Washington, D.C. 20549
The aggregate market value of the voting common equity held by non-affiliates computed by reference to the price at which common equity was last sold as of the last business day of the registrant's most recently completed second fiscal quarter, December 31, 2016,2021, was approximately $511,271,764.$78,213,138. The registrant has no non-voting common equity.
At the individual salon level, barriers to entry are low; however, barriers exist for chains to expand nationally due to the need to establish systems and infrastructure, the ability to recruit franchisees, experienced field and salon management and stylists, and to lease quality sites. The principal factors of competition in the hair care category are quality and consistency of the guest experience, the ability to attract, retain, and train stylists, technology, convenience, location and price. The Company continually strives to improve its performance in each of these areas and to create additional points of brand differentiation versus the competition.
Strategy:
The Company is focused on maximizing shareholder value. In order to successfully maximize shareholder value we place a balanced approach to our guests, employees and stylists, franchisees and shareholders. Our strategy and priorities are focused on loving our guests and stylists and initiatives to enhance shareholder value. Achieving our strategy requires a disciplined and thoughtful approach to investing and disinvesting in programming. We are focused on accelerating the growth of our franchise business while materially improving the performance of our company-owned salons. ![](https://files.docoh.com/10-K/0000716643-17-000032/keyelementsofourstrategya01.jpg)
Since the appointment of Hugh Sawyer as Chief Executive Officer in April 2017, the Company has executed a 120-day plan and other initiatives to help stabilize performance and establish a platform for longer term revenue and earnings growth in company-owned salons in order to maximize shareholder value. The core components of the 120-day plan are focused on improving upon our performance by better aligning company resources to demand while continuing to provide an exceptional guest experience, simplification of our business to grow revenues and disinvestment of certain programs that do not create value. As part of the 120-day plan, the Company has appointed several new key executives and personnel, including President of Franchise, Chief Financial Officer, Chief Marketing Officer, Chief Human Resources Officer, Vice President of Walmart Relations and Vice President Creative. To date, the initial returns on the Company's 120-day plan and other initiatives have been favorable and it is anticipated that these favorable year-over-year returns will continue to build in fiscal year 2018.
In order to continue providing an exceptional guest experience, we are investing in salon technology by launching SmartStyle online same-day check-in, which allows our guests in Walmart locations to find a location near them, view wait times, check-in via our website or mobile app and upgrading our point-of-sale (POS) hardware to facilitate an efficient guest experience within the salons and deploying tablets in corporate-owned salons to open a channel of direct communication with our stylists, including technical education.
To maximize shareholder value, we are focused on simplification, variable labor management, quality revenue growth, and the allocation of our capital to value-maximizing initiatives. Our business historically has been structured geographically. To simplify and better focus our business on our guests, effective August 1, 2017,we re-aligned the existing field leadership team into four distinct field organizations based on our core brands: SmartStyle, Supercuts, Signature Style and Premium | Mall Brands. This will enable our field leaders to focus on specific brands. Additionally, during the fourth quarter of fiscal 2017, we
focused on managing variable stylist staffing in our corporate salons to improve financial results and executed a price increase across our company-owned salons to grow revenues.
We continue to evaluate our investments and disinvest in non-value generating programs while investing in other value generating initiatives. As an example, we repurposed certain corporate programs and have invested in our creative digital capabilities to re-position Regis as the leading operator of value brands and technical education. Furthermore, we have launched a national SmartStyle digital advertising campaign to drive traffic to our SmartStyle locations in Walmart Supercenters and leverage our relationship with Walmart. We will continue this evaluation as we make decisions in the business.
As part of this evaluation of investments, the Company announced its review of strategic alternatives for the company-owned mall locations and divested its ownership interest in MyStyle.
At the same time, we are making thoughtful decisions to accelerate the growth of our franchise business, including the promotion of Eric Bakken to President of our Franchise business. This strategic initiative is intended to facilitate an ongoing multi-year transformation of our operating platform that balances our commitment to high-performing company-owned salons while enabling strategic optionality and the ongoing growth of our franchise business.
Guests
Among other factors, consistent delivery of an exceptional guest experience, haircut quality, convenience, competitive pricing, salon location, inviting salon appearance and atmosphere, differentiating benefits and guest experience elements and comprehensive retail assortments, all drive guest traffic and improve guest retention.
Guest Experience. Our portfolio of salon concepts enable our guests to select different service scheduling options based upon their preference. We believe that in the value category, the ability to serve walk-in appointments and minimize guest wait times is an essential element in delivering an efficient guest experience. Our mobile app and online check-in for Supercuts and SmartStyle allows us to capitalize on our guests' desire for convenience. We continue to focus on stylist staffing and retention, optimizing schedules and leveraging our POS systems to help us balance variable labor hours with guest traffic and manage guest wait times. In the Premium category, our salons generally schedule appointments in advance of service. Our salons are located in high-traffic strip centers, Walmart Supercenters and shopping malls, with guest parking and easy access, and are generally open seven days per week, offering guests a variety of convenient ways to fulfill their beauty needs.
Affordability. The Company strives to offer an exceptional value for its services. In the value category, our guests expect outstanding service at competitive prices. These expectations are met with average service transactions ranging from $18 to $22. In the premium category, our guests expect upscale, full service beauty services at reasonable prices. Average service transactions approximate $49 in this category. Pricing decisions are considered on a salon level basis and established based on local conditions.
Salon Appearance and Atmosphere. The Company's salons range from 500 to 5,000 square feet, with the typical salon approximating 1,200 square feet. Our salon repairs and maintenance program is designed to ensure we invest in salon cleanliness and safety, as well as in maintaining the normal operation of our salons. Our annual capital expenditures include funds to refresh the appeal and comfort of our salons.
Retail Assortments. The Company's salons sell nationally recognized hair care and beauty products, as well as a complete assortment of owned brand products. The Company's stylists are compensated and regularly trained to sell hair care and beauty products to their guests. Additionally, guests are encouraged to purchase products after stylists demonstrate their efficacy by using them in the styling of our guests' hair. The top selling brands within the Company's retail assortment include Regis designLINE, Paul Mitchell, Biolage, Redken, Sexy Hair Concepts, Nioxin, Kenra, It's a 10, Total Results, and Tigi.
Technology. Our point of sale (POS) systems have the ability to collect guest and transactional data and enable the Company to invest in guest relationship management, gaining insights into guest behavior, communicating with guests and incenting return visits. Leveraging this technology allows us to monitor guest retention and to survey our guests for feedback on improving the guest experience. Our mobile apps, including the recently launched SmartStyle mobile app, allow guests to view wait times and interact in other ways with salons. We are currently making further investments to improve the speed of our POS technology, improving the overall guest experience.
Marketing. We are investing in advertising to drive traffic. This includes leveraging advertising and media, guest relationship management programs, digital programs, one-on-one communications and local tactical efforts (e.g., couponing), among other programs. Traffic driving efforts are targeted vs. a one-size-fits-all approach. Annual advertising and promotional
plans are based on seasonality, consumer mindset, competitive positioning and return on investment. We continually reallocate marketing investments into opportunities we believe represent the highest return to our shareholders.
Stylists
Our organization depends on its stylists to help deliver great guest experiences.
Field Leadership. As of August 1, 2017, we reorganized our field leadership by brand. This change will simplify and better focus our business by re-aligning the existing field leaders into four distinct field organizations: SmartStyle, Supercuts, Signature Style, and Premium | Mall Brands. Previously, these field leaders were responsible for a variety of brands, with different business models, services, pay plans and guest expectations. Post-reorganization, each field leader is dedicated to a specific brand. We believe the new structure will further enable our field leadership to focus on quality guest experiences, enable improved salon execution, drive same-store sales traffic growth and simplify our operations.
Development of our field leaders is a high priority because stylists depend on their salons and field leaders for coaching, mentoring and motivation. Our training curriculum serves as the foundation for ongoing leadership development. Role clarity and talent assessments help us identify ways to develop and upgrade field leadership. Execution disciplines are used to drive accountability, execution and business performance. Incentives are designed to align field interests with those of the Company's shareholders by rewarding behaviors focused on revenue and EBITDA growth. This organization structure also provides a clear career path for our people who desire to ascend within the Company.
Technical Education. We place a tremendous amount of importance in ongoing development of our stylists' craft. We intend to be the industry leader in technical training, including the utilization of digital training. Our stylists deliver a superior experience for our guests when they are well trained technically and experientially. We employ technical trainers who provide new hire training for stylists joining the Company from beauty schools and training for all stylists in current beauty care and styling trends. We supplement internal training with targeted vendor training and external trainers who bring specialized expertise to our stylists. We utilize training materials to help all levels of field employees navigate the running of a salon and essential elements of guest service training within the context of brand positions.
Recruiting. Ensuring that we attract, train and retain our stylists is critical to our success. We compete with all service industries for our stylists; to that end, we continue to enhance our recruiting efforts across all levels within our organization and are focused on showing our stylists a path forward. We cultivate a pipeline of field leaders through succession planning and recruitment venues from within and outside the salon industry. We also leverage beauty school relationships and participate in job fairs and industry events.
Technology. Our POS systems and salon workstations throughout North America enable communication with salons and stylists, delivery of online and digital training to stylists, salon level analytics on guest retention, wait times, stylist productivity, and salon performance. We are currently making further investments in our POS hardware and salon technology to improve the speed of our systems allowing for stylists to be more productive and improve overall guest and stylist satisfaction. We are also deploying tablets to salons to enhance the channel of communication with our stylists and enable digital training.
Salon Support
Our corporate headquarters is referred to as Salon Support. This acknowledges that loving our guests and stylists mandates a service-oriented, guest and stylist-focused mentality in supporting our field organization.
Organization. Salon Support and our associated priorities are aligned to our field organization to enhance the effectiveness and efficiency of the service we provide and optimize the guest experience.
Simplification. Our ongoing simplification efforts focus on improving the way we plan and execute across our portfolio of brands. Every program, communication, and report that reduces time in front of our guests is being assessed for simplification or elimination. Simplifying processes and procedures around scheduling, inventory management, day-to-day salon execution, communication and reporting improve salon service. Our organization also remains focused on identifying and driving cost savings and profit enhancing initiatives that do not harm the guest experience.
Salon Concepts:
The Company's salon concepts focus on providing high quality hair care services and professional products, primarily to the mass market. A description of the Company's salon concepts are listed below:
SmartStyle. SmartStyle salons offer a full range of custom styling, cutting, and hair coloring, as well as professional hair care products and are located exclusively in Walmart Supercenters. SmartStyle has primarily a walk-in guest base with value pricing. Service revenues represent approximately 69% of total company-owned SmartStyle revenues. Additionally, the Company has 62 franchised SmartStyle and 114 franchised Cost Cutters salons located in Walmart Supercenters.
Supercuts. Supercuts salons provide consistent, high quality hair care services and professional products to its guests at convenient times and locations at value prices. This concept appeals to men, women, and children. Service revenues represent approximately 91% of total company-owned Supercuts revenues. Additionally, the Company has 1,687 franchised Supercuts locations throughout North America.
MasterCuts. MasterCuts salons are a full service, mall-based salon group which focuses on the walk-in consumer who demands moderately priced hair care services. MasterCuts salons emphasize quality hair care services, affordable prices, and time saving services for the entire family. These salons offer a full range of custom styling, cutting and hair coloring services, as well as professional hair care products. Service revenues comprise approximately 83% of the concept's total revenues.
Signature Style. Signature Style salons are made up of acquired regional company-owned salon groups operating under the primary concepts of Hair Masters, Cool Cuts for Kids, Style America, First Choice Haircutters, Famous Hair, Cost Cutters, BoRics, Magicuts, Holiday Hair, Head Start, Fiesta Salons, and TGF, as well as other concept names. Most concepts offer a full range of custom hairstyling, cutting and coloring services, as well as hair care products. Service revenues represent approximately 89% of total company-owned Signature Style salons revenues. Additionally, the Company has 770 franchised locations of Signature Style salons.
Regis Salons. Regis Salons are primarily mall-based, full service salons providing complete hair care and beauty services aimed at moderate to upscale, fashion conscious consumers. At Regis Salons both appointments and walk-in guests are common. These salons offer a full range of custom styling, cutting and hair coloring services, as well as professional hair care products. Service revenues represent approximately 83% of the concept's total revenues. Regis Salons compete in their existing markets primarily by providing high quality services. Included within the Regis Salon concept are various other trade names, including Carlton Hair, Sassoon salons and academies, Hair by Stewarts, Hair Excitement, and Renee Beauty.
International Salons. International salons are comprised of company-owned salons and academies operating in the United Kingdom and Germany primarily under the Supercuts, Regis, and Sassoon concepts. These salons offer similar levels of service as our North American salons. Sassoon is one of the world's most recognized names in hair fashion and appeals to women and men looking for a prestigious full service hair salon. Salons are usually located in prominent high-traffic locations and offer a full range of custom hairstyling, cutting and coloring services, as well as professional hair care products. Service revenues comprise approximately 77% of total company-owned international locations. Additionally, the Company has 13 franchised locations of International salons.
The tables on the following pages set forth the number of system-wide locations (company-owned and franchised) and activity within the various salon concepts.
System-wide location counts
|
| | | | | | | | | |
| | June 30, |
| | 2017 | | 2016 | | 2015 |
Company-owned salons: | | | | | | |
SmartStyle in Walmart stores | | 2,652 |
| | 2,683 |
| | 2,639 |
|
Supercuts | | 980 |
| | 1,053 |
| | 1,092 |
|
MasterCuts | | 339 |
| | 430 |
| | 466 |
|
Signature Style | | 1,468 |
| | 1,604 |
| | 1,711 |
|
Regis | | 559 |
| | 694 |
| | 761 |
|
Total North American salons(1) | | 5,998 |
|
| 6,464 |
|
| 6,669 |
|
Total International salons(2) | | 275 |
| | 328 |
| | 356 |
|
Total, Company-owned salons | | 6,273 |
|
| 6,792 |
|
| 7,025 |
|
Franchised salons: | | | | | | |
SmartStyle in Walmart stores(3) | | 62 |
| | 11 |
| | 11 |
|
Cost Cutters in Walmart stores
| | 114 |
| | 114 |
| | 116 |
|
Supercuts | | 1,687 |
| | 1,579 |
| | 1,393 |
|
Signature Style | | 770 |
| | 792 |
| | 804 |
|
Total North American salons | | 2,633 |
|
| 2,496 |
|
| 2,324 |
|
Total International salons(2) | | 13 |
| | — |
| | — |
|
Total, Franchised salons | | 2,646 |
|
| 2,496 |
|
| 2,324 |
|
Ownership interest locations: | | | | | | |
Equity ownership interest locations | | 89 |
| | 195 |
| | 207 |
|
Grand Total, System-wide | | 9,008 |
|
| 9,483 |
|
| 9,556 |
|
Constructed Locations (net relocations)
|
| | | | | | | | | |
| | Fiscal Years |
| | 2017 | | 2016 | | 2015 |
Company-owned salons: | | | | | | |
SmartStyle in Walmart stores | | 37 |
| | 51 |
| | 68 |
|
Supercuts | | 2 |
| | 5 |
| | 7 |
|
MasterCuts | | — |
| | — |
| | — |
|
Signature Style | | — |
| | 1 |
| | 1 |
|
Regis | | — |
| | — |
| | — |
|
Total North American salons(1) | | 39 |
|
| 57 |
|
| 76 |
|
Total International salons(2) | | 2 |
| | 9 |
| | 15 |
|
Total, Company-owned salons | | 41 |
|
| 66 |
|
| 91 |
|
Franchised salons: | | | | | | |
SmartStyle in Walmart stores(3) | | — |
| | — |
| | 1 |
|
Cost Cutters in Walmart stores
| | — |
| | — |
| | — |
|
Supercuts | | 111 |
| | 146 |
| | 126 |
|
Signature Style | | 27 |
| | 24 |
| | 13 |
|
Total North American salons(1) | | 138 |
|
| 170 |
|
| 140 |
|
Total International salons(2) | | 8 |
| | — |
| | — |
|
Total, Franchised salons | | 146 |
|
| 170 |
|
| 140 |
|
Closed Locations
|
| | | | | | | | | |
| | Fiscal Years |
| | 2017 | | 2016 | | 2015 |
Company-owned salons: | | |
| | |
| | |
|
SmartStyle in Walmart stores | | (11 | ) | | (7 | ) | | (3 | ) |
Supercuts | | (51 | ) | | (17 | ) | | (36 | ) |
MasterCuts | | (91 | ) | | (36 | ) | | (39 | ) |
Signature Style | | (123 | ) | | (77 | ) | | (114 | ) |
Regis | | (135 | ) | | (67 | ) | | (55 | ) |
Total North American salons(1) | | (411 | ) |
| (204 | ) |
| (247 | ) |
Total International salons(2) | | (50 | ) | | (37 | ) | | (19 | ) |
Total, Company-owned salons | | (461 | ) |
| (241 | ) |
| (266 | ) |
Franchised salons: | | | | | | |
SmartStyle in Walmart stores(3) | | (1 | ) | | — |
| | — |
|
Cost Cutters in Walmart stores
| | (5 | ) | | (2 | ) | | — |
|
Supercuts | | (44 | ) | | (22 | ) | | (22 | ) |
Signature Style | | (43 | ) | | (32 | ) | | (50 | ) |
Total North American salons(1) | | (93 | ) |
| (56 | ) |
| (72 | ) |
Total International salons(2) | | — |
| | — |
| | — |
|
Total, Franchised salons | | (93 | ) |
| (56 | ) |
| (72 | ) |
Conversions (including net franchisee transactions)(4)
|
| | | | | | | | | |
| | Fiscal Years |
| | 2017 | | 2016 | | 2015 |
Company-owned salons: | | | | | | |
SmartStyle in Walmart stores | | (57 | ) | | — |
| | — |
|
Supercuts | | (24 | ) | | (27 | ) | | (55 | ) |
MasterCuts | | — |
| | — |
| | — |
|
Signature Style | | (13 | ) | | (31 | ) | | (22 | ) |
Regis | | — |
| | — |
| | — |
|
Total North American salons(1) | | (94 | ) |
| (58 | ) |
| (77 | ) |
Total International salons(2) | | (5 | ) | | — |
| | — |
|
Total, Company-owned salons(5) | | (99 | ) |
| (58 | ) |
| (77 | ) |
Franchised salons: | | | | | | |
SmartStyle in Walmart stores(3) | | 52 |
| | — |
| | — |
|
Cost Cutters in Walmart stores
| | 5 |
| | — |
| | — |
|
Supercuts | | 41 |
| | 62 |
| | 76 |
|
Signature Style | | (6 | ) | | (4 | ) | | 1 |
|
Total North American salons(1) | | 92 |
|
| 58 |
|
| 77 |
|
Total International salons(2) | | 5 |
| | — |
| | — |
|
Total, Franchised salons(5) | | 97 |
|
| 58 |
|
| 77 |
|
| |
(1) | The North American Value operating segment is comprised primarily of the SmartStyle, Supercuts, MasterCuts and Signature Style salon brands. The North American Premium operating segment is comprised primarily of the Regis salon brands. |
| |
(2) | Canadian and Puerto Rican salons are included in the North American salon totals. |
| |
(3) | Franchised SmartStyle salons in Walmart stores includes salons originally opened as Magicuts locations in Canadian Walmart stores that were rebranded to SmartStyle. |
| |
(4) | During fiscal years 2017, 2016, and 2015, the Company acquired one, one, and zero salon locations, respectively, from franchisees. During fiscal years 2017, 2016, and 2015, the Company sold 100, 59, and 77 salon locations, respectively, to franchisees. |
| |
(5) | As of June 30, 2017, two of the conversions were not yet completed.
|
Salon Franchising Program:
General. We have various franchising programs supportingfranchise support functions our 2,6465,395 franchised salons as of June 30, 2017,2022, consisting mainly of Supercuts, SmartStyle, Cost Cutters, First Choice Haircutters and Roosters and Magicuts. These salons have been included in the discussions regarding salon counts and concepts.
salons. We provide our franchisees with a comprehensive system of business training, stylist education, site approval, and lease negotiation, construction management services, professional marketing, promotion, and advertising programs, and other forms of on-goingongoing support designed to help franchisees build successful businesses. Historically, we have signed the salon lease and then subleased the space to our franchisees. However, moving forward, for all new locations and some lease renewals, franchisees will seek to sign the salon leases directly with the landlords; however, there may be cases where we decide to stay on the lease. We have the right to approve salon leases.
Standards of Operations. The Company does not control the day-to-day operations of its franchisees, including employment, benefits and wage determination, establishing prices to chargecharged for products and services, business hours, personnel management, and capital expenditure decisions. However, the franchise agreements afford certain rights to the Company, such as the right to approve locations, suppliers and the sale of a franchise. Additionally, franchisees are required to conform to the Company's established operational policies and procedures relating to quality of service, training, salon design and decor and trademark usage. The Company's field personnel make periodic visits to franchised salons to ensure they are operating in conformity with the standards for each franchising program. All of the rights afforded to the Company with regard to franchised operations allow the Company to protect its brands, but do not allow the Company to control theday-to-day franchise operations or make decisions that have a significant impact on the success of the franchised salons. The Company’sCompany's franchise agreements do not give the Company any right, ability or potential to determine or otherwise influence any terms and/or conditions of employment of franchisees’franchisees' employees (except for those, if any, that are specifically related to quality of service, training, salon design, decor and trademark usage), including, but not limited to, franchisees’ employees’franchisees' employees' wages and benefits, hours of work, scheduling, leave programs, seniority rights, promotional or transfer opportunities, layoff/recall arrangements, grievance and dispute resolution procedures, dress code, and/or discipline and discharge.
