Regis : Reports Fourth Quarter 2014 Results

Regis Corporation (NYSE: 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, 2014 versus the prior year as noted below.

As a result of the Company's valuation allowance against most of its deferred tax assets, associated reported and as adjusted results of operations are not tax-effected. Consequently, current period results are not comparable to tax-effected prior periods.

• Sales of $483.9 million, a decline of $18.3 million. Same-store sales declined 1.8%.
  • Same-store service and product sales declined 0.2% and 8.4%, respectively.
• GAAP net loss of $(17.0) million or $(0.30) per diluted share.
  • Includes ($0.29) per share of noncash losses relating to Empire Education Group.
• EBITDA, as adjusted, of $25.9 million compared to $37.0 million in the prior year quarter.
  • Decrease of $3.8 million from same-store sales declines.
  • Decline of $7.3 million mainly from higher labor costs largely associated with stylist hours, increased marketing, and lease termination costs, partly offset by improved cost of product and cost savings.
• Diluted EPS, as adjusted, was $(0.10) compared to $0.06 in the prior year quarter.
  • Decrease of $(0.04) per share from same-store sales declines.
  • Decline of $(0.05) per share mainly from higher labor costs largely associated with stylist hours, increased marketing, and lease termination costs, partly offset by improved cost of product, cost savings and reduced depreciation.
  • Decline of $(0.07) per share from noncash equity in losses of Empire Education Group.
• The current quarter includes net discrete expense of $11.5 million. The prior year quarter includes net discrete after-tax expense of $2.8 million. See non-GAAP reconciliations.

Dan Hanrahan, President and Chief Executive Officer commented, “During the last earnings call I outlined the path we have taken since joining Regis in August, 2012. I highlighted there was, and still is, a clear need for transformational change to lay the foundation for the turnaround. I also said, although early, we are seeing the first signs of transitioning from disruption to execution. During our fourth quarter we saw additional movement toward execution as our best operators continued to make progress. Consolidated same-store service sales declined 0.2% in the fourth quarter. Across the board, a greater percentage of our field leaders posted positive same-store service sales during the fourth quarter than in any previous quarter during the fiscal year. Where we have effective leaders using processes and metrics to drive results, we are beginning to win. While these early signs of transformation are encouraging, significant work is ahead of us before we achieve similar results across 7,000 salons.”

Mr. Hanrahan continued, “Our strategy, dedicated to making it easy for stylists to succeed, so they can provide an experience that creates guests for life, is beginning to take hold. However, we are still early on the transitional path of continuous improvement focused on people, process and metrics. While our same-store service sales were near flat, we did benefit from a late Easter. In addition, we still have too wide a range in performance across our salon base. A significant number of salons have yet to see traction and continue to comp negatively. Additionally, during the fourth quarter our same store retail sales were down 8.4%. I am cautiously encouraged by early signs of improvement, however, all of us at Regis understand how much work we still have to do.”

Technology. In the fourth quarter, we made further advances in improving SuperSalon’s speed and transaction efficiency in the salon. Going forward, achieving salon network availability which enables our stylists to be successful and delivers an excellent guest experience will provide a reliable base for management, training, real-time reporting and marketing related business applications in the salon.

Organization. Developing our field and salon leaders is central to our success. Leveraging work that began last quarter on role clarity, coupled with performance expectations and talent assessments, we began to make necessary changes to develop and upgrade our leadership talent. We developed training curriculum to serve as the foundation for ongoing leadership development. We gained further traction during the quarter on our performance management platform implemented at the start of the fiscal year to drive execution and accountability. This has changed the dialogue in field operations and salons. We are seeing business conversations at all levels in the organization, fostering best practice sharing and friendly competition, while focusing the field organization on improving guest traffic and selling retail products. The build out of the Asset Protection team is nearly complete and beginning to spread loss prevention awareness and disciplines. As expected, the impact from Asset Protection to date has been modest, however, where executed it is making a difference.

Key Priorities. Our key priorities and activities will continue to follow the theme of people, process and metrics enabled by real time information to make good business decisions and drive execution. Successful execution is dependent upon strong leaders helping stylists have successful and satisfying careers. To that end, we will continue to make investments in our people by providing leadership development, stylist training, actionable information and incentives that motivate performance aligned with shareholders’ interests. Our focus will be on three areas to improve execution and performance in 2015. First, we will build our Asset Protection capabilities. Second, we will continue to train and develop field leadership talent and capabilities and leverage recruitment pipelines we are building. Third, we will invest in our stylists by strengthening our technical education programs.

