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Regis Corporation’s (RGS - Analyst Report) first-quarter fiscal 2014 adjusted earnings of a penny per share beat the Zacks Consensus Estimate of a loss of 6 cents per share. Lower operating cost resulting from the company’s cost-saving efforts as well as better-than-expected revenues led to the beat.    

However, earnings in the quarter were down 87.5% year over year from 8 cents per share. The year-over-year fall in earnings was caused by the decline in same-store sales (comparable store sales) and lower operating margin.

Total revenue declined 7.3% year over year to $468.6 million but surpassed the Zacks Consensus Estimate of $448 million by 4.6%. However, the quarterly revenues decreased due to the decline in comps and lower traffic.

Quarter Performance

Service revenues dropped 5.5% year over year to $371.7 million, mainly due to a decrease in North American salon revenues and a 3.3% decline in service same-store sales (due to 5.7% fall in guest counts). The decline in the net store counts also played a role in pulling down the total sales during the quarter.

Product revenues declined 15.2% year over year to $86.7 million owing to a 14.8% fall in product same-store sales. However, royalties and fees revenues climbed 4.7% year over year to $10.1 million, gaining from higher franchisee comps and increased store count.

Consolidated comps in the quarter were down 5.4% due to a 7.2% decrease in guest count, offset by a 1.8% rise in average ticket price. The rate of decline in comps was also worse than the year-ago quarter’s drop of 3.1%.

Cost of service as a percent of service revenues expanded 140 basis points (bps) to 60.5% as it was adversely impacted by negative service comps and higher healthcare costs. However, cost of product as a percent of product revenues (adjusted) declined 110 bps to 50.8%, due to the lap of a sales-incentive program which was present in year-ago quarter. The company’s plan-o-gram initiative also helped cost to decline.  

Store Update

During the quarter, Regis opened 30 company-owned salons while closing down or transferring 57 units. On Sep 30, 2013, the company had 9,752 salons, of which 7,403 were company-owned and the rest were franchised.

Our Take

Regis' earnings beat the estimate during the quarter but were down year over year. The company’s earnings have been reeling under pressure for quite some time now due to lower top line, higher labor costs and mounting retail expenses. Owing to the continuous fall in guest count, the company has been witnessing declining comps for the past 21 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. Apart from this, in the concurrent quarters, the company’s profit is expected to be under pressure due to higher labor costs.

Regis holds a Zacks Rank #5 (Strong Sell). Some other retail stocks with a favorable Zacks Rank that are performing well include Five Below, Inc. (FIVE - Snapshot Report), KAR Auction Services, Inc. (KAR - Snapshot Report) and Marinemax Inc. (HZO - Snapshot Report). All these companies carry a Zacks Rank #2 (Buy).

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