Franchise Terms. Pursuant to a franchise agreement with the Company, each franchisee pays an initial fee for each store and ongoing royalties to the Company. In addition, for most franchise concepts,brands, the Company collects advertising funds from franchisees and administers the funds on behalf of the concepts.brands. Franchisees are responsible for the costs of leasehold improvements, furniture, fixtures, equipment, supplies, inventory, payroll costs and certain other items, including initial working capital. The majority of franchise agreements provide the Company a right of first refusal if the store is to be sold and the franchisee must obtain the Company's approval in all instances where there is a sale of a franchise location.
Additional information regarding each of the major franchised brands is listed below:
Supercuts
Supercuts franchise agreements have a perpetual term, subject to termination of the underlying lease agreement or termination of the franchise agreement by either the Company or the franchisee. All new franchisees enter into development agreements, which give them the right to enter into a defined number of franchise agreements. These franchise agreements are site specific. The development agreement provides limited territorial protection for the stores developed under those franchise agreements. Older franchisees have grandfathered expansion rights, which allow them to develop stores outside of development agreements and provide them with greater territorial protections in their markets. The Company has a comprehensive impact policy that resolves potential conflicts among Supercuts franchisees and/or the Company's Supercuts locations regarding proposed store sites.
SmartStyle and Cost Cutters in Walmart Supercenters
The majority of existing SmartStyle and Cost Cutters franchise agreements for salons located in Walmart Supercenters have a five yearfive-year term with a five yearfive-year option to renew. The franchise agreements are site specific to salonsspecific.
Cost Cutters (not located in Walmart Supercenters. As announced in January 2017, this business is growing both organically and through transfers from corporate to franchise-owned salons.
Cost Cutters,Supercenters), First Choice Haircutters and Magicuts
The majority of existing Cost Cutters franchise agreements have a 15 year15-year term with a 15 year15-year option to renew (at the option of the franchisee), while the majority of First Choice Haircutters franchise agreements have a ten year10-year term with a five yearfive-year option to renew. The majority of Magicuts franchise agreements have a term equal to the greater of five years or the current initial term of the lease agreement with an option to renew for two additional five yearfive-year periods. The current franchise agreement is site specific. Franchisees may enter into development agreements with the Company, which provide limited territorial protection.
Roosters Men’s Grooming Center
Roosters franchise agreements have a ten-year10-year term with a ten-year10-year option to renew (at the option of the franchisee). New franchisees enter into a franchise agreement concurrent with the opening of their first store, along with a development agreement under which they havewith the right to open two additional locations.
Franchisee Training. The Company provides new franchisees with training, focusing on the various aspects of salon management, includingincluding: operations, personnel management training, marketing fundamentals and financial controls. Existing franchisees receive training, counseling and information from the Company on a regular basis. The Company provides franchisee salon managers and stylists with access to technical training resources.
Guests
Among other factors, consistent delivery of an exceptional guest experience, haircut quality, convenience, competitive pricing, salon location, inviting salon appearance and atmosphere, comprehensive retail assortments, and engagement through technology all drive guest traffic and improve guest retention.
Guest Experience. Our portfolio of salon concepts enables our guests to select different service scheduling options based upon their preference. We believe the ability to serve walk-in appointments and minimize guest wait times are essential elements in delivering an efficient guest experience. Our mobile applications and online check-in capabilities, including check-ins directly from Google®, allow us to capitalize on our guests' desire for Supercutsconvenience. Our franchisees continue to focus on stylist staffing and SmartStyle franchisees.retention, optimizing schedules, balancing variable labor hours with guest traffic and managing guest wait times. Our franchise salons are located in high-traffic strip centers and Walmart Supercenters, with guest parking and easy access, and are generally open seven days per week to offer guests a variety of convenient ways to fulfill their beauty needs.
Affordability. The Company strives to offer an exceptional value for its services. In the value category, our guests expect outstanding service at competitive prices. These expectations are met with the average service price of transactions ranging from $20 to $28. Pricing decisions are considered on a salon-level basis and are established based on local conditions. Our franchisees control all pricing at their locations.
Salon Safety, Appearance and Atmosphere. Guest and stylist safety is our first priority and became even more important by the novel strain of coronavirus and all related variants (COVID-19). We have invested heavily in safety and personal protective equipment and training employees on safety measures. Our salon repairs and maintenance program is designed to ensure we invest in salon cleanliness and safety, as well as in maintaining the normal operation of our company-owned salons. The Company's salons range from 500 to 5,000 square feet, with the typical salon approximating 1,200 square feet.
Retail Assortments. Salons sell nationally recognized hair care and beauty products, as well as an assortment of corporate-owned brand products. Stylists are compensated and regularly trained to sell hair care and beauty products to their guests. Additionally, guests are encouraged to purchase products after stylists demonstrate their efficacy by using them in the styling of our guests' hair. The top selling brands within the Company's retail assortment include: L'Oreal Professional Brands, Regis Private Label Brand, Designline®, and Paul Mitchell. We also distribute our Designline brand through distribution channels, including Amazon.com and Walmart.com.
Technology. In fiscal year 2022, we sold our proprietary back-office salon management system, Opensalon® Pro to a third party, Zenoti. See Note 3 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K. We expect all of our salons will transition to the Zenoti salon management system in fiscal year 2023. We also use mobile applications to allow guests to view wait times and interact in other ways with salons.
Marketing. Our marketing is brand specific and funded primarily from contractual contributions, based on sales, to the brand's cooperative advertising funds. These funds are used largely in support of advertising and other efforts to increase guest traffic to our salons, grow online booking usage, and improve overall awareness of and affinity for our brands. A portion of our marketing funds are used in support of stylist recruitment to grow the number of active stylists in our system.
Stylists
Our Company depends on its stylists to help deliver great guest experiences. We believe in the importance of the ongoing development of our stylists' craft. We aim to be an industry leader in stylist training, including the utilization of both live and digital training. Our stylists deliver a superior experience for our guests when they are well-trained technically and through years of experience. We employ trainers who provide new hire training for stylists joining the Company and train franchisee trainers. We supplement internal training with targeted vendor training and external trainers that bring specialized expertise to our stylists. We utilize training materials to help all levels of field employees navigate the operation of a salon and essential elements of guest service training within the context of brand positions.
Salon MarketsSupport
Our corporate headquarters is referred to as Salon Support. We take a service-oriented mentality to best support our franchisees and Marketing:stylists in an effort to ensure guest satisfaction by helping our franchisees drive their business, as well as overseeing our company-owned operations.
Company-Owned Salons
The Company utilizes various marketing vehicles for its salons, including traditional advertising, guest relationship management, digital marketing programs and promotional/pricing based programs. A predetermined allocation of revenue is used for such programs. Most marketing vehicles including radio, print, online, digital and television advertising are developed and supervised at the Company's Organization. Salon Support headquarters. The Company reviews its brand strategyand our associated priorities are aligned with the intent to create more clear communication platforms, identities and differentiation points for our brands to drive consumer preference.enhance the effectiveness and efficiency of the service we provide.
Franchised SalonsSimplification. Our ongoing simplification efforts focus on aligning our cost structure with our transition to an asset-light franchise model and improving the way we plan and execute across our portfolio of brands. In fiscal year 2022 and 2021, we completed a corporate reorganization based on a zero-based budgeting philosophy to ensure each employee was performing the "right work," each team was the "right size" based on resources and priorities and overall, we have the "right structure" to succeed as a company. This exercise reduced Salon Support headcount in fiscal year 2022 and 2021.
Most franchiseLocation. Salon Support is primarily located in Minneapolis, Minnesota while allowing for hybrid and remote work.
Salon Concepts:
The Company's salon concepts maintain separate advertising funds that provide comprehensive marketingfocus on providing high-quality hair care services and sales support for each system. The Supercuts advertising fund isprofessional hair care products. A description of the Company's largest advertising fundsalon concepts is listed below:
Supercuts. Supercuts salons provide consistent, high-quality hair care services and is administered byprofessional hair care products to its guests at convenient times and locations at value prices. This concept appeals to men, women, and children. The Company has 2,264 franchised and 18 company-owned Supercuts locations throughout North America.
SmartStyle/Cost Cutters in Walmart stores. SmartStyle and Cost Cutters salons offer a council consistingfull range of custom styling, cutting, and hair coloring, as well as professional hair care products and are currently located exclusively in Walmart Supercenters. This concept has primarily a "walk-in" guest base with value pricing. The Company has 1,646 franchised and 49 company-owned SmartStyle and Cost Cutters salons located in Walmart Supercenter locations throughout North American.
Portfolio Brands. Portfolio Brands salons are made up of acquired regional salon groups operating under the primary concepts of Cost Cutters, First Choice Haircutters, Roosters, Hair Masters, Cool Cuts for Kids, Style America, Famous Hair, Magicuts, Holiday Hair, and TGF, as well as other concept names. Most concepts offer a full range of custom hairstyling, cutting and coloring services, as well as professional hair care products. The Company has 1,344 franchised and 38 company-owned Portfolio Brands locations throughout North America.
International Salons. International salons are locations operating in the United Kingdom, primarily under the Supercuts and Regis concept. These salons offer similar levels of service as our North American salons. Salons are usually located in prominent high-traffic locations and offer a full range of custom hairstyling, cutting and coloring services, as well as professional hair care products. The Company has 141 franchised International locations.
The tables on the following pages set forth the number of system-wide locations (franchised and company-owned) and activity within the various salon concepts.
System-wide location counts | | | | | | | | | | | | | | | | |
| | June 30, |
| | 2022 | | 2021 | | |
| | | | | | |
FRANCHISE SALONS: | | | | | | |
Supercuts | | 2,264 | | | 2,386 | | | |
SmartStyle/Cost Cutters in Walmart stores | | 1,646 | | | 1,666 | | | |
Portfolio Brands | | 1,344 | | | 1,357 | | | |
Total North American salons | | 5,254 | | | 5,409 | | | |
Total International salons (1) | | 141 | | | 154 | | | |
Total Franchise salons | | 5,395 | | | 5,563 | | | |
as a percent of total Franchise and Company-owned salons | | 98.1 | % | | 95.3 | % | | |
| | | | | | |
COMPANY-OWNED SALONS: | | | | | | |
Supercuts | | 18 | | | 35 | | | |
SmartStyle/Cost Cutters in Walmart stores | | 49 | | | 91 | | | |
Portfolio Brands | | 38 | | | 150 | | | |
Total Company-owned salons | | 105 | | | 276 | | | |
as a percent of total Franchise and Company-owned salons | | 1.9 | % | | 4.7 | % | | |
| | | | | | |
OWNERSHIP INTEREST LOCATIONS: | | | | | | |
Equity ownership interest locations | | 76 | | | 78 | | | |
| | | | | | |
Grand Total, System-wide | | 5,576 | | | 5,917 | | | |
Constructed locations (net relocations) | | | | | | | | | | | | | | | | |
| | Fiscal Years |
| | 2022 | | 2021 | | |
| | | | | | |
FRANCHISE SALONS: | | | | | | |
Supercuts | | 15 | | | 21 | | | |
SmartStyle/Cost Cutters in Walmart stores | | 1 | | | — | | | |
Portfolio Brands | | 5 | | | 10 | | | |
Total North American salons | | 21 | | | 31 | | | |
Total International salons (1) | | — | | | 1 | | | |
Total Franchise salons | | 21 | | | 32 | | | |
| | | | | | |
COMPANY-OWNED SALONS: | | | | | | |
Supercuts | | — | | | 4 | | | |
SmartStyle/Cost Cutters in Walmart stores | | — | | | — | | | |
Portfolio Brands | | — | | | — | | | |
| | | | | | |
| | | | | | |
Total Company-owned salons | | — | | | 4 | | | |
Closed locations | | | | | | | | | | | | | | | | |
| | Fiscal Years |
| | 2022 | | 2021 | | |
| | | | | | |
FRANCHISE SALONS: | | | | | | |
| | | | | | |
Supercuts | | (156) | | | (273) | | | |
SmartStyle/Cost Cutters in Walmart stores | | (49) | | | (56) | | | |
Portfolio Brands | | (81) | | | (82) | | | |
Total North American salons | | (286) | | | (411) | | | |
Total International salons (1) | | (13) | | | (14) | | | |
Total Franchise salons | | (299) | | | (425) | | | |
| | | | | | |
COMPANY-OWNED SALONS: | | | | | | |
| | | | | | |
Supercuts | | (6) | | | (54) | | | |
SmartStyle/Cost Cutters in Walmart stores | | (15) | | | (252) | | | |
Portfolio Brands | | (40) | | | (307) | | | |
| | | | | | |
| | | | | | |
Total Company-owned salons | | (61) | | | (613) | | | |
Conversions (including net franchisee representatives. The council has overall controltransactions) (2)
| | | | | | | | | | | | | | | | |
| | Fiscal Years |
| | 2022 | | 2021 | | |
| | | | | | |
FRANCHISE SALONS: | | | | | | |
| | | | | | |
Supercuts | | 19 | | | 130 | | | |
SmartStyle/Cost Cutters in Walmart stores | | 28 | | | 405 | | | |
Portfolio Brands | | 63 | | | 212 | | | |
| | | | | | |
| | | | | | |
Total Franchise salons | | 110 | | | 747 | | | |
| | | | | | |
COMPANY-OWNED SALONS: | | | | | | |
| | | | | | |
Supercuts | | (11) | | | (125) | | | |
SmartStyle/Cost Cutters in Walmart stores | | (27) | | | (408) | | | |
Portfolio Brands | | (72) | | | (214) | | | |
| | | | | | |
| | | | | | |
Total Company-owned salons | | (110) | | | (747) | | | |
_______________________________________________________________________________(1)Canadian and Puerto Rican salons are included in the North American salon totals.
(2)During fiscal years 2022 and 2021, the Company acquired 0 and 1 salon locations, respectively, from franchisees. During fiscal years 2022 and 2021, the Company sold 110 and 748 salon locations, respectively, to franchisees.
Affiliated Ownership Interests:Interest:
The Company maintains ownership interests in beauty schools. The primary ownership interest is a 54.6%non-controlling 55.1% ownership interest in Empire Education Group, Inc. (EEG), which is accounted for as an equity method investment. See Note 1 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K. EEG operates accredited cosmetology schools. ContributingWe entered into an agreement to sell our stake in EEG to the controlling owner in fiscal year 2020, the closing of which is pending state approvals. The sale is not expected to have a significant impact on the Company's beauty schools in fiscal 2008 to EEG leveraged EEG's management expertise, while enabling the Company to maintain a vested interest in the beauty school industry. Additionally, we utilize our EEG relationship to recruit stylists straight from beauty school.operations or financial position.
Corporate Trademarks:
The Company holds numerous trademarks, both in the United StatesStates. and in many foreign countries. The most recognized trademarks are "SmartStyle®," "Supercuts" "MasterCuts,®," "Regis Salons®," "Cost Cutters" "Hair Masters,®," "First Choice Haircutters®," "Roosters®" and "Magicuts."Magicuts®."
"Sassoon"Human Capital Management:
Our Culture
We are committed to our purpose of Unleashing the Beauty of Potential, which is supported by our four core values:
Foster Trust. Create powerful relationships by acting with empathy and integrity.
Create Community. Connect and collaborate with all your partners. Share the challenges as much as you celebrate the wins.
Be Brave. Dream big and courageously challenge the status quo.
Own It. You are empowered. Take responsibility and own your role and your results.
These values support a registered trademarkcollaborative and inclusive culture that is critical to the success and growth of Procter & Gamble. The Company hasour Company. To help reinforce our values and incorporate them into everything we do, we have a license agreement to usevalues committee comprised of cultural ambassadors who serve as the Sassoon name for existing salonsvoice of employees and academies and new salon development.help ensure a best-in-class employee experience.
Corporate Employees:Our People
As of June 30, 2017,2022, the Company hademployed approximately 41,000 full630 employees; 122 of whom were corporate employees serving the Company's headquarters in Minnesota, 10 of whom served at its product engineering headquarters in California, 52 of whom provided artistic education to its hair care salons, and part-timethe remainder of whom served as field employees worldwide,or at its company-owned salons. The Company offers flexible work arrangements such as hybrid and remote work.
Diversity and Inclusion
The Company promotes diversity of thoughts, backgrounds, experiences, and ideas. As of June 30, 2022, racial minorities comprise over 32% of the Company's U.S. workforce, which is summarized below.
•68% White
•12% Hispanic or Latinx
•9% Asian
•6% Black or African American
•1% American Indian or Alaska Native
•1% Native Hawaiian
•3% Two or more races
Also, 85% of the Company's entire workforce are women and 15% are men. Additionally, 67% of the Company's leadership positions are held by women.
Families First
One hundred years ago, the Company began as a family business and its support of families continues today. It offers up to 16 weeks of parental leave, including adoption, up to 12 of which approximately 36,000are paid, so that parents have time to focus on their newest family members. It also offers flexible work arrangements, including full-time telecommuting. Additionally, the Company offers flexible paid time off, which allows employees were located in the United States. to control their time away from work based on individual needs, not years of service.
Other Compensation and Benefits
The Company believesalso takes care of its people by offering competitive compensation and benefits packages that are designed to support the total well-being and promote the full potential of our employees and their families. These include short- and long-term incentive packages, an employee relationsstock purchase plan, retirement plans, health, dental, and vision benefits, basic life insurance, long-term disability coverage, and wellness and employee assistance programs. The Company analyzes market trends and monitors its own compensation practices to attract, retain, and promote employees and reduce turnover and associated costs. In addition, its short- and long-term incentive plans are amicable.aligned with its core values and key business objectives, which are intended to motivate strong performance.
Development and Engagement
Continuous employee development and engagement are essential to creating a high-performance culture. In fiscal year 2022, we increased our investment in learning and development. In addition to the resources available on our internal Learning Hub, we launched our Beauty of Series, which consists of interactive sessions designed to help our employees unleash their potential. This series included the following topics. The Beauty of Being Remarkable, where employees learned the importance of self-promotion in both their personal and professional lives. The Beauty of Wellness, which was designed to help employees manage stress more effectively and create healthy habits and coping skills. And The Beauty of Being Tech-Enabled, where panelists discussed how technology fueled and disrupted their industries.
We survey our employees to provide them with an opportunity to share anonymous feedback with management in a variety of areas, including support from leadership, communication and collaboration, growth and career opportunities, available resources, and recognition. Leaders reviewed the results to determine opportunities and develop action plans for their teams to improve engagement and the overall employee experience. We introduced Regis Listens, which highlights offerings that we've implemented as a result of employee feedback to show employees that we are listening.
Corporate Responsibility
The Company will not do business with organizations that employ or condone unfair labor practices. Instead, it partners with companies who share its commitment to ethical business conduct and fair labor practices. The Company also specifically condemns human trafficking and abuse of child labor.
Executive Officers:Officers of the Registrant:
Information relating to the Executive Officers of the Company follows:
|
| | | | | | | | | | | | | |
Name | | Age | | Position |
Hugh Sawyer | | 63 |
| |
John Davi | | 44 | | | Executive Vice President, Chief Digital Officer |
Matthew Doctor | | 35 | | | President and Chief Executive Officer |
Andrew LackoMichael Ferranti | | 4739 |
| | Executive Vice President and Chief Financial Officer |
Eric Bakken | | 50 |
| | President of Franchise, Executive Vice President, Chief AdministrativePeople Officer Corporate Secretary and General Counsel |
Jim Lain | | 5358 |
| | Executive Vice President, and Chief Operating Officer |
Andrew DulkaJames Suarez | | 4347 |
| | Senior Vice President, Merchandising and Chief Information OfficerEducation |
Annette MillerAndra Terrell | | 5551 |
| | Senior Vice President, General Counsel and Chief Merchandising OfficerCorporate Secretary |
Shawn MorenKersten Zupfer | | 5047 |
| | SeniorExecutive Vice President, and Chief Human ResourcesFinancial Officer |
Rachel Endrizzi | | 41 |
| | Senior Vice President and Chief Marketing Officer |
Hugh Sawyer has served as President and Chief Executive Officer, as well as a member of the Board of Directors, since April 2017. Before joining Regis Corporation, he served as a Managing Director of Huron Consulting Group Inc. ("Huron") from January 2010 to April 2017. While at Huron, he served as Interim President and CEO of JHT Holdings, Inc. from January 2010 to March 2012, as the Chief Administrative Officer of Fisker Automotive Inc. from January 2013 to March 2013 and as Chief Restructuring Officer of Fisker Automotive from March 2013 to October 2013, and as Interim President of Euramax International, Inc. from February 2014 to August 2015. Mr. Sawyer has served as President or CEO of nine companies (including Regis) and on numerous Boards of Directors.
Andrew LackoJohn Davi was appointed to Executive Vice President and Chief FinancialTechnology Officer in October 2021, and Executive Vice President and Chief Digital Officer in July 2017. Before2022. Prior to joining Regis Corporation,the Company, he served as Chief Product Officer for BriteCore, Senior Vice President of Product at MINDBODY, Inc, founding Vice President of Product for Diffbot, and Head of Engineering for Cisco Systems' Media Solutions Group.
Matthew Doctor was appointed to President and Chief Executive Officer in May 2022, after holding such position on an interim basis since December 2021. Previously, he served as Executive Vice President and Chief Strategy Officer since February 2021. Prior to joining the Company, he was Chief Financial Officer of Kava Restaurants LLC, a Tim Horton's franchisee. Earlier in his career, Mr. Doctor worked in business development at Restaurant Brands International and was in investment banking with J.P. Morgan.
Michael Ferranti was appointed to Executive Vice President and Chief People Officer in December 2021. Previously, he served as Senior Vice President, Global Financial Planning, AnalysisPeople and CorporateCulture since March 2021. Before joining the Company, Mr. Ferranti served as Head of M&A and Franchising for Subway Restaurants U.S. and Canada on their Development team. Prior to Subway Restaurants, Mr. Ferranti held a variety of Hertz Global Holdings, Inc. since 2015senior leadership roles with Le Pain Quotidien, KraftHeinz and asRestaurant Brands International.
