Regis Corp. Not Cutting It

Sales Decline at Sell-Rated Regis Corp. (RGS)

If you happen to be a fan of long hair, the economic recession has some upside for you. With consumers looking to cut back on expenditures wherever they can, it seems that delaying their next haircut might be a popular option.

Sell-rated Regis Corporation (RGS), the largest beauty salon company in the country, announced this morning that third quarter revenues declined 2.5% versus the prior year. Excluding the deconsolidation of its European salon operations, revenues would have been down 1.7%.

More importantly, in our opinion, is the fact that same-store-sales decreased 4.5% year-over-year.

The company recently opted to divest its Trade Secret brand, which had been posting the largest same-store-sale declines of any chain in the company’s portfolio. Absent this divestiture, same-store-sales would likely have been down even further.

With more than 12,800 system-wide locations throughout the world, Regis is substantially larger than peers such as Ulta Salon, Cosmetics & Fragrance, Inc. (ULTA). The company has interests in a wide range of salon concepts, including higher-end salons such as the Regis brand, which has an average ticket of $37, and lower-cost brands such as MasterCuts and Supercuts, which have average tickets of $17 and $14, respectively.

The third quarter sales figures imply that customers may be trading down, or at least delaying visits longer at the higher-end brands. The company’s best performing brand during the quarter was SmartStyle, which is located exclusively in Wal-Mart (WMT) Supercenters.

Regis is also feeling the impact of lower product sales as consumers scale back their expenditures. Product sales represented more than 23% of consolidated revenues in the quarter. Same-store product sales were down 6.5% in total, compared to a 3.9% decline in service revenues during the period.

Regis is the dominant company in the industry, and its platform should allow it to leverage its position should operating trends turn in the company's favor. Given the current challenging operating environment, the recent weakness in overall same-store sales, and potential financial constraints going forward, however, we maintain our Sell rating on the shares.

Read the full analyst report on RGS