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On July 9, we maintained our Neutral recommendation on Regis Corp. (RGS - Analyst Report) despite its impressive strategic initiatives as we await a more sustained improvement in top line.

Why the Reiteration?

With a strong network of 10,000 beauty stores, Regis is one of the largest hair salon chains in the world. In order to improve its top line, the company is investing heavily on several strategic initiatives such as installing third-party SuperSalon point-of-sale (POS) software system, improving its staffing levels and aggressive marketing to drive its top line, going ahead.

The company has also taken an initiative to stretch its normal salon hours in its SmartStyle and Supercuts salons to give a boost to traffic growth. Positive comps posted in both the salons during the past two quarters reflect that the effort has started to pay off.

Asset sales remain another bright spot for Regis. The company’s divestment of one of its subsidiaries, Hair Club for Men and Women, in Apr 2013, can be seen as a positive as it provided Regis an immediate cash value and an option to sell one of its underperforming assets. Apart from this, Regis’ cost effective measures to augment profitability is also noteworthy.

However, the hair salon chain’s poor quarterly performance and increasing cost level keep us on the sidelines at the current level.

The company’s top line has been sluggish for quite some time. Owing to the continuous fall in guest count, the company has witnessed negative comps for the past 19 quarters and the trend is expected to continue until the customer-visit patterns completely rebound. In the ensuing quarters, the company’s profit will remain under pressure due to the stretching of the company’s normal working hours leading to higher labor costs. Additionally, changing fashion trends remains a major cause of concern.

Other Stocks to Consider

Regis carries a Zacks Rank #3 (Hold). Some other stocks in the retail industry that have a bright outlook include Big 5 Sporting Goods Corp. (BGFV - Analyst Report), Five Below, Inc. (FIVE - Snapshot Report) and Ulta Salon, Cosmetics & Fragrance, Inc. (ULTA - Snapshot Report). All these companies carry a Zacks Rank #2 (Buy).

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