Jim Lain was appointed to Executive Vice President - Financial Planning and Analysis of Hertz Global Holdings, Inc. beginningChief Operating Officer in January 2014. Before joining Hertz, Mr. Lacko served as Vice President, Financial Planning and Analysis at First Data Corp. from 2013 to January 2014. Prior to that, Mr. Lacko served in senior financial planning and analysis and investor relations roles at Best Buy Co., Inc. from 2008 to 2013.
Eric Bakken hasDecember 2021. Previously, he served as President of FranchisePortfolio Brands since April 2017December 2020, President of SmartStyle since June 2021, and as Executive Vice President, Chief Administrative Officer, Corporate Secretary and General Counsel since April 2013. He also served as Interim Chief Financial Officer from September 2016 to January 2017. He served as Executive Vice President, General Counsel and Business Development and Interim Corporate Chief Operating Officer from 2012 to April 2013, and performed the function of interim principal executive officer between July 2012 and August 2012. Mr. Bakken joined the Company in 1994 as a lawyer and became General Counsel in 2004.
Jim Lain has served as Executive Vice President and Chief Operating Officer since November 2013. Before joining Regis Corporation, hethe Company, Mr. Lain served as Vice President at Gap, Inc. from August 2006 to November 2013.
Andrew Dulka hasJames Suarez was appointed to Senior Vice President, Merchandising and Education in February 2022. Prior to his promotion to Senior Vice President, Merchandising and Education, Mr. Suarez had 25 years of combined salon operations and education experience at the Company.
Andra Terrell was appointed to Senior Vice President, General Counsel and Corporate Secretary in February 2022. Prior to joining the Company, she served as Deputy General Counsel and Assistant Secretary of Cajun Operating Company for the Church's Chicken and Texas Chicken brands. Ms. Terrell also served as Assistant General Counsel - Franchise for Luxottica Retail, Assistant General Counsel for General Nutrition Centers Inc., Franchise Counsel for Precision Tune Auto Care, Inc. and General Counsel of Decorating Den Systems, Inc.
Kersten Zupfer was appointed to Executive Vice President and Chief Financial Officer in November 2019. For more than 13 years before her promotion to Chief Financial Officer, Ms. Zupfer served in accounting and finance roles of increasing leadership at the Company. Ms. Zupfer served as Senior Vice President and Chief InformationAccounting Officer since May 2015. PriorNovember 2017, prior to his current role, he served as Vice President, Retail Systems and Enterprise Architecture from July 2012 to April 2015.
Annette Miller has served as Senior Vice President and Chief Merchandising Officer since December 2014. Before joining Regis Corporation, she served as Senior Vice President of Merchandising, Grocery at Target from 2010 to 2014.
Shawn Moren was appointed to Senior Vice President and Chief Human Resources Officer in August 2017. Before joining Regis Corporation, she served as Senior Vice President, Human Resources, for Bluestem Group, Inc. from July 2013 to August 2017. Prior to that,which she served as Vice President, Human Resources, Retail, Supply Chain & Corporate for SUPERVALU during 2013 and as Group Vice President, Human Resources for SUPERVALU from March 2012 to March 2013.
Rachel Endrizzi has served as Senior Vice PresidentController and Chief MarketingAccounting Officer since May 2017. She joined Regis Corporation in 2004 and most recently served as Vice President, Branding and Marketing Communications.December 2014.
Governmental Regulations:
The Company is subject to various federal, state, local and provincial laws affecting its business, as well as a variety of regulatory provisions relating to the conduct of its beauty relatedbeauty-related business, including health and safety.
At the end of fiscal year 2020, the majority of state and local governments where we operate temporarily mandated the closure of our salons in response to the COVID-19 global pandemic. These pandemic related government-mandated closures continued into fiscal year 2021 and even into fiscal year 2022 in parts of Canada. We monitor state and local regulations carefully to ensure the safety of our stylists and guests.
In the United States, the Company's franchise operations are subject to the Federal Trade Commission's Trade Regulation Rule on Franchising (the FTC Rule) and by state laws and administrative regulations that regulate various aspects of franchise operations and sales. The Company's franchises are offered to franchisees by means of an offering circular/a disclosure document containing specified disclosures in accordance with the FTC Rule and the laws and regulations of certain states. The Company has registered its offering of franchises with the regulatory authorities of those states in which it offers franchises and in which suchwhere registration is required. State laws that regulate the franchisor-franchiseefranchisee/franchisor relationship presently exist in a substantial number of states and, in certain cases, apply substantive standards to this relationship. Such laws may, for example, require that the franchisor deal with the franchisee in good faith, may prohibit interference with the right of free association among franchisees, and may limit termination of franchisees without payment of reasonable compensation. The Company believes that the current trend is for government regulation of franchising to increase over time. However, such laws have not had, and the Company does not expect such laws to have, a significant effect on the Company's operations.
In Canada, the Company's franchise operations are subject to franchise laws and regulations in the provinces of Ontario, Alberta, Manitoba, New Brunswick, and Prince Edward Island.Island and British Columbia. The offering of franchises in Canada occurs by way of a disclosure document, which contains certain disclosures required by the applicable provincial laws. The provincial franchise laws and regulations primarily focus on disclosure requirements, although each requires certain relationship requirements, such as a duty of fair dealing and the right of franchisees to associate and organize with other franchisees.
The Company believes it is operating in substantial compliance with applicable laws and regulations governing all of its operations.
The Company maintains an ownership interest in EEG.Empire Education Group, Inc. Beauty schools derive a significant portion of their revenue from student financial assistance originating from the U.S. Department of Education's Title IV Higher Education Act of 1965. For the students to receive financial assistance at the school,schools, the beauty schools must maintain eligibility requirements established by the U.S. Department of Education. In 2020, the Company signed an agreement to sell our ownership interest in EEG to the other owner. The transaction is expected to close after receipt of state ownership transfer approvals.
Financial Information about Foreign and North American Operations
Financial information about foreign and North American marketsoperations is incorporated herein by reference to Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 and segment information in Note 1315 to the Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.
Available Information
The Company is subject to the informational requirements of the Securities and Exchange Act of 1934, as amended (Exchange Act). The Company therefore files periodic reports, proxy statements and other information with the Securities and Exchange Commission (SEC). Such reports may be obtained by visiting the Public Reference Room of the SEC at 100 F Street NE, Washington, DC 20549, or by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an internet site (www.sec.gov) that containsAll of our reports, proxy and information statements and other information.information are available on the SEC's internet site (www.sec.gov).
Financial and other information can be accessed in the Investor InformationRelations section of the Company's website at www.regiscorp.com. The Company makes available, free of charge, copies of its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the SEC.
Item 1A. Risk Factors
We are inBusiness and Industry Risks
The impact of the processCOVID-19 pandemic, including variants, and the measures implemented to contain the spread of implementing,the virus have had, and may further implement,continue to have, a new strategy, priorities and initiatives undermaterial adverse impact on our recently appointed President and Chief Executive Officer, which could affect our performance and could result in an alteration of our strategy moving forward, and any inability to evolve and execute these strategies over time could adversely impact our financial conditionbusiness and results of operations.
Hugh E. Sawyer becameOur operations expose us to risks associated with public health crises and epidemics/pandemics, such as COVID-19, that has spread globally. COVID-19 has had, and may continue to have, an adverse impact on our new Presidentoperations. The pandemic may affect the health and Chief Executive Officer and a memberwelfare of our stylist community, customers, franchise partners or Salon Support personnel. As of the Boarddate of Directors effectivethis filing, our salons across essentially all geographies are allowed to be open; however, states may again decide to require the closure of salons as the level of April 17, 2017. The transition has resultedCOVID-19 cases continue to fluctuate.
Some of our franchisees, many of whom were in the early stages of developing their businesses prior to the onset of the pandemic, have chosen, or may choose, not to resume operation of their salons and/or are facing challenges rehiring employees, reestablishing operations with their landlords and could furtherother vendors, and attracting customers back to their salons. As a result, in, changes in business strategy as Mr. Sawyer seeksmany of our franchisees requested reductions or other modifications to their royalty payments or other amounts due to us, which may be critical to their ability to reestablish operations, and they may simply be unable or unwilling to make lease, royalty or other payments to us and may be unable to continue to improveoperate or may need to close their salons. The removal or reduction of these payments, including the performance of company-owned salons while at the same time accelerate the growth of our franchise model. To date,added expense associated with closed locations where we may have announced that we are seeking strategic alternatives for our mall-based salons, a reorganization of our field structure by brand/concept,residual lease liability, has and implemented a 120-day plan and other initiatives, including investments in marketing and a SmartStyle mobile app, designedis expected to improve the guest experience.
Our success depends, in part,continue to have, an adverse impact on our ability to grow our franchise model. We announced plans in fall 2016 to expand the franchise side of our business, including by selling certain company-owned salons to franchisees over time. In January
2017, we began franchising the SmartStyle brand throughout the U.S. for the first time, and during the second half of fiscal 2017, we entered into agreements to sell 233 of our company-owned salons across our brands to new and existing franchisees. This initiative is still in an early stage. It will take time to execute, and we may not be able to effectively do so. Furthermore, it may create additional costs, expose us to additional legal and compliance risks, cause disruption to our current business and impact our short-term operating results.
Our success also depends, in part, on our ability to improve sales, as well as both cost of service and product and operating margins at our company-owned salons. Same-store sales are affected by average ticket and same-store guest visits. A variety of factors affect same-store guest visits, including the guest experience, staffing and retention of stylists and salon leaders, price competition, fashion trends, competition, current economic conditions, product assortment, customer traffic at Walmart where our SmartStyle locations reside, marketing programs and weather conditions. These factors may cause our same-store sales to differ materially from prior periods and from our expectations.
In addition to a new President and Chief Executive Officer, since May we have appointed a new President of Franchise, Chief Financial Officer, Chief Marketing Officer, Chief Human Resources Officer, Vice President of Walmart Relations and Vice President Creative, and over the next fiscal year we may add personnel in a number of key positions, which may further result in new strategies, priorities and initiatives. The process of implementing any new strategies, priorities and initiatives involves inherent risks and the changes we implement could harm our relationships with customers, suppliers, employees or other third parties and may be disruptive to our business. While we believe the pursuit of these changes will have a positive effect on our business in the long term, we cannot provide assurance that these changes will lead to the desired results. If we do not effectively and successfully execute on these changes, it could have a material adverse effect on our business.
It is important for us to attract, train and retain talented stylists and salon leaders.
Guest loyalty is dependent upon the stylists who serve our guests. Great stylists are a key to a great guest experience that creates loyal customers. In order to profitably grow our business, it is important for us to attract, train and retain talented stylists and salon leaders and to adequately staff our salons. Because the salon industry is highly fragmented and comprised of many independent operators, the market for stylists is highly competitive. In addition, increases in minimum wage requirements may impact the number of stylists considering careers outside the beauty industry. In some markets, we have experienced a shortage of qualified stylists. Offering competitive wages, benefits, education and training programs are important elements to attracting and retaining great stylists. In addition, due to challenges facing the for-profit education industry, cosmetology schools, including our joint venture EEG, have experienced declines in enrollment, revenues and profitability in recent years. If the cosmetology school industry sustains further declines in enrollment or some schools close entirely, or if stylists leave the beauty industry, we expect that we wouldcash flows. Customers and employees have increased difficulty staffing our salons in some markets. If we are not successful in attracting, training and retaining stylists or in staffing our salons, our same-store sales could experience periods of variability or sales could decline and our results of operations could be adversely affected.
Our continued success depends in part on the success of our franchisees, who operate independently.
As of June 30, 2017, approximately 29% of our salons were franchised locations and we intendbeen cautious about returning to expand our number of franchised locations. We derive revenues associated with our franchised locations from royalties,personal service fees and product sales to franchised locations. Our financial results are therefore dependent in part upon the operational and financial success of our franchisees. As we increase our focus on our franchise business, our dependence on our franchisees grows.
We have limited control over how our franchisees’ businesses are run. Though we have established operational standards and guidelines, they own, operate and oversee the daily operations of their salon locations. If franchisees do not successfully operate their salons in compliance with our standards, our brand reputation and image could be harmed and our financial results could be affected. We could experience greater risks as the scale of our franchise owners increases. Further, some franchise owners may not successfully execute the turnaround of under-performing salons which we have transferred to them.
In addition, our franchisees are subject to the same general economic risks as our Company, and their results are influenced by competition for both guests and stylists, market trends, price competition and disruptions in their markets due to severe weather and other external events. Like us, they rely on external vendors for some critical functions and to protect their company data. They may also be limited in their ability to open new locations by an inability to secure adequate financing, especially since many of them are small businesses with much more limited access to financing than our Company, or by the limited supply of favorable real estate for new salon locations. They may experience financial distressproviders. Furthermore, as a result of over-leveraging,the pandemic, many of our customers have themselves experienced adverse financial impacts, including loss of disposable income, which may limit their spending on personal care, including purchasing of beauty products, or have identified other means for hair care. The trend of increased remote work and utilization of advanced video-conferencing technology has led to a less-formal work environment, which could impact the frequency of our hair care services. In addition, COVID-19 may cause additional workers' compensation claims and customer claims associated with the pandemic.
As a result, COVID-19 has negatively affected, and may continue to negatively affect, our operating results as a resultrevenue, increased the cost of delayed payments to us. The bankruptcy of a franchisee could also exposesalon operations and potentially exposed us to additional liability, under leases,the combination of which are generally sub-leased byhas reduced and may continue to reduce our profitability, including the profitability of our franchisees. In addition, we retain a residual real estate lease liability of $501.3 million for company-owned and franchise salons that either sublease the premises of their location from us or that require us to guarantee the franchisee's lease. The combination of the revenue reduction, obligations we ultimately owe to landlords, and other costs both related and unrelated to COVID-19 could significantly reduce or exhaust our franchisees.available liquidity over time and limit our ability to access liquidity sources.
The COVID-19 pandemic caused disruption to the global economy and to our business, which may lead to triggering events that prevent our recovery of the carrying value of certain assets, including accounts receivables, long-lived assets, intangibles, and goodwill. Assessing goodwill for impairment can be difficult to predict because, among other things, it requires management to make assumptions and to apply judgment, including forecasting future sales and expenses, and selecting appropriate discount rates, all of which can be affected by economic conditions and other factors.
A deterioration
Consumer shopping trends and changes in the financial resultsmanufacturer choice of our franchisees, or a failure of our franchisees to renew their franchise agreements, could adverselydistribution channels may negatively affect our operating results through decreased royalty payments, feesboth service and product revenues.
AccelerationOur salons are partly dependent on the volume of customer foot traffic around their locations to generate both service and product revenues. Customer foot traffic may be adversely affected by changing consumer shopping trends that favor internet-based shopping or alternative shopping methods or locations. In recent years, we have experienced substantial declines in foot traffic in some shopping malls that changed traffic patterns at those salons that may affect our revenues and impact the salehealth of certain company-owned salons to franchisees may not improve our operating results and could cause operational difficulties.
During fiscal 2017, we accelerated the sale of company-owned salons to new and existing franchisees. Specifically, in January 2017, we began offering SmartStyle franchises for the first time, and during fiscal 2017 we entered into agreements to refranchise 233 salons across our brands.
Success will depend on a number of factors, including franchisees’ ability to improve the results of the salons they purchase and their ability and interest in continuing to grow their business. We also must continue to attract qualified franchisees and work with them to make their business successful. Moving a salon from company-owned to franchise-owned is expected to reduce our consolidated revenues, increase our royalty revenue and decrease our operating costs; however, the actual benefit from a sale is uncertain and may not be sufficient to offset the loss of revenues.
In addition, challenges in supporting our expanding franchise system could cause our operating results to suffer. If we are unableexperiencing a proliferation of alternative channels of distribution, such as blow dry bars, booth rental facilities, discount brick-and-mortar and online professional product retailers, as well as manufacturers selling directly to effectively select and train new franchisees and support and manage our growing franchisee base, it couldconsumers online, all of which may negatively affect our brand standards, cause disputes between usproduct and our franchisees,service revenue. Also, product manufacturers may decide to utilize these other distribution channels to a larger extent than in the past and potentially lead to material liabilities.
The continued unit growth and operation of the SmartStyle business is completely dependent on our relationship with Walmart.
At June 30, 2017, we had 2,828 SmartStyle or Cost Cutters salons within Walmart locations, including 37 salons opened during fiscal year 2017 (net of relocations). Walmart is by far our largest landlord, and we are Walmart’s largest tenant. Our business within each of those 2,828 salons relies primarily on the traffic of visitors to the Walmart in which it is located, so our success is tied to Walmart’s success in bringing shoppers into their stores. Wethey generally have limited control over the locations and markets in which we open new SmartStyles, as we only have potential opportunities in locations offered to us by Walmart. Furthermore, Walmart has the right to close up to 100terminate relationships with us with little advance notice. These trends could reduce the volume of foot traffic around our salons, per year for any reason, upon payment of certain penalties; to terminate lease agreements for breach, such as if we failed to conform with required operating hours, subject to a notice and cure period; and to terminate the lease if the Walmart store in which it sits is closed. During fiscal year 2017, we began franchising the SmartStyle brand, with Walmart’s approval. Operating both company-owned and franchised SmartStyles adds complexity in overseeing franchise compliance and coordination with Walmart.
Our future growth and profitability may depend, in part, onturn, our ability to build awareness and drive traffic with advertising and marketing efforts, and on delivering a quality guest experience to drive repeat visits to our salons.
Our future growth and profitability may depend on the effectiveness, efficiency and spending levels of our marketing and advertising efforts to drive awareness and traffic to our salons. In addition, delivering a quality guest experience is crucial in order to drive repeat visits to our salons. We are developing our marketing and advertising strategies, including national and local campaigns, to build awareness, drive interest, consideration and traffic to our salons. We are also focusing on improving guest experiences to provide brand differentiation and preference, and to ensure we meet our guests’ needs. If our marketing, advertising and improved guest experience efforts do not generate sufficient customer traffic and repeat visits to our salons, our business, financial condition and results of operationsrevenues may be adversely affected.
Changes in regulatory and statutory laws, such as increases in the minimum wage and changes that make collective bargaining easier, and the costs of compliance and non-compliance with such laws, may result in increased costs to our business.
With 9,0085,576 locations and approximately 41,000630 employees worldwide, our financial results can be adversely impacted by regulatory or statutory changes in laws. Due to the number of people we or our franchisees employ, laws that increase minimum wage rates, employment taxes, overtime requirements or costs to provide employee benefits or administration may result in additional costs to our Company.Company or our franchisees.
We are subject to laws and regulations that could require us to modify our current business practices and incur increased costs, which could have an adverse effect on our business, financial condition and revenues.
In our U.S. markets, numerous laws and regulations at the federal, state and local levels can affect our business. Legal requirements are frequently changed and subject to interpretations, and we are unable to predict the ultimate cost of compliance with these requirements or their effect on our operations. If we fail to comply with any present or future laws or regulations, we could be subject to future liabilities or a prohibition on the operation of our salons.
A number of U.S. states, Canadian provinces, and municipalities in which we do business with have recently increased, or are considering increasing, the minimum wage, with increases generally phased over several years depending upon the size of the employer. Increases in minimum wages and overtime pay result in an increase in our costs, and our ability to offset these increases through price increases may be limited. In fact, increases in minimum wages have increased our costs over the last fourfive years. In addition, a growing number of states, provinces and municipalities have passed, or are considering passing, requirements for paid sick leave, family leave, predictive scheduling (which imposes penalties for changing an employee’semployee's shift as it nears), and other requirements that increase the administrative complexity of managing our workforce. Finally, changes in labor laws such as recent legislation in Ontario and Alberta designed to facilitate union organizing, could increase the likelihood of some of our employees being
subjected to greater organized labor influence. If a significant portion of our employees were to become unionized, it would have an adverse effect on our business and financial results.
Increases in minimum wages, administrative requirements and unionization could also have an adverse effect on the performance of our franchisees, especially if our franchisees are treated as a "joint employer" with us by the National Labor Relations Board (NLRB) treats our franchisees as "joint employers" with us or if our franchisees are classified as a large employeremployers under minimum wage statutes because of their affiliationaffiliations with us. In addition, we must comply with state employment laws, including the California Labor Code, which has stringent requirements and penalties for non-compliance.
Various state and federal laws govern our relationshiprelationships with our franchisees and our potential sale of a franchise. If we fail to comply with these laws, we may subject the Company and our personnel to claims lodged by our franchisees, as well as federal and state government agencies, and those claims may include, among others, fraud, misrepresentation, unfair business practices and wrongful terminations. As a result of those claims, we could be liable for fines, damages, to franchisees and finesstop orders or other penalties. A franchisee or government agency may bring legal action against us based on the franchisee/franchisor relationship. Also, under the franchise business model, we may face claims and liabilities based on vicarious liability, joint-employer liability or other theories or liabilities. All such legal actions could not only could result in changes to laws and interpretations, makingwhich could make it more difficult to appropriately support our franchisees and, consequently, impactingimpact our performance, but could also such legal actions could result in expensive litigation with our franchisees, third parties or government agencies, thatwhich could adversely affect both our profits and our important relationsrelationships with our franchisees. In addition, other regulatory or legal developments may result in changes to laws or to the franchisor/franchiseefranchisee/franchisor relationship that could negatively impact the franchise business model and, accordingly, our profits.
We are also subject to federal statutes and regulations, including the rules promulgated by the U.S. Federal Trade Commission, as well as certain state laws governing the offer and sale of franchises. Many state franchise laws impose substantive requirements on franchise agreements, including limitations on non-competition provisions and on provisions concerning the termination or non-renewal of a franchise. Some states require that certain materials be filed for a franchisor to be registered and approved before franchises can be offered or sold in that state. The failure to obtain or retain licenses or approvals to sell franchises could have a material adverse effect on our business, financial condition, results of operations and prospects.
