Regis Corporation (NASDAQ:RGS), a leader in the hair salon industry, reported its second-quarter fiscal 2024 results with a slight increase in same-store sales and a decrease in adjusted EBITDA compared to the previous year. The company showed a notable improvement in operating income, reaching $4.8 million, up from $700,000 in the same quarter of the previous year. Despite this, Regis faced challenges with 148 net franchisee closures in the first half of the fiscal year. The company is actively working on optimizing its salon footprint and enhancing the customer experience, while also focusing on increasing salon productivity and supporting stylists. Regis is evaluating strategic alternatives to improve its capital structure and aims to develop a capital allocation strategy to maximize asset value. The company has also managed to reduce costs, contributing to long-term growth and sustainability.
Key Takeaways
- Regis Corporation reported a 1.9% rise in same-store sales year-over-year.
- Adjusted EBITDA decreased to $6 million from $7.8 million the previous year.
- Operating income improved significantly to $4.8 million from $700,000.
- Total liquidity at the end of the quarter stood at $38 million.
- The company experienced 148 net franchisee closures in the first half of fiscal 2024.
- Regis is focused on salon optimization, customer experience, and stylist support.
- Strategic alternatives are being evaluated to improve the capital structure.
- The company is managing its G&A expenses and reducing costs for future growth.
- Regis began trading on the NASDAQ and adopted a tax benefits preservation plan.
Company Outlook
- Regis aims to improve salon productivity and the customer experience across all brands.
- The company is looking into strategic alternatives for capital structure improvement.
- Plans are in place to pursue new salon openings and international expansion with additional capital.
Bearish Highlights
- A decrease in adjusted EBITDA from the previous year.
- Decline in revenues due to a reduction in franchise rental income and the wind down of company-owned salons.
- The company reported 148 net franchisee closures in the first half of the fiscal year.
Bullish Highlights
- Positive net income and earnings per share reported for the second quarter.
- Improved liquidity position and compliance with debt covenants.
- Reduction in G&A expenses contributing to an improved adjusted EBITDA for the first half of the fiscal year.
Misses
- Lower adjusted EBITDA in Q2 compared to the previous year.
- Continued closure of salons impacting overall salon count.
Q&A Highlights
- The company discussed marketing initiatives like the Supercuts high score promotion to increase awareness and trial.
- Regis emphasized the importance of providing training and tools to support stylists, including a digital training platform.
- Management mentioned stability in the business and the factors contributing to the decline in revenues.
In summary, Regis Corporation is navigating a period of transformation with a focus on strategic growth and operational optimization. While facing some headwinds with salon closures and a dip in adjusted EBITDA, the company remains committed to supporting its stylists and expanding its market presence. With the recent move to the NASDAQ and the adoption of a tax benefits preservation plan, Regis looks to strengthen its financial position and capitalize on future opportunities.
InvestingPro Insights
Regis Corporation (RGS) has been undergoing significant operational changes, as reflected in the recent quarterly report. To provide a deeper financial perspective, InvestingPro data indicates that RGS has a market cap of $26.85 million and a negative price-to-earnings (P/E) ratio of -3.95, suggesting that investors are concerned about the company's profitability. The adjusted P/E ratio for the last twelve months as of Q2 2024 stands at an even lower -5.55. These figures underscore the challenges RGS faces in turning a profit and justifying its market valuation.
Revenue for RGS in the last twelve months as of Q2 2024 was reported at $215.91 million, with a notable decline of 14.22% in revenue growth, highlighting the company's struggle with top-line performance. This aligns with the InvestingPro Tip that analysts anticipate a sales decline in the current year. Additionally, the stock price volatility is evident with a 21.8% total return over the last month, yet a significant 67.85% decline over the past year, reflecting the high price volatility that investors in RGS are experiencing.
InvestingPro Tips further reveal that RGS is quickly burning through cash and operates with a significant debt burden, which may raise concerns about the company's liquidity and ability to meet short-term obligations. Moreover, the company's stock has taken a substantial hit over the last week, and analysts do not expect RGS to be profitable this year.
For readers looking to delve deeper into the financial health and future prospects of Regis Corporation, InvestingPro offers a comprehensive array of additional tips. There are currently 17 InvestingPro Tips available, providing valuable insights for a more informed investment decision.
