Regis Misses Zacks Estimates

Regis Corporation ( RGS - Analyst Report ) reported second quarter fiscal 2013 adjusted earnings of 3 cents per share, significantly below the Zacks Consensus Estimate of 13 cents as well as the year-ago quarter earnings of 27 cents per share. High labor cost, Empire Education Group’s lower equity in earnings and adverse impact from Hurricane Sandy caused the quarterly earnings to decline by 5 cents.

On a GAAP basis, the company delivered a net loss of $12.3 million or 22 cents per share inclusive of the after-tax charges of $14 million; partially offsetting the gains from the company’s discontinued Hair Club operations. The results improved considerably from the net loss of $57.4 million or $1.01 per share posted in the year-ago quarter.

Total revenue declined 3.8% year over year to $506.2 million in the reported quarter, which was below the Zacks Consensus Estimate of $513 million. Revenue in the quarter has dipped with the 1.9% decline in same-store sales. However, the rate of decline in comps was lower than the year-ago quarter’s drop of 3.3%. The comps in the quarter were primarily impacted by Hurricane Sandy and Regis’ change in the number of store counts.

Quarter Performance

Service revenues dipped 3.9% year over year to $388.3 million, mainly due to a 4% annual decline in service revenues in the region. Product revenue decreased 4.1% to $108.2 million owing to a 3.6% fall in the same store sales. However, fees and royalties climbed 4.7% year over year to $9.6 million.

As per revenue concept, Salon revenues declined 3.9% year over year to $496.5 million. North American Salons recorded sales of $473.4 million, down 3.8%, attributed to a decrease of 1.7% in same-store sales. International Salons segment, which includes company-owned salons located primarily in the United Kingdom, reported revenues of $32.8 million, down 3.8%. International same-store sales plunged 6.6%, although it was narrower than the year-ago quarter’s same-store sales of 10.1%.

In the second quarter, Supercuts and SmartStyle witnessed positive comps of 0.3% and 0.5%, respectively, primarily due to improved traffic. Regis Salons’ comps also improved annually which were negative 3.2%.

During the quarter, gross margins shrank 250 basis points (bps) to 41.7% and operating margins were 1.7% compared with 2.2% in the year-ago quarter.

Store Update

As of December 31, 2012, the company's store count is 10,000.

Liquidity

At the end of the quarter, cash and cash equivalents decreased to $218.3 million from 222.5 million at the end of first quarter 2012. As of December 31, 2012, Regis’ long-term debt was $240.0 million; declined from $251.2 million as of September 30, 2012.

Our Take

Though the company is undertaking various strategic initiatives to improve traffic, continuous decline in revenue as well as same-store sales implies that the efforts are not completely paying off. Even if it is for the first time in thirteen years, the traffic in Smart Style was positive; this signal is not quite encouraging.

One of the company’s peers Ulta Salon, Cosmetics & Fragrance Inc. ( ULTA - Snapshot Report ) recently declared that its Holiday Total Sales have increased considerably by 23.2% within the period of November 11, 2012 to December 29, 2012. Ulta, which is slated to release its fourth quarter 2012 results on March 14 currently, expects its net sales to be within $742 million to $754 million in fourth quarter.

Regis currently retains a Zacks Rank #3 (Hold). Two of the company’s peers, that are performing impressively - Big 5 Sporting Goods Corp. ( BGFV - Analyst Report ) and Sally Beauty Holdings Inc. ( SBH - Snapshot Report ) – hold a Zacks Rank #1 (Strong Buy) a Zacks Rank #2 (Buy), respectively.