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Regis Reports Second Quarter 2020 Operating Results and Estimates That Its Transition to a Franchise Platform Will Be Substantially Complete by Calendar Year-end; Company Begins Meaningful G&A Reductions

The Company Continues To Make Significant Progress In Its Transition To A Fully-Franchised Model With The Sale And Conversion Of An Additional 443 Company-Owned Salons To Its Asset-Light Franchise Portfolio During The Quarter; Year-To-Date, The Company Has Sold And Converted 988 Company-Owned Salons To Its Franchise Portfolio

Approximately 900 Company-Owned Salons, Or Approximately 50% Of The Remaining Company-Owned Salon Portfolio Available For Sale Are Now In Various Stages Of Negotiations To Be Purchased After Adjusting For Expected Salon Closures

Significant Progress In Transition Enables The Company's Retention Of Guggenheim Securities, LLC, The Investment Banking And Capital Markets Business Of Guggenheim Partners, LLC, As Its Exclusive Investment Banker To Identify Sources Of Replacement Debt Financing On Terms Appropriate For A Fully-Franchised Capital-Light Growth Platform

The Company's Board Of Directors Elects Hugh Sawyer, President and Chief Executive Officer, As Chairman Of The Company's Board Of Directors

Dave Williams To Remain The Board's Lead Independent Director

Regis Corporation (NYSE:RGS):

 

 

Three Months Ended
December 31,

 

Six Months Ended
December 31,

(Dollars in thousands)

 

2019

 

2018

 

2019

 

2018

Consolidated Revenue

 

$208,765

 

 

$274,671

 

 

$455,803

 

 

$562,506

 

System-wide Revenue (1)

 

$428,731

 

 

$451,045

 

 

$878,019

 

 

$916,257

 

 

 

 

 

 

 

 

 

 

System-wide Same-Store Sales Comps (2)

 

(2.3

)%

 

0.9

%

 

(1.7

)%

 

0.8

%

Franchise Same-Store Sales Comps (2)

 

(1.4

)%

 

1.4

%

 

(0.8

)%

 

1.3

%

Company-owned Same-Store Sales Comps

 

(3.6

)%

 

0.5

%

 

(2.7

)%

 

0.5

%

 

 

 

 

 

 

 

 

 

Net (Loss) Income From Continuing Operations

 

$(9,481

)

 

$417

 

 

$(23,659

)

 

$(46

)

Diluted (Loss) Income per Share From Continuing Operations

 

$(0.26

)

 

$0.01

 

 

$(0.66

)

 

$0.00

 

EBITDA (3)

 

$(986

)

 

$16,956

 

 

$(6,828

)

 

$26,723

 

as a percent of revenue

 

(0.5

)%

 

6.2

%

 

(1.5

)%

 

4.8

%

 

 

 

 

 

 

 

 

 

As Adjusted (3)

 

 

 

 

 

 

 

 

Net Income, as Adjusted

 

$4,622

 

 

$8,039

 

 

$18,522

 

 

$19,356

 

Diluted Income per Share, as Adjusted

 

$0.13

 

 

$0.18

 

 

$0.50

 

 

$0.43

 

EBITDA, as Adjusted (3)

 

$17,014

 

 

$20,615

 

 

$46,799

 

 

$45,749

 

as a percent of revenue

 

8.1

%

 

7.5

%

 

10.3

%

 

8.1

%

 

(1) Represents total sales within the system, excluding TBG.

(2) System-wide and franchise same-store sales excludes TBG in both periods.

(3) See GAAP to non-GAAP reconciliations, within the attached section titled "Non-GAAP Reconciliations".

Regis Corporation (NYSE: RGS), a leader in the haircare industry, whose primary business is franchising, owning and operating technology enabled hair salons, today reported second quarter 2020 net loss from continuing operations of $9.5 million, or $0.26 loss per diluted share as compared to net income from continuing operations of $0.4 million, or $0.01 income per diluted share in the second quarter of 2019. The Company’s reported results include $20.7 million of non-cash goodwill derecognition associated with the sale of 443 salons to franchisees, partially offset by $2.6 million of other discrete items. Excluding discrete items and the income from discontinued operations, the Company reported second quarter 2020 adjusted net income of $4.6 million, or $0.13 earnings per diluted share as compared to adjusted net income of $8.0 million, or $0.18 earnings per diluted share, for the same period last year. The year-over-year decrease in adjusted net income was driven primarily by the elimination of adjusted net income that had been generated in the prior year period from the 1,447 company-owned salons that were sold and converted to the Company’s asset-light franchise portfolio over the past twelve months.