In addition to employment and franchise laws, we are also subject to a wide range of federal, state, provincial and local laws and regulations in the jurisdictions in which we operate, including those affecting public companies, product manufacturemanufacturing and sale and those governing the franchisor-franchisee relationship, in the jurisdictions in which we operate.franchisee/franchisor relationship. Compliance with new, complex, and changing laws may cause our expenses to increase. In addition, any non-compliance with laws or regulations could result in penalties, fines, product recalls and enforcement actions or otherwise restrict our ability to market certain products or attract or retain employees, which could adversely affect our business, financial condition and results of operations.
Cybersecurity
Changes in the general economic environment may impact our business and results of operations.
Changes to the U.S., Canada and U.K.'s economies have an impact on our business. General economic factors that are beyond our control, such as recession, inflation, deflation, tax rates and policy, energy costs, unemployment trends, extreme weather patterns, viruses, pandemics, stay-at-home orders and other casualty events that influence consumer confidence and spending, may impact our business and results of operations. In particular, visitation patterns to our salons can be adversely impacted by increases in unemployment rates and decreases in discretionary income levels.
Changes in consumer tastes, hair product innovation, fashion trends and consumer spending patterns may impact our revenue.
Our success depends, in part, on our ability to anticipate, gauge and react in a timely manner to changes in consumer tastes, hair product innovation, fashion trends and consumer spending patterns. If we do not timely identify and properly respond to evolving trends and changing consumer demands for hair care or services, our sales may decline. The recent trend to work remotely reduces foot traffic in downtowns, city centers, and other business districts where our salons are located, causing a reduction in our revenue.
As of June 30, 2022, we were not in compliance with New York Stock Exchange listing requirements.
In June 2022, we received written notice from the New York Stock Exchange ("NYSE") that we did not meet certain NYSE continued listing standards. Under the NYSE continued listing standards, the Company is required to maintain (a) a minimum average closing price of $1.00 per share over a period of 30 consecutive trading days, and (b) an average market capitalization of at least $50.0 million over a period of 30 consecutive trading days, and at the same time, total stockholders' equity equal to or greater than $50.0 million. If we are unable to improve our stock price to over $1.00 by December 13, 2022 and our market capitalization to greater than $50.0 million by December 13, 2023, we will be subject to the NYSE’s suspension and delisting procedures. We are closely monitoring the closing share price of our common stock and are considering all available options. We intend to regain compliance with the NYSE listing standards by pursuing measures that are in the best interest of the Company and our shareholders. A delisting of our common stock could negatively impact us by, among other things, reducing the liquidity and market price of our common stock; reducing the number of investors willing to hold or acquire our common stock, which could negatively impact our ability to raise equity financing; limiting our ability to issue additional securities or obtain additional financing in the future; decreasing the amount of news and analyst coverage of us; and causing us reputational harm with investors, our employees, and parties conducting business with us.
Operating Risks
We are now substantially dependent on franchise royalties and the overall success of our franchisees' salons.
We are now substantially dependent on franchise royalties and the overall success of our franchisees' salons. It customarily takes new franchisees time to develop their salons and increase their sales. Further, a number of our historically successful and more experienced franchisees are onboarding new salon operations. This could adversely impact our revenue and profitability during this next stage of our transformation. To support and enhance our franchisees' businesses, we may need to invest in certain unanticipated new capabilities and/or services and we will need to determine the appropriate amount of investment to optimize the success of our franchisees, while ensuring that the level of investment supports our expected return on those investments. If we are not able to identify the right level of support and effectively deliver those resources to our franchisees, our results of operations and business may be adversely affected. Furthermore, our transition to a fully-franchised model may expose us to additional legal, compliance and operational risks specific to this different business model, including the business failure of unproven new salon owners.
Sales at franchise locations may not return to pre-pandemic levels.
Sales at most of our franchise locations have not returned to their pre-pandemic levels causing our franchisees to earn less profits or incur losses. Franchisees may be unable to pay their royalties or rents as they come due, which could decrease cash collections and increase our cash outflows if the franchisee subleases from us or we guarantee the lease. Franchisees may decide to close their salons and there may not be another franchisee willing to take over the business, which would decrease the size of our fleet and our revenues.
We have exited our wholesale distribution business and entered into a preferred supplier agreement with a third party.
We exited our wholesale distribution business and entered into a preferred supplier agreement with a supplier. This change has and will continue to reduce our future revenue. If our new supplier is unable to source the products at the prices expected by our franchisees, our franchisees' profitability and our profitability may be adversely impacted. Further, economic instability and other impactful events and circumstances in the regions in which our supplier and their manufacturers are located, the financial instability of our supplier, our supplier's failure to meet our terms and conditions or our supplier standards, product safety and quality issues, disruption or delay in the transportation of products from our supplier and their manufacturers to our salons, transport availability and cost, transport security, inflation and other factors relating to the suppliers and the areas in which they are located are beyond our control.
It is important for us and our franchisees to attract, train and retain talented stylists and salon leaders.
Guest loyalty is strongly dependent upon the stylists who serve our guests and the customer experience in our salons. Qualified, trained stylists are key to a memorable guest experience that creates loyal customers. In order to profitably grow our business, it is important for our salons to attract, train and retain talented stylists and salon leaders and to adequately staff our salons. Because the salon industry is highly fragmented and comprised of many independent operators, the market for stylists is typically highly competitive. In addition, labor shortages and increases in minimum wage requirements may impact the number of stylists considering careers outside the beauty industry. In most markets, we and our franchisees have experienced a shortage of qualified stylists or a reduction in the hours stylist will work. Offering competitive wages, benefits, education, and training programs are important elements to attracting and retaining qualified stylists. In addition, due to challenges facing the for-profit education industry, cosmetology schools have experienced declines in enrollment, revenues, and profitability in recent years. If the cosmetology school industry sustains further declines in enrollment or some schools close entirely, or if stylists leave the beauty industry, we expect that we and our franchisees would have increased difficulty staffing our salons in some markets. We are making significant investments in programs to attract and retain stylists. If our strategies are not successful in attracting, training and retaining stylists or in staffing salons, our same-store sales or the performance of our franchise business could experience periods of volatility or sales could decline and our results of operations could be adversely affected.
Our continued success depends, in part, on the success of our franchisees, which operate independently.
As of June 30, 2022, 98.1% of our salons were franchised locations. We derive revenues associated with our franchised locations primarily from royalties and fees. Our financial results are therefore substantially dependent upon the operational and financial success of our franchisees. As a franchise business, we are dependent on our franchisees.
We have limited control over how our franchisees' businesses are operated. Though we have established operational standards and guidelines, franchisees own, operate, and oversee the daily operations of their salon, including employee-related matters and pricing. If franchisees do not successfully operate their salons in compliance with our standards, our brand reputation and image could be harmed, and our financial results could be affected. Additionally, if franchisees do not price their goods and services competitively, the franchisee may fail to maximize the financial performance of their salon. We could experience greater risks as the scale of our franchised salons increases. Further, some franchise owners may not successfully execute the rebranding and/or turnaround of under-performing salons that we have transferred to them.
In addition, our franchisees are subject to the same general economic risks as our Company, and their results are influenced by competition for both guests and stylists, market trends, price competition and disruptions in their markets and business operations due to public health issues, including pandemics, severe weather and other external events. Like us, they rely on external vendors for some critical functions and to protect their company data. They may also be limited in their ability to open new locations by an inability to secure adequate financing, especially because many of them are small businesses with much more limited access to financing than our Company or by the limited supply of favorable real estate for new salon locations. They may also experience financial distress because of over-leveraging, which could negatively affect our operating results due to delayed or non-payments to us. The bankruptcy, default, abandonment, or breach by or of a franchisee could also expose us to lease liability due to our lease guarantees or subleases as explained previously.
A deterioration in the financial results of our franchisees, a failure of our franchisees to renew their franchise agreements or closure of locations could adversely affect our operating results through decreased royalty payments and fees. We also must continue to attract qualified franchisees and work with them to make their businesses successful.
In addition, challenges in supporting our expanding franchise system could cause our operating results to suffer. If we are unable to effectively select and train new franchisees and support our growing franchisee base, it could affect our brand standards, cause disputes between us and our franchisees, and potentially lead to material liabilities.
Our business is dependent on franchisees continuing to operate. If a franchisee exits the franchise system, we need to recruit an existing or new franchisee to run that salon location or our salon count would decline and our revenues would decline. A decline in salon count could also reduce the value of our brands. Additionally, we are dependent on our franchisees to grow their business in order for our business to grow. However, franchisees may not have access to capital, labor, etc., to support their growth.
Data security and data privacy compliance requirements could increase our costs, and cybersecurity incidents could result in the compromise of potentially sensitive information about our guests, franchisees, employees, vendors or companyCompany and expose us to business disruption, negative publicity, costly government enforcement actions or private litigation and our reputation could suffer.
The normal operations of our business and our investments in technology involve processing, transmissiontransmitting and storage ofstoring potentially sensitive personal information about our guests, as well as employees, franchisees, vendors and our Company.Company, all of which require the appropriate and secure utilization of such information and subjects us to increased focus regarding our data security compliance. Cyber-attacks, including ransomware, designed to gain access to sensitive information by breaching mission critical systems of large organizations and(and their third party vendorsthird-party vendors) are constantly evolving and high profilehigh-profile electronic security breaches leading to unauthorized release of sensitive guest information have occurred at a number of large U.S. companies in recent years. Furthermore, there has been heightened legislative and regulatory focus on data security in the U.S. and abroad, including requirements for varying levels of customer notification in the event of a data breach. These laws are changing rapidly and vary among jurisdictions. We will continue our efforts to meet any applicable privacy and data security obligations; however, it is possible that certain new obligations may be difficult to meet and could increase our costs. We rely on commercially available systems, software, and tools to provide security for processing, transmitting, and storing of sensitive information. As this risk of cyber-attacks increases, our related insurance premiums may also increase. Despite the security measures and processes we have in place, our efforts and(and those of our third party vendors,third-party vendors) to protect sensitive guest, employee, franchisee, vendor, and employeeCompany information may not be successful in preventing a breach in our systems or detecting and responding to a breach on a timely basis. As a result of a security incident or breach in our systems, our systems could be interrupted or damaged, and/or sensitive information could be accessed by third parties. If that happened,occurred, our guests could lose confidence in our ability to protect their personal information, which could cause them to stop visiting our salons altogether.altogether or our franchisees could exit the system due to lack of confidence. Such events could also lead to lost future sales and adversely affect our results of operations. In addition, as the regulatory environment relating to retailers and other companies' obligations to protect sensitive data becomes stricter, a material failure on our part to comply with applicable regulations could potentially subject us to fines, orpenalties, other regulatory sanctions, or lawsuits with the possibility of substantial damages. The costs to remediate security incidents or breaches that may occur could be material. Also, as cyber-attacks become more frequent, intense, and potentially to lawsuits. These laws are changing rapidly and vary among jurisdictions.sophisticated, the costs of proactive defensive measures may increase. Furthermore, while our franchisees are independently responsible for data security at their franchised salon locations, a breach of guestsecurity incident or vendor databreach at a franchised salon location could also negatively affect public perception of our brands. More broadly, our incident response preparedness and disaster recovery planning efforts may be inadequate or ill-suited for a security incident and we could suffer disruption of operations or adverse effects to our operating results.
Our SmartStyle salon operations are dependent on our relationship with Walmart.
As of June 30, 2022, we had 1,695 SmartStyle or Cost Cutters salons within Walmart locations. Walmart is our largest landlord. Our business within each of those 1,695 salons relies primarily on the traffic of visitors to the Walmart location, so our success is tied to Walmart's success in bringing shoppers into their stores. We have limited control over the locations and markets in which we open new SmartStyle locations, as we only have potential opportunities in locations offered to us by Walmart. Furthermore, Walmart has the right to (a) close up to 100 of our salons per year for any reason, upon payment of certain buyout fees; (b) terminate lease agreements for breach, such as if we failed to conform with required operating hours, subject to a notice and cure period; (c) non-renew the lease agreements if our salons fail to reach certain sales thresholds; and (d) to terminate the lease if the Walmart store is closed. Future franchising activity is dependent upon a continued relationship between us and Walmart, as well as Walmart's approval of our proposed franchisee on a location-by-location basis. Further, Walmart may attempt to impose changes to the terms and conditions of our agreements, which may be contrary to our economic interests. Operating SmartStyle salons adds complexity in overseeing franchise compliance and coordination with Walmart. Additionally, there are various remodel requirements of our franchisees, whether it be upon lease expiration or the remodeling of a Walmart location. To the extent Walmart accelerates the pace of their own store remodels, our stores in remodeled Walmart locations would be held to the same standard. The cost of these remodels may be prohibitive to our franchisees and could lead to the Company bearing a portion of the cost, or closures if the remodel requirement is not satisfied.
Our future growth and profitability may depend, in part, on our ability to build awareness and drive traffic with advertising and marketing efforts and on delivering a quality guest experience to drive repeat visits to our salons.
Our future growth and profitability may depend on the effectiveness, efficiency and spending levels of our marketing and advertising efforts to drive awareness and traffic to our salons. In addition, delivering a quality guest experience is crucial to drive repeat visits to our salons. We are developing our marketing and advertising strategies, which might include national and local campaigns, to build awareness, drive interest, consideration and traffic to our salons. We are also focusing on improving guest experiences to provide brand differentiation and preference as well as ensure our guests' needs are met. If our marketing, advertising, and improved guest experience efforts do not generate sufficient customer traffic and repeat visits to our company-owned and franchise-owned salons, our business, financial condition, and results of operations may be adversely affected. Our future growth and profitability may depend on the effectiveness, efficiency and spending levels of our marketing and advertising efforts to drive awareness and traffic to our salons. Additionally, we plan to increase our digital marketing efforts, and the success of those efforts are dependent upon our franchisee's migration to the Zenoti salon technology platform and customers opting-in to receive marketing messages from us.
Our success depends substantially on the migration of our Franchisees to the Zenoti salon technology platform.
The success of our digital marketing efforts discussed previously, as well as providing franchisees with back-office and salon management, including walk-in or advanced appointments, is dependent upon our franchisees' adoption of the Zenoti point-of-sale software. We previously developed a mobile application, platform and salon management system called Opensalon Pro, which we sold to Soham, Inc. ("Zenoti"), in fiscal year 2022. That agreement requires us to receive certain payments based upon the migration of our salons to the Zenoti software. Additionally, some of our technology capabilities will require development by Zenoti, and thus if not developed, may adversely affect our digital marketing efforts as well as providing our franchisees with critical functionality and information.
Our success depends substantially on the value of our brands.
Our success depends, in large part, on our ability to maintain and enhance the value of our brands, our customers' connection to our brands and a positive relationship with our franchisees. Declining franchisee revenue reduces the advertising funds available to invest in the brands and a decline in the Company's investment in its brands could reduce brand awareness and the overall value of our brands. Brand value can be severely damaged even by isolated incidents, particularly if the incidents receive considerable negative publicity, including via social media or if they result in litigation. Some of these incidents may relate to the way we manage our relationships with our franchisees, our growth strategies, our development efforts or the ordinary course of our, or our franchisees' business. Other incidents may arise from events that may be beyond our control and may damage our brands, such as actions taken (or not taken) by one or more franchisees or their employees relating to health, safety, welfare or otherwise, litigation and claims, security breaches or other fraudulent activities associated with our back-office management or payment systems, and illegal activity targeted at us or others. Consumer demand for our products and services and our brands' value could diminish significantly if any such incidents or other matters erode consumer confidence in us or our products or services. This could result in lower sales and, ultimately, lower royalty income, which could materially and adversely affect our business and operating results.
We rely heavily on our information technology systems for our key business processes. If we experience an interruption in their operation, our results of operations may be affected.
The efficient operation of our business is dependent on our management information systems. We rely heavily on our management information systems to collect daily sales information and guest demographics, generate payroll information, monitor salon performance, manage salon staffing and payroll costs, manage our two distribution centers and other inventory and other functions. Such systems are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, hackers,hacker attempts, security breaches and natural disasters. Certain capabilities or entire systems may be outdated or have limited functionality. These management information systems may require upgrades or replacements periodically, which involve implementation and other operational risks. In addition, certain of our management information systems are developed and maintained by external vendors includingand we are transitioning our POS system, and some are outdated or of limited functionality.franchisees onto the Zenoti salon technology platform beginning in fiscal year 2023. The failure of our management information systems to perform as we anticipate, or to meet the continuously evolving needs of our business, or to provide an affordable long-term solution, could disrupt our business operations and result in other negative consequences, including remediation costs, loss of revenue and reputational damage.
Further, if our external vendors fail to adequately provide technical support for any one of our key existing management information systems or if new or updated components are not integrated smoothly, we could experience service disruptions that could result in the loss of important data, increase our expenses, decrease our revenues and generally harm our business, reputation and brands. Also, any such conduct with respect to our franchisees could also result in litigation.
We rely on external vendors for products and services critical to our operations.
We rely on external vendors for the manufacture, supply and distribution of our owned brand products, other retail products we sell, and products we use during salon services, such as color and chemical treatments. We also rely on external vendors for various services critical to our operations and the security of certain Company data. Our dependence onupon vendors exposes us to operational, reputational, financial and compliance risk.
If our product offerings do not meet our guests’guests' expectations regarding safety and quality, we could experience lost sales, increased costs, and exposure to legal and reputational risk. All of our vendors must comply with applicable product safety laws, and we are dependent on them to ensure that the products and packages we buy, for either use on a guest during a service or resale to the public, comply with all safety and quality standards. Events that give rise to actual, potential or perceived product safety concerns or mislabeling could expose us to government enforcement action and/or private litigation and result in costly product recalls and other liabilities. In addition, we do not own the formulas for certain of our owned brand products, and could be unable to sell those products if the vendor decided to discontinue working with us.
Our vendors are also responsible for the security of certain Company data, as discussed above. In the event thatIf one of our key vendors becomes unable to continue to provide products and services, or their systems fail, or are compromised or the quality of their systems deteriorate, we may suffer operational difficulties and financial loss.
Consumer shopping trends and changes in manufacturer choiceThe use of distribution channelssocial media may negatively affect both service and product revenues.have an adverse effect on our reputation.
Our North American Value business is located mainly in strip center locations and Walmart Supercenters and the North American Premium business is primarily in mall-based locations. Our salons are partly dependent on the volume of traffic around these locations in order to generate both service and product revenues. Customer traffic to these shopping areas may be adversely affected by changing consumer shopping trends that favor alternative shopping locations, such as the internet. In particular, we have experienced substantial declines in traffic in some shopping malls due to changes in consumer preferences favoring retail locations other than malls or online shopping.
In addition, we are experiencing a proliferation of alternative channels of distribution, like blow dry bars, booth rental facilities, discount brick-and-mortar and online professional products retailers, and manufacturers selling direct to consumers online, which may negatively affect our product and service revenue. Also, product manufacturers may decide to utilize these other distribution channels to a larger extent than in the past and they generally have the right to terminate relationships with us without much advance notice. These trends could reduce the volume of traffic around our salons, and in turn, our revenues may be adversely affected.
If we are not able to successfully compete in our business markets, our financial results may be affected.
Competition on a market by market basis remains challenging as many smaller chain competitors are franchise systems with local operating strength in certain markets and the hair salon industry as a whole is fragmented and highly competitive for customers, stylists and prime locations. Therefore, our ability to attract guests, raise prices and secure suitable locations in certain markets can be adversely impacted by this competition. Our strategies for competing are complicated by the fact that we have multiple brands in multiple segments, which compete on different factors.
We also face significant competition for prime real estate, particularly in strip malls. We compete to lease locations not only with other hair salons, but with a wide variety of businesses looking for similar square footage and high-quality locations.
Furthermore, our reputation is critical to our ability to compete and succeed. OurHowever, our reputation may be damaged by negative publicity on social media or other channels regarding the quality of products or services we provide. There has been a substantial increase in the use of social media platforms, which allow individuals to be heard by a broad audience of consumers and other interested persons. Negative or false commentary regarding us or the products or services we offer may be posted on social media platforms at any time. Customers value readily available information and may act on information without further investigation or regard to its accuracy. The harm to our reputation may be immediate, without affording us an opportunity for redress or correction. Our reputation may also be damaged by factors that are mostly or entirely out of our control, including actions by a franchisee or a franchisee’sfranchisee's employee.
We also use social media platforms as marketing tools. As laws and regulations rapidly evolve to govern the use of these platforms, the failure by us, our employees or third parties acting at our direction, to abide by applicable laws and regulations in the use of these platforms could adversely affect our business, financial condition and revenues.
Failure to simplify and standardize our operating processes across our brands could have a negative impact on our financial results.
We expect standardization of operating processes across our brands, marketing and products to enable us to simplify our operating model and decrease our costs and believe failure to do so could adversely impact our ability to grow revenue and realize further efficiencies within our results of operations.
Our enterprise risk management program may leave us exposed to unidentified or unanticipated risks.
We maintain an enterprise risk management program that is designed to identify, assess, mitigate and monitor the risks that we face. There can be no assurance that our frameworks or models for assessing and managing known risks, compliance with applicable laws and related controls will effectively mitigate risk and limit losses in all market environments or against all types of risk in our business. If conditions or circumstances arise that expose flaws or gaps in our risk management or compliance programs, the performance and value of our business could be adversely affected.
Insurance and other traditional risk-shifting tools may be held by, or made available to, us in order to manage certain types of risks, but they are subject to terms such as deductibles, retentions, limits and policy exclusions, as well as risk of denial of coverage, default or insolvency. If we suffer unexpected or uncovered losses, or if any of our insurance policies or programs are terminated for any reason or are not effective in mitigating our risks, we may incur losses that are not covered or that exceed our coverage limits and could adversely impact our results of operations, cash flows and financial position.
The franchise agreements require each franchisee to maintain specified insurance coverages and levels. Certain extraordinary hazards, however, may not be covered, and insurance may not be available (or may be available only at prohibitively expensive rates) with respect to many other risks. Moreover, any loss incurred could exceed policy limits and policy payments made to franchisees may not be made on a timely basis. Any such loss or delay in payment could have a material and adverse effect on a franchisee's ability to satisfy its obligations under its franchise agreement, including its ability to make royalty payments.
