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On Sep 18, 2013, we downgraded our long-term recommendation on Regis Corporation (RGS - Analyst Report), the owner, operator and franchisor of hairstyling and hair-care salons worldwide, to Underperform following weak fourth-quarter fiscal 2013 results.

Why the Downgrade?

Estimates for Regis have been declining after it reported fourth-quarter fiscal 2013 results on Aug 27, 2013. Regis announced lackluster fourth-quarter results, missing the Zacks Consensus Estimate for both earnings and revenues. The company’s 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% due to lower top line and higher costs. Moreover, the company posted an average negative earnings surprise of 69.31% over the past four quarters.

In the fourth quarter, total revenue declined 5.0% year over year to $502.3 million, missing the Zacks Consensus Estimate by 2.3%. Regis’ revenues have been reeling under pressure for the past few quarters owing to the decline in comparable sales (comps) and lower traffic.

Following the release of fourth-quarter results, the Zacks Consensus Estimate has been reduced, as analysts are apprehensive of the stock’s performance. The Zacks Consensus Estimate for fiscal 2014 fell by 41.7% to 21 cents, over the past 30 days. The company now has a Zacks Rank #5 (Strong Sell).

Cause for Concern

Owing to the continuous fall in guest count, the company has been witnessing declining comps for the past 20 quarters. Although the company has undertaken several sales-building initiatives, we believe that the sluggish comps trend will continue to affect its performance until the customer-visit patterns completely rebound especially in the U.S.

In the ensuing quarters, the company will incur increased expenses due to its various sales-driven initiatives. Profit is also expected to be under pressure due to the stretching of the company’s normal working hours, which in turn will lead to higher labor costs.

As the company’s major international company-owned salons are located primarily in the U.K., the challenging retail environment in the region will continue to be a headwind. Apart from this, continuous changes in fashion trends are a risk for a company that earns revenues through providing latest haircuts and styling.

Other Stocks that Warrant a Look

While we prefer to avoid Regis until we see signs of improvement in the company's performance, other retail stocks worth a look are Five Below, Inc. (FIVE - Snapshot Report), Ulta Salon, Cosmetics & Fragrance, Inc. (ULTA - Snapshot Report) and Tractor Supply Company (TSCO - Analyst Report). All these stocks carry a Zacks Rank #2 (Buy).

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