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Regis Upped to Neutral

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On Dec 11, we upgraded our recommendation on Regis Corp. from Underperform to Neutral on the back of better-than-expected third-quarter results announced on Nov 5.

Why Neutral?

Though Regis’ first-quarter fiscal 2014 adjusted earnings of 1 cent per share declined 87.5% year over year, it beat the Zacks Consensus Estimate of a loss of 6 cents per share by a wide margin. Lower operating costs resulting from the company’s cost-saving efforts led to the earnings beat.

Total revenue of $468.6 million also surpassed the Zacks Consensus Estimate by 4.6% benefiting from the company’s sales-building efforts. Following a better-than-expected performance estimates largely moved upward, encouraging us to revise our recommendation.

With a strong network of nearly 10,000 beauty stores, Regis is one of the largest hair salon chains in the world. In order to improve its top line, the company is investing heavily on strategic initiatives such as installing third-party SuperSalon point-of-sale software system, improving its staffing levels and aggressive marketing. Moreover, Regis’ cost-controlling efforts are expected to contribute to growth.

However, the Zacks Rank #3 (Hold) company’s comps have declined for the past 21 quarters due to a fall in guest count. Although the company has undertaken several sales-building initiatives, we believe they will take time to completely turn around the customer-visit patterns and thereby boost comps.

In addition, Regis has been affected by the changing fashion trend in the recent years and hence needs novelty in its system to cope with the change. A limited consumer spending environment also remains an overhang.

Other Stocks to Consider

Investors interested in the retail industry may consider stocks like Barnes & Noble, Inc. (BKS), Marinemax Inc. (HZO - Free Report) and Tractor Supply Co. (TSCO). All these companies hold a Zacks Rank #2 (Buy).

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