Regis Reports Fourth Quarter 2013 Results

Regis Reports Fourth 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 fourth quarter ended June 30, 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 $502.3 million, a decrease of 5.0%. Same-store sales declined 3.1%.

  • Same-store service sales declined 3.1%.

• GAAP net income of $0.7 million. GAAP net income per diluted share, including discontinued operations (Diluted EPS) was $0.01. GAAP loss from continuing operations of $15.3 million or $0.27 per diluted share compared to a loss of $1.14 last year.

• Diluted EPS, as adjusted, of $0.06 compared to $0.36 last year.

  • Prior year adjusted earnings included $0.12 per share, representing equity in earnings of Provalliance (sold in the first quarter of fiscal 2013) and tax benefits primarily from the release of certain income tax reserves.

  • Current quarter adjusted earnings were reduced by approximately $0.11 per share, including increased labor costs primarily due to negative leverage associated with same-store sales declines; increased cost of product mainly from clearance sales; higher connectivity costs associated with SuperSalon point-of-sale and wireless salon workstations; and increased depreciation from the write down of underperforming salon assets. Partly offsetting these items were reduced utilities, maintenance and general and administrative expenses.

  • Same-store sales declines of 3.1% reduced current year earnings by approximately $0.07 per share.

• EBITDA, as adjusted, of $37.0 million compared to $51.6 million last year.

  • Current quarter was reduced by approximately $7.8 million, including increased labor costs primarily due to negative leverage associated with same-store sales declines; increased cost of product mainly from clearance sales; and higher connectivity costs associated with SuperSalon point-of-sale and wireless salon workstations. Partly offsetting these items were reduced utilities, maintenance and general and administrative expense.

  • Same-store sales declines of 3.1% accounted for the majority of the remaining decline.

• The current quarter includes net discrete after-tax expense of $2.8 million, primarily related to inventory reserves, a make-whole payment related to prepaying private placement debt, and certain restructuring costs, partly offset by a gain from the sale of our Hair Club operations. The prior year quarter includes $86.2 million of net discrete after-tax expense. See non-GAAP reconciliations.

• All periods presented reflect the reclassification of Hair Club to discontinued operations. The Company completed the sale of this business on April 9, 2013 for approximately $165 million. During the current quarter, Hair Club generated earnings of $0.28 per diluted share, mostly comprised of the gain from the sale.

Dan Hanrahan, President and Chief Executive Officer commented, "In the fourth quarter, we made significant investments behind our strategies, drawing from best in class operators. Our major focus was on three initiatives. We rolled out a new point-of-sale system to approximately 6,700 salons throughout North America. This point-of-sale system will provide management with vastly improved measurement and transparency into our salons. Second, we reorganized our field management organization. This management structure will enable localized mentoring and decision making, improve geographic proximity and increase local market efficiency. Third, we standardized our retail plan-o-grams. This improves salon appearance, reduces inventory management time and increases distribution efficiencies. Each of these initiatives is transformational. Executing all three of these initiatives in a single quarter highlights our sense of urgency in creating a stable operating structure that will allow Regis to generate improved financial results on a sustainable basis. We cannot transform Regis into a strong operator without making the changes we did in the fourth quarter. These initiatives are focused on generating guest traffic, delivering an outstanding guest experience and cultivating a loyal guest following. As I have said in the past, changing the strategic direction of any established business requires investment, execution and time. While there has been disruption to our current business performance, I am proud of the progress our entire organization has made in laying the foundation for us to become a best in class operator."

The Company provided the following updates on fourth quarter strategic investments and associated benefits cited by Mr. Hanrahan:

• Technology. The Company successfully completed the initial rollout of the SuperSalon point-of-sale system and salon workstations in approximately 6,700 salons, which represents over 95% of our North American locations. The next area of focus will be to ensure our stylists become fluent in the use of SuperSalon, through a combination of web based and hands on user training. As we begin to optimize our use of this technology, we will benefit from improved analytics on guest retention, real time information on stylist productivity and salon performance and vastly improved Guest Relationship Management capabilities. As expected, the magnitude and scope of this initiative created certain challenges in the quarter that have since been remediated. The performance of SuperSalon improves each day as stylists become more familiar with the system.

• Organization. The Company made significant progress in its field reorganization. The reorganization reduces span of control, improves geographic alignment and enables more localized decision making. This structure will closely align field management compensation with key financial and operating metrics. In addition, this structure will provide long-term career paths for successful employees. While span of control is reduced, individual field manager responsibility is concentrated geographically. This reduces travel costs, travel time and allows management more time in individual salons. With assistance from outside staffing experts, we have filled over 93% of open positions at all levels throughout the field organization, sourced mainly from internal candidates. We noted disruption in salon performance as we filled open positions and acclimated field leaders to their new roles. Our field leaders are in the salons on a more frequent basis and are focused on delivering a great guest experience.