Financial and Economic Risks
If we fail to comply with any of the covenants in our existing financing arrangement, we may not be able to access our existing revolving credit facility, and we may face an accelerated obligation to repay our indebtedness.
If we fail to comply with our existing financing arrangements, such a failure may cause a default under our financing arrangement, which could limit our ability to obtain new replacement financing or additional financing under our existing credit facility, require us to pay higher levels of interest or accelerate our obligation to repay our indebtedness. The impacts of significant business disruptions could ultimately impair our ability to comply with our covenants, which could preclude our ability to access our credit facility or accelerate our debt repayment obligation, which is secured by a lien on substantially all of the Company's assets.
If our capital investments in developing new and improving current technology infrastructure do not achieve appropriate returns, our financial condition and results of operations may be adversely affected.
We are currently making, and expect to continue to make, strategic investments in technology to increase traffic to salons and improve guest experiences, including without limitation, our mobile applications. These investments may not provide the anticipated benefits or desired return and could expose us to additional legal and compliance risks. Furthermore, some of our technology capabilities and developments involve third-party partnerships that we are dependent on. If these partnerships are unsuccessful, the technology-enabled capabilities may not fully achieve their anticipated returns.
Premature termination of franchise agreements can cause losses.
Our franchise agreements may be subject to premature termination in certain circumstances, such as failure of a franchisee to cure a default, monetary or otherwise, a franchisee bankruptcy, voluntary termination, or abandonment of the franchise. If terminations occur for these or other reasons, we may need to enforce our right to damages for breach of contract and related claims, which could cause us to incur significant legal fees and expenses and/or to take back and operate such salons as company-owned salons. Any damages we ultimately collect could be less than the projected future value of the fees and other amounts we would have otherwise collected under the franchise agreement. In addition, with many of our brands, we remain liable under the lease and, therefore, will be obligated to pay rent or enter into a settlement with the landlord, and we may not be made whole by the franchisee. A significant loss of franchisee agreements due to premature terminations could hurt our financial performance or our ability to grow our business.
Empire Education Group, Inc. may be unsuccessful, which could adversely affect our financial results.
In 2020, we entered into an agreement to sell to the other owner our 55.1% ownership stake in Empire Education Group, Inc. (EEG), an operator of accredited cosmetology schools. The transaction is subject to regulatory approval before it can close, and there is no guarantee that the regulatory approval will occur, which has been delayed, in part, due to COVID-19. Due to poor financial performance of EEG, we fully impaired the investment in prior years. If the transaction does not close as anticipated and EEG is unsuccessful in executing its business plan, or if economic, regulatory and other factors, including declines in enrollment, revenue and profitability continue for the for-profit secondary education market, our financial results may be affected by certain potential liabilities related to this investment.
Failure to control costs may adversely affect our operating results.
We must continue to control our expense structure. Failure to manage our cost of product, labor and benefit rates, advertising and marketing expenses, operating lease costs, other store expenses, or indirect spending could delay or prevent us from achieving increased profitability or otherwise adversely affect our operating results.
If we are not able to successfully compete in our business markets, our financial results may be affected.
Competition on a market-by-market basis remains challenging as many smaller chain competitors are franchise systems with local operating strength in certain markets and the hair salon industry, as a whole, is fragmented and highly competitive for customers, stylists and prime locations. Therefore, our ability to attract guests, raise prices and secure suitable locations in certain markets can be adversely impacted by this competition. Our strategies for competing are complicated by the fact that we have multiple brands in multiple segments, which compete on different factors. We also face significant competition for prime real estate, particularly in strip malls. We compete for lease locations not only with other hair salons, but with a wide variety of businesses looking for similar square footage and high-quality locations. If we are unable to successfully compete, we may lose market share and our ability to grow same-store sales and increase our revenue and earnings may be impaired.
Corporate Structure and Governance Risks
We rely on our management team and other key personnel.
We depend on the skills, working relationships and continued services of key personnel, including our management team and others throughout our Company. We are also dependent on our ability to attract and retain qualified personnel, for whom we compete with other companies both inside and outside our industry. We may be required to increase wages and/or benefits to attract and retain qualified personnel or risk considerable turnover. Our business, financial condition or results of operations may be adversely impacted by the unexpected loss of any of our management team or other key personnel, or more generally if we fail to identify, recruit, train and/or retain talented personnel. In addition, our business may be harmed if we lose too many individuals with institutional knowledge.
If we fail to maintain an effective system of internal controls over financial reporting, we may not be able to accurately report our financial results and prevent or detect material misstatement due to fraud, which could reduce investor confidence and adversely affect the value of our common stock.
Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and effectively prevent and detect material fraud. If we cannot provide reliable financial reports or prevent or detect material fraud, our operating results could be materially misstated. There can be no assurances that we will be able to prevent control deficiencies from occurring, which could cause us to incur unforeseen costs, reduce investor confidence, cause the market price of our common stock to decline or have other potential adverse consequences.
We could be subject to changes in tax rates, the adoption of new U.S. or international tax legislation or exposure to additional tax liabilities.
We are subject to income taxes in the U.S. and other foreign jurisdictions. Significant judgment is required in determining our tax provision for income taxes. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. We are subject to the examination of our income tax returns, payroll taxes and other tax matters by the Internal Revenue Service and other tax authorities and governmental bodies. The CompanyWe regularly assessesassess the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of itsour provision for income taxes and payroll tax accruals. There can be no assurances as to the outcome of these examinations. Although we believe our tax estimates are reasonable, the final determination of tax audits, and any related litigation, could be materially different from our historical tax provisions and employment taxes. The results of an audit or litigation could have a material effect on our consolidated financial statementsConsolidated Financial Statements in the period or periods for whichwhere that determination is made.
Our Also, in the future, our effective income tax rate in the future could be adversely affected by a number of factors, including changes in the mix of earnings in countries with different statutory tax rates, changes in tax laws or the outcome of income tax audits, and any repatriation of non-U.S. earnings on which we have not previously providedexaminations.
Our ability to use our U.S. taxes.
Changesnet operating loss carryforwards to healthcare laws in the U.S. may increase the number of employees who participate in our healthcare plans, which may significantly increase our healthcare costs and negatively impact our operating results.
We offer comprehensive healthcare coverage to eligible employees in the United States. Historically, a majority of our eligible employees do not participate in our healthcare plans. Due to changes to healthcare laws in the United States, it is possible that enrollment in the Company’s healthcare plans may increase as individual penalties for failing to have insurance increase pursuant to the Affordable Care Act (ACA), and as employees continue to assess their changing healthcare alternatives, including if Medicaid coverage decreases or health insurance exchanges become less favorable. Furthermore, under the ACA, potential fees and or penaltiesoffset future taxable income may be assessed againstsubject to certain limitations.
Utilization of the net operating loss carryforwards may be subject to an annual limitation if an ownership change under Section 382 of the Internal Revenue Code of 1986 occurs. An ownership change could be triggered by subsequent sales of securities by us asor our stockholders and such a resultchange of individuals either not being offered healthcare coverage within a limited timeframeownership may limit our utilization of net operating losses.
Litigation and other legal or if coverage offered does not meet minimum careregulatory proceedings or claims and affordability standards. An increase in the numberoutcome of employees who elect to participate in our healthcare plans, changing healthcare-related requirementssuch litigation, proceedings or if the Company fails to comply with one or more provisions of ACA may significantly increase our healthcare-related costsclaims, including possible fines and negatively impact our operating results.
Changes to interest rates and foreign currency exchange rates may impact our results from operations.
Changes in interest rates and foreign currency exchange rates willpenalties, could have an impactadverse effect on our expected results from operations. Historically, we have managed the risk related to fluctuations in these rates through the use of fixed rate debt instruments and other financial instruments. In particular, the United Kingdom’s vote in June 2016 to leave the European Union, commonly known as “Brexit,” has increased the volatility of currency exchange rates. If the British pound weakens further, it may adversely affect our results of operations.
Failure to simplify and standardize our operating processes across our brands could have a negative impact on our financial results.
Standardization of operating processes across our brands, marketing and products will enable us to simplify our operating model and decrease our costs. Failure to do so could adversely impact our ability to grow revenue and realize further efficiencies within our results of operations.
If our joint venture with Empire Education Group is unsuccessful, our financial results may be affected.
We have a joint venture arrangement with Empire Education Group (EEG), an operator of accredited cosmetology schools. Due to significantly lower financial projections resulting from continued declines in EEG’s enrollment, revenue and profitability, we recorded a $13.0 million non-cash impairment charge in fiscal year 2016, resulting in a full-impairment of our investment. If EEG is unsuccessful in executing its business plan, or if economic, regulatory and other factors, including declines in enrollment, revenue and profitability continue for the for-profit secondary education market, our financial results may be affected by certain potential liabilities related to this joint venture.
Failure to control costs may adversely affect our operating results.
We must continue to control our expense structure. Failure to manage our cost of product, labor and benefit rates, advertising and marketing expenses, operating lease costs, other store expenses or indirect spending could delay or prevent us from achieving increased profitability or otherwise adversely affect our operating results.
If we fail to comply with any of the covenants in our financing arrangements, we may not be able to access our existing revolving credit facility, and we may face an accelerated obligation to repay our indebtedness.
We have several financing arrangements that contain financial and other covenants. If we fail to comply with any of the covenants, it may cause a default under one or more of our financing arrangements, which could limit our ability to obtain additional financing under our existing credit facility, require us to pay higher levels of interest or accelerate our obligations to repay our indebtedness.
Changes in the general economic environment may impact our business and resultsany loss contingency accruals may be inadequate to cover actual losses.
From time-to-time in the ordinary course of operations.
Changesour business operations, we are subject to the U.S., Canadianlitigation, including potential class action and United Kingdom economies have an impact on our business. General economic factors that are beyond our control, such as recession, inflation, deflation, tax rates and policy, energy costs, unemployment trends, extreme weather patterns, other casualty eventssingle-plaintiff litigation, arbitration and other matterslegal or regulatory proceedings or claims. Litigation to defend ourselves against claims by third parties, or to enforce any rights that influence consumer confidence and spending, may impact our business. In particular, visitation patterns to our salons can be adversely impacted by increases in unemployment rates and decreases in discretionary income levels.
Brexitwe may have economic repercussions, including recession,against third parties, may be necessary, which could adversely impactrequire significant time commitments from our operating results.
Changesmanagement team and result in consumer tastes, hair product innovation, fashion trendssubstantial costs and consumer spending patternsdiversion of our resources, which may impact our revenue.
Our success depends in partcause an adverse effect on our ability to anticipate, gauge and react in a timely manner to changes in consumer tastes, hair product innovation, fashion trends and consumer spending patterns. If we do not timely identify and properly respond to evolving trends and changing consumer demands for hair care, our sales may decline significantly. Furthermore, we may accumulate additional inventory and be required to mark down unsold inventory to prices that are significantly lower than normal prices, which could adversely impact our margins and could further adversely impact our business, financial condition and results of operations.
Operational failure at one of our distribution centers would impact our ability to distribute product.
revenues. We operate two distribution centers, one near Chattanooga, Tennessee,establish accruals for potential liabilities arising from litigation and one near Salt Lake City, Utah. These supply our North America company-owned salonsother legal or regulatory proceedings or claims when potential liabilities are probable and many of our franchisees with retail products to sell and products used during salon services. A technology failure or natural disaster that caused onethe amount of the distribution centers to be inoperable would cause disruption in our business and could negatively impact our revenues.
Our enterprise risk management program may leave us exposed to unidentified or unanticipated risks.
We maintain an enterprise risk management program that is designed to identify, assess, mitigate, and monitor the risks that we face. Thereloss can be no assurance that our frameworks or modelsreasonably estimated based on currently available information. We may still incur legal costs for assessing and managing known risks, compliance with applicable law, and related controls will effectively mitigate risk and limita matter even if we have not accrued a liability. In addition, actual losses in all market environments or against all types of risk in our business. If conditions or circumstances arise that expose flaws or gaps in our risk management or compliance programs, the performance and value of our business could be adversely affected.
Insurance and other traditional risk-shifting tools may be held byhigher than the amount accrued for a certain matter or available to Regis in order to manage certain typesthe aggregate. Any resolution of risks, but they are subject to terms such as deductibles, retentions, limits and policy exclusions,litigation or other legal or regulatory proceedings as well as risk of denial of coverage, default or insolvency. If we suffer unexpected or uncovered losses, or if any of our insurance policies or programs are terminated for any reason or are not effective in mitigating our risks, we may incur losses that are not covered or that exceed our coverage limits andclaims could adversely impactaffect our results of operations, cash flows and financial position.
We rely on our management team and other key personnel.
We depend on the skills, working relationships, and continued services of key personnel, including our management team and others throughout our organization. We are also dependent on our ability to attract and retain qualified personnel, for whom we compete with other companies both inside and outside our industry. Our business, financial condition or resultsrevenues.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
The Company'sCompany leases its corporate offices are headquarteredheadquarters in a 170,000 square foot, three building complexMinneapolis, Minnesota and the lease expires in Edina, Minnesota that is owned by the Company.
2030. The Company also operates officesoperated an office in Edina, Minnesota; Toronto, Canada; and Coventry and London, England. These offices are occupied under long-term leases.Fremont, California related to its product engineering business, which it will exit in fiscal year 2023.
TheIn fiscal year 2022, the Company ownsexited its distribution centers located in Chattanooga, Tennessee and Salt Lake City, Utah. The Chattanooga facility currently utilizes 230,000 square feet whileUtah and signed agreements to sublease the Salt Lake City facility utilizes 210,000 square feet. The Salt Lake City facility can be expanded to 290,000 square feet to accommodate future growth.
The Company operates all of its salon locations under leases or license agreements. Substantially all of its North American locationsfacilities in regional malls are operating under leases with an original term of at least ten years. Salons operating within strip centersthe short-term before a full lease novation in fiscal years 2023 and Walmart Supercenters have leases with original terms of at least five years, generally with the ability to renew, at the Company's option, for one or more additional five year periods. Salons operating within department stores in Canada and Europe operate under license agreements, while freestanding or shopping center locations in those countries have real property leases comparable to the Company's North American locations.2024.
The Company also leases the premises in which approximately 85%88% of ourits franchisees operate and has entered into corresponding sublease arrangements with thethese franchisees. TheseGenerally, these leases have a five yearfive-year initial term and one or more five yearfive-year renewal options. All lease costs are passed through to the franchisees. Remaining franchisees who do not enter into sublease arrangements with the Company negotiate and enter into leases on their own behalf. As leases renew, the Company intends for franchisees to sign the non-Walmart leases directly so it will no longer be the primary tenant.
The Company operates all of its company-owned salons under lease agreements with original terms of at least five years, generally with the ability to renew at the Company's option, for one or more additional five-year periods.
None of the Company's salon leases are individually material to the operations of the Company, and the Company expects that it will be able to renew its leases on satisfactory terms as they expire or identify and secure other suitable locations. See Note 76 to the Consolidated Financial Statements.Statements in Part II, Item 8, of this Form 10-K.
Item 3. Legal Proceedings
The Company is a defendant in various lawsuits and claims arising out of the normal course of business. Like certain other franchisors, the Company has been faced with allegations of franchise regulation and agreement violations. Additionally, because the Company may be the tenant under a master lease for a location subleased to a franchisee, the Company faces allegations of non-payment of rent and associated charges. Further, similar to other large retail employers, the Company has been faced with allegations of purported class-wide consumer and wage and hour violations. Litigation is inherently unpredictable, and the outcome of these matters cannot presently be determined. Although the actions are being vigorously defended, the Company could in the future, incur judgments or enter into settlements of claims that could have a material adverse effect on its results of operations in any particular period. See Note 9 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
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Item 5. | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Repurchase of Equity Securities |
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Regis common stock is listed and traded on the New York Stock Exchange under the symbol "RGS."
The accompanying table sets forth the high and low closing bid quotations for each quarter during fiscal years 2017 and 2016 as reported by the New York Stock Exchange (under the symbol "RGS"). The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions.
As of August 10, 2017,15, 2022, Regis shares were owned byhad approximately 12,0001,125 shareholders based on the number of record holders and an estimate of individual participants in security position listings.record. The closing stock price was $10.51$1.27 per share on August 10, 2017.
|
| | | | | | | | | | | | | | | | |
| | Fiscal Years |
| | 2017 | | 2016 |
Fiscal Quarter | | High | | Low | | High | | Low |
1st Quarter | | $ | 14.49 |
| | $ | 12.18 |
| | $ | 16.10 |
| | $ | 10.60 |
|
2nd Quarter | | 15.56 |
| | 11.56 |
| | 18.13 |
| | 11.81 |
|
3rd Quarter | | 15.61 |
| | 11.37 |
| | 16.55 |
| | 13.04 |
|
4th Quarter | | 11.71 |
| | 9.02 |
| | 16.02 |
| | 10.96 |
|
15, 2022.In accordance with its capital allocation policy, the Company no longer paysdoes not pay dividends.
The following graph compares the cumulative total shareholder return on the Company's stock for the last five years with the cumulative total return of the Standard and Poor's 500 Stock Index and the cumulative total return of a peer group index (the Peer Group) constructed by the Company. In addition, the Company has included the Standard and Poor's 400 Midcap Index and the Dow Jones Consumer Services Index in this analysis because the Company believes these two indices provide a comparative correlation to the cumulative total return of an investment in shares of Regis Corporation.
The Peer Group consists of the following companies: Boyd Gaming Corp., Brinker International, Inc., Buffalo Wild Wings,The Cheesecake Factory, Inc., Cracker Barrel Old Country Store, DineEquity,Inc., Dine Brands Global, Inc., Fossil Group, Inc., Fred's,Franchise Group, Inc., Jack in the Box, Inc., Panera Bread Co.Papa John's International, Inc., Penn National Gaming, Inc., Revlon,Planet Fitness, Inc., Ruby Tuesday,Revlon, Inc., Sally Beauty Holdings, Inc., Service Corporation International, The Cheesecake Factory,Ulta Beauty, Inc. and Ulta Salon, Cosmetics & Fragrance Inc.Winmark Corporation. The Peer Group is a self-constructed peer group of companies that have comparable annual revenues and market capitalization and are in the franchise industry, beauty industry, or other industries where guest service, multi-unit expansion or franchise play a part. The Company reviewed and adjusted its Peer Group used for executive compensation purposes in early fiscal 2017, resulting in this Peer Group. Information regarding executive compensation will be set forth in the 20172022 Proxy Statement.
The comparison assumes the initial investment of $100 in the Company's common stock, the S&P 500 Index, the Peer Group, the S&P 400 Midcap Index and the Dow Jones Consumer Services Index on June 30, 20122017 and that dividends, if any, were reinvested.
Comparison of 5Five Year Cumulative Total Return
Assumes Initial Investment of $100
June 201730, 2022
![](https://files.docoh.com/10-K/0000716643-17-000032/rgs-2017063_chartx10083.jpg)
![rgs-20220630_g1.jpg](https://files.docoh.com/10-K/0000716643-22-000043/rgs-20220630_g1.jpg)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, |
| | 2017 | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 |
| | | | | | | | | | | | |
Regis | | $ | 100.00 | | | $ | 161.05 | | | $ | 161.64 | | | $ | 79.65 | | | $ | 91.14 | | | $ | 10.52 | |
S & P 500 | | 100.00 | | | 114.37 | | | 126.29 | | | 135.77 | | | 191.15 | | | 170.86 | |
S & P 400 Midcap | | 100.00 | | | 113.50 | | | 115.05 | | | 107.35 | | | 164.49 | | | 140.41 | |
Dow Jones Consumer Services Index | | 100.00 | | | 119.57 | | | 136.11 | | | 145.76 | | | 201.67 | | | 142.15 | |
Peer Group | | 100.00 | | | 101.26 | | | 122.30 | | | 93.22 | | | 155.12 | | | 128.66 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, |
| | 2012 | | 2013 | | 2014 | | 2015 | | 2016 | | 2017 |
Regis | | $ | 100.00 |
| | $ | 92.66 |
| | $ | 80.08 |
| | $ | 89.64 |
| | $ | 70.81 |
| | $ | 58.41 |
|
S & P 500 | | 100.00 |
| | 120.60 |
| | 150.27 |
| | 161.43 |
| | 167.87 |
| | 197.92 |
|
S & P 400 Midcap | | 100.00 |
| | 125.18 |
| | 156.78 |
| | 166.81 |
| | 169.03 |
| | 200.41 |
|
Dow Jones Consumer Services Index | | 100.00 |
| | 128.44 |
| | 157.01 |
| | 184.39 |
| | 187.76 |
| | 217.77 |
|
Peer Group | | 100.00 |
| | 128.35 |
| | 133.66 |
| | 166.92 |
| | 175.56 |
| | 189.85 |
|
Share Issuance ProgramOn February 3, 2021, the Company filed a $150.0 million shelf registration statement and $50.0 million prospectus supplement with the SEC under which it may offer and sell, from time to time, up to $50.0 million worth of its common stock in "at-the-market" offerings. During fiscal year 2022, the Company issued 9.3 million shares for proceeds of $38.4 million offset by fees of $1.2 million. There were no shares issued in the fiscal quarter ended June 30, 2022. On June 30, 2022, $11.6 million remains under the prospectus supplement, which equates to 10.7 million shares based on the share price as of June 30, 2022.
