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Regis Reports Fourth Quarter 2012 Results

Regis Corporation (NYSE:RGS), the global leader in the $160 billion haircare industry, today reported a fourth quarter net loss of $1.11 per share. These results include non-operational after-tax items of $89.2 million, primarily related to goodwill impairment in the Company’s Regis salon division and the write-down of the equity investment in Empire Education. Excluding non-operational items, fourth quarter operational earnings increased to $0.40 per diluted share from $0.37 in the year-earlier quarter. Sales totaled $568.2 million versus $592.0 million in the 2011 fourth quarter.

“The gain in fourth quarter operational earnings amidst a negative sales trend reflects Regis’ ongoing commitment to controlling costs, managing our business more efficiently and a decrease in the effective income tax rate,” said Dan Hanrahan, President and Chief Executive Officer. “I have been on the job for less than three weeks and I believe there is significant opportunity to improve our performance. We are committed to improving the salon experience for our guests, hiring and retaining the best stylists, continuing our efforts to simplify our operating model and effectively leveraging our scale as North America’s largest salon company.”

Commenting on fiscal 2012, Hanrahan said, “Regis faced a number of challenges in the past year, but reported operational earnings per diluted share of $1.30, which was up 11.4% from fiscal 2011. We have lots of work ahead of us. The previously announced sale of non-core assets will allow us to focus on our core business.”

FISCAL 2012 CONSOLIDATED FINANCIAL HIGHLIGHTS

Consolidated Highlights
  • Sales of $2,273.8 million, down 2.2% from $2,325.9 million in fiscal 2011.
  • Same-store sales declined 3.1% versus a decline of 1.7% in fiscal 2011.
  • Same-store transaction counts for our salon businesses declined 3.0% in fiscal 2012.
  • Gross margin decreased 10 basis points to 44.7% of sales from 44.8% in fiscal 2011.
  • Operational operating margins remained flat with fiscal year 2011 at 5.0% of sales.
  • Operational net income of $80.5 million increased 13.0%, from $71.2 million in fiscal 2011.
  • Operational diluted earnings per share of $1.30 increased 11.4%, from $1.16 in fiscal 2011.
  • Operational EBITDA of $220.4 million decreased 2.8%, from $226.6 million in fiscal 2011.
  • Net store base decreased by 54 units in fiscal 2012 for a total store count of 12,647 at June 30, 2012.
  • The reported income tax rate was 5.8%, which includes the impact of the non-operational charges. The operational income tax rate was 28.6%.
  • Total cash at June 30, 2012 grew to $111.9 million, an increase of $15.7 million since June 30, 2011.
  • Total debt at June 30, 2012 decreased to $287.7 million, a decline of $25.7 million since June 30, 2011.

FISCAL 2012 FOURTH QUARTER FINANCIAL HIGHLIGHTS

Consolidated Highlights
  • Sales of $568.2 million, down 4.0% from $592.0 million in the fourth quarter of fiscal 2011.
  • Same-store sales declined 3.0% versus a decline of 1.7% in the fourth quarter of fiscal 2011.
  • Same-store transaction counts for our salon businesses declined 4.0% in the fourth quarter of fiscal 2012.
  • Gross margin decreased 40 basis points to 44.6% of sales from 45.0% in the fourth quarter of fiscal 2011.
  • Operational operating margins remained flat with the fourth quarter of fiscal 2011 at 5.7% sales.
  • Operational net income of $25.6 million increased 11.8%, from $22.9 million in the fourth quarter of fiscal 2011.
  • Operational diluted earnings per share of $0.40 increased 10.4%, from $0.37 in the fourth quarter of fiscal 2011.
  • Operational EBITDA of $59.1 million decreased 4.1%, from $61.7 million in the fourth quarter of fiscal 2011.
  • Net store base decreased by 15 units in the fourth quarter for a total store count of 12,647 at June 30, 2012.
  • The reported income tax rate was 21.2%, which includes the impact of the non-operational charges. The operational income tax rate was 19.5%.

Segment Results:

North America Salons

Revenues: Fourth quarter 2012 revenues were $487.9 million, a decrease of 4.7% from the fiscal 2011 fourth quarter. Service revenues were $381.4 million, a decrease of 5.6% compared to the same period a year ago. Same-store service sales for the quarter declined 4.0%. Same-store service guest counts declined 3.6% and average ticket declined 0.4%. Retail product revenues were $96.7 million, a decrease of 1.5%. Retail product same-store sales declined 0.5%.