• Merchandising. The Company simplified and standardized plan-o-grams in approximately 7,000 salons. These plan-o-grams improve salon appearance, optimize retail performance and enable efficiencies throughout our supply chain. This initiative involved transitioning from over 1,300 to fewer than 50 plan-o-grams. This resulted in the elimination of approximately 4,500 items. The Company originally planned to complete the reset in the fourth quarter, but delayed completion to mid-August in order to dedicate necessary resources to the SuperSalon rollout and field reorganization. A combination of clearance activity, delayed implementation and execution challenges during a period of significant change has negatively impacted our product same-store sales in July and August. We are monitoring compliance with new plan-o-grams, and evaluating the impact these changes have on our longer-term retail performance and adjusting our assortment as necessary.

Recent Trends

Factoring out the impact of the Easter shift from April of last year to March of this year, same-store service sales declined 140 basis points from the third to the fourth quarter. As of August 25, 2013, first quarter-to-date same-store service sales and product sales were down 3.4 % and 14.9%, respectively. We have seen improvement in August same-store service sales which are down 2.4%, a 180 basis point improvement since July. We expect these trends to further improve as our new field teams transition from reorganizing and hiring activities to focusing on their salons, and as we become more comfortable with and optimize our use of SuperSalon. Our retail product unit volume was up approximately 11% in the fourth quarter and may have taken some guests temporarily out of the product market. The Company has taken a number of steps to reverse this trend, including providing an incentive for stylists to gain traction on our first quarter promotion and accelerating by two weeks the delivery of items within our new product assortment so that salon shelves could be reset sooner. Since salon resets are finishing up, product sales trends have yet to show improvement.

Mr. Hanrahan concluded, "I am pleased with the operational changes we have implemented. The impact these changes have had on our operating results are necessary to position Regis to generate sustainable revenue and profitability growth and I expect our business performance to improve over time. I expected these transformational changes to disrupt our business. However, I am not satisfied with our performance during the fourth and first quarters of fiscal 2013 and 2014. We must drive better execution, get our business back on course and continue to execute on changes that will enable the organization to move forward along a strategic path that will result in longer-term revenue and profitability growth."

Fourth Quarter Results:

Revenues. Revenues declined $26.6 million, or 5.0%, compared to the prior year quarter.

Service revenues were $390.0 million, a decrease of $21.8 million, or 5.3%, from the prior year quarter, mainly driven by declines in North American salon revenue. Compared to the prior year quarter, same-store service sales declined 3.1%, comprised of a 3.4% decrease in guest counts and 0.3% increase in average ticket price. Net changes in store counts drove the remaining 2.2% decrease compared to the prior year quarter.

Product revenues were $102.0 million, a decrease of $5.3 million, or 4.9%, versus the prior year quarter. Product same-store sales declined 3.3%.

Royalties and fees of $10.2 million increased $0.5 million, or 5.2%, versus the prior year quarter.

Cost of Service and Product. Cost of service and product as a percent of service and product revenues increased 440 basis points to 60.3% compared to the prior year quarter. Excluding the impact of discrete items in the current period, cost of service and product, as adjusted, as a percent of service and product revenues increased 180 basis points to 57.7% compared to the prior year quarter.

Cost of service as a percent of service revenues was 58.9%, an increase of 180 basis points compared to the prior year quarter, primarily because stylist hours were flat, creating negative leverage with same-store service sales declines and health care costs increased due to increased enrollment and claims. The current quarter improved 90 basis points compared to the previous quarter, attributed to improvements in optimizing salon schedules and seasonal declines in payroll taxes.

Cost of product as a percent of product revenues was impacted by our inventory simplification program, which standardizes retail plan-o-grams, reduces retail products and consolidates from four to one private label brand. Historically, the Company has been able to recover its cost on discontinued retail inventory through in-store promotional discounts, and during the fourth quarter, the Company cleared approximately $8 million of product at cost. However, given the change in the Company's strategic direction to standardize plan-o-grams, the scope and size of this simplification program and the negative impact continued clearance sales would have on future product sales and margins, the Company immediately liquidated any remaining inventory into non Regis distribution channels within the parameters of existing supply agreements. This resulted in a discrete, non-cash after-tax inventory charge of $7.7 million in the fourth quarter. While negatively impacting cost of product as a percent of product revenues, clearance sales and liquidation of inventories generated higher cash returns than past practices of repackaging and returning products to distribution centers for restocking, disposal or return to vendors.

Cost of product as a percent of product revenues was 65.8%, an increase of 1,470 basis points compared to the prior year quarter. Excluding the impact of the discrete inventory charge in the current period, cost of product, as adjusted, as a percent of product revenues was 53.5%, an increase of 240 basis points compared to the prior year quarter, mainly driven by clearance sales.