Total revenue in the quarter of $208.8 million decreased $65.9 million, or 24.0%, year-over-year driven primarily by the conversion of a net 1,447 company-owned salons to the Company's asset-light franchise portfolio over the past 12 months. These reductions were partially offset by revenue growth of $39.4 million in the Company's franchise segment. The Company noted that in connection with the new leasing guidance, it now records franchise rental income and the corresponding rental expense on separate line items. The net impact is to gross up both revenue and expense with no impact to overall earnings. The impact during the second quarter was an increase in revenue and expense by $33.6 million, with no impact on operating income.

Second quarter adjusted EBITDA of $17.0 million decreased $3.6 million, versus the same period last year. Excluding the $15.0 and $9.4 million gain from the sale of company-owned salons during the current and prior year quarter, respectively, adjusted EBITDA of $2.0 million was $9.2 million unfavorable versus the same period last year driven primarily by the elimination of EBITDA that had been generated in the prior year from the 1,447 company-owned salons that were sold and converted to the Company’s asset-light franchise portfolio over the past 12 months.

Hugh Sawyer, Chairman, President and Chief Executive Officer, commented, "As we disclosed at the close of fiscal year 2019, the transition to a capital-light franchise model initially has a dilutive impact on the Company’s Adjusted EBITDA, as we saw this quarter. Nevertheless, we remain convinced that a fully-franchised business that generates a higher return on its capital will prove to be in the best long-term interests of our shareholders." Mr. Sawyer continued, "The second quarter represents an important milestone in our transition where we gained additional clarity into the estimated end-state of our transformational process. We now believe that our transition to a fully-franchised business will be substantially complete by the end of this calendar year." Mr. Sawyer concluded, "This improved visibility related to the speed of our transition enabled us to begin meaningful reductions in our annualized expenses and to initiate plans to re-engineer our capital structure in expectation of our estimated end-state and a new organic growth phase as a capital-light franchisor."

Second Quarter Segment Results

Franchise

 

 

Three Months Ended
December 31,

 

Increase (Decrease)

 

Six Months Ended
December 31,

 

Increase (Decrease)

(Dollars in millions) (1)

 

2019

 

2018

 

 

2019

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

$

16.2

 

 

$

10.6

 

 

$

5.6

 

 

$

28.0

 

 

$

20.7

 

 

$

7.3

 

Product sold to TBG mall locations

 

0.7

 

 

7.2

 

 

(6.5

)

 

2.0

 

 

12.7

 

 

(10.7

)

Total product

 

$

16.9

 

 

$

17.8

 

 

$

(0.9

)

 

$

30.0

 

 

$

33.4

 

 

$

(3.4

)

Royalties and fees

 

29.3

 

 

22.6

 

 

6.7

 

 

57.4

 

 

45.0

 

 

12.4

 

Franchise rental income

 

33.6

 

 

 

 

33.6

 

 

65.1

 

 

 

 

65.1

 

Total franchised salons revenue

 

$

79.8

 

 

$

40.4

 

 

$

39.4

 

 

$

152.5

 

 

$

78.4

 

 

$

74.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Franchise Same-Store Sales Comps (2)

 

(1.4

)%

 

1.4

%

 

 

 

(0.8

)%

 

1.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EBITDA, as Adjusted

 

$

13.1

 

 

$

8.5

 

 

$

4.6

 

 

$

24.9

 

 

$

18.3

 

 

$

6.6

 

as a percent of revenue

 

16.4

%

 

20.9

%

 

 

 

16.4

%

 

23.4

%

 

 

as a percent of adjusted revenue

 

37.6

%

 

33.4

%

 

 

 

38.8

%

 

36.8

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Franchise Salons

 

4,790

 

 

4,266

 

 

524

 

 

 

 

 

 

 

as a percent of total Company-owned and Franchise salons

 

67.8

%

 

53.8

%

 

 

 

 

 

 

 

 

(1) Variances calculated on amounts shown in millions may result in rounding differences.

(2) TBG is excluded from same-store sales in both periods.

Second quarter Franchise revenue was $79.8 million, a $39.4 million, or 97.5% increase compared to the prior year quarter and included franchise rental income of $33.6 million due to the adoption of the new lease accounting requirements. Royalties and fees were $29.3 million, a $6.7 million, or 29.8% increase versus the same period last year. Royalties and fees increased due to increased franchise salon counts. Product sales to franchisees of $16.9 million decreased $0.9 million versus the same period last year driven primarily by lower sales to TBG, partially offset by increased franchise salon counts.

Franchise adjusted EBITDA of $13.1 million grew $4.6 million, or 54.4% year-over-year primarily driven by the increase in salon counts.

