We maintain our Neutral recommendation on Regis Corp. (RGS - Analyst Report) , the global leader in beauty salons. Though we prefer the company’s strong brand recognition and asset-light strategy, continuous decline in comparable store sales (comps) as well as margins keep us on the sidelines at the current level.
Why the Reiteration?
Regis with a worldwide network of nearly 10,000 stores is well established in the market to command a premium rate relative to the overall personal services industry.
Regis continues to take various strategic initiatives such as installing third-party point-of-sale (POS) software system (SuperSalon), implementing cost-effective promotion as well as pricing strategy and enhancing normal salon hours in order to drive its top-line growth and same-store sales through boosting traffic.
Regis also remains steadfast in its goal to continuously expand its business globally. Over the past 18 years, the company has acquired more than 8,000 salons, thereby expanding both in North America and internationally.
Regis is concentrating on liquidation of its non-core assets in order to facilitate its financial flexibility, which in turn will maximize shareholders’ value. In this regard, Regis has completed the sale of one of its subsidiaries, Hair Club for Men and Women, to Tokyo-based Aderans Co., Ltd in Apr, 2013 and also divested its minority ownership interest in Provalliance to Provost Family, the largest hair salon company in Europe in Sept, 2012.
However, Regis has witnessed negative comps in the past 18 quarters, which can act as headwinds to its growth story. Although the company has taken several strategic initiatives to drive its traffic, lower revenues and comps reflect that the efforts are not completely paying off.
Regis has been witnessing contraction in its gross as well as operating margin in the past few quarters due to increased salon labor costs. In the near term, we expect margins to remain under pressure as the salon operator plans to increase its staffing hours and labor costs to control the ongoing decline in customer traffic.
Moreover, as Regis’ major international company-owned salons are located primarily in the U.K., the challenging retail environment in the region is expected to adversely affect its overall International salon business’ comps. Apart from this, Regis is highly exposed to any risk associated with fashion changes, which may hurt its sales, going ahead.
Hence, at the current level, we remain cautious and prefer to wait until we find some greater evidence of an outperformance. Regis currently carries a Zacks Rank #3 (Hold).
Other Stocks to Consider
Some other retail stocks with a favorable Zacks Rank include Cabela's Incorporated (CAB - Analyst Report) , Sally Beauty Holdings Inc. (SBH - Snapshot Report) and Hastings Entertainment Inc. . While Cabela’s holds a Zacks Rank #1 (Strong Buy), Sally Beauty and Hastings Entertainment carry a Zacks Rank #2 (Buy).