Site Operating Expenses. Site operating expenses of $48.0 million, or 9.5% of revenues, decreased by $2.0 million or 4.0% compared to the prior year quarter. Excluding the impact of discrete items in the prior period, site operating expenses, as adjusted, decreased $1.2 million, or 2.4% compared to the prior year quarter. The decrease was primarily driven by cost savings initiatives to lower utilities, repairs and maintenance expenses and the timing of marketing spending, which were partly offset by increased connectivity costs to support the Company's new point-of-sale system and salon workstations.

General and Administrative. General and administrative expenses of $58.3 million, or 11.6% of revenues, decreased $2.6 million, or 4.3%, compared to the prior year quarter. Excluding the impact of discrete items in both periods, general and administrative expenses, as adjusted, decreased $3.5 million, or 6.4%, compared to the prior year quarter. Much of this improvement was timing related reflecting reduced incentive compensation and lower levels of salary and travel expense due to vacancies in our new field organization. While we have lapped significant cost reductions made in the prior year, we continue to focus on ways to simplify and drive further cost efficiencies.

Beginning in the first quarter of fiscal year 2014, the field reorganization will result in a change in expense classifications on our Statement of Operations. Previously, field leaders did not work on the salon floor daily. As reorganized, field leaders will spend most of their time on the salon floor leading, mentoring and serving guests. Accordingly, it is appropriate to place those costs in the operation where they are managed by including their labor and travel costs in salon level expenses. As a result, district and senior district leader labor costs will be reported within Cost of Service rather than General and Administrative expenses, and their travel costs will be reported within Site Operating expenses rather than General and Administrative expenses. This expense classification will have no financial impact on the Company's operating income (loss), reported net income (loss) or cash flow from operations. The Company is in the process of recasting historical annual and quarterly financial statements as supplemental financial data to reflect these expense classifications, and we plan to post recasted financial statements on our website not later than September 15, 2013.

Rent. Rent expense was $81.9 million, or 16.3% of revenues, representing an increase of 40 basis points over the prior year quarter, primarily the result of negative leverage due to decreases in same-store sales. Rent expense declined by $2.3 million, or 2.7%, compared to the prior year quarter, due to salon closures.

Depreciation and Amortization. Depreciation and amortization was $26.4 million, or 5.3% of revenues, compared to $22.3 million, or 4.2% of revenues in the prior quarter. Excluding the impact of discrete items in the current quarter, depreciation and amortization increased 80 basis points versus the prior year quarter, primarily due to increased depreciation related to the Company's new point-of-sale system and salon work stations and higher impairments of salon level fixed assets.

Income Taxes. During the three months ended June 30, 2013, the Company recognized income tax expense, as adjusted, of approximately $1.1 million.

Equity in Affiliates. Income from equity method investments and affiliated companies increased $24.6 million compared to the prior year quarter. Excluding the impact of discrete items in the prior year quarter, income from equity method investments and affiliated companies, as adjusted, decreased $3.9 million compared to the prior year quarter. This decline is the result of the Company's sale of its investment in Provalliance and reduced earnings at Empire Education Group, primarily due to impairment charges.

EBITDA. EBITDA of $33.6 million increased by $79.2 million compared to the prior year quarter. Excluding the impact of discrete items, EBITDA, as adjusted, of $37.0 million decreased by $14.6 million, or 28.3% compared to the prior year quarter.

Discrete Items. Discrete items for the current quarter netted to $2.8 million of after-tax expense, comprised of the following after-tax items:

• Non-cash inventory charge of $7.7 million, related to the inventory simplification program.

• Make-whole payment of $6.7 million, related to the prepayment of private placement debt.

• Restructuring costs of $3.5 million, primarily related to severance.

• Legal fees of $0.8 million.

• Accelerated depreciation of $0.7 million associated with a planned exit of a leased building at the Company's headquarters.

• Earnings from discontinued operations of $15.9 million, primarily representing the gain on sale of Hair Club.

• Income tax benefit of $0.6 million related to a cumulative translation adjustment.

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 fourth quarter results today, August 27, 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 877-941-6009. A replay of the presentation will be available later that day. The replay phone number is 800-406-7325, access code 4635921#.

About Regis Corporation

Regis Corporation (NYS: RGS) is a leader in beauty salons and cosmetology education. As of June 30, 2013, the Company owned, franchised or held ownership interests in 9,763 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 significant initiatives and changes in our management and organizational structure; negative same-store sales; the success of our stylists and our ability to attract and retain talented stylists; the effect of changes to healthcare laws; changes in regulatory and statutory laws; the Company's reliance on management information systems; competition within the personal hair care industry, which remains strong, both domestically and internationally; changes in economic conditions; the continued ability of the Company to implement cost reduction initiatives; certain of the terms and provisions of the outstanding convertible notes; failure to optimize our brand portfolio; the ability of the Company to maintain satisfactory relationships with certain companies and suppliers; financial performance of our joint ventures; changes in interest rates and foreign currency exchange rates; changes in consumer tastes and fashion trends; our ability to protect the security of personal information about our guests; 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, 2013. 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.