Bear of the Day: Regis (RGS)

Zacks

Regis Corporation (RGS) recently reported its 4th straight earnings miss, driven by a -3.1% decline in same-store service sales and falling profit margins.

Analysts revised their estimates significantly lower for Regis after the latest miss, sending the stock to a Zacks Rank #5 (Strong Sell). Despite the negative earnings momentum, the valuation picture does not look attractive for Regis at this point. Investors should consider avoiding this stock until it can turn things around.

Regis Corporation is focused primarily on hair salons. It owns, franchises or holds ownership interests in approximately 10,000 locations across the globe under the brands Supercuts, Sassoon Salon, Regis Salons, MasterCuts and Cost Cutters, among others.

Fourth Quarter Results

Regis Corporation reported disappointing results for the fourth quarter of its fiscal 2013 on August 27. Sales fell -5% to $502.3 million, which was below the Zacks Consensus Estimate of $514.0 million. This was driven by a -3.1% decline in same-store service sales as guest count fell -3.7%.

The adjusted cost of service and product as a percentage of revenues increased 180 basis points to 57.7%. This was driven in part by negative leverage of fixed expenses.

Adjusted earnings per share came in at 6 cents, missing the Zacks Consensus Estimate of 10 cents. It was below the 36 cents earned in the same quarter last year.

Estimates Falling

Following the lackluster Q4 results, analysts revised their 2014 estimates for Regis Corporation significantly lower. This sent the stock to a Zacks Rank #5 (Strong Sell).

The Zacks Consensus Estimate for 2014 is now $0.14, down from $0.47 90 days ago. You can see the steady decline in consensus estimates over the last several months as Regis has delivered 4 straight earnings misses:

Valuation

Shares of Regis Corporation have sold off following the Q4 earnings miss. But the stock still does not look like a value here.

Shares of RGS trade at a pricey 61x 12-month forward earnings, which is well above its historical median and the industry multiple. Analysts do expect a bit of a turnaround for Regis in FY2015, however. The 2015 Zacks Consensus Estimate is currently $0.46. But this still implies a rich multiple of 32x based on current prices.

The Bottom Line

With negative sales growth, falling earnings estimates and premium valuation, investors should consider avoiding Regis Corporation until it can turn things around.

Todd Bunton, CFA is the Growth & Income Stock Strategist for Zacks Investment Research and Editor of the Income Plus Investor service.


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