Mr. Hanrahan concluded, “Because we are a people organization providing services, investments we make often flow through our earnings instead of our balance sheet. While this impacts near-term profitability, these investments will provide significant operating leverage once we turn around our business. We think of all investments whether funded by earnings or through our balance sheet as cash outlays. Consistent with our capital allocation policy to maximize shareholder value, we will stay focused on cash flow and diligently manage the investments necessary to turn Regis around. Funding investments and managing inflation through disciplined cost management and rigorous review of all spending will ensure we continue to protect the strong balance sheet we have built. Improving profiability will be dependent on our ability to drive same-store sales growth.

Fourth Quarter Results:

Starting in fiscal year 2014, in connection with our field reorganization, components of our expenses have been recategorized. Previously, field leaders did not work on the salon floor daily. As reorganized, field leaders now spend their time on the salon floor leading and mentoring stylists, and serving guests. Accordingly, field leader costs, including labor and travel, now directly arise from the management of salon operations. As a result, district and senior district leader labor costs are reported within Cost of Service rather than General and Administrative expenses, and their travel costs are reported within Site Operating expenses rather than General and Administrative expenses. This expense classification does not have a financial impact on the Company's reported operating income (loss), reported net income (loss) or cash flows from operations. Recategorized historical annual and quarterly financial statements can be found on the Company’s website.

Beginning in the second quarter of fiscal year 2014, the Company redefined its operating segments to reflect how the chief operating decision maker evaluates the business. These segments relate to the restructuring of the North American field organization that took place in the fourth quarter of fiscal year 2013 and was completed during the second quarter of fiscal year 2014.

Revenues. Revenues were $483.9 million, a decline of $18.3 million, or 3.6%, compared to the prior year quarter. Same-store sales declined 1.8% compared to the prior year quarter. Management estimates the shift of Easter from March of last year to April of this year positively impacted same-store sales by approximately 70 basis points during the fourth quarter of the current year.

Service revenues were $380.2 million, a reduction of $9.9 million, or 2.5%, compared to the prior year quarter. During this period, same-store service sales declined 0.2%, driven by a decrease in guest traffic of 1.5%, partly offset by an increase in average ticket price of 1.3%. The remaining 230 basis point decline in service revenues was primarily due to a net reduction of 167 North American salons.

Product revenues were $92.6 million, a decline of $9.3 million, or 9.2%, compared to the prior year quarter. Product same-store sales declined 8.4%, lapping significant clearance activity last year in anticipation of plan-o-gram standardization.

Royalties and fees were $11.1 million, an increase of $0.9 million, or 8.4% compared to the prior year quarter. Franchisees posted positive same-store sales during the quarter and the Company added 97 net franchised locations in the last twelve months.

Cost of Service and Product. Cost of service and product, as a percent of service and product revenues, decreased to 59.0%, or 130 basis points, compared to the prior year quarter. Excluding the impact of discrete items in the prior year and the prior year change in expense categorization, cost of service and product as a percent of service and product revenues increased 30 basis points compared to the prior year quarter.

Cost of service as a percent of service revenues was 61.2%, an increase of 230 basis points compared to the prior year quarter. Excluding the impact of the prior year change in expense categorization, cost of service as a percent of service revenues increased 120 basis points compared to the prior year quarter. The primary driver of this increase was stylist hours which were up 3.5% versus the prior year. Also, increases in minimum wages, incentives and the shift of Easter holiday pay into the fourth quarter were essentially offset by savings from the field reorganization.

Cost of product as a percent of product revenues was 50.3%, an improvement of 1,550 basis points when compared to the prior year quarter. Excluding the impact of discrete items in the prior year, cost of product as a percent of product revenues improved 320 basis points compared to the prior year quarter. This improvement was primarily the result of lapping clearance sales in the prior year.

Site Operating Expenses. Site operating expenses of $51.1 million increased $3.1 million compared to the prior year quarter. Excluding impacts of discrete items in the current year and the prior year change in expense categorization, site operating expenses, as adjusted, increased $3.0 million compared to the prior year quarter. This was primarily driven by increased marketing expenses and lapping last year’s favorable adjustment to self-insurance reserves, partly offset by lower freight costs.

