Regis Reports Third Quarter 2013 Results

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Regis Reports Third Quarter 2013 Results

MINNEAPOLIS--(BUSINESS WIRE)-- Regis Corporation (NYS: RGS) , a leader in the haircare industry, whose primary business is owning, operating and franchising hair salons, today reported results for its fiscal third quarter ended March 31, 2013 versus the prior year as noted below. As a reminder, references made to discrete items were formerly referred to as non-operational items in previous earnings releases, and references made to financial measures, as adjusted, were formerly referred to as operational measures in previous earnings releases.

  • Sales of $504.9 million, a decrease of 5.8%. Same-store sales declined 1.4%.
    • Same-store service sales declined 0.3%.
  • GAAP net income of $2.4 million. GAAP net income including discontinued operations per diluted share (Diluted EPS) of $0.04.
  • Diluted EPS, as adjusted, of $0.01 compared to $0.29.
    • Current year earnings were reduced by approximately $0.12 per share due to two fewer sales days in the quarter, increased labor costs primarily associated with increased stylist hours, increased retail product costs primarily associated with clearance sales and reduced equity in earnings of Empire Education Group.
    • Prior year earnings included $0.03 per share, representing equity in earnings of Provalliance (sold in the current year first quarter) and tax benefits realized primarily due to the release of income tax reserves and increased Work Opportunity tax credits.
  • EBITDA, as adjusted, of $26.8 million compared to $52.1 million.
    • Current year was reduced by approximately $10.0 million due to two fewer sales days in the quarter, increased labor costs primarily associated with increased stylist hours and increased retail product costs from clearance sales.
    • Several additional factors impacted the decline in EBITDA, including same-store sales declines of 1.4%, increased costs in connection with our new point of sale system and salon work stations, and increased salon repairs and maintenance expense.
  • The current year quarter includes net discrete after-tax income of $1.7 million, mainly from earnings from discontinued operations and Work Opportunity tax credits, partly offset by accelerated depreciation and senior management restructuring costs. The prior year quarter includes $19.3 million of net discrete after-tax expense.
  • All periods presented reflect the reclassification of our Hair Restoration segment to discontinued operations. During the current quarter, the Hair Restoration segment generated earnings of $0.03 per diluted share. The Company completed the sale of this business on April 9, 2013. At the closing of the sale, the Company received $162.8 million, which was the purchase price of $163.5 million adjusted for the preliminary working capital provision.

"Service traffic is the engine of our business and accounts for over 75% of our revenue. My primary focus over the past six months has been to reverse the decline in service traffic Regis has been experiencing over the past several years," said Dan Hanrahan, President and Chief Executive Officer. "This focus is producing positive results. We have slowed the revenue decline in same-store sales and are generating sequential improvement in our service business. Third quarter consolidated same-store service sales declined 0.3%, which improved 120 basis points from second quarter and 270 basis points from first quarter.


"We made the decision to invest in salon hours, focusing mainly on our SmartStyle salons located in Walmart and our Supercuts salons as these are our biggest assets. Both groups posted positive same-store service sales in the quarter, with SmartStyle and Supercuts increasing revenue 2.6% and 1.3%, respectively. Traffic trends in the quarter were varied and we benefited from an early Easter. We made the decision to invest in stylist hours, recognizing it would have a negative impact on margins in the short term. I view these lower margins as a temporary and necessary investment to improve the guest experience and help bring guests back to our brands. We did make progress on our scheduling optimization initiative, which helped us narrow the gap between staffing and guest traffic and improved third quarter cost of service by 50 basis points when compared to second quarter."

Mr. Hanrahan continued, "Over the last nine months I spent most of my time in the field, visiting our top performing stores, and consulting with our best operators and franchisees, and I have seen in action what works. We are applying these learnings and beginning to build a foundation that is necessary to turnaround our business. As we said on the last call, our mission is to create guests for life. To achieve our mission we need to make foundational changes to improve our guest and stylist experience, simplify and standardize operating processes and drive ownership behaviors inherent in a performance-based culture that capitalizes on the revenue and profitability potential of each salon, one guest at a time."

