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Regis Corporation’s (RGS - Analyst Report) third-quarter fiscal 2013 adjusted earnings of one cent per share missed the Zacks Consensus Estimate of 13 cents by 92.3% and the comparable year-ago quarter’s earnings by 96.6%.

The weaker top-line, fewer working days during the quarter, mounting labor costs generated from higher working hours and growing costs of retail products are being held primarily responsible for such disappointing earnings. As the company has ownership interests in the U.S. based cosmetology company, Empire Education Group, lower equity in earnings in the latter also played a part.

Total revenue declined 5.8% year over year to $504.9 million in the reported quarter, which missed the Zacks Consensus Estimate of $521 million by 3.1%. While benefiting from the time-shift of Easter, the quarterly revenues have declined due to a drop in traffic and decreased service revenues that resulted in negative comparable store sales (comps).

Quarter Performance

Service revenues dropped 5% year over year to $392.1 million, mainly due to a 5% decrease in North American service revenues and a 0.4% decline in North American comps. North American comps were affected by a 1.7% decline in guest counts, fewer working days and reduction in the number of stores offsetting a 1.3% rise in average ticket prices. Comps in the quarter have also gained from early Easter.

Product revenues decreased 8.8% to $103.2 million owing to a 5.2% fall in comps. Royalties and fees revenues have also witnessed a drop of 2.1% year over year to $9.6 million.

Consolidated comps in the quarter were down 1.4%. However, the rate of decline in comps was better than the year-ago quarter’s drop of 3.9%, reflecting that Regis’ sales-driving initiatives have started to pay off. However, comps were adversely affected by a 2.4% decline in guest count, which again was offset by a 1% rise in the average ticket price.

The company's portfolio of salons offers a wide variety of concepts, including Regis Salons, Supercuts, MasterCuts, SmartStyle and Promenade in malls, strip centers, lifestyle centers, Wal-Mart supercenters, department stores, mass merchants and high-street locations.

In the third quarter, Supercuts and SmartStyle salon revenues increased 2.6% and 1.3% year over year with positive comps of 0.7% and 0.3%, respectively. Regis’ decision to increase the salon hours positively impacted revenues for both the salons.

Cost of service as a percent of service revenues expanded 180 basis points (bps) to 59.8%, reflecting a rise in labor costs in North American salons with increased salon hours. Cost of product as a percent of product revenues also increased 130 bps to 51.6%, mainly due to the occurrence of clearance sales.

Store Update

As of Mar 31, 2013, the company's store count (including company-owned and franchised) was 9,939.

Our Take

Decline in salon traffic due to changes in lifestyle patterns and economic pressure has resulted in 18 straight quarters of negative comps for the company. We believe that the sluggish comps will continue to affect Regis’ result in the near term.

Although the company has taken several initiatives to drive traffic, lower revenues and comps indicate that the efforts are not completely paying off. Moreover, in the near term, we expect profits to remain under pressure as the salon operator plans to increase its staffing hours to control the ongoing decline in customer traffic, which in turn will lead to higher labor costs.

Although Regis continues to take various strategic initiatives such as installing third-party point-of-sale (POS) software systems (SuperSalon), implementing cost-effective promotions, revising its pricing strategy and enhancing normal salon hours, we believe the company has a long way to go.

Another retailer Big 5 Sporting Goods Corp.’s (BGFV - Analyst Report) earnings and revenues outperformed the Zacks Consensus Estimate during the first quarter of 2013.

Regis currently carries a Zacks Rank #4 (Sell). Some other retail stocks with a favorable Zacks Rank include Cabela's Incorporated (CAB - Analyst Report) and Hastings Entertainment Inc. while Cabela’s holds a Zacks Rank #1 (Strong Buy), Hastings Entertainment carries a Zacks Rank #2 (Buy).

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