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Regis Reports Third Quarter 2012 Results

Regis Corporation (NYSE:RGS), the global leader in the $160 billion haircare industry, today reported a third quarter net loss of $0.02 per share. These results include non-operational after-tax items of $21.0 million primarily related to the non-cash write-down of the Company’s investment in Provalliance. Absent non-operational items, third quarter operational earnings increased to $0.32 per diluted share.

“We continue to make progress on our plans to improve operationally and increase efficiency while continuing to develop and implement our long-term strategies. We are pleased that the third quarter results reflected our ongoing vigilance in controlling costs and managing our business more efficiently. Looking ahead, our priorities remain focused on improving the salon experience for our customers, hiring and retaining the best stylists, continuing our efforts to simplify our operating model by consolidating our salons into one of four consumer segments and effectively leveraging our scale as North America’s largest salon company. We believe these initiatives are putting us on the right track to enhance profitability and drive value for our shareholders,” said Eric Bakken, EVP, Interim Corporate Chief Operating Officer.

FISCAL 2012 THIRD QUARTER FINANCIAL HIGHLIGHTS

Consolidated Highlights

  • Sales of $573.6 million, down 1.3% from $581.3 million in the third quarter of fiscal 2011.
  • Same-store sales declined 3.4% versus a decline of 2.3% in the third quarter of fiscal 2011.
  • Same-store customer counts for our salon businesses declined 3.0% in the third quarter of fiscal 2012.
  • Gross margin decreased 10 basis points to 44.2% of sales from 44.3% in the third quarter of fiscal 2011.
  • Operational operating margins increased 120 basis points to 5.6% of sales from 4.4% in the third quarter of fiscal 2011. Operational net income of $19.7 million increased 33.6%, from $14.7 million in the third quarter of fiscal 2011. Operational diluted earnings per share of $0.32 increased 29.3%, from $0.25 in the third quarter of fiscal 2011.
  • Operational EBITDA of $58.1 million increased 12.2%, from $51.8 million in the third quarter of fiscal 2011.
  • Net store base decreased by 115 units in the third quarter for a total store count of 12,662 at March 31, 2012.
  • The reported income tax rate was 32.4%, which includes the impact of the non-operational charges. The operational income tax rate was 33.6%.
  • Total cash at March 31, 2012 grew to $97.6 million, an increase of $1.3 million since June 30, 2011.
  • Total debt at March 31, 2012 decreased to $292.3 million, a decline of $21.1 million since June 30, 2011.

Segment Results:

North America Salons

Revenues: Third quarter 2012 revenues were $503.3 million, a decrease of 1.3% from the fiscal 2011 third quarter. Service revenues were $390.2 million, a decrease of 2.1% compared to the same period a year ago. Same-store service sales for the quarter declined 4.1%. Same-store service customer counts declined 2.3% and average ticket declined 1.8%. Retail product revenues were $103.3 million, an increase of 1.4%. Retail product same-store sales declined 0.8%.

Service Margins: Service margin rate for the third quarter of fiscal 2012 was 41.6%, an improvement of 10 basis points over the third quarter of fiscal 2011.

Retail Product Margins: Retail product margin rate for the third quarter of fiscal 2012 was 50.1%, an improvement of 40 basis points compared to the third quarter of fiscal 2011. The improvement in product margins was a driven by savings from the retail commission plans implemented for new stylists.

Site Operating Expense: Site operating expense for the third quarter of 2012 was 20 basis points, or $1.6 million, lower than the third quarter of 2011, coming in at $45.3 million, or 9.0% of North American revenue. The decline in site operating expense is a result of decreased advertising expenses due to the timing of promotions year over year.

General and Administrative Expense: General and administrative expense for the third quarter of 2012 was 60 basis points, or $3.6 million lower than the third quarter of 2011, coming in at $27.2 million, or 5.4% of North American revenues. We continue to see savings in travel expense due to the implementation of new portable technology for our field staff. In addition, we saw a decline in general and administrative salaries and related expenses due to the implementation of cost saving initiatives.

Rent Expense: Rent expense was $73.1 million, or 14.5% of North American revenue. This represented an increase of 30 basis points over the same period a year ago, primarily the result of deleveraging due to negative same-store sales.

Depreciation and Amortization Expense: Depreciation and amortization was $16.7 million, or 3.3% of North American revenues; which included non-operational charges of $0.1 million related to the accelerated depreciation on our point-of-sale system. Operational depreciation and amortization was $16.7 million, or 3.3% of North American revenues, a decrease of 30 basis points over the third quarter of fiscal 2011.

Operating Margins: Third quarter 2012 GAAP operating margin was 12.3% of North American revenues. Excluding non-operational items, operational operating margin was 12.3% of North American revenues, an increase of 120 basis points over the third quarter of fiscal 2011.

International Salons

Revenues: Third quarter 2012 revenues were $32.6 million, a decrease of 8.3% from the fiscal 2011 third quarter. Service revenues were $22.8 million, a decrease of 7.2% compared to the same period a year ago. Same-store service sales for the quarter declined 9.3%. Retail product revenues were $9.8 million, a decrease of 10.6%. Retail product same-store sales declined 12.7%.

Service Margins: Service margin rate for the third quarter of fiscal 2012 was 48.1%, a decline of 240 basis points over the third quarter of fiscal 2011. The decline in service margin was primarily driven by lower salon productivity due to reduced sales levels.

Retail Product Margins: Retail product margin rate for the third quarter of fiscal 2012 was 45.6%, a decrease of 80 basis points compared to the fiscal 2011 third quarter. The decrease in product margins was the result of an increase in the obsolescence reserve due to the decline in retail sales.

Rent Expense: Rent expense was $8.6 million, or 26.4% of International revenue. The increase of 110 basis points over the same period a year ago was primarily the result of deleveraging due to negative same-store sales.

Operating Margins: Third quarter 2012 GAAP operating margin was $0.6 million, or 1.8% of International revenues; which includes non-operational expense of $0.1 million related to severance. Operational operating margin was $0.7 million, or 2.2% of International revenues, a decrease of 420 basis points compared to the third quarter of fiscal 2011.

Hair Restoration Centers

Revenues: Third quarter 2012 revenues were $37.7 million, an increase of 5.0% from the third quarter of fiscal year 2011. Same-store sales for the quarter increased 4.3%.

Gross Margins: Gross margin rate for the third quarter of fiscal 2012 was 52.0%, a decline of 320 basis points over the third quarter of fiscal 2011. The decline in gross margin was primarily driven by increased hair system costs due to wage pressure in China, as well as an increase in labor costs due to a sales incentive program.

Operating Margins: Third quarter 2012 operating margin was $2.7 million, or 7.3% of Hair Club revenues, a decrease of 40 basis points compared to the third quarter of fiscal 2011.

Corporate

General and Administrative Expense: Third Quarter 2012 GAAP general and administrative expense was $34.1 million, or 5.9% of consolidated revenues, which includes non-operational charges of $6.0 million. Operational general and administrative expense for the third quarter of 2012 was $28.1 million or 4.9% of consolidated revenue, a decrease of 50 basis points over the third quarter of 2011. The decrease in this expense category was due to a decline in corporate general and administrative salaries and related expenses due to the cost savings initiatives being implemented. We continue to expect general and administrative expenses to be in the $28 million range for the fourth quarter of fiscal 2012.

Income Taxes

During the three months ended March 31, 2012, the Company recognized tax expense of $6.0 million with a corresponding effective tax rate of 32.4% utilizing the year-to-date method. The Company’s operational tax rate of 33.6% came in better than expected primarily due to the release of income tax reserves and increased employment tax credits during the quarter.

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