Examples of foundational changes discussed by Mr. Hanrahan include the following:

  • Stylist Hours. Stylists are the Company's most important and productive assets. When the Company reduces stylist hours, its revenue generating capability declines. More importantly, by cutting hours, wait times increase which reduces the quality of the guest experience. To the detriment of profitability, the Company continued investing in stylist hours to help drive traffic and improve the guest experience. Investments were made primarily in SmartStyle and Supercuts salons, and the Company is beginning to see improvements in guest traffic, especially in these brands.
  • Optimization. To improve the return on the investment in stylist hours, the Company is focused on balancing these hours with demand patterns in guest traffic, referred to as optimization.Historically, the Company did not manage the business to optimize salon schedules. Regis is driving towards making scheduling optimization a core competency. Last November, a scheduling tool was rolled out to our salons, and the Company improved the balance between hours and sales during the third quarter and will continue to focus on this area.
  • Technology. Historically, the Company did not utilize technology to drive traffic, create guest loyalty or measure guest satisfaction. During the fourth quarter, the Company will complete the rollout of SuperSalon, a new point of sale system, and salon work stations in well over 90% of North American salons. This will significantly enhance guest relationship management capabilities, improve communications with our salons, facilitate delivery of training to stylists and provide improved salon level analytics on guest retention, stylist productivity and salon performance.
  • Organization. Having the right organization structure and people in place to drive these changes is critical to the Company's success. The Company's current organizational structure has too many layers of management, which restricts local level execution and agility. We are following the lead of our top performing franchisees and operators and restructuring our field operations. The restructuring of the field organization is currently underway and will reduce the span of control, improve geographic alignment, enable more localized decision making, incent ownership behaviors and provide long-term career paths for our employees. We remain focused on the guest experience training program which delivers on critical points of service.
  • Merchandising. While the Company's efforts have been devoted to the service engine, recent attention has been focused on plan-o-gram standardization and product rationalization, in an effort to simplify and manage our ongoing inventory investment. The Company has rolled out simplified and standardized plan-o-grams in approximately 20 salons in an effort to develop the best product assortment. Simplification and standardization will make it easier for guests to shop and stylists to sell retail products, improve salon appearance, reduce inventory management time and enable distribution efficiencies. In anticipation of simplifying on a broader basis, the Company offered clearance sales during the third quarter that will continue through the balance of this fiscal year.
  • Disposals. During the fiscal year, Regis completed the sale of its Provalliance and Hair Club businesses for approximately $266 million, and will continue to review its portfolio and shed non-core properties to the extent they enable simplification and focus on core businesses.

Mr. Hanrahan concluded, "While these initiatives have made progress and we are beginning to simplify our business for long-term success, we are still in the early stages of a challenging turnaround. I remain optimistic about recent improvements in sales trends and, as I mentioned last quarter, changing the strategic direction of any established business requires investment, execution and time. We are focused on creating an ideal guest experience that drives loyalty and repeat business, developing, retaining and attracting the best stylists and optimizing our brand portfolio. I remain extremely confident about our ability to improve Regis' long-term performance."

 
 
Comparable Profitability Measures (1)
 
  Three Months Ended Nine Months Ended Fiscal Years Ended
March 31,March 31,June 30,
2013 20122013 20122012 2011
(Dollars in Millions)
Revenue$504.9$535.9$1,516.5$1,593.4$2,122.2$2,180.2
 
Revenue decline %(5.8)(1.7)(4.8)(2.0)(2.7)(1.6)
 
Same-Store Sales %(1.4)(3.9)(2.1)(3.5)(3.5)(1.9)
Same-Store Average Ticket % Change1.0(0.4)0.6(0.5)(0.6)1.0
Same-Store Guest Count % Change(2.4)(3.5)(2.7)(3.0)(2.9)(2.9)
 
Cost of Service and Product % (2)58.156.358.055.855.855.9
Cost of Service % (2)59.858.059.757.357.357.4
Cost of Product % (2)51.650.351.550.150.450.3
 
Site operating expense as % of total revenues, U.S. GAAP reported10.69.510.39.99.89.7
Site operating expense as % of total revenues, as adjusted10.69.510.49.99.79.7
 
General and administrative as % of total revenues, U.S. GAAP reported11.211.211.111.811.813.1
General and administrative as % of total revenues, as adjusted11.110.211.011.211.011.3
 
Operating income (loss) as % of total revenues, U.S. GAAP reported0.74.31.42.8(0.1)(0.7)
Operating income as % of total revenues, as adjusted1.05.51.54.44.64.5
 
EBITDA28.633.8114.960.314.7101.3
EBITDA, as adjusted26.852.188.3139.8191.4195.3
 
  1) As of September 30, 2012, the Company classified the results of operations of the Hair Restoration Centers segment as discontinued operations. Beginning with the first quarter ended September 30, 2012, the Company reclassified certain salon marketing and advertising expenses that were previously within cost of service and general and administrative expense to site operating expense. All periods presented reflect the Hair Restoration Centers segment operations as discontinued operations and the reclassifications that were made during the quarter ended September 30, 2012.
2)Excludes depreciation and amortization.
 

Third Quarter Results:

Revenues. Revenues for the quarter declined $31.0 million, or 5.8%, compared to the prior year quarter.

