Regis Downgraded to Underperform

We are downgrading our rating on Regis Corp. (RGS - Analyst Report), which owns, operates, and franchises hairstyling and hair care salons worldwide to Underperform from Neutral.
 
The rating downgrade is based on disappointing fourth quarter 2010 results, as total revenue continues to fall due to eight consecutive quarters of decline in same store sales. Regis continues to see sagging same store sales as salon traffic remains weak, given that consumer behavior has changed in this difficult economic environment. People are cutting back on expenditure, resulting in a slowdown in discretionary spending and longer recesses between salon visits. This trend is expected to continue to affect Regis’ results in the near term. Moreover, customer visit patterns are not rebounding as quickly as the company had earlier projected and is unlikely be stable before the end of 2011.
 
The company does not face demand risk, stemming from technological innovations or foreign competition, but it is exposed to a lingering risk from changes in fashion trends. These continuous changes in trends are risky for a company that generates revenues by providing haircuts and styling.
 
Fourth Quarter Results below Estimates
 
Regis’ fourth quarter adjusted earnings of 34 cents per share were below the Zacks Consensus Estimate of 37 cents per share. Regis’ total revenue plunged 5.6% year over year to $590.0 million due to a lower footfall at its salons and decline in total same-store sales. The company also missed the Zacks Consensus Estimate of $596.0 million. Consolidated same-store sales fell 2.7% year over year.
 
Outlook
 
For fiscal 2011, Regis expects same-store sales to be in a range of negative -1% to +3%, with positive comps anticipated in the second half of the year. EBITDA is expected to be in a range of $235 million to $270 million.
 
Consensus Estimate Revised
 
Based on disappointing earnings results, the analysts reduced their estimates. Moreover, going forward, the analysts believe that revenues will decrease as same store sales continue to remain weak and higher site operating expense is expected.
 
The Zacks Consensus Estimate for the first quarter of 2011 is now expected to be 30 cents, compared with 32 cents, 60 days ago. In the last 60 days, the average forecast for fiscal 2010 and 2011 dropped to $1.34 per share and $1.52 per share compared with $1.40 and $1.61, respectively.

Read the full analyst report on RGS