The Company issued the following common stock through its share issuance program:
| | | | | | | | | | | | | | | | |
| | Fiscal Years |
| | 2022 | | 2021 | | |
| | | | | | |
Issued Shares | | 9,295,618 | | | — | | | |
Average Price (per share) | | $4.13 | | | $— | | | |
Price range (per share) | | $3.76 - $5.99 | | $— | | | |
Total | | $38.4 million | | $— | | | |
Share Repurchase Program
In May 2000, the Company's Board of Directors (Board) approved a stock repurchase program with no stated expiration date. Since that time and through June 30, 2017,2022, the Board has authorized $450.0$650.0 million to be expended for the repurchase of the Company's stock under this program. All repurchased shares become authorized but unissued shares of the Company. The timing and amounts of any repurchases depends on many factors, including the market price of the common stock and overall market conditions. There were no shares repurchased in the fiscal year ended June 30, 2022. As of June 30, 2017, 18.42022, 30.0 million shares have been cumulatively repurchased for $390.0$595.4 million, and $60.0$54.6 million remained outstanding under the approved stock repurchase program.
authorized for repurchase. The Company repurchased the followingdoes not anticipate repurchasing shares of common stock through its share repurchase program:for the forseeable future.
|
| | | | | | | | | | | | |
| | Fiscal Years |
| | 2017 | | 2016 | | 2015 |
Repurchased Shares | | — |
| | 7,647,819 |
| | 3,054,387 |
|
Average Price (per share) | | $ | — |
| |
| $13.19 |
| |
| $15.64 |
|
Price range (per share) | | $ | — |
| | $10.94 - $15.95 |
| | $13.72 - $17.32 |
|
Total | | $ | — |
| | $101.0 million |
| | $47.9 million |
|
Item 6. Selected Financial DataReserved
The following table sets forth selected financial data derived from the Company's Consolidated Financial Statements in Part II, Item 8. The table should be read in conjunction with Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", and Item 8, "Financial Statements and Supplementary Data", of this Report on Form 10-K.Not applicable.
|
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Years |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013(b) |
| | (Dollars in thousands, except per share data) |
Revenues | | $ | 1,691,888 |
| | $ | 1,790,869 |
| | $ | 1,837,287 |
| | $ | 1,892,437 |
| | $ | 2,018,713 |
|
Operating (loss) income(a) | | (1,204 | ) | | 17,614 |
| | 3,531 |
| | (34,958 | ) | | 13,359 |
|
(Loss) income from continuing operations(a) | | (16,140 | ) | | (11,316 | ) | | (33,212 | ) | | (139,874 | ) | | 5,478 |
|
(Loss) income from continuing operations per diluted share | | (0.35 | ) | | (0.23 | ) | | (0.60 | ) | | (2.48 | ) | | 0.10 |
|
Dividends declared, per share | | — |
| | — |
| | — |
| | 0.12 |
| | 0.24 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | June 30, |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013(b) |
| | (Dollars in thousands) |
Total assets, including discontinued operations | | $ | 1,011,488 |
| | $ | 1,035,932 |
| | $ | 1,160,843 |
| | $ | 1,414,291 |
| | $ | 1,390,447 |
|
Long-term debt and capital lease obligations, including current portion | | 120,599 |
| | 119,606 |
| | 118,830 |
| | 291,845 |
| | 173,818 |
|
| |
(a) | The following significant items affected each of the years presented: |
During fiscal year 2017, the Company recorded $11.4 million of non-cash fixed asset impairment charges, $8.4 million of severance expense related to the termination of former executive officers including the Company's Chief Executive Officer, $7.7 million of non-cash tax expense related to tax benefits on certain indefinite-lived assets that the Company cannot recognize for reporting purposes and $5.9 million of expense for a one-time non-cash inventory expense related to salon tools.
During fiscal year 2016, the Company recorded a $13.0 million other than temporary non-cash impairment charge to fully impair its investment in EEG, $10.5 million of non-cash fixed asset impairment charges and $7.9 million of non-cash tax expense related to tax benefits on certain indefinite-lived assets that the Company cannot recognize for reporting purposes.
During fiscal year 2015, the Company recorded its share of a non-cash deferred tax asset valuation allowance recorded by EEG of $6.9 million, non-cash other than temporary impairment charges of its investment in EEG of $4.7 million, $14.6 million of non-cash fixed asset impairment charges, $8.9 million of non-cash tax expense related to tax benefits on certain indefinite-lived assets that the Company cannot recognize for reporting purposes and established a non-cash $2.1 million valuation allowance against its Canadian deferred tax assets.
During fiscal year 2014, the Company recorded a non-cash goodwill impairment charge of $34.9 million associated with the Company's Regis salon concept, non-cash fixed asset impairment charges of $18.3 million, non-cash of $15.9 million,
net of tax for the Company's share of goodwill and fixed asset impairment charges recorded by EEG and established a non-cash $86.6 million valuation allowance against the U.S. and U.K. deferred tax assets.
During fiscal year 2013, the Company recorded $7.4 million in restructuring charges and a $12.6 million non-cash inventory write-down. In addition, the Company recognized a net $33.8 million foreign currency translation gain in connection with the sale of Provalliance, recorded net other than temporary non-cash impairment charges of $17.9 million associated with the Company's investment in EEG and incurred a $10.6 million make-whole payment in connection with the prepayment of $89.3 million of senior term notes in June 2013.
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(b) | In fiscal year 2013 the Hair Restoration Centers operations were accounted for as discontinued operations. |
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is designed to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity, and certain other factors that may affect our future results.
BUSINESS DESCRIPTION
Regis Corporation (the Company) franchises, owns franchises and operates beauty salons. As of June 30, 2017,2022, the Company-owned,Company franchised, owned or held ownership interests in 9,0085,576 locations worldwide. The Company'sOur locations consistconsisted of 8,919 company-owned5,500 system-wide North American and franchisedInternational salons, and 89in 76 locations in whichwhere we maintain a non-controlling ownership interest of less than 100%.interest. Each of the Company's salon concepts generally offer similar salon products and services and serve the mass market. As of June 30, 2022, we had approximately 630 corporate employees worldwide. See discussion within Part I, Item 1.1 of this Form 10-K.
RESULTS OF OPERATIONS
BeginningOn June 30, 2022, the Company sold its Opensalon Pro (OSP) software-as-a-service solution to Soham Inc. for a purchase price of $20.0 million in cash plus up to an additional $19.0 million in cash contingent upon the number of salons that migrate to Soham's Zenoti product as their salon technology platform. The Company received $13.0 million in proceeds in June 2022. The remaining $7.0 million of the purchase price is subject to holdbacks including $4.0 million of the proceeds retained in escrow to be paid upon completion of the Company’s refinancing, $1.0 million once the Company ends its arrangement with its former third-party salon technology provider in December 2022 and $2.0 million of proceeds held back until general indemnity provisions are satisfied within 18 months from closing. As a result of the sale, the Company classified the OSP business as discontinued operations in the financial statements as discussed in Note 3 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K.
As part of the Company's strategic transition to a fully-franchised model, the Company is selling salons to franchisees. The impact of these transactions are as follows: | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Years | | |
| | 2022 | | 2021 | | | | | | |
| | | | | | | | | | |
| | (Dollars in thousands) |
Salons sold to franchisees | | 110 | | | 748 | | | | | | |
Cash proceeds received | | $ | — | | | $ | 8,437 | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Loss from sale of salon assets to franchisees, net | | $ | (2,334) | | | $ | (16,696) | | | | | | | |
The Company shifted its product business from a wholesale model to a third-party distribution model as part of its asset-light transformation. In fiscal year 2022, the Company exited its distribution centers and ceased selling products to franchisees. Going forward, franchisees will source product from a third-party distribution partner and the Company receives a royalty payment based on franchisee purchases. This change has significantly decreased both the Company's franchise product revenue and general and administrative expense, including the Franchise distribution costs discussed in Note 1 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K. In fiscal years 2022 and 2021, the Company experienced the following charges related to the plan to exit the distribution centers: | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fiscal Years |
| | | | 2022 | | 2021 | | |
| | | | | | | | |
| | Financial Statement Caption | | (Dollars in thousands) |
Inventory reserve (1) | | Inventory reserve | | $ | 7,655 | | | $ | — | | | |
Inventory valuation adjustment (2) | | Company-owned salon expense | | 2,823 | | | 12,068 | | | |
Gain from disposal of distribution center assets | | Interest income and other, net | | — | | | (14,997) | | | |
____________________________________________________________________________ (1)Includes charges in the third and fourth quarter of fiscal year 2017,2022 associated with the Company redefined its operating segmentsliquidation of distribution center inventory, which primarily related to reflect how the chief operating decision maker evaluates the businessreserving for personal protective equipment acquired as a result of the increased focusCOVID-19 pandemic.
(2)Due to the reduction in company-owned salons, the Company cannot redistribute inventory from closed salons causing an increase to the reserve. Also included in fiscal year 2021 was the write-off of marketing and promotional items.
RESULTS OF OPERATIONS
The Company reports its operations in two operating segments: Franchise salons and Company-owned salons.
COVID-19 Impact:
During fiscal years 2022 and 2021, the global coronavirus pandemic (COVID-19) had an adverse impact on operations. The COVID-19 pandemic continues to impact salon guest visits and franchisee staffing, resulting in a significant reduction in revenue and profitability. In response to COVID-19, the Company received Canadian rent relief, Canadian wage relief and U.S. employee retention payroll tax credits. In fiscal years 2022 and 2021, the Company received the following amounts in rent and wage assistance: | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fiscal Years |
| | | | 2022 | | 2021 | | |
| | | | | | | | |
| | Financial Statement Caption | | (Dollars in thousands) |
Canadian rent relief | | Rent | | $ | 1,235 | | | $ | — | | | |
Canadian wage relief | | Company-owned salon expense | | 1,966 | | | 1,629 | | | |
U.S. employee retention payroll tax credit | | Company-owned salon expense | | — | | | 1,547 | | | |
Additionally, in December 2021, the Company paid $2.5 million of social security contributions that had been deferred under the CARES Act. The ultimate impact of the COVID-19 pandemic in both the short- and long-term is not currently estimable due to the uncertainty surrounding the duration of the pandemic, the emergence and impact of new COVID-19 variants and changing government restrictions. Additional impacts to the business may arise that we are not aware of currently.
System-wide results
Our results are impacted by our system-wide sales, which include sales by all points of distribution, whether owned by our franchisees or the Company. While we do not record sales by franchisees as revenue, and such sales are not included in our Consolidated Financial Statements, we believe that this operating measure is important in obtaining an understanding of our financial performance. We believe system-wide sales information aids in understanding how we derive royalty revenue and in evaluating performance.
System-wide same-store sales (1) by concept are detailed in the table below: | | | | | | | | | | | | | | | | |
| | Fiscal Years |
| | 2022 | | 2021 | | |
| | | | | | |
SmartStyle | | 5.7 | % | | (26.7) | % | | |
Supercuts | | 22.1 | | | (25.8) | | | |
Portfolio Brands | | 11.2 | | | (24.8) | | | |
Total | | 14.8 | % | | (25.8) | % | | |
____________________________________________________________________________ (1)Fiscal years 2022 and 2021 system-wide same-store sales are calculated as the total change in sales for system-wide franchise business. Discontinued operationsand company-owned locations that were open on a specific day of the week during the current period and the corresponding prior period. Year-to-date system-wide same-store sales are discussed at the endsum of this section.the system-wide same-store sales computed on a daily basis. Franchise salons that do not report daily sales are excluded from same-store sales. System-wide same-store sales are calculated in local currencies to remove foreign currency fluctuations from the calculation.
Consolidated Results of Operations
The following table sets forth, for the periods indicated, certain information derived from our Consolidated Statement of Operations. The percentages are computed as a percent of total revenues, except as otherwise indicated.and the increase (decrease) is measured in basis points. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Years |
| | 2022 | | 2021 | | | | 2022 | | 2021 | | | | 2022 | | |
| | | | | | | | | | | | | | | | |
| | (Dollars in millions) | | | | % of Total Revenues (1) | | | | Increase (Decrease) |
| | | | | | | | | | | | | | | | |
Royalties | | $ | 65.8 | | | $ | 52.4 | | | | | 23.8 | % | | 12.7 | % | | | | 1,110 | | | |
Fees | | 11.6 | | | 10.2 | | | | | 4.2 | | | 2.6 | | | | | 160 | | | |
Product sales to franchisees | | 15.1 | | | 56.7 | | | | | 5.5 | | | 13.8 | | | | | (830) | | | |
Advertising fund contributions | | 32.6 | | | 22.0 | | | | | 11.8 | | | 5.3 | | | | | 650 | | | |
Franchise rental income | | 130.8 | | | 127.4 | | | | | 47.4 | | | 30.9 | | | | | 1,650 | | | |
Company-owned salon revenue | | 20.2 | | | 143.0 | | | | | 7.3 | | | 34.7 | | | | | (2,740) | | | |
| | | | | | | | | | | | | | | | |
Cost of product sales to franchisees (2) | | 17.4 | | | 43.8 | | | | | 115.2 | | | 77.2 | | | | | 3,800 | | | |
Inventory reserve | | 7.7 | | | — | | | | | 2.8 | | | — | | | | | N/A | | |
General and administrative | | 65.3 | | | 96.4 | | | | | 23.7 | | | 23.4 | | | | | 30 | | | |
Rent | | 9.4 | | | 40.8 | | | | | 3.4 | | | 9.9 | | | | | (650) | | | |
Advertising fund expense | | 32.6 | | | 22.0 | | | | | 11.8 | | | 5.3 | | | | | 650 | | | |
Franchise rent expense | | 130.8 | | | 127.4 | | | | | 47.4 | | | 30.9 | | | | | 1,650 | | | |
Company-owned salon expense | | 22.0 | | | 141.2 | | | | | 8.0 | | | 34.3 | | | | | (2,630) | | | |
Depreciation and amortization | | 6.2 | | | 21.7 | | | | | 2.2 | | | 5.3 | | | | | (310) | | | |
Long-lived asset impairment | | 0.5 | | | 13.0 | | | | | 0.2 | | | 3.2 | | | | | (300) | | | |
| | | | | | | | | | | | | | | | |
Goodwill impairment | | 13.1 | | | — | | | | | 4.7 | | | — | | | | | N/A | | |
| | | | | | | | | | | | | | | | |
Operating loss (3) | | (28.9) | | | (94.7) | | | | | (10.5) | | | (23.0) | | | | | 1,250 | | | |
| | | | | | | | | | | | | | | | |
Interest expense | | (12.9) | | | (13.2) | | | | | (4.7) | | | (3.2) | | | | | (150) | | | |
Loss from sale of salon assets to franchisees, net | | (2.3) | | | (16.7) | | | | | (0.8) | | | (4.1) | | | | | 330 | | | |
Interest income and other, net | | (0.3) | | | 15.9 | | | | | (0.1) | | | 3.9 | | | | | (400) | | | |
| | | | | | | | | | | | | | | | |
Income tax (expense) benefit (4) | | (2.0) | | | 5.4 | | | | | (4.5) | | | 5.0 | | | | | N/A | | |
| | | | | | | | | | | | | | | | |
Loss from discontinued operations, net of taxes | | (39.4) | | | (10.1) | | | | | (14.3) | | | (2.5) | | | | | (1,180) | | | |
| | | | | | | | | | | | | | | | |
Net loss (3) | | (85.9) | | | (113.3) | | | | | (31.1) | | | (27.5) | | | | | (360) | | | |
____________________________________________________________________________ |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Years |
| | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 |
| | (Dollars in millions) | | % of Total Revenues(1) | | Basis Point Increase (Decrease) |
Service revenues | | $ | 1,307.7 |
| | $ | 1,383.7 |
| | $ | 1,429.4 |
| | 77.3 | % | | 77.3 | % | | 77.8 | % | | — |
| | (50 | ) | | (40 | ) |
Product revenues | | 335.9 |
| | 359.7 |
| | 363.2 |
| | 19.9 |
| | 20.1 |
| | 19.8 |
| | (20 | ) | | 30 |
| | 20 |
|
Franchise royalties and fees | | 48.3 |
| | 47.5 |
| | 44.6 |
| | 2.9 |
| | 2.7 |
| | 2.4 |
| | 20 |
| | 30 |
| | 20 |
|
| | | | | | | | | | | | | | | | | | |
Cost of service(2) | | 838.2 |
| | 868.2 |
| | 882.7 |
| | 64.1 |
| | 62.7 |
| | 61.8 |
| | 140 |
| | 90 |
| | 50 |
|
Cost of product(2) | | 166.3 |
| | 179.3 |
| | 180.6 |
| | 49.5 |
| | 49.9 |
| | 49.7 |
| | (40 | ) | | 20 |
| | (60 | ) |
Site operating expenses | | 168.4 |
| | 183.0 |
| | 192.4 |
| | 10.0 |
| | 10.2 |
| | 10.5 |
| | (20 | ) | | (30 | ) | | (30 | ) |
General and administrative | | 174.5 |
| | 178.0 |
| | 186.1 |
| | 10.3 |
| | 9.9 |
| | 10.1 |
| | 40 |
| | (20 | ) | | 100 |
|
Rent | | 279.3 |
| | 297.3 |
| | 309.1 |
| | 16.5 |
| | 16.6 |
| | 16.8 |
| | (10 | ) | | (20 | ) | | (20 | ) |
Depreciation and amortization | | 66.3 |
| | 67.5 |
| | 82.9 |
| | 3.9 |
| | 3.8 |
| | 4.5 |
| | 10 |
| | (70 | ) | | (80 | ) |
Goodwill impairment | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (180 | ) |
| | | | | | | | | | | | | | | | | | |
Interest expense | | 8.7 |
| | 9.3 |
| | 10.2 |
| | 0.5 |
| | 0.5 |
| | 0.6 |
| | — |
| | (10 | ) | | (60 | ) |
Interest income and other, net | | 3.1 |
| | 4.2 |
| | 1.7 |
| | 0.2 |
| | 0.2 |
| | 0.1 |
| | — |
| | 10 |
| | — |
|
| | | | | | | | | | | | | | | | | | |
Income taxes(3) | | (9.2 | ) | | (9.0 | ) | | (14.6 | ) | | (135.0 | ) | | 72.3 |
| | (293.4 | ) | | N/A |
| | N/A |
| | N/A |
|
Equity in loss of affiliated companies, net of income taxes | | 0.1 |
| | 14.8 |
| | 13.6 |
| | — |
| | 0.8 |
| | 0.7 |
| | (80 | ) | | 10 |
| | 10 |
|
| | | | | | | | | | | | | | | | | | |
Loss from discontinued operations, net of income taxes | | — |
| | — |
| | (0.6 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (10 | ) |
| |
(1) | Cost of service is computed as a percent of service revenues. (1)Cost of product is computed as a percent of product revenues. |
| |
(2) | Excludes depreciation and amortization expense. |
| |
(3) | Computed as a percent of income (loss) from continuing operations before income taxes and equity in loss of affiliated companies. The income taxes basis point change is noted as not applicable (N/A) as the discussion below is related to the effective income tax rate. |
Consolidated Revenues
Consolidated revenues primarily include revenues of company-owned salons, product and equipment sales to franchisees is computed as a percent of product sales to franchisees.
(2)Excludes depreciation and franchise royalties and fees.amortization expense.
(3)Total is a recalculation; line items calculated individually may not sum to total due to rounding.
(4)Computed as a percent of loss from continuing operations before income taxes. The following tables summarize revenues and same-store sales by concept,income taxes basis point change is noted as wellnot applicable (N/A) as the reasons fordiscussion below is related to the percentage change:effective income tax rate.
|
| | | | | | | | | | | | |
| | Fiscal Years |
| | 2017 | | 2016 | | 2015 |
| | (Dollars in thousands) |
North American Value salons: | | | | | | |
SmartStyle | | $ | 523,911 |
| | $ | 522,700 |
| | $ | 500,562 |
|
Supercuts | | 290,051 |
| | 295,401 |
| | 298,078 |
|
MasterCuts | | 94,313 |
| | 106,791 |
| | 117,246 |
|
Signature Style | | 372,125 |
| | 391,518 |
| | 413,134 |
|
Total North American Value salons | | 1,280,400 |
| | 1,316,410 |
| | 1,329,020 |
|
North American Franchise salons: | | | | | | |
Product | | 30,548 |
| | 31,406 |
| | 29,756 |
|
Royalties and fees | | 47,973 |
| | 47,523 |
| | 44,643 |
|
Total North American Franchise salons | | 78,521 |
| | 78,929 |
| | 74,399 |
|
North American Premium salons | | 241,501 |
| | 283,438 |
| | 309,600 |
|
International salons | | 91,466 |
| | 112,092 |
| | 124,268 |
|
Consolidated revenues | | $ | 1,691,888 |
| | $ | 1,790,869 |
| | $ | 1,837,287 |
|
Percent change from prior year | | (5.5 | )% | | (2.5 | )% | | (2.9 | )% |
Salon same-store sales (decrease) increase(1) | | (1.8 | )% | | 0.2 | % | | (0.3 | )% |
| |
(1) | Same-store sales are calculated on a daily basis as the total change in sales for company-owned locations which were open on a specific day of the week during the current period and the corresponding prior period. Quarterly and fiscal year same-store sales are the sum of the same-store sales computed on a daily basis. Locations relocated within a one mile radius are included in same-store sales as they are considered to have been open in the prior period. International same-store sales are calculated in local currencies to remove foreign currency fluctuations from the calculation. |
Decreases in consolidated revenues were driven by the following:Fiscal Year Ended June 30, 2022 Compared with Fiscal Year Ended June 30, 2021
|
| | | | | | | | | |
|
| Fiscal Years |
Factor |
| 2017 |
| 2016 |
| 2015 |
Same-store sales |
| (1.8 | )% |
| 0.2 | % |
| (0.3 | )% |
Closed salons |
| (3.5 | ) |
| (2.7 | ) |
| (2.7 | ) |
New stores and conversions |
| 0.4 |
|
| 0.5 |
|
| 0.6 |
|
Foreign currency | | (0.8 | ) | | (1.2 | ) | | (0.8 | ) |
Other |
| 0.2 |
|
| 0.7 |
|
| 0.3 |
|
|
| (5.5 | )% |
| (2.5 | )% |
| (2.9 | )% |
Same-store sales by concept by fiscal year are detailed in the table below:
|
| | | | | | | | | |
| | Fiscal Years |
| | 2017 | | 2016 | | 2015 |
SmartStyle | | (0.4 | )% | | 3.4 | % | | 1.6 | % |
Supercuts | | 0.4 | % | | 2.0 | % | | 1.3 | % |
MasterCuts | | (3.6 | )% | | (4.4 | )% | | (4.0 | )% |
Signature Style | | (1.4 | )% | | (0.2 | )% | | (0.7 | )% |
Total North American Value salons | | (0.8 | )% | | 1.3 | % | | 0.3 | % |
North American Premium salons | | (5.9 | )% | | (3.8 | )% | | (3.0 | )% |
International salons | | (5.7 | )% | | (2.3 | )% | | 0.6 | % |
Consolidated same-store sales | | (1.8 | )% | | 0.2 | % | | (0.3 | )% |
The same-store sales decrease of 1.8% during fiscal year 2017 was due to a 5.2% decrease in same-store guest visits, partly offset by a 3.4% increase in average ticket price. We closed 554 salons (including 93 franchised salons), constructed (net of relocations) 41 company-owned salons and acquired one company-owned salon via franchise buyback during fiscal year 2017 (2017 Net Salon Count Changes).