Service revenues during the quarter were $392.1 million, a decrease of $20.8 million, or 5.0%, from the prior year quarter, mainly driven by declines in North American salons. North American service revenues for the quarter were $370.7 million, a decrease of $19.5 million, or 5.0%, compared to the same period last year. Compared to the prior year quarter, North American same-store service sales declined 0.4%, comprised of a 1.7% decrease in guest counts and 1.3% increase in average ticket price. Management estimates that the shift in Easter from April to March positively impacted same-store service sales by approximately 70 basis points. Net changes in store counts and two fewer sales days drove the remaining 4.6% decrease compared to the prior year quarter.

Product revenues for the quarter were $103.2 million, a decrease of $9.9 million, or 8.8%, versus the same period last year. Product same-store sales declined 5.2%.

Royalties and fees for the quarter of $9.6 million decreased $0.2 million, or 2.1%, versus the prior year quarter.

Cost of Service and Product. Cost of service and product as a percent of service and product revenues for the third quarter increased 180 basis points to 58.1% compared to the prior year quarter.

Cost of service as a percent of service revenues for the quarter was 59.8%, an increase of 180 basis points compared the prior year quarter, primarily related to increased salon labor costs in North American salons and increased holiday pay due to the shift of the Easter holiday from April last year to March this year. The increase in salon labor costs was due to the Company's continued decision to increase stylist hours to drive traffic. The Company is working to improve scheduling optimization which will help align changes to salon hours with changes in guest traffic.

Cost of product as a percent of product revenues for the quarter was 51.6%, an increase of 130 basis points compared to the prior year quarter, largely driven by clearance sales. We made a conscious decision to mark down salon inventories in anticipation of plan-o-gram standardization and simplification across over 7,000 salons and product rationalization initiatives planned for next fiscal year. While this activity increases our cost of product rate as a percentage of product revenues, marking down inventories yields higher cash returns than the Company's past practice of repackaging and returning these products to our distribution centers for restocking, disposal or return to vendors. We expect to continue this clearance program in the fourth quarter of fiscal 2013.

Site Operating Expenses. Site operating expenses for the quarter of $53.7 million, or 10.6% of revenues, increased by $3.0 million or 5.8% compared to the same quarter last year. The increase was primarily driven by increased connectivity costs to support the Company's new point of sale system and salon work stations, advertising costs and higher salon repairs and maintenance expense.

General and Administrative. General and administrative expenses for the quarter of $56.8 million, or 11.2% of revenues, decreased $3.5 million, or 5.7%, compared to the same quarter last year. Excluding the impact of discrete items in both periods, general and administrative expenses, as adjusted, for the quarter increased $1.3 million, or 2.3%, compared to the same quarter last year, representing an 90 basis point increase as a percent of revenues. It is important to note that the current quarter has begun to lap significant cost reductions made in the same quarter last year when the Company implemented its senior management restructuring and corporate workforce reduction. While general and administrative expenses, as adjusted, during the third quarter were consistent with the first half of our fiscal year, we remain focused on simplification to drive further cost efficiencies.

Rent. Rent expense for the quarter was $80.8 million, or 16.0% of revenues, representing an increase of 70 basis points over the same quarter last year, primarily the result of negative leverage due to decreases in same-store sales. Rent expense declined by $1.4 million, or 1.7%, compared to the same quarter last year, due to store closures.

Depreciation and Amortization. Depreciation and amortization for the quarter was $22.7 million, or 4.5% of revenues, compared to $23.5 million, or 4.4% of revenues in the prior quarter. Excluding the impact of discrete items in both years, depreciation and amortization increased 20 basis points versus the prior year quarter.

Income Taxes. During the three months ended March 31, 2013, the Company recognized a tax benefit, as adjusted, of approximately $1.0 million primarily relating to Work Opportunity tax credits.

Equity in Affiliates. Income from equity method investments and affiliated companies was $1.2 million in the third quarter of fiscal 2013, a decrease of $1.2 million over the as adjusted amount for the third quarter of fiscal 2012. The reduction in earnings is the result of the Company's sale of its investment in Provalliance and reduced earnings at Empire Education Group due to declining student enrollment.

EBITDA. EBITDA for the quarter of $28.6 million decreased by $5.2 million, or 15.5%, compared to the prior year quarter. Excluding the impact of discrete items, EBITDA, as adjusted, for the quarter of $26.8 million decreased by $25.3 million, or 48.5% compared to the prior year quarter.

Discrete Items. Discrete income for the current quarter netted to $1.7 million on an after-tax basis, and consisted of the following after-tax items:

  • Senior management restructuring costs of $0.5 million primarily related to severance.
  • Accelerated depreciation of $0.5 million associated with a leased building at the Company's headquarters.
  • Income tax benefit of $1.2 million related to the retroactive reenactment of Work Opportunity tax credits.
  • Earnings from discontinued operations of $1.5 million related to the Company's Hair Restoration segment.