Service Margins: Service margin rate for the fourth quarter of fiscal 2012 was 42.5%, a decline of 10 basis points from the fourth quarter of fiscal 2011.

Retail Product Margins: Retail product margin rate for the fourth quarter of fiscal 2012 was 48.4%, a decline of 170 basis points compared to the fourth quarter of fiscal 2011. The decline in product margins was driven by a sales incentive program for stylists and higher fuel costs.

Site Operating Expense: Site operating expense was $44.4 million, or 9.1% of North American revenues, which included non-operational charges of $0.8 million related to an adjustment to self-insurance reserves. Operational site operating expense for the fourth quarter of 2012 was $0.5 million lower than the fourth quarter of 2011, coming in at $43.6 million, or 8.9% of North American revenue.

General and Administrative Expense: General and administrative expense was $28.5 million, or 5.8% of North American revenues, which included non-operational charges of $1.4 million related to our field restructuring. Operational general and administrative expense for the fourth quarter of 2012 was 20 basis points, or $2.1 million lower than the fourth quarter of 2011, coming in at $27.1 million, or 5.5% of North American revenues. Regis continued to see savings in travel expense due to implementing new portable technology for the field staff. In addition, general and administrative salaries and professional fees declined due to cost-saving initiatives.

Rent Expense: Rent expense was $72.2 million, or 14.8% of North American revenue. This represented an increase of 60 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 $16.6 million, or 3.4% of North American revenues, an increase of 10 basis points over the fourth quarter of fiscal 2011.

Operating Margins: Fourth quarter 2012 GAAP operating margin was -2.2% of North American revenues. Excluding non-operational items, operational operating margin was 12.1% of North American revenues, a decrease of 110 basis points compared to the fourth quarter of fiscal 2011.

International Salons

Revenues: Fourth quarter 2012 revenues were $41.0 million, a decrease of 3.7% from the fiscal 2011 fourth quarter. Service revenues were $30.4 million, a decrease of 2.4% compared to the same period a year ago. Same-store service sales for the quarter declined 5.2%. Retail product revenues were $10.5 million, a decrease of 7.5%. Retail product same-store sales declined 10.0%.

Service Margins: Service margin rate for the fourth quarter of fiscal 2012 was 47.3%, a decline of 130 basis points over the fourth 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 fourth quarter of fiscal 2012 was 54.1%, an improvement of 890 basis points compared to the fiscal 2011 fourth quarter. The increase in product margins resulted from a favorable book to physical count and vendor participation in special discounting to sell inventory.

Operating Margins: Fourth quarter 2012 operating margin was $1.1 million, or 2.8% of International revenues, an improvement of 110 basis points compared to the fourth quarter of fiscal 2011.

Hair Restoration Centers

Revenues: Fourth quarter 2012 revenues were $39.3 million, an increase of 4.3% from the fourth quarter of fiscal year 2011. Same-store sales for the quarter increased 4.4%.

Gross Margins: Gross margin rate for the fourth quarter of fiscal 2012 was 51.6%, a decline of 300 basis points over the fourth quarter of fiscal 2011. The decline in gross margin was primarily driven by increased hair system costs due to wage pressure in China.

Operating Margins: Fourth quarter 2012 GAAP operating margin was $4.1 million, or 10.4% of Hair Club revenues, which includes non-operational expense of $0.1 million. Operational operating margin was $4.2 million, or 10.6% of Hair Club revenues, a decrease of 40 basis points compared to the fourth quarter of fiscal 2011.

Corporate

General and Administrative Expense: Fourth quarter 2012 GAAP general and administrative expense was $33.8 million, or 6.0% of consolidated revenues, which includes non-operational charges of $6.5 million. Operational general and administrative expense for the fourth quarter of 2012 was $27.3 million, or 4.8% of consolidated revenue, a decrease of 100 basis points over the fourth quarter of 2011. The decrease in this expense category reflects the cost-saving initiatives Regis put in place to become more effective and efficient in supporting salon operations.

Income Taxes

During the three months ended June 30, 2012, the Company recognized a tax benefit of $10.5 million with a corresponding effective tax rate of 21.2% utilizing the year-to-date method. The Company’s operational tax rate of 19.5% came in better than expected primarily due to the release of income tax reserves.

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