The same-store sales increase of 0.2% during fiscal year 2016 was due to a 3.1% increase in average ticket price, partly offset by a 2.9% decrease in same-store guest visits. We closed 297 salons (including 56 franchised salons), constructed (net of relocations) 66 company-owned salons and acquired one company-owned salon via franchise buyback during fiscal year 2016 (2016 Net Salon Count Changes).
The same-store sales decrease of 0.3% during fiscal year 2015 was due to a 1.9% decrease in same-store guest visits, partly offset by a 1.6% increase in average ticket price. We closed 338 salons (including 72 franchised salons), constructed (net of relocations) 91 company-owned salons and did not acquire any company-owned locations during fiscal year 2015 (2015 Net Salon Count Changes).Consolidated Revenues
Consolidated revenues are primarily comprised of service androyalties, fees, advertising fund contributions, product revenues, as well assales to franchisees, franchise royalties and fees. Fluctuations in these three major revenue categories, operating expenses and otherrental income and expense were as follows:company-owned salon revenue.
Service Revenues
The $75.9Consolidated revenues decreased $135.7 million, decrease in service revenuesor 33.0%, during fiscal year 2017 was2022. Royalty revenue increased $13.4 million during fiscal year 2022 due to higher franchise system-wide sales and a higher average franchise salon count during the year. The overall decrease in revenue is due to the sale of company-owned salons to franchisees, the closure of company-owned salons which contributed $105.4 million to the decline and the reduction in product sales to franchisees of $41.6 million. During fiscal year 2022, 110 salons were sold to franchisees, net of buy backs, and 360 and 21 system-wide salons were closed and constructed, respectively (2022 Net Salon Count Changes). Additionally, our sales continue to be challenged by labor issues with active stylists and stylist hours worked below pre-COVID levels.
Royalties
During fiscal year 2022, royalties increased $13.4 million, or 25.6%, primarily due to a higher average franchise salon count and higher franchise system-wide sales.
Fees
During fiscal year 2022, fees increased $1.4 million, primarily due to the 1.4% decreaserebate from the Company's third-party distributor included in same-store servicefees, which was a new source of revenue in fiscal year 2022. Training revenues also increased year over year. See Note 2 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K.
Product Sales to Franchisees
Product sales the 2017 Net Salon Count Changes and foreign currency fluctuations. The decrease in same-store service sales was primarily a result of a 4.9% decrease in same-store guest visits, partly offset by a 3.5% increase in average ticket.
The $45.7to franchisees decreased $41.6 million, decrease in service revenuesor 73.4%, during fiscal year 2016 was2022, primarily due to the 2016 Net Salon Count Changes and foreign currency fluctuations. Same-store serviceCompany's shift in its product business to a third-party distribution model. The Company expected revenue from product sales were flat, primarily a result of a 2.7% increase in average ticket price, offset by a 2.7%to decrease in same-store guest visits.
The $50.7 million decrease in service revenuessignificantly during fiscal year 2015 was2022 and expects it to continue to decrease in fiscal year 2023.
Advertising Fund Contributions
Advertising fund contributions increased $10.6 million, or 48.2%, during fiscal year 2022, primarily due to the 0.4% decreasea higher average franchise salon count in same-store servicefiscal year 2022 and system-wide sales the 2015 Net Salon Count Changes and foreign currency fluctuations. The decrease in same-store service sales was primarily a result of a 1.2% decrease in same-store guest visits, partly offset by a 0.8%an increase in average ticket price.
Product Revenues
The $23.8 million decreasethe contribution rate that had been reduced in product revenues duringthe first half of fiscal year 2017 was2021 in response to COVID-19.
Franchise Rental Income
During fiscal year 2022, franchise rental income increased $3.4 million, or 2.7%, primarily due to a higher average franchise salon count.
Company-owned Salon Revenue
During fiscal year 2022, company-owned salon revenue decreased $122.8 million, or 85.9%, due to the decrease in same-store product sales of 3.4%, the 2017 Net Salon Count Changes and foreign currency fluctuations. The decrease in same-store product sales was primarilycompany-owned salons as a result of the sale of salons to franchisees and salon closures, a 4.8% decrease in same-store transactions, partly offset by a 1.4% increase in average ticket price.
The $3.6 million decreasedecline in product revenues duringsales, and exiting our third-party logistic revenue associated with the closure of our warehouses in fiscal year 2016 was primarily due to the 2016 Net Salon Count Changes and foreign currency fluctuations, partly offset by the increase in same-store product sales of 1.3%. The increase in same-store product sales was primarily a result of a 2.0% increase in same-store transactions, offset by a 0.7% decrease in average ticket price.
The $8.2 million decrease in product revenues during fiscal year 2015 was primarily due to the 2015 Net Salon Count Changes. Same-store product sales were flat primarily a result of a 1.7% increase in same-store transactions, offset by a 1.7% decrease in average ticket price.
Royalties and Fees
The $0.8, $2.9, and $3.8 million increases in royalties and fees during fiscal years 2017, 2016 and 2015, respectively, were due to increases in franchised locations of 150, 172 and 145, respectively, and same-store sales increases at franchised locations.
Cost of Service
The 140 basis point increase in cost of service as a percent of service revenues during fiscal year 2017 was primarily due to state minimum wage increases, unfavorable stylist productivity, a one-time inventory expense related to salon tools and a non-recurring rebate in the prior year, partly offset by mix improvement from closing underperforming salons, lower incentives expense and favorable usage rates versus the prior year.
The 90 basis point increase in cost of service as a percent of service revenues during fiscal year 2016 was primarily due to minimum wage increases, unfavorable stylist productivity, higher health insurance costs and mix shifts to more costly color services, partly offset by mix improvement from closing underperforming salons.
The 50 basis point increase in cost of service as a percent of service revenues during fiscal year 2015 was primarily due to state minimum wage increases, higher field incentives as the Company anniversaries an incentive-lite year and the lapping of a prior year rebate, partly offset by improved stylist productivity and a decrease in healthcare costs.2022.
Cost of Product Sales to Franchisees
The 40 basis point decrease in cost of product as a percent of product revenues during fiscal year 2017 was primarily from the closure of salons with higher product costs as a percent of product revenues and favorable shrink rates versus the prior year.
The 203,800 basis point increase in cost of product as a percent of product revenuesrevenue during fiscal year 2016 was primarily from increased promotions, partly offset by the closure of salons with higher product costs as a percent of product revenues.
The 60 basis point decrease in cost of product as a percent of product revenues during fiscal year 2015 was primarily the result of improved salon-level inventory management and compliance, closure of salons with higher product costs as a percent of product revenues and lapping of an inventory write-down in the prior year. These were partly offset by increased promotional activity and lapping of vendor rebates in the prior year.
Site Operating Expenses
Site operating expenses decreased $14.5 million during fiscal year 2017 primarily due to store closures, mainly within our North American Value and Premium segments, lower self-insurance costs and cost savings associated with salon telecom costs.
Site operating expenses decreased $9.5 million during fiscal year 2016 primarily due to store closures, mainly within our North American Value and Premium segments, cost savings associated with salon telecom costs, reduced marketing expenses, lower self-insurance costs and foreign currency, partly offset by the lapping of a sales and use tax refund in the prior year.
Site operating expenses decreased $11.0 million during fiscal year 2015 primarily due to store closures, mainly within our North American Value and Premium segments, lower self-insurance reserves, reduced marketing expenses, a sales and use tax refund and cost savings.
General and Administrative
General and administrative expense (G&A) declined $3.5 million during fiscal year 2017. This decrease was primarily driven by lower incentive compensation and cost savings, partly offset by severance related to the termination of former executive officers including the Company's Chief Executive Officer and higher professional fees.
G&A declined $8.0 million during fiscal year 2016. This decrease was primarily driven by reduced incentive compensation, cost savings, a gain on life insurance proceeds and foreign currency, partly offset by planned strategic investments in Technical Education, higher legal fees and financing arrangement modification fees.
G&A increased $13.3 million during fiscal year 2015. This increase was primarily driven by higher incentive compensation levels as the Company anniversaries an incentive-lite year, planned strategic investments in Asset Protection and
Human Resource initiatives and the lapping of a favorable deferred compensation adjustment within our Corporate segment. These items were partly offset by cost savings and reduced legal and professional fees.
Rent
Rent expense decreased by $18.0 million during fiscal year 2017 primarily due to salon closures, primarily within our North American Value and Premium segments and foreign currency fluctuations, partly offset by rent inflation and lease termination fees.
Rent expense decreased by $11.9 million during fiscal year 2016 primarily due to salon closures, primarily within our North American Value and Premium segments and foreign currency fluctuations, partly offset by rent inflation.
Rent expense decreased by $13.1 million during fiscal year 2015 primarily due to salon closures, primarily within our North American Value and Premium segments and foreign currency fluctuations, partly offset by rent inflation.
Depreciation and Amortization
Depreciation and amortization expense (D&A) decreased $1.1 million during fiscal year 2017, primarily driven by lower depreciation expense on a reduced salon base, partly offset by increased fixed asset impairment charges.
D&A decreased $15.4 million during fiscal year 2016, primarily driven by lower depreciation expense on a reduced salon base and reduced fixed asset impairment charges.
D&A decreased $16.9 million during fiscal year 2015, primarily driven by lower depreciation expense on a reduced salon base and reduced fixed asset impairment charges.
Interest Expense
Interest expense decreased by $0.6 million during fiscal year 2017 primarily due to reduced commitment fee amortization resulting from the senior term note modification and the revolving credit facility amendment in fiscal year 2016.
Interest expense decreased by $0.9 million during fiscal year 2016 primarily due to the lapping of prior year interest for the $172.5 million convertible senior notes settled in July 2014.
Interest expense decreased by $12.1 million during fiscal year 2015 primarily due to the settlement of the $172.5 million convertible senior notes in July 2014, partly offset by interest on the $120.0 million Senior Term Notes issued in November 2013.
Interest Income and Other, net
Interest income and other, net decreased $1.1 million during fiscal year 2017 primarily due to prior year gains on re-franchised salon assets sold, lower foreign currency gains and lapping a prior year insurance recovery.
Interest income and other, net increased $2.5 million during fiscal year 2016 primarily due to lapping a prior year foreign currency loss and an insurance recovery.
Interest income and other, net was flat during fiscal year 2015 compared to the prior year period.
Income Taxes
During fiscal year 2017, the Company recognized income tax expense of $9.2 million on $6.8 million of loss from continuing operations before income taxes and equity in loss of affiliated companies. The recorded tax expense for fiscal year 2017 is different than would normally be expected primarily due to the impact of the valuation allowance against the majority of our deferred tax assets. Approximately $7.7 million of the tax expense relates to non-cash tax expense for tax benefits on certain indefinite-lived assets that the Company cannot recognize for reporting purposes. This non-cash tax expense will continue as long as we have a valuation allowance in place.
During fiscal year 2016, the Company recognized income tax expense of $9.0 million on $12.5 million of income from continuing operations before income taxes and equity in loss of affiliated companies. The recorded tax expense for fiscal year 2016 is different than would normally be expected primarily due to the impact of the valuation allowance against the majority of our deferred tax assets. Approximately $7.9 million of the tax expense relates to non-cash tax expense for tax benefits on certain indefinite-lived assets that the Company cannot recognize for reporting purposes. This non-cash tax expense will continue as long as we have a valuation allowance in place.
During fiscal year 2015, the Company recognized income tax expense of $14.6 million on $5.0 million of loss from continuing operations before income taxes and equity in loss of affiliated companies. The recorded tax expense for fiscal year 2015 is different than would be expected primarily due to the establishment of a $2.1 million valuation allowance against the majority of the Canadian deferred tax assets and $8.9 million non-cash tax expense relating to tax benefits on certain indefinite-lived assets that the Company cannot recognize for reporting purposes.
The Company is currently paying taxes in Canada and certain states in which it has profitable entities.
Equity in Loss of Affiliated Companies, Net of Income Taxes
The loss in affiliated companies, net of income taxes, was $0.1 million for fiscal year 2017.
The loss in affiliated companies, net of income taxes, of $14.8 million for fiscal year 2016 was due to the Company recording a $13.0 million other than temporary non-cash impairment charge and EEG's net loss of $1.8 million. See Note 4 to the Consolidated Financial Statements.
The loss in affiliated companies, net of income taxes, of $13.6 million for fiscal year 20152022 was primarily due to the Company recording its portion of EEG's non-cash deferred tax asset valuation allowance ($6.9 million) and EEG's net loss ($2.0 million), plus other than temporary non-cash impairment charges ($4.7 million). See Note 4reducing prices to the Consolidated Financial Statements.liquidate distribution center inventory.
(Loss) Income from Discontinued Operations, Net of Income TaxesInventory Reserve
During fiscal year 2015,2022, the Company recognized $0.6recorded an inventory reserve charge of $7.7 million related to distribution center inventory, primarily consisting of legalpersonal protective equipment the Company no longer believes is marketable. During fiscal year 2021, the Company recorded an inventory reserve charge of $12.1 million, which was included in company-owned salon expense in connection with our distribution center exit strategy.
General and Administrative
The decrease of $31.1 million, or 32.3%, in general and administrative expense during fiscal year 2022 was primarily due to lower administrative and field management compensation resulting from headcount reductions and a decrease in expenses associated with the Trade Secretdistribution centers closed in fiscal year 2022.
Rent
The decrease of $31.4 million, or 77.0%, in rent expense during fiscal year 2022 was primarily due to the net reduction in the number of company-owned salons. Additionally in fiscal year 2022, the Company accrued less rent deemed uncollectible from franchisees. Partially offsetting the decrease was a $0.9 million broker fee incurred in fiscal year 2022 related to exiting the Company's distribution centers.
Advertising Fund Expense
Advertising fund expense increased $10.6 million, or 48.2%, during fiscal year 2022, primarily due to a higher average franchise salon concept.count in fiscal year 2022 and system-wide sales and an increase in the contribution rate that had been reduced in the first half of fiscal year 2021 in response to COVID-19.
Franchise Rent Expense
During fiscal year 2022, franchise rent expense increased $3.4 million, or 2.7%, primarily due to a higher average franchise salon count.
Company-owned Salon Expense
Company-owned salon expense decreased $119.2 million, or 84.4%, during fiscal year 2022, primarily due to the reduction in company-owned salons, a reduction in the inventory reserve charge and a decline in product sales.
Depreciation and Amortization
The decrease of $15.5 million, or 71.4%, in depreciation and amortization during fiscal year 2022 was primarily due to the net reduction in company-owned salon count and no depreciation expense in fiscal year 2022 related to the distribution center assets that were derecognized in fiscal year 2021.
Long-Lived Asset Impairment
In fiscal year 2022, the Company recorded a long-lived asset impairment charge of $0.5 million, which represents a right of use (ROU) asset impairment charge of $0.5 million. In fiscal year 2021, the Company recorded a long-lived asset impairment charge of $13.0 million, which included a ROU asset impairment of $9.5 million. The decrease in long-lived asset impairment was primarily due to more salon ROU assets being impaired in prior periods.
Goodwill Impairment
During fiscal year 2022, the Company recorded a goodwill impairment charge of $13.1 million. See Note 1 to the Consolidated Financial Statements.Statements in Part II, Item 8, of this Form 10-K.
Interest Expense
The $0.3 million decrease in interest expense during fiscal year 2022 was primarily due to interest incurred in fiscal year 2021 related to the financing liabilities associated with our sale leasebacks. Interest expense is expected to increase in fiscal year 2023 as fees related to the credit amendment signed in the first quarter of 2023 are amortized as interest expense over the new term of the credit agreement. Additionally, under the terms of the amended credit agreement, we expect interest expense to increase in the fourth quarter of fiscal year 2023.
Loss from Sale of Salon Assets to Franchisees, net
The $14.4 million decrease in the loss from the sale of salon assets to franchises, net during fiscal year 2022 was primarily due to fewer salons sold in fiscal year 2022.
Interest Income and Other, net
The decrease of $16.2 million in interest income and other, net during fiscal year 2022 was primarily due to the $15.0 million gain associated with the leases for the Company's distribution centers that was recognized in fiscal year 2021.
Income Tax (Expense) Benefit
During fiscal year 2022, the Company recognized tax expense of $(2.0) million, with a corresponding effective tax rate of (4.5)%, compared to recognizing a tax benefit of $5.4 million, with a corresponding effective tax rate of 5.0% during fiscal year 2021. See Note 10 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K.
Loss from Discontinued Operations, net of Income Taxes
In fiscal year 2022, the loss from discontinued operations includes the loss from the sale of OSP, including goodwill derecognition of $38.4 million, partially offset by proceeds from the sale. In fiscal year 2021, loss from discontinued operations includes the income generated from OSP software subscriptions. See Note 3 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K. In fiscal year 2023, we expect to record gains relate to discontinued operations as we receive cash related to the release of holdbacks of the purchase price in connection with the sale of OSP.
Results of Operations by Segment
Based on our internal management structure, we report fourtwo segments: North American Value, North American Franchise North American Premiumsalons and InternationalCompany-owned salons. See Note 1315 to the Consolidated Financial Statements.Statements in Part II, Item 8, of this Form 10-K. Significant results of continuing operations are discussed below with respect to each of these segments.
North American ValueFranchise Salons | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Years |
| | 2022 | | 2021 | | | | 2022 | | |
| | | | | | | | | | |
| | (Dollars in millions) | | Increase (Decrease) (1) |
| | | | | | | | | | |
Royalties | | $ | 65.8 | | | $ | 52.4 | | | | | $ | 13.4 | | | |
Fees | | 11.6 | | | 10.2 | | | | | 1.4 | | | |
Product sales to franchisees | | 15.1 | | | 56.7 | | | | | (41.6) | | | |
Advertising fund contributions | | 32.6 | | | 22.0 | | | | | 10.6 | | | |
Franchise rental income | | 130.8 | | | 127.4 | | | | | 3.4 | | | |
Total franchise revenue (1) | | $ | 255.8 | | | $ | 268.7 | | | | | $ | (12.9) | | | |
| | | | | | | | | | |
Franchise same-store sales (2) | | 15.0 | % | | (24.5) | % | | | | | | |
| | | | | | | | | | |
Operating loss | | $ | (11.8) | | | $ | (24.6) | | | | | $ | 12.8 | | | |
_______________________________________________________________________________(1)Total is a recalculation; line items calculated individually may not sum to total due to rounding. |
| | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Years |
| 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 |
| (Dollars in millions) | | Increase (Decrease) |
Total revenue | $ | 1,280.4 |
| | $ | 1,316.4 |
| | $ | 1,329.0 |
| | $ | (36.0 | ) | | $ | (12.6 | ) | | $ | (30.5 | ) |
Same-store sales | (0.8 | )% | | 1.3 | % | | 0.3 | % | | (210 bps) |
| | 100 bps |
| | 480 bps |
|
| | | | | | | | | | | |
Operating income | $ | 83.6 |
| | $ | 96.2 |
| | $ | 92.2 |
| | $ | (12.6 | ) | | $ | 3.9 |
| | $ | 3.9 |
|
North American Value Salon Revenues
Decreases in North American Value salon revenues were driven by the following:
|
| | | | | | | | | |
| | Fiscal Years |
Factor | | 2017 | | 2016 | | 2015 |
Same-store sales | | (0.8 | )% | | 1.3 | % | | 0.3 | % |
Closed salons | | (2.8 | ) | | (2.5 | ) | | (2.6 | ) |
New stores and conversions | | 0.5 |
| | 0.7 |
| | 0.7 |
|
Foreign currency | | (0.1 | ) | | (0.9 | ) | | (0.7 | ) |
Other | | 0.5 |
| | 0.5 |
| | 0.1 |
|
| | (2.7 | )% | | (0.9 | )% | | (2.2 | )% |
North American Value salon revenues decreased $36.0 million(2)Franchise same-store sales in fiscal year 20172022 and 2021 are calculated as the total change in sales for franchise locations that were open on a specific day of the week during the current period and the corresponding prior period. Year-to-date franchise same-store sales are the sum of the franchise same-store sales computed on a daily basis. Franchise salons that do not report daily sales are excluded from same-store sales. Franchise same-store sales are calculated in local currencies to remove foreign currency fluctuations from the calculation.
Fiscal Year Ended June 30, 2022 Compared with Fiscal Year Ended June 30, 2021
Franchise Revenues
Franchise revenues decreased $12.9 million during fiscal year 2022. The decrease in franchise revenue was primarily due to the closure of 276 salons, the sale of 94 company-owned salons (net of buybacks)decrease in product sales to franchisees due to the Company's shift to third-party distributors, partially offset by higher royalties and the 0.8% decrease in same-store sales. The same-store sales decrease wasadvertising fund contributions due to a 4.8% decrease in same-store guest visits, partly offset by a 4.0%higher average salon count and increase in average ticket price. Partly offsetting the decrease was revenue growth from construction (net of relocations) of 39 salons during fiscal year 2017.