A complete reconciliation of reported earnings to adjusted earnings is included in this press release and is available on the Company's website at www.regiscorp.com.

Regis Corporation will host a conference call and presentation via webcast discussing third quarter results today, May 7, 2013, at 10 a.m., Central time. Interested parties are invited to participate in the live webcast by logging on to www.regiscorp.com or participate by phone by dialing 877-941-8631. A replay of the presentation will be available later that day. The replay phone number is 800-406-7325, access code 4615164#.

About Regis Corporation
Regis Corporation (NYS: RGS) a leader in beauty salons and cosmetology education. As of March 31, 2013, the Company owned, franchised or held ownership interests in approximately 10,000 worldwide locations. Regis' corporate and franchised locations operate under concepts such as Supercuts, SmartStyle, MasterCuts, Regis Salons, Sassoon Salon, Cost Cutters and Cool Cuts 4 Kids. Regis maintains ownership interests in Empire Education Group in the U.S. and the MY Style concepts in Japan. For additional information about the Company, including a reconciliation of certain non-GAAP financial information and certain supplemental financial information, please visit the Investor Information section of the corporate website at www.regiscorp.com. To join Regis Corporation's email alert list, click on this link: http://www.b2i.us/irpass.asp?BzID=913&to=ea&Nav=1&S=0&L=1

This press release may contain "forward-looking statements" within the meaning of the federal securities laws, including statements concerning anticipated future events and expectations that are not historical facts. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements in this document reflect management's best judgment at the time they are made, but all such statements are subject to numerous risks and uncertainties, which could cause actual results to differ materially from those expressed in or implied by the statements herein. Such forward-looking statements are often identified herein by use of words including, but not limited to, "may," "believe," "project," "forecast," "expect," "estimate," "anticipate," and "plan." In addition, the following factors could affect the Company's actual results and cause such results to differ materially from those expressed in forward-looking statements. These factors include the impact of management and organizational changes; the Company's dependence on same-store sales increases to increase revenue; the impact on the Company of healthcare reform and minimum wage legislation; successful deployment of point-of-sale and guest relationship management systems; competition within the personal hair care industry, which remains strong, both domestically and internationally; price sensitivity; changes in economic conditions; changes in consumer tastes and fashion trends;the ability of the Company to implement its planned spending and cost reduction plan and to continue to maintain compliance with financial covenants in its credit agreements; the Company's reliance on management information systems; the ability of the Company to retain and attract stylists; labor and benefit costs; legal claims; the continued ability of the Company and its franchisees to obtain suitable locations and financing for new salon development and to maintain satisfactory relationships with landlords and other licensors with respect to existing locations; governmental initiatives such as minimum wage rates, taxes, unionization and possible franchise legislation; the ability of the Company to optimize its brand portfolio and integrate salons that support its growth objectives; the ability of the Company to maintain satisfactory relationships with suppliers; financial performance of our joint ventures; risk inherent to international developments (including currency fluctuations); or other factors not listed above. Additional information concerning potential factors that could affect future financial results is set forth in the Company's Annual Report on Form 10-K for the year ended June 30, 2012. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. However, your attention is directed to any further disclosures made in our subsequent annual and periodic reports filed or furnished with the SEC on Forms 10-K, 10-Q and 8-K and Proxy Statements on Schedule 14A.

 
 
REGIS CORPORATION (NYSE: RGS)
CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited)
(Dollars in thousands, except per share data)
 
  March 31, 2013  June 30, 2012
ASSETS
Current assets:
Cash and cash equivalents$180,309$111,943
Receivables, net32,73428,954
Inventories148,493142,276
Deferred income taxes18,05114,503
Income tax receivable19,19814,098
Other current assets47,93955,903
Current assets held for sale 17,222 17,000
Total current assets463,946384,677
 
Property and equipment, net307,295305,799
Goodwill462,333462,279
Other intangibles, net22,15423,395
Investment in and loans to affiliates43,308160,987
Other assets61,74759,488
Long-term assets held for sale 181,009 175,221
 
Total assets$1,541,792$1,571,846
 
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Long-term debt, current portion$29,044$28,937
Accounts payable67,72147,890
Accrued expenses133,265157,026
Current liabilities related to assets held for sale 18,503 18,120
Total current liabilities248,533251,973
 
Long-term debt and capital lease obligations239,593258,737
Other noncurrent liabilities162,252143,972
Long-term liabilities related to assets held for sale 30,356 28,007
Total liabilities 680,734 682,689
 
Shareholders' equity:
Common stock, $0.05 par value; issued and outstanding 56,712,570 and 57,415,241 common shares at March 31, 2013 and June 30, 2012, respectively2,8362,871
Additional paid-in capital333,920346,943
Accumulated other comprehensive income21,85055,114
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