Regis Corporation Form 10-Q Summary
Business Context and Reporting Period
Regis Corporation operates approximately 12,750 worldwide locations, including North American and international salons, hair restoration centers, and equity interests in affiliated businesses. This Form 10-Q covers the quarter and six months ended December 31, 2010, the second quarter of fiscal 2011. The interim financial statements are unaudited and were reviewed, but not audited, by PricewaterhouseCoopers LLP.
Key Financial Metrics
| Metric | Three Months Ended Dec. 31 | Six Months Ended Dec. 31 |
|---|---|---|
| Revenue | $574.4 million, down 0.2% | $1,152.6 million, down 2.4% |
| Operating income | $22.9 million; 4.0% margin | $56.3 million; 4.9% margin |
| Income from continuing operations | $14.5 million | $32.8 million |
| Net income | $14.5 million | $32.8 million |
| Diluted earnings per share | $0.24 | $0.54 |
| Operating cash flow | Not provided for the quarter | $102.8 million |
- Gross margin, excluding depreciation and amortization, was 44.5% for the quarter and 44.9% for the six months, compared with 45.0% and 44.3%, respectively, in the prior-year periods.
- Service revenue declined 1.0% for the quarter and 1.6% year to date; product revenue increased 2.4% for the quarter but declined 5.2% year to date, partly because the prior-year period included $20.0 million of Trade Secret product sales.
- Consolidated same-store sales declined 1.3% for the quarter and 1.4% year to date. Management cited lower customer visitations and adverse December weather, partly offset by higher average ticket prices.
- Cash and cash equivalents were $174.3 million at December 31, 2010, compared with $151.9 million at June 30, 2010.
- Total debt was $404.1 million, down from $440.0 million at June 30, 2010. Debt-to-capitalization improved to 27.5% from 30.3%.
- Shareholders’ equity increased to $1.065 billion from $1.013 billion, primarily from net income and foreign-currency translation.
- Capital expenditures were $30.7 million and acquisitions used $8.1 million during the six months. Dividends paid were $4.6 million, or $0.08 per share.
Material Changes Versus the Prior Comparable Period
- Quarterly operating income fell 28.7%, from $32.1 million to $22.9 million, and quarterly net income fell 20.1%, from $18.2 million to $14.5 million.
- Year-to-date operating income declined 6.7%, from $60.3 million to $56.3 million, while net income increased 26.6%, from $25.9 million to $32.8 million.
- Year-to-date earnings benefited substantially from lower interest expense. Prior-year interest expense included approximately $18.0 million of make-whole payments, debt repayment fees, and interest-rate swap settlements.
- Year-to-date results no longer include the prior-year $3.2 million net income from discontinued operations related to the 2009 sale of Trade Secret.
- International salon revenue declined 8.1% for the quarter and 8.9% year to date, primarily due to lower same-store sales, salon closures, and unfavorable foreign-currency translation.
- Hair restoration revenue increased 2.1% for the quarter and 2.9% year to date, while year-to-date operating income increased 5.4%.
- North American salon operating income declined 12.9% for the quarter and 6.2% year to date. Management cited holiday staffing costs, lower same-store sales, higher advertising, telecommunications costs, and unfavorable self-insurance adjustments.
- Lease termination costs were zero in the current-year periods versus $3.6 million in the prior-year six-month period.
Liquidity, Outlook, Risks, and Unusual Items
- Management stated that operating cash flow and available debt facilities should fund anticipated capital expenditures, acquisitions, and required debt repayments for the foreseeable future. The company reported compliance with all financing covenants at December 31, 2010.
- Fiscal 2011 outlook included approximately 160 constructed salons, approximately $95 million of capital expenditures, and approximately $25 million of acquisitions. Management projected consolidated same-store sales at the low end of a negative 1.0% to positive 2.0% range.
- Management continues to target long-term annual revenue growth of 6% to 10%, but reduced the pace of salon development and acquisitions until customer visitations stabilize.
- Regis expected to acquire an additional 17% interest in Provalliance for approximately $56 million in cash before June 30, 2011. The transaction was expected to increase Regis’s ownership to approximately 46% and generate a gain of approximately $1 million to $3 million from reversal of part of the equity put liability.
- The purchaser of Trade Secret filed for Chapter 11 bankruptcy in July 2010. Regis carried a net note receivable of approximately $31.5 million, believed to be fully collateralized, but warned that declining collateral could require additional reserves. Interest recognition was placed on a cash basis.
- Promenade goodwill was considered particularly vulnerable to future impairment because its estimated fair value exceeded carrying value by approximately 10%. No interim impairment-triggering event was identified through December 31, 2010.
- Regis remained exposed to wage-and-hour and other litigation. A $5.2 million charge was recorded in fiscal 2010 for two settlements, with $4.3 million remaining accrued at December 31, 2010.
- Key risks include continued negative same-store sales, consumer spending and fashion trends, competition and price sensitivity, labor and benefit costs, regulatory changes, foreign-currency and interest-rate movements, franchise and landlord relationships, acquisition execution, product distribution changes, data security, and potential covenant pressure.
- The Board concluded in December 2010 that Regis would continue as an independent public company after reviewing strategic alternatives. Senior management changes announced February 3, 2011 appointed Randy Pearce as President and Brent Moen as Chief Financial Officer.
Most Important Facts for Investors to Verify
- Whether same-store sales and customer visitation stabilize, particularly in North American and international salons.
- Whether planned fiscal 2011 capital spending, salon construction, acquisitions, and Provalliance investment remain within stated amounts.
- The collectability and collateral value of the $31.5 million net Trade Secret-related receivable.
- Potential future impairment of Promenade goodwill and other long-lived assets if operating trends weaken.
- Debt maturities, convertible-note conversion or cash-settlement exposure, covenant headroom, and the effect of interest-rate changes.
- Outcomes and potential costs of pending litigation, wage-and-hour claims, and other contingencies.
- The effect of the announced leadership transition and continued execution of the independent-company strategy.