To access these insights and more, consider subscribing to InvestingPro, now on a special New Year sale with discounts of up to 50%. Use coupon code "SFY24" to get an additional 10% off a 2-year InvestingPro+ subscription, or "SFY241" to get an additional 10% off a 1-year InvestingPro+ subscription. With these tools at your disposal, you can stay ahead of market trends and make more strategic investment choices.
Full transcript - Regis Corp (RGS) Q2 2024:
Biz McShane: Good morning, and thank you for joining the Regis Second Quarter Fiscal 2024 Earnings Conference Call. I'm your host Biz McShane, Vice President, Corporate Controller. All participants are in listen-only mode. The prepared remarks by our President and Chief Executive Officer, Matthew Doctor and Executive Vice President and Chief Financial Officer, Kersten Zupfer are accompanied by slides to help participants follow along. As a reminder, this conference is being recorded. I would like to remind everyone that the language on forward-looking statements included in our earnings release, and 8-K filing also apply to our comments made on the call today. These documents along with their presentation today can be found on our website, www.regiscorp.com/investorrelations, along with reconciliation of any non-GAAP financial measures mentioned on today's call with their corresponding GAAP measures. Today's slides are located in the investor presentations and supplemental financial statements section of the investor site. With that, I will now turn the call over to Matt.
Matthew Doctor: Thank you, Biz. And good morning, everyone. On today's call, I will discuss our Q2 fiscal 2024 results and share my observations about the progress we have made to stabilize Regis over the past 2 years as well as our ongoing work to reaccelerate growth and drive value for all of our stakeholders. Jumping right into our results for the quarter and first half of the year. Same-store sales rose 1.9% in the quarter and 1.8% year-to-date. Now while we ended the quarter 1.9% above last year, we saw a progression in comparable sales throughout the quarter with October being a bit more challenging coming in roughly flat year-over-year. Well, in the month of December, we were up 4.5% versus December of 2022. And from a sales perspective, we're seeing notable disparity between our top and bottom quartile salons, and this is really driving the overall sales comp. We are really seeing some bright spots in those top quartile salons across all of our brands as they have collectively demonstrated approximately 6% same-store sales for the quarter with positive traffic comps. Adjusted Q2 EBITDA on a consolidated basis was $6 million compared to $7.8 million in the prior year's quarter. Part of that gap between this quarter and Q2 fiscal 2023 is due to the onetime $1.1 million received from the state of North Carolina, with the remaining due to our lower salon count driving lower revenues and timing of expenses. For the first half of fiscal 2024, our adjusted EBITDA of $13.5 million is a $1.8 million improvement versus the first half fiscal 2023 adjusted EBITDA of $11.7 million. We reported operating income of $4.8 million in the quarter versus $700,000 in Q2 fiscal '23. This is a $4.1 million improvement. Operating income for the first half has improved by $9 million versus the prior year at $12.2 million versus $3.2 million during the first half of fiscal 2023. We ended Q2 with total liquidity of $38 million. Kersten will go into the details relating to our liquidity and cash used which continues to improve year-over-year on a normalized basis. We project our cash use to decline in the second half of the year, assuming no dramatic changes to our business. Additionally, our $2 million indemnity payment from Zenoti that we recognized from an accounting perspective in December ended up coming in as cash in the beginning of January. We continue to see closures from a salon count perspective, albeit at a lower rate than last year with 148 net franchisee closures in the first half of fiscal 2024 versus 210 in the first half of fiscal 2023. The disparity in performance amongst salons I mentioned earlier is expected to continue, and we expect to continue to see salon counts decrease in the short to medium term due to this as lease end dates come up, especially as the efforts required to significantly move the needle on these salons takes time away from the more viable salons that are better positioned with stronger fundamentals. Those salons, as I mentioned, the top quartile performance across our system averaged roughly $440,000 in sales volumes, and these salons are up 6% in sales year-over-year for the quarter, and they are the strong contributors to our and our franchisees' profitability. There will be continued focus moving forward on optimizing the footprint we have and driving more out of a smaller, much strong base. And when I think back to 2 years ago, when I became CEO, we faced a difficult situation where there was an urgent need to take action to rebuild the foundation of the company. Our profitability, cash flow profile, upcoming debt maturity, noncore business lines, franchisee support processes, G&A, numerous organizational adjustments and a rapidly changing industry landscape were all things we needed to address and needed to address quickly. Now the priority was to ensure the stability and longevity of this company. And over the course of last 2 years this has really been our primary focus. And as we evaluate the situation today, we have made significant progress in stabilizing the business and increasing the company's profitability. However, work remains to be