Regis Stays at Neutral

We are maintaining our long-term Neutral recommendation on Regis Corp. (RGS - Analyst Report), the largest hair salon chain in the world.

Hanrahan, the CEO of Regis Corp., is taking all the measures to turnaround its business. He is implementing a sound strategy of transformation, which includes simplifying the operating model, leveraging the company’s scale and encouraging a performance-driven environment, which will ultimately improve the customer experience.

To achieve its objectives, management currently plans to roll out a third-party point-of-sale (POS) software system (SuperSalon) to all salons by the end of 2013, replacing another provider (Shortcuts), which previously replaced an internally developed program. Regis is optimistic about this new technology, as this new software, SuperSalon, has adequate capabilities of both POS and customer relationship management, confirmed by its successful use by Regis franchisees. To drive traffic as well as profitability, the company is focusing on an effective promotion and pricing strategy. As a result, Regis also employed a Vice President of pricing to better execute the promotion and pricing strategy. Moreover, to increase sales, the company plans to improve its scheduling and staffing levels.

During the quarter, SmartStyle salon witnessed positive traffic for the first time in several years, benefiting from better staffed hours and the back-to-school promotion. To enhance guest service, the company has rolled out a program, ‘The Moments of Truth’, which focuses on the critical points in a service including the welcome, consultation and check out. The initial response to the program was great and to further enhance guest experience, management plans to train its stylists. The company is still reviewing its technical training programs, which still have several tests underway. Furthermore, Regis is also focusing on salons manager training, employee rewards, promotional activities and use of technology. The company has also created centralized corporate operations and human resources groups to standardize and improve business processes throughout the entire organization and develop a performance-based culture.

Additionally, its cost saving initiatives, impressive balance sheet position and divestiture of Hair Club remain encouraging.

However, the persistent sluggishness in traffic due to economic concerns remains a drag on same-store sales and has resulted in 17 straight quarters of negative same-store sales. Traffic trends remained choppy and average ticket remained under pressure due to the comprehensive promotional strategy and lower pricing. Additionally, United Kingdom retail environment remains challenging; hence going forward, we expect International salon business to record weak same-store sales as the segment mainly includes company-owned salons located in United Kingdom. During the first quarter of 2012, International same-store sales declined 5.1%.

Moreover, lingering risks from fashion changes and competition from companies like Ulta Salon, Cosmetics & Fragrance, Inc. (ULTA - Snapshot Report) and Sally Beauty Holdings Inc. (SBH - Snapshot Report) add to the woes. Furthermore, the absence of the 2013 guidance until the new CEO completes the evaluation of business indicates lack of visibility in the near term.