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Regis Corporation’s (RGS - Analyst Report) fourth-quarter fiscal 2013 adjusted earnings of 6 cents per share missed the Zacks Consensus Estimate of 10 cents by 40% and the comparable year-ago quarter’s earnings of 36 cents by 83.3%.

Negative same-store sales (comparable store sales) caused the quarterly earnings to decline 7 cents. Along with this, mounting labor costs, increased product costs and higher connectivity costs also pressurized earnings in the quarter.

Total revenue declined 5.0% year over year to $502.3 million, missing the Zacks Consensus Estimate of $514 million by 2.3%. The quarterly revenues decreased due to a decline in comps and lower traffic.

Quarter Performance

Service revenues dropped 5.3% year over year to $390 million, mainly due to a decrease in North American salon revenues and a 3.1% decline in service same-store sales resulting from a 3.4% fall in guest counts. The shift of Easter from April to March also played a role in pulling down the service same-store sales during the quarter.

Product revenues dipped 4.9% to $102.0 million owing to a 3.3% fall in product same-store sales. However, royalties and fees revenues climbed 5.2% year over year to $10.2 million, gaining from higher franchisee comps.

Consolidated comps in the quarter were down 3.1% due to a 3.7% decrease in guest count, offset by a 0.6% rise in average ticket price. However, the rate of decline in comps was slightly better than the year-ago quarter’s drop of 3.5%.

Cost of service as a percent of service revenues expanded 180 basis points (bps) to 58.9% as it was adversely impacted by negative service comps and higher labor costs. Cost of product as a percent of product revenues (adjusted) also climbed up 240 bps to 53.5%, due to headwinds from regular clearance sales.

Annual Results

In full fiscal year 2013, the company reported earnings of 18 cents per share versus $1.14 per share in the prior year. Earnings were also lower than the Zacks Consensus Estimate of 24 cents. Total revenue was $2.02 billion, down 0.5% from the Zacks Consensus Estimate and 4.9% from the year-ago quarter.

Store Update

During the quarter, Regis opened 28 company-owned salons while closing down or transferring 118 company-owned units. On Jun 30, 2013, the company had 9,763 salons, of which 7,435 were company-owned and 2,082 franchised.

Our Take

Although the Zacks Rank #3 (Hold) company has taken a set of initiatives to boost its business, lower earnings and  a weaker top line reflect that the company’s efforts are not paying off. Initiatives taken by the company include installing third-party point-of-sale software systems (SuperSalon), implementing cost-effective promotions, revising its pricing strategy and enhancing normal salon hours. Moreover, owing to the continuous fall in guest count, the company has witnessed negative comps for the past 20 quarters. We believe that the sluggish comps trend will continue to affect Regis’ result in the next few quarters until the customer-visit patterns completely rebound. Regis’ profits are also expected to reel under pressure due to higher labor costs and mounting retail expenses.

Some other retail stocks with a favorable Zacks Rank include Five Below, Inc. (FIVE), Steiner Leisure Ltd. (STNR - Snapshot Report) and Tractor Supply Company (TSCO - Analyst Report). All these companies carry a Zacks Rank #2 (Buy).

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