done. Our comp sales are on a lower base of salons due to those closures of underperformers, and our cash is being deployed primarily to service the interest expense on our debt. Now as the Board continues to evaluate strategic alternatives for Regis, I believe we are at a key inflection point and have a huge opportunity to further advance our brands and our business. As we look ahead and assess where we are today, the following 6 areas are what we believe will truly set Regis up for long-term sustainable growth. Now first and foremost, we need to address our capital structure, which is the purpose of our previously announced strategic alternatives process. Improving our balance sheet is critical for us to be able to operate our business as a franchise or from a position of strength. Now currently, given our financial position, this requires a balancing act, as we must use our limited resources, both to ensure that we stay in debt [ph] complaints and drive the business forward. And if we can address our balance sheet challenges, it will also give us the ability to develop and deploy a capital allocation strategy that maximizes the value of our assets and generates higher returns for our stakeholders. Our strategic review is aimed at this critical component of Regis' future, and we will have an update on this process in due course. Now our next major area of focus is improving the customer experience across all of our brands. It has become clear to us through data, customer feedback and salon visits that a return to basics and an intense focus on the customer experience is critical. Now we all know that there is no replacement for quality haircuts and an excellent customer experience and now is the time to return to being more intentional in our and our franchisees approach. We will be bringing more rigor to the standardization, evaluation and execution between us, our customers and our franchisees. It is important to be consistent in how existing and potential customers interact and schedule services with our salons. The service offerings themselves, expected service times, the in-salon experience, interactions pre and post visit and what is probably ultimately more a longer-term focus salon image and modernization. We fully appreciate the fact that bad haircut or a poor experience can have on our brands. And with the price increases that have been taken over the last few years, we need to protect the value proposition of our salons. The ability to attract and retain new and existing customers really starts here, and we are in the early stages regarding the systems, guidance and processes to implement the change management required to properly execute on this core tenant of our business. In addition to renewing our commitment to the customer experience and other focus areas, increasing salon productivity. Now key to this effort will be finalizing the adoption of Zenoti as our new point-of-sale systems across all of our salons and utilizing the native CRM and loyalty functions built into the software to benefit from the scale of our platform. Now we have been split across multiple point-of-sale systems far too long. Continuing to increase digital engagement with our customers is a major opportunity for our brands as we've seen an organic shift to online booking versus walk-ins and call ahead’s. Online booking across all of our brands is up roughly more than 20% year-over-year in Q2 fiscal '24. And taking Supercuts as an example, those salons demonstrating 40% or greater bookings through digital channels, demonstrated positive traffic comps for the quarter and overall same-store sales of 8.1%. And with only approximately 15% of Supercuts at 40% plus online booking there was clear runway here. And there is further opportunity when we think about combining Zenoti with the standardization approach I mentioned earlier as part of the customer experience to really drive an increase in digital in a deliberate way. We currently have approximately 1,600 salons on the Zenoti platform with another 900 expected to migrate by March 31 and the remainder by June 30 of this year. Now completing this transition will mark a major milestone in what has been a long technology journey Regis. And ultimately, I believe we have landed on the right sustainable technology solution for our company and our franchisees for the long term. In addition to Zenoti, we've begun to test and use targeted promotions and loyalty strategies in an effort to drive traffic and sales. These have been mostly through pilots to find that right combination that not only drive sales but also increases franchisee profitability. After observing results, we have some examples of those pilots that are ready to be rolled out on a broader scale. They are: one, our Supercuts loyalty program, Supercut rewards. Now this has been piloting for the last 8 months in 5 metro areas, and we are seeing success with this program in driving increased frequency and retention. And now with over 50% of sales coming through those members who are on loyalty program, we're also seeing 90-day retention rates around 3 times higher for members versus non-members. Another example of a pilot that is to be rolled out more broadly as Supercuts Tuesdays in which customers on Tuesdays received $3 off a haircut. We piloted this across approximately 60 salons in late 2023 and saw more than 4% weekly traffic increased by shifting significantly more sales to Tuesday and subsequently freeing up those more busy days of the week. And just as of yesterday, we began our national rollout of Supercuts Tuesdays and we believe this is a promotion that our brand can uniquely own. And one