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Regis Disappoints, Comps Weak

RGS ULTA

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Regis Corporation (RGS - Analyst Report) reported first quarter 2013 adjusted earnings of 8 cents per share, significantly below the Zacks Consensus Estimate of 25 cents as well as the year-ago quarter earnings of 22 cents per share. The below-expectation results can be traced back to fragile same-store sales and a contraction of 230 basis points in service margins.

On GAAP basis, the company delivered net income of $28.5 million or 45 cents per share inclusive of the after-tax net non-operational charges of $24.2 million, related to the cumulative foreign currency translation benefit, particularly from the sale of the ownership interest in Provalliance. The result improved considerably from earnings of $8.3 million or 15 cents per share posted in the year-ago quarter.

Total revenue fell 5.0% year over year to $505.4 million in the reported quarter as feeble same-store sales continue.

Quarter Performance

Service revenues dipped 5.0% year over year to $393.4 million and product revenue decreased 4.0% to $102.3 million due to depressing same store sale. However, fees and royalties crept up 1.0% to $9.7 million.

Consolidated same-store sales slipped 3.1%. Though, the rate of decline was slightly lower than the year-ago drop of 3.4%, this marked the 17th straight quarter of negative comps. The continuous deterioration in comps is primarily due to less customer footfall in salons. During the quarter, same-store transaction counts for salon businesses lagged 2.3%.

As per revenue concept, North America Salons contributed more than 90% of the total revenue and recorded sales of $473.9 million, down 4.8%, attributed to a decrease of 3.0% in same-store sales. International Salons segment, which includes company-owned salons located primarily in the United Kingdom, reported revenues of $31.5 million, down 6.0%. International same-store sales plunged 5.1% as retail environment in U.K. continues to remain challenged.

Comps for value-priced salons were led by Supercuts, which was positive 1.2% and also outperformed Promenade, MasterCuts and SmartStyle which were negative 3.2%, 4.2% and 4.2%, respectively.

During the quarter, gross margins constricted 230 basis points (bps) to 42.4% and operational operating margins decreased 210 basis points to 1.8%.

Store Update

As of September 30, 2012, store count dropped by 2,602 units to 10,045 salons, as the sale of ownership interest in Provalliance closed during the quarter.

Liquidity

At the end of the quarter, cash and cash equivalents increased to $222.5 million from $112.0 million at the end of 2012. As of September 30, 2012, Regis reduced its long term debt to $251.2 million from $258.7 million as of June 30, 2012.

Our Take

Though for the first time in several years traffic was positive in Smart Style, supported by a back-to-school coupon event and increased staffing in this business, this positive signal is not much encouraging and we believe that the company has a long way to go. At present, the main goal of the company is to drive traffic and hence, management remains focused on improving the salon experience, simplifying operating model, leveraging the company’s scale and optimizing salon schedules.

Regis which competes with Ulta Salon, Cosmetics & Fragrance Inc. (ULTA - Snapshot Report) has a Zacks #3 Rank, implying a short-term ‘Hold’ rating on the stock. Our long-term recommendation on the stock remains ‘Neutral’.

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