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Regis Corp. (RGS - Analyst Report), which owns, operates and franchises hair and retail product salons worldwide, posted third quarter 2011 results on April 27, 2011. The company’s adjusted earnings in the third quarter missed the Zacks Consensus Estimate due to sluggish same-store sales for the eleventh consecutive quarter and lower margin. The recent earnings announcement, subsequent analyst estimate revisions and the Zacks ratings for both the short-term and the long-term outlook for the stock are covered in depth below.
Earnings Report Review
During the third quarter, Regis reported adjusted earnings of 25 cents per share, which missed the Zacks Consensus Estimate of 31 cents and also the prior-year quarter earnings of 37 cents.
Total revenue inched down 1.1% year over year to $581.0 million due to lower footfall at its salons and a decline in total same-store sales. The company also failed to beat the Zacks Consensus Estimate of $586.0 million.
Consolidated same-store sales in the quarter fell 2.3%. Notably, this rate of decline was higher than the year-ago quarter's drop of 1.8% as well as the first and second quarter drops of 1.5% and 1.3%, respectively, arising from a significant plunge in the quarter’s comps. The decline was due to inclement weather in the month of January and the calendar shift of Easter holiday from March to April this year, resulting in a slowdown in customer visits.
(Read our full coverage on this earnings report: REGIS’ 3Q LAGS ON LOWER COMPS)
Earnings Estimate Revisions: Overview
Following the third quarter earnings release, the Zacks Consensus Estimate for the company has decreased; implying that the analysts have a pessimistic outlook on the stock. The earnings estimate details are discussed below.
Agreement of Estimate Revisions
The analyst estimates reflect a negative inclination on the stock. Over the last 30 days, out of the 10 analysts covering the stock, 9 have reduced their estimates for fiscal 2011 and for fiscal 2012, 8 out of the 9 analysts have done the same. Similarly, for the fourth quarter of 2011, 8 out of the 9 analysts have lowered their estimates. However, none of the analysts have increased their estimates over the last 30 days.
The same trend can be witnessed in the last 7 days with 1, 6 and 5 analysts trimming their estimates for the next quarter, 2011 and 2012, respectively, and not a single analyst moved in the opposite direction.
Analysts remain cautious on the stock as same-store sales continue to suffer and the company’s earnings guidance range of 30 cents to 33 cents per share for the fourth quarter of 2011 remains below the concensus expectation of 37 cents owing to wavering consumer behavior and a hike in state unemployment taxes. Additionally, higher operating expenses and payroll taxes are negatively impacting the company’s margins.
Moreover, customer-visit patterns are not expected to rebound quickly given Regis' same-store sales projection of -1% to +1% for 2012.
Magnitude of Estimate Revisions
The earnings estimates have decreased by 7 cents to 30 cents for the fourth quarter of 2011, by 12 cents to $1.12 for fiscal year 2011 and by 17 cents to $1.26 for 2012 over the last 30 days. The magnitude of estimate revisions indicates that the analysts expect earnings to remain under pressure.
We remain cautious on the stock due to economic concerns that remain a drag on same-store sales. Moreover, Regis’ outlook remains below consensus, as consumer-visit pattern is not rebounding quickly.
Consumers across the globe are trimming expenditure, which is resulting in a slowdown in spending and longer recesses between salon visits. Additionally, the margin of the company also continues to plunge due to higher payroll taxes and increased operating cost resulting from various initiatives taken by the company to drive traffic.
Moreover, the company does not face demand risk stemming from technological innovations or foreign competition. However, it has a lingering risk from fashion changes. Continuous changes in trends are risky for a company that generates revenues by providing haircuts and styling.
Regis has a Zacks #5 Rank, implying a short-term Strong Sell rating. Our long-term recommendation for the stock remains Underperform.
Apart from Regis, another stock that promises long-term growth opportunities is Ulta Salon, Cosmetics & Fragrance Inc (ULTA - Snapshot Report), which holds a Zacks #1 Rank (short-term Strong Buy recommendation), as fourth quarter earnings of 48 cents were above the Zacks Consensus Estimate of 44 cents as well as the prior-year quarter earnings of 34 cents. Results improved on double-digit top-line growth.
About Earnings Estimate Scorecard
Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education/