General and Administrative. General and administrative expenses of $45.0 million decreased $13.2 million compared to the prior year quarter. Excluding the impact of discrete items in both periods and the change in expense categorization, general and administrative expenses, as adjusted, decreased $1.4 million compared to the prior year quarter. This improvement was primarily driven by lapping SuperSalon rollout costs in the prior year quarter, cost savings, and reduced healthcare costs. These were partly offset by the lapping of favorable adjustments to reduce incentives and certain other costs in the prior year quarter, and purposeful investments in asset protection capabilities in the current year quarter.

Rent. Rent expense was $83.3 million, or 17.2% of revenues, representing an increase of 90 basis points over the prior year quarter. This basis point increase is primarily the result of negative leverage due to a decline in same-store sales and the impact of lease termination costs.

Depreciation and Amortization. Depreciation and amortization was $22.9 million compared to $26.4 million in the prior year quarter, a decrease of $3.5 million. The decrease was primarily due to salon closings and lower fixed asset impairment charges recorded during the current year quarter.

Equity in Affiliates. Loss from equity method investments and affiliated companies was $16.4 million compared to break-even in the prior year quarter, a decrease of $16.4 million. Excluding the impact of discrete items in the current year, equity in affiliates decreased $3.8 million compared to the prior year quarter primarily due to intangible and fixed asset impairment charges recorded by Empire Education Group.

EBITDA. EBITDA of $10.5 million declined $23.1 million compared to the prior year quarter. Excluding the impact of discrete items in both periods, EBITDA, as adjusted, was $25.9 million, a decrease of $11.1 million compared to the prior year quarter.

Discrete Items. Discrete items for the current quarter netted to $11.5 million of expense, comprised of the following items:

Expense:

• Legal fees of $1.0 million.
• Regis' portion of Empire Education Group goodwill impairment charge of $12.6 million.

Income:

• Insurance reserve adjustments of $1.3 million.
• Tax benefit of $0.7 million associated with a discontinued operation.

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 via webcast discussing fourth quarter results today, August 26, 2014, 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 888-631-5926. A replay of the presentation will be available later that day. The replay phone number is 800-101-2009, access code 1131937.

About Regis Corporation

Regis Corporation (NYSE:RGS) is the leader in beauty salons and cosmetology education. As of June 30, 2014, the Company owned, franchised or held ownership interests in 9,674 worldwide locations. Regis’ corporate and franchised locations operate under concepts such as Supercuts, SmartStyle, MasterCuts, Regis Salons, Sassoon Salon, Cost Cutters and First Choice Haircutters. 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, changes in our management and organizational structure and our ability to attract and retain our executive management team; negative same-store sales; the success of our stylists and our ability to attract, train and retain talented stylists; changes in regulatory and statutory laws; the effect of changes to healthcare laws; our ability to protect the security of sensitive information about our guests, employees, vendors or Company information; the Company's reliance on management information systems; the continued ability of the Company to implement cost reduction initiatives; reliance on external vendors; changes in distribution channels of manufacturers; compliance with debt covenants; financial performance of our franchisees; competition within the personal hair care industry; changes in economic conditions; failure to standardize operating processes across brands; the ability of the Company to maintain satisfactory relationships with certain companies and suppliers; financial performance of our investment with Empire Education Group; changes in interest rates and foreign currency exchange rates; changes in consumer tastes and fashion trends; 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, 2014. 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.

SAME-STORE SALES (1):

(1) Same-store sales are calculated on a daily basis as the total change in sales for company-owned locations that were open on a specific day of the week during the current period and the corresponding prior period. Quarterly and fiscal year same-store sales are the sum of the same-store sales computed on a daily basis. Locations relocated within a one-mile radius are included in same-store sales as they are considered to have been open in the prior period. International same-store sales are calculated in local currencies to remove foreign currency fluctuations from the calculation.

Non-GAAP Reconciliations

We believe our presentation of non-GAAP operating income, net income, net income per diluted share, and other non-GAAP financial measures provides meaningful insight into our ongoing operating performance and an alternative perspective of our results of operations. Presentation of the non-GAAP measures allows investors to review our core ongoing operating performance from the same perspective as management and the Board of Directors. These non-GAAP financial measures provide investors an enhanced understanding of our operations, facilitate investors’ analyses and comparisons of our current and past results of operations and provide insight into the prospects of our future performance. We also believe the non-GAAP measures are useful to investors because they provide supplemental information research analysts frequently use to analyze financial performance.

