generation could require limiting or delaying strategic initiatives.
- In December 2015, the company exchanged $120.0 million of 5.75% senior notes due 2017 for $123.0 million of 5.5% senior notes due 2019. In January 2016, the revolving-credit capacity was reduced from $400.0 million to $200.0 million; unused availability was $198.4 million at January 28, 2016.
- The company recorded a $13.0 million non-cash impairment charge to fully impair its investment in Empire Education Group, reflecting lower enrollment, revenue and profitability projections. The company retained a 54.6% ownership interest but reported no remaining investment value.
- Long-lived salon asset impairment charges were $5.0 million for the six months ended December 31, 2015, compared with $7.0 million in the prior-year period.
- Effective tax rates were unusually high because of valuation-allowance effects on deferred tax assets. Management expects approximately $8.0 million of related tax expense for fiscal 2016.
- Prior-period financial statements were revised for deferred-rent accounting and self-insurance accrual errors. The company stated that the revisions did not affect cash provided by operations or cash balances.
- Disclosure controls remained ineffective because a previously reported material weakness in lease accounting had not been fully remediated. Management warned that material misstatements in deferred rent and related accounts could continue until remediation is completed and tested.
- Risks include stylist recruitment and retention, declining cosmetology-school enrollment, competition, wage and healthcare costs, foreign currency, debt-covenant compliance, litigation, tax audits, cybersecurity and the financial performance of Empire Education Group.
- The company is involved in ordinary-course lawsuits, including consumer and wage-and-hour claims, whose outcomes cannot presently be determined and could materially affect a particular period.
Most Important Facts for Investors to Verify
- Whether same-store sales growth can offset continued salon closures, lower guest visits and foreign-currency pressure.
- Progress in remediating the material weakness in lease-accounting controls.
- Cash-flow trends after substantial share repurchases and the effect of the reduced revolving-credit facility.
- Compliance with debt covenants and the company’s ability to refinance or repay the $120.1 million of debt.
- Further deterioration or potential liabilities associated with Empire Education Group.
- Resolution and financial exposure from wage-and-hour, consumer, tax and other legal matters.
- The sustainability of reported profitability excluding non-cash impairments, unusual tax benefits and prior-period revisions.