Sales and Comps Wane at Regis

Regis Corporation (RGS - Analyst Report) recently reported second quarter 2012 revenues of $563 million, down 2.0% year over year and 1.2% sequentially.

Same-store sales (comps) for the second quarter fell 3.0% year over year. The rate of decline was sharper than the year-ago drop of 1.3% but in line with the previous quarter’s decrease. This indicates a persistent deterioration in the quarter’s same-store sales. Although service customer visits improved 10 basis points sequentially, it was not sufficient to hold up comps. Service same-store sales fell 3.3% versus a decline of 2.1% in the prior-year quarter.

Retail same-store sales fell 2.2% against a growth of 1.5% in the second quarter of 2010, implying that the company is struggling to drive traffic. However, consolidated Hair restoration business remained a sweet spot where same-store sales grew 1.3% in the quarter versus a growth of 0.8% in the prior-year quarter.

Geographically, North America was better placed than the international market. Domestic same-store sales fell 2.9% year over year, while international same-store sales plunged 10.1%. 

Results remained weak in the company’s relatively higher-priced, mall-based Regis Salon division, but were stronger in value salon concepts owing to a shift in consumer behavior in the backdrop of economic uncertainty.

While Supercuts (located in strip centers; around $17 average ticket) declined 1.1% versus a 0.5% growth in the year-ago period, MasterCuts (around $21 average ticket) and higher-end Regis salons (87% located in malls; around $41 average ticket) posted declines of 3.4% and 4.9%, respectively. SmartStyle salons, which are located exclusively in Wal-Mart Supercenters, recorded a decrease of 3.7%.

Outlook

Regis, which owns, franchises or has stakes in more than 12,700 salons, hair restoration centers and cosmetology education services, is considering a slew of initiatives to turn its business around. Management remains committed to restructuring and cost cutting through overhead reduction as well as closure of underperforming stores.

However, none of the efforts have paid off till now. Sales have on the downhill for quite some time. We expect international salon business to record weak same-store sales as the segment mainly includes company-owned salons located primarily in the United Kingdom.  

Additionally, we expect margins to remain under pressure at Hair restoration in the near term as the business continues to experience increase in the cost of hair systems due to spike in labor cost in China where these systems are manufactured.

Regis currently retains a Zacks #4 Rank, which translates into a short-term Sell rating. We are also maintaining a long-term Neutral recommendation on the stock. However, one of Regis’ close competitors, Ulta Salon, Cosmetics & Fragrance Inc. (ULTA - Snapshot Report) currently retains a Zacks #1 Rank, which translates into a short-term Strong Buy rating.

However, the company is expected to end the first quarter of 2012 on a disappointing note due to economic challenges. Estimates are also expected to move down in the coming days as same-store sales continue to remain sluggish. 

The company is slated to release its second quarter earnings on January 23, 2011. The Zacks Consensus earnings estimate for the second quarter is 26 cents, representing an annualized gain of 3.2%.

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