The method we use to produce non-GAAP results is not in accordance with U.S. GAAP and may differ from methods used by other companies. These non-GAAP results should not be regarded as a substitute for corresponding U.S. GAAP measures but instead should be utilized as a supplemental measure of operating performance in evaluating our business. Non-GAAP measures do have limitations in that they do not reflect certain items that may have a material impact upon our reported financial results. As such, these non-GAAP measures should be viewed in conjunction with both our financial statements prepared in accordance with U.S. GAAP and the reconciliation of the selected U.S. GAAP to non-GAAP financial measures, which are located in the Investor Information section of the corporate website at www.regiscorp.com.

Non-GAAP reconciling items for the three and twelve months ended June 30, 2014 and 2013:

The following information is provided to give qualitative and quantitative information related to items impacting comparability. Items impacting comparability are not defined terms within U.S. GAAP. Therefore, our non-GAAP financial information may not be comparable to similarly titled measures reported by other companies. We determine which items to consider as “items impacting comparability” based on how management views our business, makes financial, operating and planning decisions and evaluates the Company’s ongoing performance. The following items have been excluded from our non-GAAP results:

• Inventory reserves attributed to our inventory simplification program.
• Self-insurance reserve adjustments.
• Expense associated with legal cases.
• Professional fees associated with the evaluation and sale of non-core assets.
• Deferred compensation adjustments.
• Expenses associated with senior management and field restructuring charges.
• Recovery of bad debt expense associated with the outstanding note receivable with Pure Beauty.
• Accelerated depreciation related to our corporate office consolidation.
• Goodwill impairment charge related to our Regis salon concept reporting unit.
• Expense associated with make-whole payments and other fees associated with the prepayment of debt.
• Recognition in earnings of amounts previously classified within accumulated other comprehensive income (AOCI) that were associated with the liquidation of foreign entities denominated in the Euro related to the sale of its investment in Provalliance.
• Recovery of previously impaired investments in an affiliate.
• Impairment recorded on our investment in Empire Education Group and our portion of a goodwill impairment charge recorded by Empire Education Group.
• Other than temporary impairment recorded on our investment in Provalliance, partially offset by a gain recorded for the reduction in the fair value of the equity put option associated with our investment in Provalliance.
• Operations of our Hair Restoration Centers and professional fees associated with the disposition of our Hair Restoration Centers on April 9, 2013 and tax benefits associated with a discontinued operation.
• Tax benefit associated with prior year Work Opportunity Tax Credits.

Non-GAAP tax provision adjustments primarily relate to changes in taxable income or loss resulting from the non-GAAP reconciling items addressed above. During the twelve months ended June 30, 2014, the Company recorded valuation reserves against the Company's United States and United Kingdom deferred tax assets. As a result of the valuation reserves, the Company did not record any tax effect for the non-GAAP adjustments during the three and six months ended June 30, 2014. The non-GAAP weighted average shares adjustments are due to the change in non-GAAP net income (loss) as compared to the U.S. GAAP net income (loss), resulting from the non-GAAP reconciling items addressed herein. Non-GAAP net income (loss) per share reflects the weighted average shares associated with non-GAAP net income, which may include the dilutive effect of common stock and convertible share equivalents.

REGIS CORPORATION
Reconciliation of reported U.S. GAAP net (loss) income to adjusted EBITDA, a non-GAAP financial measure
(Dollars in thousands)
(Unaudited)

Adjusted EBITDA
EBITDA represents U.S. GAAP net (loss) income for the respective period excluding interest expense, income taxes and depreciation and amortization expense. The Company defines adjusted EBITDA, as EBITDA excluding equity in (loss) income of affiliated companies, and identified items impacting comparability for each respective period. For the three and twelve months ended June 30, 2014 and 2013, the items impacting comparability consisted of the items identified in the non-GAAP reconciling items for the respective periods. The impact of the income tax provision adjustments associated with the above items, the deferred tax valuation and accelerated depreciation related to the corporate office consolidation are already included in the U.S. GAAP reported net (loss) income to EBITDA reconciliation, therefore there is no adjustment needed for the reconciliation from EBITDA to adjusted EBITDA. The impacts of the recovery of a previously impaired investment in an affiliate, impairments of Empire Education Group and net Provalliance impairment and gain for the settlement of a portion of the Provalliance equity put are already included by excluding the impact of the Company’s equity in (loss) income of affiliated companies, net of taxes, as reported.