Company-Owned Salons

 

 

Three Months Ended
December 31,

 

(Decrease)

 

Six Months Ended
December 31,

 

(Decrease)

(Dollars in millions) (1)

 

2019

 

2018

 

 

2019

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Revenue

 

$

128.9

 

 

$

234.3

 

 

$

(105.3

)

 

$

303.4

 

 

$

484.1

 

 

$

(180.7

)

Company-owned Same-Store Sales Comps

 

(3.6

)%

 

0.5

%

 

 

 

(2.7

)%

 

0.5

%

 

 

Year-over-Year Ticket change

 

3.0

%

 

5.2

%

 

 

 

3.0

%

 

4.7

%

 

 

Year-over-Year Transaction change

 

(6.6

)%

 

(4.7

)%

 

 

 

(5.7

)%

 

(4.2

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EBITDA, as Adjusted

 

$

4.2

 

 

$

21.3

 

 

$

(17.1

)

 

$

15.7

 

 

$

48.9

 

 

$

(33.2

)

as a percent of revenue

 

3.3

%

 

9.0

%

 

 

 

5.2

%

 

10.1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Company-owned salons (2)

 

2,277

 

 

3,668

 

 

(1,391

)

 

 

 

 

 

 

as a percent of total Company-owned and Franchise salons

 

32.2

%

 

46.2

%

 

 

 

 

 

 

 

 

 

(1) Variances calculated on amounts shown in millions may result in rounding differences.

(2) Includes the 207 mall-based salons that were acquired from TBG on December 31, 2019.

Second quarter revenue for the Company-owned salon segment decreased $105.3 million, or 45.0%, versus the prior year to $128.9 million. The year-over-year decline in revenue was driven by the decrease of a net 1,447 salons sold and converted to the Company's asset-light franchise portfolio over the past 12 months, the closure of a net 151 unprofitable salons over the past 12 months and by a decline in Company-owned same-store sales of 3.6%. The year-over-year decline in company-owned same store sales was driven by a 6.6% decrease in transactions, which may be partially related to the shorter number of retail days between Thanksgiving and Christmas in 2019, partially offset by a 3.0% increase in average ticket.

Second quarter adjusted EBITDA of $4.2 million decreased $17.1 million, or 80.1% versus the same period last year driven primarily by the elimination of EBITDA that had been generated in the prior year period from the 1,447 company-owned salons that were sold and converted to the Company's asset-light franchise portfolio over the past 12 months and the decline in service and product margins, partially offset by a decrease in marketing spend.

Other Key Events

  • In January 2020, the Company announced further reductions to general and administrative expenses that are expected to save approximately $19 million on an annualized basis.
  • The Company's retention of Guggenheim Securities, LLC as its exclusive investment banker to identify sources of replacement debt financing on terms appropriate for a fully-franchised capital-light growth platform. The Company expects to complete its replacement debt financing no later than the fourth quarter of this fiscal year.
  • The Company's Board of Directors elected Hugh Sawyer, President and Chief Executive Officer, as Chairman of the Company's Board of Directors. Dave Williams to remain the Board's Lead Independent Director.
  • The Company closed on the sale of its corporate headquarters in December 2019 resulting in a $4.0 million gain in the three and six months ended December 31, 2019.
  • The Company sold and converted an additional 133 company-owned salons to the Alline Salon Group, who is now the Company's largest franchisee and sole Holiday Hair franchisee.
  • Announced the sale of 121 SmartStyle salons to the Yellowhammer Salon Group.
  • Closure of 51 non-performing company-owned salons in the quarter which were at or near the end of their lease term.
  • The Company integrated a small number of former TBG North American salons which are now being managed in the normal course. These salons represent approximately 10% of the company-owned salon portfolio.
  • The Company's new internally developed back office salon management system is in Beta.
  • The Company is preparing for the launch of its new private label haircare products under its "Blossom" brand and the relaunch of its repackaged and reformulated successful "Designline" owned brand in the Spring.
  • The Company entered into an agreement to sell its stake in the Empire Education Group which allows the Company to de-complicate and de-risk its business while preserving and enhancing the essential value we derive from our relationship with Empire Education.
  • The Company continues to make meaningful progress on its previously disclosed effort to convert to a fully-franchised model. During the quarter, it sold and transferred 443 company-owned salons to its asset-light franchise portfolio. In addition, the Company has a pipeline of approximately 900 salons to be transitioned in various stages of negotiation. The pipeline represents approximately 50% of the Company-owned salon portfolio when taking into account expected closures of approximately 350 - 500 company-owned salon locations. The Company estimates that its transition to a franchise platform will be substantially complete by calendar year-end.
  • The impact of the transactions closed in the quarter is as follows:

 

 

Three Months Ended
December 31,

 

Increase (Decrease)

 

Six Months Ended
December 31,

 