last highlight here in our SmartStyle brand is our partnership with the Walmart (NYSE:WMT) Plus subscription program. We launched this promotion in August 2023, in a subset of locations offering Walmart Plus members discounts on SmartStyle services and products. Having seen that three quarters of offer redemptions were either from new or reactivated guests and positive traffic impacts for participating salons, we are now more widely rolling this out in conjunction with the Walmart Plus team. And we've also taken steps recently to lean heavier into earn media to raise awareness consideration and trial. A good example of this, which some of you may have seen is our Supercuts high score promotion is going on currently around the big game on February 11, where if the combined score of the game is 75 points or higher, entrants can receive a free haircut. Now we see this as an opportunity to drive trial around a major event in a cost-effective manner, and we will look to explore more opportunities like this in the future. Our core component of being able to improve our customer experience and salon productivity will be the continued support of stylists. We will continue to support stylists through our network of corporate and franchisee employed trainers to ensure they have the tools and training to successfully deliver quality hair services and an attractive price point. On our franchisees stylist support system is critical and is often cited as the reason why franchisees choose to be part of our franchise system. And we will continue to complement these efforts given the hands-on nature of our industry with our proprietary digital training platform, the Regis Education playground that receives over 31,000 views per month from the stylist community, as well as the salon leader digital training modules that we have developed and deployed last year. Now through addressing our capital structure, improving the customer experience, increasing salon productivity and supporting the stylist community, the proper components will be in place to pursue an accelerated pace of new salon openings and advance our development efforts. A strong business case is foundational to unit expansion and additional potential capital would enable accelerated entry into international markets as well as the scaling of our current brands. In addition to allowing for potential remodel incentive program to enhance the image of our existing salon base at a much larger scale. And lastly, I wanted to touch on managing our G&A. Enormous strides have been made here to date. And over the last few years, our G&A went from $96 million at the end of fiscal year '21 to our currently - current run rate of approximately $47 million, equating close to $50 million or 50% in savings. Moving forward, we will continue to manage the size of our organization and ensure that any further moves do not adversely affect our business as we continue towards long-term growth and sustainability. We will continue to monitor our G&A just as we have been and adjust as appropriate. I want to close by thanking you all for your continued interest in Regis and thanking our employees, franchisees, stylists, vendors and partners for all of your hard work and contributions. I am proud of the progress that we've made over the course of the past 2 years, but our work is only getting started. And I am looking forward to executing on these initiatives as I have laid out today as part of the next chapter of Regis' growth. And before wrapping up, I just want to reiterate once again that we are in the midst of a comprehensive strategic alternative process, and our comments related to this process will continue to be limited until its completion. I will now turn the call over to Kersten to provide more detail on our Q2 and first half results. Kersten?
Kersten Zupfer: Thanks, Matt, and good morning. For this morning’s call, I will review our second quarter results. The second quarter saw positive system-wide same store sales, increased operating income, positive net income, positive earnings per share and strong adjusted EBITDA. Overall, we are continuing to see stability in our business. Reviewing the second quarter in more detail and beginning with the income statement, the second quarter revenues were $51.1 million and declined $8.9 million from the prior year. This revenue decline was expected and relates primarily to a reduction in franchise rental income, which is a gross up of revenue and expense and has no impact on profitability. Additionally, transitioning out of company-owned salons and product sales reduced revenue with minimal impact on profitability. Royalty and fee revenue of $18.3 million, which represents our core business revenue was down $1.1 million versus the prior year second quarter due to the number of salons closures over the course of the last 12 months. Another reflection of our revenue performance is our system-wide same-store sales, which grew to 1.9% in the quarter. We posted GAAP operating income of $4.8 million in the quarter compared to $700,000 in the prior year quarter. The increase in GAAP operating income of $4.1 million was driven by lower depreciation and an inventory reserve charge in the prior year period. We continue to produce operating profit each quarter and we expect that trend to continue. We reported positive net income of $1 million and earnings per share of $0.43 in the second quarter compared to a loss of $2.4 million a year ago and a loss per share of $1.04 a year ago. The improvement relates to the improvement in operating income previously mentioned and a $2 million gain in discontinued operations related to the sale of