Regis Corporation — Form 10-Q Summary
Business Context and Reporting Period
Regis Corporation owns, franchises and operates beauty salons. This filing covers the three and six months ended December 31, 2013, the second quarter of fiscal 2014. The company reported 9,757 worldwide locations, including 9,511 system-wide salons and 246 locations with non-controlling ownership interests.
During the quarter, Regis completed a North American field-organization restructuring and changed its reportable segments to North American Value, North American Premium and International. Prior-period segment information was revised for comparability. Hair Club results were classified as discontinued operations following its fiscal 2013 sale.
Financial Results and Key Metrics
| Metric | Three Months Ended Dec. 31, 2013 | Three Months Ended Dec. 31, 2012 | Six Months Ended Dec. 31, 2013 | Six Months Ended Dec. 31, 2012 |
|---|---|---|---|---|
| Revenue | $468.4 million | $506.2 million | $937.0 million | $1,011.5 million |
| Operating income (loss) | $(34.7) million | $8.7 million | $(33.2) million | $18.0 million |
| Net income (loss) | $(109.1) million | $(12.3) million | $(109.2) million | $26.2 million |
| Diluted EPS | $(1.93) | $(0.22) | $(1.94) | $0.46 |
| Cash flow from operations | Not provided for the quarter | Not provided for the quarter | $49.2 million | $59.0 million |
Revenue declined 7.5% for the quarter and 7.4% year to date. Consolidated same-store sales decreased 6.2% and 5.8%, respectively, driven primarily by lower guest visits. Service revenue declined 7.0% for the quarter and 6.3% year to date; product revenue declined 9.7% and 12.4%, respectively. Royalties and fees were approximately flat for the quarter and increased modestly year to date.
Operating margins were approximately negative 7.4% for the quarter and negative 3.5% year to date, compared with positive 1.7% and 1.8% in the prior-year periods. Net margins were approximately negative 23.3% and negative 11.7%, compared with negative 2.4% and positive 2.6%.
North American Value operating income declined to $26.8 million for the quarter from $37.4 million. North American Premium reported a $38.9 million operating loss, including the $34.9 million goodwill impairment charge. International operating income increased to $0.5 million from $0.2 million.
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $339.4 million at December 31, 2013, up from $200.5 million at June 30, 2013.
- Total debt was $294.2 million, including $174.1 million classified as current and $120.0 million classified as long term. The debt-to-capitalization ratio was 28.3%, versus 16.9% at June 30, 2013.
- In November 2013, Regis issued $120.0 million of 5.75% senior notes due December 2017 and received $118.1 million of net proceeds.
- The $400.0 million revolving credit facility had no borrowings, $2.2 million of standby letters of credit and $397.8 million of unused availability. The company was in compliance with its financing covenants.
- Year-to-date operating cash flow was $49.2 million, investing cash flow was $(18.9) million and financing cash flow was $107.8 million. Capital expenditures were $23.9 million.
Material Changes Versus the Prior Comparable Period
- Revenue and same-store sales deteriorated materially, reflecting disruption from strategic initiatives, salon closures and weaker guest traffic.
- Regis recorded a $34.9 million non-cash goodwill impairment charge for the Regis salon concept, reducing the related goodwill to zero.
- Regis recorded an $83.1 million non-cash valuation allowance against U.S. deferred tax assets. This contributed to tax expense of $72.3 million for the quarter and $72.0 million year to date.
- Operating results benefited from lower general and administrative costs, but the benefit was offset by revenue declines, negative operating leverage and impairment charges.
- Interest expense decreased to $5.2 million for the quarter and $9.7 million year to date, primarily because of lower average debt levels, despite the new senior notes issued in November.
- Prior-year results included $33.8 million of foreign-currency translation gain and income from Hair Club discontinued operations; these items did not recur in the current year.
- The company paid $0.12 per share in dividends during the first six months but announced that regular quarterly dividends would no longer be declared under its new capital allocation policy.
Guidance, Outlook, Risks and Unusual Items
Regis provided no specific quantitative earnings or revenue guidance. Management expects business performance to improve over time as the company reverses disruption from its new point-of-sale system, salon workstations, field-organization restructuring, plan-o-gram standardization and retail assortment reductions. Management intends to retain excess cash, emphasize franchised-location growth and expand company-owned locations through its Walmart partnership.
Management stated that it may use the senior-notes proceeds and existing cash to settle the $172.5 million of 5.0% convertible senior notes described in the filing as due in July 2014. The debt table separately presents a fiscal-year 2015 maturity, so the maturity and refinancing plan should be verified against the underlying debt documents.
Key risks include continued negative same-store sales, unsuccessful strategic execution, additional impairment charges, difficulty attracting and retaining stylists, competition, economic conditions, healthcare and regulatory changes, reliance on information systems, joint-venture performance, interest-rate and foreign-currency changes, litigation and data-security risks.
Regis is involved in various lawsuits and claims, including alleged consumer and wage-and-hour violations and a stayed shareholder derivative action concerning executive compensation and related-party transactions. The company states that outcomes cannot presently be determined and that material judgments or settlements could affect results.
Important Facts for Investors to Verify
- Whether same-store sales and guest visits recover following implementation of the strategic initiatives.
- Whether the North American Premium segment requires further asset or goodwill impairments.
- The precise maturity, settlement terms and refinancing plan for the convertible senior notes.
- Whether the U.S. deferred tax asset valuation allowance can ultimately be reversed.
- Future compliance with debt covenants and the company’s ability to fund operations, capital expenditures and debt maturities from cash flow.
- The effect of discontinued dividends on shareholder returns and capital allocation.
- Developments in pending litigation, tax audits and the company’s investment in Empire Education Group.