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Regis to Offload Hair Club

Zacks Equity Research

Regis Corporation (RGS) recently inked a deal with Tokyo, Japan-based Aderans Co., Ltd. to sell one of its subsidiaries Hair Club. The deal follows the divesture of Regis’ minority ownership interest in Provalliance — the largest hair salon company in Europe —in April this year. Both decisions reflect the leading global hair care company’s efforts to turn around from continued underperformance by departing non-core assets and solely focusing on enhancing salon experience.

Per the deal, Minneapolis-based Regis will receive $163.5 million in cash from Aderans, which is a worldwide provider of hair replacement and restoration products and services housing several internationally acknowledged brands. The divesture is expected to be completed by the third or fourth quarter of calendar 2012. Regis will likely record a post-tax gain of $8–12 million from the deal.

Regis operates hair restoration centers under the trade name Hair Club for Men and Women. There are nearly 98 North American Hair Club locations, including 29 franchise units. Regis got hold of Hair Club in December 2004. The subsidiary offers solutions for hair loss ailments and holds around 5% share in the $4 billion U.S. market. The business is susceptible to prudent marketing strategies. During the three months ended December 31, 2011 Regis considered evaluation of its non-core assets and even the possible vending of this hair restoration business.
Regis, which owns various consumer segments like Supercuts, MasterCuts, Regis salons and SmartStyle, has been reeling under pressure for quite sometime. Weak salon traffic due to changes in lifestyle patterns and economic uncertainty has resulted in 14 straight quarters of negative same-store sales (comps) as Regis has already announced a 3.0% fall in comps for the upcoming fourth quarter of fiscal 2012. The rate of decline is steeper than the year-ago drop of 1.7% but less than the previous quarter’s decrease of 3.4%. Customers continue to elongate the time between salon visits due to faltering consumer confidence.

Responding to the above difficulties, Regis, which competes with Ulta Salon, Cosmetics & Fragrance Inc. (ULTA) decided to concentrate on its core North American salon business. Management remains committed to restructuring and cost-containment efforts. In 2011, Regis revealed its intention to slash costs by $40 million to $50 million over the next two fiscal years. Regis also remains steadfast in shutting down underperforming stores.

We view the deal as strategically positive for both parties as it gives Regis with an immediate cash value as well as an option to divest one of its non-core businesses. On the other hand, Japanese Aderans will cater to Regis’ strong U.S. market share and strengthen its global business. Regis currently retains a Zacks #3 Rank that translates into a short-term Hold rating. 

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