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TheStreet Open House

Regis Reports First Quarter 2013 Results

Regis Corporation (NYSE:RGS), the global leader in the $160 billion haircare industry, today reported first quarter net income of $0.45 per share. These results include a net non-operational after-tax benefit of $24.2 million, primarily related to the release of cumulative foreign currency translation rate gains primarily related to the sale of our ownership interest in Provalliance. Excluding non-operational items, first quarter operational earnings decreased to $0.08 per diluted share from $0.22 in the year-earlier quarter. All fiscal 2012 results have been restated to exclude amounts related to our hair restoration segment which is now presented in discontinued operations. During the quarter the hair restoration segment generated earnings of $0.07 per share. Sales totaled $505.4 million versus $531.3 million in the 2012 first quarter.

Same-store sales declined 3.1 percent and service margins decreased 230 basis points in the quarter. These two items were the primary drivers of the year-over-year earnings decline.

“First quarter results are indicative of the necessary re-engineering that needs to take place and this change is just beginning,” said Dan Hanrahan, President and Chief Executive Officer. “Service margins declined due to an increase in salon labor costs. In the past, Regis has consistently reduced stylist hours to offset declining customer counts. Today, our entire organization is focused on staffing and optimizing our salon schedules. Sales volumes cannot improve if we continue to reduce stylist hours in our salons.”

Mr. Hanrahan concluded, “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. There is a significant opportunity to improve our financial performance.”

FISCAL 2013 FIRST QUARTER FINANCIAL HIGHLIGHTS

Consolidated Highlights

  • Sales of $505.4 million, down 4.9% from $531.3 million in the first quarter of fiscal 2012.
  • Same-store sales declined 3.1%.
  • Same-store transaction counts for our salon businesses declined 2.3% in the first quarter of fiscal 2013.
  • Gross margin decreased 230 basis points to 42.4% of sales from 44.7% in the first quarter of fiscal 2012.
  • Operational operating margins declined 210 basis points to 1.8% of sales from 3.9% in the first quarter of fiscal 2012.
  • Operational net income of $4.3 million decreased 66.4%, from $12.9 million in the first quarter of fiscal 2012.
  • Operational diluted earnings per share of $0.08 decreased 65.3%, from $0.22 in the first quarter of fiscal 2012.
  • Operational EBITDA of $30.4 million decreased 30.7%, from $43.9 million in the first quarter of fiscal 2012.
  • Net store base decreased by 2,602 units in the first quarter for a total store count of 10,045 at September 30, 2012. The decrease was primarily due to the sale of our ownership interest in Provalliance which closed during the quarter.
  • The reported income tax rate was 11.0%, which includes the impact of the net non-operational benefit. The operational income tax rate was 40.8%.
  • Total cash at September 30, 2012 grew to $222.5 million, an increase of $110.5 million since June 30, 2012.
  • Total debt at September 30, 2012 decreased to $280.1 million, a decline of $7.6 million since June 30, 2012.

Segment Results:

North America Salons

Revenues: First quarter fiscal 2013 revenues were $473.9 million, a decrease of 4.8% from the fiscal 2012 first quarter. Service revenues were $369.7 million, a decrease of 5.3% compared to the same period a year ago. Same-store service sales for the quarter declined 3.0%. Same-store service guest counts declined 2.1% and average ticket declined 0.9%. Product revenues were $94.5 million, a decrease of 3.7%. Product same-store sales declined 2.7%.

Service Margins: Service margin rate for the first quarter of fiscal 2013 was 40.4%, a decline of 250 basis points from the first quarter of fiscal 2012. As discussed above, the decline in service margins was primarily related to an increase in salon labor costs.

Product Margins: Product margin rate for the first quarter of fiscal 2013 was 48.1%, a decline of 250 basis points compared to the first quarter of fiscal 2012. The decline in product margins was driven by a sales incentive program designed to motivate stylists to sell more products to their guests and a shift in the mix of sales to lower margin promotional items.

Site Operating Expense: Site operating expense was $49.6 million, or 10.5% of North American revenues which was $2.3 million lower than the first quarter of 2012. The decrease in site operating expenses was driven by changes to our promotion strategy to more efficiently spend marketing dollars.

General and Administrative Expense: General and administrative expense was $31.7 million, or 6.7% of North American revenues, $1.0 million lower than the first quarter of fiscal 2012.

Rent Expense: Rent expense was $72.7 million, or 15.3% of North American revenue. This represented an increase of 60 basis points over the same period a year ago, primarily the result of negative leverage due to decreases in same-store sales.

Depreciation and Amortization Expense: Depreciation and amortization was $16.6 million, or 3.5% of North American revenues, flat with the first quarter of fiscal 2012.

Operating Margins: Operating margin was 7.2% of North American revenues, a decrease of 310 basis points compared to the first quarter of fiscal 2012.

International Salons

Revenues: First quarter fiscal 2013 revenues were $31.5 million, a decrease of 6.0% from the fiscal 2012 first quarter. Service revenues were $23.7 million, a decrease of 4.5% compared to the same period a year ago. Same-store service sales for the quarter declined 3.3%. Product revenues were $7.7 million, a decrease of 10.4%. Product same-store sales declined 8.9%.

Service Margins: Service margin rate for the first quarter of fiscal 2013 was 48.2%, a decline of 70 basis points over the first quarter of fiscal 2012. The decline in service margin was primarily driven by lower salon productivity due to reduced sales levels.

Product Margins: Product margin rate for the first quarter of fiscal 2013 was 47.6%, an improvement of 60 basis points compared to the fiscal 2012 first quarter. The increase in product margins resulted from an adjustment to the inventory obsolescence reserve.

Operating Margins: First quarter fiscal 2013 operating margin was $0.4 million, or 1.3% of International revenues, a decline of 80 basis points compared to the first quarter of fiscal 2012.

Corporate

General and Administrative Expense: First quarter fiscal 2013 GAAP general and administrative expense was $21.7 million, or 4.3% of consolidated revenues, which includes a non-operational benefit of $0.3 million. Operational general and administrative expense for the first quarter of fiscal 2013 was $22.0 million, or 4.4% of consolidated revenue, a decrease of 80 basis points over the first quarter of fiscal 2012. 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 September 30, 2012, the Company recognized tax expense of $3.0 million with a corresponding effective tax rate of 11.0%. The Company’s operational tax rate of 40.8% came in 310 basis points higher than the prior year operational rate primarily due to the expiration of Work Opportunity Tax Credits on December 31, 2011.

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