Opensalon Pro in June of '22. As Matt mentioned, we received the $2 million in January. Now let's turn to our adjusted results. On an adjusted basis, second quarter consolidated EBITDA was $6 million compared to $7.8 million in the prior year's quarter. The $1.8 million decrease was due primarily to the company receiving a $1.1 million grant from the State of North Carolina related to COVID-19 relief with the remaining due to lower revenue and timing of expenses. Our adjusted G&A was $11.7 million for the second quarter, an increase of $600,000 from the prior year quarter. We do see some variability in our G&A quarter-to-quarter, which is primarily due to the timing of expenses. We have lowered our annual run rate G&A expectations to $46 million to $48 million versus our view last quarter, which was $47 million to $50 million. Our core franchise business achieved adjusted EBITDA of $6.4 million in the quarter, a $1.2 million decline compared to $7.5 million in the prior year. The decline is primarily related to the timing of G&A spend. On an adjusted EBITDA basis, our company-owned segment lost $300,000 for the quarter, a decline of $600,000 from the same quarter last year. This decline is due to the $1.1 million North Carolina COVID grant previously discussed, partially offset by having fewer loss-generating company-owned salons in the current period as we are closing salons either at lease end or negotiating a Bio [ph] when it makes economic sense to do so. A large number of our remaining company-owned salons will come to lease end in our third fiscal quarter. So our company-owned salon segment will have less impact in the second half of fiscal year 2024. Revenues for the first half of the year were $104 million compared to $122 million in the first half of fiscal year 2023. Similar to the second quarter revenue decline, this decline was expected and relates primarily to a reduction in franchise rental income and the wind down of our company-owned salons, as well as lower product sales to franchisees. Adjusted EBITDA for the first half of the year was $13.5 million, a $1.8 million improvement compared to $11.7 million in the first half of fiscal year 2023. Adjusted EBITDA improved primarily due to our lower G&A and franchise rent, partially offset by the $1.1 million grant from the state of North Carolina received in 2023. Turning to liquidity. As of December 31, we had $38.1 million of liquidity including $31 million of available revolver capacity and $7.2 million of cash. At December 31, 2023, our debt outstanding, excluding deferred financing fees was $188.9 million. We are in compliance with our debt covenants currently and we do not expect to violate any of the covenants during the term of our credit facility assuming no major impacts to the business. Additionally, we believe we have adequate liquidity to operate the business. As a reminder, due to accounting standards, our balance sheet shows approximately $334 million of operating lease liabilities related to liabilities associated with sub-leasing salons to our franchisees over the entire life of their respective leases. These liabilities are serviced by our franchisees and should not be factored into Regis' debt position so long as the franchisees continue to pay their obligations as they have been. These liabilities have decreased $229 million over the last 3 years due to the reduction in salon count and also due to Regis moving off of franchise leases. Having our franchisees sign the leases accounted for approximately $85 million of the reduction, Regis is solely responsible for lease liabilities for our corporate office space and remaining company-owned salons, which amounts to $9.9 million over the life of the leases. In the first half of the year, we used $6.9 million of cash from operations which is similar to the prior year. Excluding the $1.1 million grant discussed earlier, received in fiscal year 2023, cash used in operating activities improved $1.1 million due primarily to our lower cost structure, partially offset by increased interest expense of approximately $2.6 million due to higher variable interest rates on our bank debt. We do expect to use less cash in the second half of the fiscal year, and management remains committed to continued cash management and returning to cash flow generation. Before wrapping up my remarks, I have a few more items I wanted to highlight. On January 9, Regis' stock began trading on the NASDAQ. We are pleased to be able to make the move to NASDAQ and to continue trading on a national securities exchange. Additionally, yesterday, we announced that Regis has adopted a tax benefits preservation plan designed to preserve the availability of its NOL carryforwards and certain other tax attributes. Regis has approximately $646 million of U.S. federal NOLs, which represent a valuable asset to the company and are available to offset the company's current or future taxable income. The plan is designed to protect shareholder value by mitigating the likelihood of ownership changes that would result in significant limitations on Regis' ability to use its NOLs or certain other tax attributes to offset current or future taxable income. This concludes my prepared remarks. I would like to thank you for your continued support and interest in Regis. I will turn it back to Biz to wrap up the call.
End of Q&A: Thank you for joining. This will conclude today's earnings call. If you have any questions about our financial results, please contact Kersten through our Investor Relations e-mail at investorrelations@regiscorp.com. Thank you, and have a great day.
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