Increase (Decrease)

(Dollars in thousands)

 

2019

 

2018

 

 

2019

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salons sold to franchisees

 

443

 

 

133

 

 

310

 

 

988

 

 

257

 

 

731

 

Cash proceeds received

 

$

31,468

 

 

$

11,628

 

 

$

19,840

 

 

$

69,414

 

 

$

24,050

 

 

$

45,364

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain on sale of venditions, excluding goodwill derecognition

 

$

14,993

 

 

$

9,369

 

 

$

5,624

 

 

$

41,213

 

 

$

16,501

 

 

$

24,712

 

Non-cash goodwill derecognition

 

(20,685

)

 

(6,504

)

 

14,181

 

 

(52,765

)

 

(17,596

)

 

35,169

 

(Loss) Gain from sale of salon assets to franchisees, net

 

$

(5,692

)

 

$

2,865

 

 

$

(8,557

)

 

$

(11,552

)

 

$

(1,095

)

 

$

(10,457

)

Adoption of New Accounting Standard

On July 1, 2019, the Company adopted amended lease guidance. The guidance was adopted on a prospective basis and results in an increase in franchise revenue and franchise rent expense. There is no impact on operating income.

Non-GAAP reconciliations:

For GAAP to non-GAAP reconciliations, please refer to attached section titled "Non-GAAP Reconciliations." 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.

Earnings Webcast

Regis Corporation will host a conference call via webcast discussing second quarter results tomorrow, February 4, 2020, at 9 a.m., Central time. Interested parties are invited to participate in the live webcast by logging on to www.regiscorp.com or participate via telephone by dialing (800) 367-2403 and entering access code 8274513. A replay of the presentation will be available later that day. The replay phone number is (888) 203-1112, access code 8274513.

About Regis Corporation
Regis Corporation (NYSE:RGS) is a leader in beauty salons and cosmetology education. As of December 31, 2019, the Company franchised, owned or held ownership interests in 7,152 worldwide locations. Regis’ franchised and corporate locations operate under concepts such as Supercuts®, SmartStyle®, Cost Cutters®, Roosters® and First Choice Haircutters®. Regis maintains an ownership interest in Empire Education Group in the U.S. 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.

This press release contains or 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 continued ability of the Company to implement its strategy, priorities and initiatives including the re-engineering of our corporate and field infrastructure; our and our franchisee's ability to attract, train and retain talented stylists; financial performance of our franchisees; acceleration of sale of salons to franchisees; if our capital investments in technology do not achieve appropriate returns; our ability to manage cyber threats and protect the security of potentially sensitive information about our guests, employees, vendors or Company information; the ability to operate or sell the salons transferred back from TBG; the outcome of the review by the administrator in TBG's insolvency proceedings in the United Kingdom; the ability of the Company to maintain a satisfactory relationship with Walmart; marketing efforts to drive traffic; changes in regulatory and statutory laws including increases in minimum wages; our ability to maintain and enhance the value of our brands; premature termination of agreements with our franchisees; reliance on information technology systems; reliance on external vendors; consumer shopping trends and changes in manufacturer distribution channels; competition within the personal hair care industry; changes in tax exposure; changes in healthcare; changes in interest rates and foreign currency exchange rates; failure to standardize operating processes across brands; financial performance of Empire Education Group; the continued ability of the Company to implement cost reduction initiatives; compliance with debt covenants and access to existing revolving credit facility; changes in economic conditions; changes in consumer tastes and fashion trends; exposure to uninsured or unidentified risks; reliance on our management team and other key personnel or other factors not listed above. Additional information concerning potential factors that could affect future financial results is set forth under Item 1A on Form 10-K. 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

CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited)

(Dollars in thousands, except share data)

 

 

December 31,
2019

 

June 30,
2019

ASSETS

 

 

 

 

Current assets:

 

 

 

 

Cash and cash equivalents

 

$

49,783

 

 

$

70,141

 

Receivables, net

 

27,756

 

 

30,143

 

Inventories

 

68,413

 

 

77,322

 

Other current assets

 

32,458

 

 

33,216

 

Total current assets

 

178,410

 

 

210,822

 

 

 

 

 

 

Property and equipment, net

 

68,917

 

 

78,090

 

Goodwill

 

293,019

 

 

345,718

 

Other intangibles, net

 

8,159

 

 

8,761

 

Right of use asset

 

911,948

 

 

 

Other assets

 

38,144

 

 

34,170

 

Non-current assets held for sale

 

 

 

5,276

 

Total assets

 

$

1,498,597

 

 

$

682,837

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

Current liabilities:

 

 

 

 

Accounts payable

 

$

55,587

 

 

$

47,532