North American Value salon revenues decreased $12.6 million in fiscal year 2016 primarily due to the closure of 137 salons and the sale of 58 company-owned salons (net of buybacks) to franchisees. Partly offsetting the decrease was the same-store sales increase of 1.3% and revenue growth from construction (net of relocations) of 57 salons during fiscal year 2016. The same-store sales increase was due to a 3.8% increase in average ticket price, partly offset by a 2.5% decrease in same-store guest visits.
North American Value salon revenues decreased $30.5 million in fiscal year 2015 primarily due to the closure of 192 salons and the sale of 77 company-owned salons (net of buybacks) to franchisees. Partly offsetting the decrease was revenue growth from construction (net of relocations) of 76 salons during fiscal year 2015 and the same-store sales increase of 0.3%. The same-store sales increase was due to a 1.8% increase in average ticket price, partly offset by a 1.5% decrease in same-store guest visits.
North American Value Salon Operating Income
North American Value salon operating income decreased $12.6 million during fiscal year 2017 primarily due to minimum wage increases, unfavorable stylist productivity, same-store sales declines and a one-time inventory expense related to salon tools, partly offset by the closure of underperforming salons.
North American Value salon operating income increased $3.9 million during fiscal year 2016 primarily due to the closure of underperforming salons, same-store sales increases, cost savings associated with salon telecom and utilities costs and reduced marketing expenses, partly offset by minimum wage increases and unfavorable stylist productivity.
North American Value salon operating income increased $3.9 million during fiscal year 2015 primarily due to the closure of underperforming salons, lower self-insurance costs, reduced fixed asset impairment charges, reduced marketing expenses, same-store sales increases and a sales and use tax refund, partly offset by minimum wage increases.
North American Franchise Salons
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Years |
| 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 |
| (Dollars in millions) | | Increase (Decrease) |
North American Franchise salons: | | | | | | | | | | | |
Product | $ | 30.5 |
| | $ | 31.4 |
| | $ | 29.8 |
| | $ | (0.9 | ) | | $ | 1.7 |
| | $ | 0.1 |
|
Royalties and fees | 48.0 |
| | 47.5 |
| | 44.6 |
| | 0.5 |
| | 2.9 |
| | 3.8 |
|
Total North American Franchise salons | $ | 78.5 |
| | $ | 78.9 |
| | $ | 74.4 |
| | $ | (0.4 | ) | | $ | 4.5 |
| | $ | 3.8 |
|
| | | | | | | | | | | |
Operating income | $ | 34.2 |
| | $ | 33.8 |
| | $ | 30.4 |
| | $ | 0.3 |
| | $ | 3.5 |
| | $ | 0.9 |
|
North American Franchise Salon Revenues
North American Franchise salon revenues decreased $0.4 million during fiscal year 2017 due to a $0.9 million decrease in franchise product sales, partly offset by a $0.5 million increase in royalties and fees. The increase in royalties and fees was primarily due to mix of franchisees opening salons in fiscal year 2017, which shifted to existing franchisees, who pay lower fees for opening additional salons and lapping franchise termination revenue, mostly offset by higher royalties.system-wide sales. During fiscal year 2017,2022, franchisees purchased 110 salons from the Company and constructed (net of relocations) and closed 13821 and 93 franchise-owned299 franchise salons, respectively, duringrespectively.
Franchise Operating Loss
During fiscal year 20172022, franchise salon operations generated operating losses of $11.8 million, and purchased (netgenerated an operating loss of Company buybacks) 92 salons from the Company during the same period.
North American Franchise salon revenues increased $4.5$24.6 million during fiscal year 2016 due to a $1.7 million increase in franchise product sales and a $2.9 million increase in royalties and fees. Both of these increases are due to increased franchised locations as2021. The operating loss improved during fiscal year 2016, franchisees constructed (net of relocations) and closed 170 and 56 franchise-owned salons, respectively, and purchased (net of Company buybacks) 58 salons from2022 compared to the Company during the same period. In addition, the higher royalties are due to positive same-store sales by the franchisees.
North American Franchise salon revenues increased $3.8 million during fiscal year 2015 due to a $0.1 million increase in franchise product sales and a $3.8 million increase in royalties and fees. The increase in royalties is due to an increase in franchised locations and positive same-store sales by the franchisees during the fiscal year 2015. Franchisees constructed (net of relocations) and closed 140 and 72 franchise-owned salons, respectively, during fiscal year 2015 and purchased (net of Company buybacks) 77 salons from the Company during the same period. The higher franchise fees are alsoprior comparable period due to the increase in franchised locations.royalties and decrease in general and administrative expense and rent, partially offset by the $13.1 million goodwill impairment charge.
Company-owned Salons
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Years |
| | 2022 | | 2021 | | | | 2022 | | |
| | | | | | | | | | |
| | (Dollars in millions) | | | | (Decrease) Increase (1) |
| | | | | | | | | | |
Total revenue | | $ | 20.2 | | | $ | 143.0 | | | | | $ | (122.8) | | | |
Operating loss | | $ | (9.5) | | | $ | (70.0) | | | | | $ | 60.5 | | | |
Total company-owned salons | | 105 | | | 276 | | | | | | | |
_______________________________________________________________________________(1)Total is a recalculation; line items calculated individually may not sum to total due to rounding.
Fiscal Year Ended June 30, 2022 Compared with Fiscal Year Ended June 30, 2021
Company-owned Salon Operating IncomeRevenues
North American FranchiseCompany-owned salon operating income increased $0.3revenues decreased $122.8 million duringin fiscal year 20172022, primarily due to the lower bad debt expense and higher margins on product sales due to mix, partly offset by higher incentive costs.2022 Net Salon Count Changes.
Company-owned Salon Operating Loss
North American FranchiseDuring fiscal year 2022, company-owned salon operating income increased $3.5loss improved $60.5 million, compared to the prior comparable period. The improvement in the loss during fiscal year 2016 primarily due to the increased number of franchised locations and same-store sales increases at franchised locations.
North American Franchise salon operating income increased $0.9 million during fiscal year 2015 primarily due to the increased number of franchised locations and same-store sales increases at franchised locations.
North American Franchise Cash Generated from Re-Franchised Salons
During fiscal year 2017, 2016 and 2015, North American Franchise salons generated $2.3, $1.7 and $3.0 million, respectively, of cash from re-franchising salons (the sale of company-owned salons to franchisees).
North American Premium Salons
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Years |
| 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 |
| (Dollars in millions) | | Increase (Decrease) |
Total revenue | $ | 241.5 |
| | $ | 283.4 |
| | $ | 309.6 |
| | $ | (41.9 | ) | | $ | (26.2 | ) | | $ | (24.3 | ) |
Same-store sales | (5.9 | )% | | (3.8 | )% | | (3.0 | )% | | (210 bps) |
| | (80 bps) |
| | 370 bps |
|
| | | | | | | | | | | |
Operating loss | $ | (18.3 | ) | | $ | (12.8 | ) | | $ | (14.2 | ) | | $ | (5.5 | ) | | $ | 1.4 |
| | $ | 32.1 |
|
North American Premium Salon Revenues
Decreases in North American Premium salon revenues were driven by the following:
|
| | | | | | | | | |
| | Fiscal Years |
Factor | | 2017 | | 2016 | | 2015 |
Same-store sales | | (5.9 | )% | | (3.8 | )% | | (3.0 | )% |
Closed salons | | (7.3 | ) | | (3.8 | ) | | (3.5 | ) |
Foreign currency | | — |
| | (0.7 | ) | | (0.6 | ) |
Other | | (1.6 | ) | | (0.1 | ) | | (0.2 | ) |
| | (14.8 | )% | | (8.4 | )% | | (7.3 | )% |
North American Premium revenues decreased $41.9 million during fiscal year 2017 primarily due to the closure of 135 salons and the same-store sales decrease of 5.9%. The same-store sales decrease2022 was due to a 9.6% decrease in same-store guest visits, partly offset by a 3.7% increase in average ticket price.
North American Premium revenues decreased $26.2 million during fiscal year 2016 primarily due to the closure of 67 salons and the same-store sales decrease of 3.8%. The same-store sales decrease of 3.8% was due to a 6.5% decrease in same-store guest visits, partly offset by a 2.7% increase in average ticket price.
North American Premium revenues decreased $24.3 million during fiscal year 2015 primarily due to the closure of 55 salons and the same-store sales decrease of 3.0%. The same-store sales decrease was due to a 5.2% decrease in same-store guest visits, partly offset by a 2.2% increase in average ticket price.
North American Premium Salon Operating Loss
North American Premium salon operating loss increased $5.5 million during fiscal year 2017 primarily due to same-store sales declines and unfavorable stylist productivity, partly offset by the closure of underperforming salons.
North American Premium salon operating loss decreased $1.4 million during fiscal year 2016 primarily due to the closure of underperforming salons and reduced fixed asset impairment charges, partly offset by same-store sales declines and unfavorable stylist productivity.
North American Premium salon operating loss decreased $32.1 million during fiscal year 2015 primarily due to a goodwill impairment charge recorded in fiscal year 2014 and the closure of underperforming salons, partly offset by same-store sales declines.
International Salons
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Years |
| 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 |
| (Dollars in millions) | | Increase (Decrease) |
Total revenue | $ | 91.5 |
| | $ | 112.1 |
| | $ | 124.3 |
| | $ | (20.6 | ) | | $ | (12.2 | ) | | $ | (4.2 | ) |
Same-store sales | (5.7 | )% | | (2.3 | )% | | 0.6 | % | | (340 bps) |
| | (290 bps) |
| | 210 bps |
|
| | | | | | | | | | | |
Operating (loss) income | $ | (1.9 | ) | | $ | (1.9 | ) | | $ | 0.3 |
| | $ | — |
| | $ | (2.2 | ) | | $ | 3.4 |
|
International Salon Revenues
Decreases in International salon revenues were driven by the following:
|
| | | | | | | | | |
| | Fiscal Years |
Factor | | 2017 | | 2016 | | 2015 |
Same-store sales | | (5.7 | )% | | (2.3 | )% | | 0.6 | % |
Closed salons | | (5.2 | ) | | (4.2 | ) | | (3.1 | ) |
New stores and conversions | | 1.4 |
| | 0.8 |
| | 1.5 |
|
Foreign currency | | (12.5 | ) | | (5.4 | ) | | (3.3 | ) |
Other | | 3.6 |
| | 1.3 |
| | 1.0 |
|
| | (18.4 | )% | | (9.8 | )% | | (3.3 | )% |
International salon revenues decreased $20.6 million during fiscal year 2017 primarily due to foreign currency translation, the same-store sales decrease of 5.7% and the closure of 50 salons. This decrease was partly offset by growth from construction (net of relocations) of 10 salons during fiscal year 2017. The same-store sales decrease was due to a 6.7% decrease in same-store guest visits, partly offset by a 1.0% increase in average ticket price.
International salon revenues decreased $12.2 million during fiscal year 2016 primarily due to foreign currency translation, the closure of 37 salons and the same-store sales decrease of 2.3%. This decrease was partly offset by growth from the construction (net of relocations) of 9 salons during fiscal year 2016. The same-store sales decrease was due to a 2.9% decrease in same-store guest visits, partly offset by a 0.6% increase in average ticket price.
International salon revenues decreased $4.2 million during fiscal year 2015 primarily due to foreign currency translation and the closure of 19 salons. This decrease was partly offset by growth from the construction (net of relocations) of 15 salons and the same-store sales increase of 0.6%. The same-store sales increase was due to a 2.9% increase in average ticket price, partly offset by a 2.3% decrease in same-store guest visits.
International Salon Operating (Loss) Income
International salon operating loss was flat during fiscal year 2017 primarily due to negative leverage on fixed payroll costs due to decreased same-store sales, offset by a net reduction in salon counts.
International salon operating loss increased $2.2 million during fiscal year 2016 primarily due to negative leverage on fixed payroll costs due to decreased same-store sales, partly offset by a net reduction in salon counts.
International salon operating income increased $3.4 million during fiscal year 2015 primarily due to the closure of unprofitable salons, same-store sales increases and reduced fixed asset impairment charges, partly offset by negative leverage on fixed payroll costs.
Corporate
Corporate Operating Loss
Corporate operating loss increased $0.9 million during fiscal year 2017 primarily driven by severance related to the termination of former executive officers including the Company's Chief Executive Officer, expense associated with legal settlements and higher professional fees, partly offset by lower incentive compensation and cost savings.
Corporate operating loss decreased $7.4 million during fiscal year 2016 primarily due to reduced incentive compensation, cost savings,general and administrative expense primarily related to salaries, a gain on life insurance proceeds, partly offset by salaries expense, higher legal fees and financing arrangement modification fees.
Corporate operating loss increased $1.8 million during fiscal year 2015 primarily due to higher incentive compensation levels as the Company anniversaried an incentive-lite year, salaries expensedecrease in long-lived asset impairment and the lappingexiting of a favorable deferred compensation adjustment. These items were partly offset by cost savings, reduced legal and professional fees and lower depreciation on corporate assets.
Recent Developments
Operating and Reportable Segments
Historically,loss-generating company-owned salons. We expect losses associated with the Company has had three operating segments: North American Value, North American Premium, and International.
Duringcompany-owned segment to decrease as we reduce the fourth quarter of fiscal year 2017, the Company redefined its operating segments to reflect how the chief operating decision maker now evaluates the business as a result of a number of factors, including the increased focus on the franchise business and appointing a President of Franchise in April 2017. The Company now reports its operations in four operating segments: North American Value, North American Franchise, North American Premium and International.remaining salons through closures or lease buyouts.
Recent Accounting Pronouncements
Recent accounting pronouncements are discussed in Note 1 to the Consolidated Financial Statements.Statements in Part II, Item 8, of this Form 10-K.
LIQUIDITY AND CAPITAL RESOURCES
In August 2022, the Company reached an agreement to amend its credit agreement and extend the maturity to August 2025 from March 2023. Under the amendment, the revolving credit facility was converted to a $180.0 million term loan and $55.0 million revolving credit facility with the minimum liquidity covenant reduced to $10.0 million from $75.0 million. The amended credit agreement includes typical provisions and financial covenants, including minimum EBITDA, leverage and fixed-charge coverage ratio covenants, the latter two of which are not tested until December 31, 2023. See additional discussion under Financing Arrangements and Note 8 and Note 16 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K.
Sources of Liquidity
Funds generated by operating activities, available cash and cash equivalents and our borrowing agreements are our most significant sources of liquidity. The Company believes it has sufficient liquidity, cash on hand and borrowing capacity, to meet its obligations in the next twelve months and beyond.
As of June 30, 2017,2022, cash and cash equivalents were $172.4$17.0 million, with $156.0, $12.2$14.9 and $4.2$2.1 million inwithin the U.S.,United States and Canada, and Europe, respectively.
TheAs of June 30, 2022, the Company's borrowing agreementsarrangements include $123.0a $277.5 million 5.5% senior notes due December 2019 (Senior Term Notes) and a $200.0 million five-year unsecured revolving credit facility that expires in March 2023, of which $81.9 million was available as of June 2018.30, 2022. The Company's liquidity per the agreement includes the unused available balance under the credit facility, unrestricted cash and cash equivalents and the shortfall in the gap in expected proceeds from the sale of salon assets of $20.9 million as of June 30, 2022. Total liquidity per the agreement was $119.8 million compared to a minimum liquidity covenant of $75.0 million as of June 30, 2022. See additional discussion under Financing Arrangements.Arrangements and Notes 8 and 16 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K.
Additionally, on February 3, 2021, the Company filed a $150 million shelf registration and $50 million prospectus supplement with the Securities and Exchange Commission under which it may offer and sell, from time to time, up to $50 million worth of its common stock in "at-the-market" offerings. Net proceeds from sales of shares under the "at-the-market" program, if any, may be used to, among other things, fund working capital requirements, repay debt and support of our brands and franchisees. The timing and amount of sales of shares, if any, will depend on a variety of factors, including prevailing market conditions, the trading price of shares, and other factors as determined by the Company. During fiscal year 2022, the Company issued 9.3 million shares and received net proceeds of $37.2 million.
Uses of Cash
The Company closely manages its liquidity and capital resources. The Company's liquidity requirements depend on key variables, including the performance of the business, the level of investment needed to support its business strategies, capital expenditures, credit facilities and borrowing arrangements and working capital management. Capital expenditures are a component of the Company's cash flow and capital management strategy, which can be adjusted in response to economic and other changes in the Company's business environment. The Company has a disciplined approach to capital allocation, policy thatwhich focuses on threeinvesting in key principles. These principles focus on preserving a strong balance sheet and enhancing operating flexibility, preventing unnecessary dilution sopriorities to support the benefitsCompany's strategic plan as discussed within Part I, Item 1.
Cash Requirements
The Company's most significant contractual cash requirements as of future value accrue to shareholders and deploying capitalJune 30, 2022 were lease commitments. See Note 6 to the highestConsolidated Financial Statements in Part II, Item 8, of this Form 10-K for further detail. Additionally, the Company is committed to purchasing $1.8 million of Designline inventory in the first quarter of fiscal year 2023. This inventory will be sold to our third-party supplier and best use by optimizing the tradeoff between risk and after-tax returns.customers.
Cash Flows
Cash Flows from Operating Activities
FiscalDuring fiscal year 20172022, cash provided byused in operating activities of $60.1 million increased by $4.3 million compared to the previous fiscal year largely due to lower inventory levelswas $38.6 million. Cash used in fiscal year 2017, partly offset by lower earnings.
Fiscal year 2016 cash provided by operating activities of $55.8 million decreased by $39.0 million compared to the previous fiscal year largelyoperations improved due to higher inventory levels inroyalties, lower general and administrative expense, lower rent and the exiting of loss-generating company-owned salons. These improvements were partially offset by $2.5 million of social security contributions that had been deferred under the CARES Act and $3.6 million of costs related to our debt refinancing. Quarter-over-quarter cash use improved throughout fiscal year 2016, enhanced incentive payouts2022. Cash used in operating activities was $12.3, $12.1, $10.0 and $4.3 million in the first, second, third and fourth quarters, respectively. We expect cash use in first quarter of fiscal year 2016 and lower income tax refunds.
Fiscal year 2015 cash provided by operating activities of $94.7 million decreased by $22.7 million compared2023 to the previous fiscal year, primarily as a result of a $12.0 million decrease in working capital primarilyincrease due to lapping fiscal year 2014 income tax refundsapproximately $5.0 million of costs paid in connection with the credit amendment and lower earnings.approximately $2.8 million of bonus payments.
Cash Flows from Investing Activities
Cash used inDuring fiscal year 2022, cash provided by investing activities during fiscal year 2017 of $29.1$7.7 million was more than the $17.4primarily related to cash received of $13.0 million used in fiscal year 2016. In fiscal year 2017, cash used in investing activities was primarily for capital expenditures of $33.8 million, partly offset by cash proceeds from sale of salon assets of $2.3 million, a reduction in restricted cash of $1.1 million, cash proceeds from company-owned life insurance policies of $0.9 million and cash proceeds from the sale of OSP, partially offset by capital expenditures primarily related to developing the Company's ownership interest in MyStyleOSP software. In the first quarter of $0.5 million.
Cash used in investing activities during fiscal year 20162023, we expect to receive approximately $4 million related to the release of $17.4 million was less thanpurchase price holdbacks in connection with the $35.6 million usedsale of OSP. Additionally, due to the sale of OSP, we expect capital expenditures to decrease in fiscal year 2015. In fiscal year 2016, we used $31.1 million for capital expenditures, partly offset by a reduction in restricted cash of $9.0 million, cash proceeds from company-owned life insurance policies of $2.9 million and cash proceeds from sale of salon assets of $1.7 million.
Cash used in investing activities during fiscal year 2015 of $35.6 million was less than the $44.4 million used in fiscal year 2014. In fiscal year 2015, we used $38.3 million for capital expenditures, partly offset by cash proceeds from sale of salon assets of $3.0 million.2023.
Cash Flows from Financing Activities
During fiscal year 2017,2022, cash used inprovided by financing activities of $6.8$29.4 million was for employee taxes paid for shares withheldprimarily a result of $3.7net proceeds of $37.2 million and settlement of equity awards of $3.2 million.
During fiscal year 2016, cash used in financing activities of $102.6 million was for repurchasesrelated to the issuance of common stock and a net $6.9 million paydown on the Company's revolving credit facility. The additional purchase price of $101.0approximately $4 million expected to be received in the purchasefirst quarter of an additional 24% ownership interest in Roosters MGC International, LLC for $0.8 million, and employee taxes paid for shares withheld of $0.8 million.
During fiscal year 2015, cash2023 will be used in financing activitiesto repay the term loan as required by the credit agreement.
Financing Arrangements
Financing activities are discussed in Note 68 and Note 16 to the Consolidated Financial Statements.Statements in Part II, Item 8, of this Form 10-K. Derivative activities are discussed in Part II, Item 7A, "Quantitative and Qualitative Disclosures about Market Risk."
The Company's financing arrangements consist of the following: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | June 30, |
| | Maturity Dates | | 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | | | | |
| | (Fiscal year) | | (Interest rate %) | | (Dollars in thousands) |
| | | | | | | | | | |
Revolving credit facility | | 2023 | | 5.50% | | 5.00% | | $ | 179,994 | | | $ | 186,911 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
|
| | | | | | | | | | | | | | |
| | | | Interest rate % | | | | |
| | | | Fiscal Years | | June 30, |
| | Maturity Dates | | 2017 | | 2016 | | 2017 | | 2016 |
| | (fiscal year) | | | | | | (Dollars in thousands) |
Senior Term Notes, net | | 2020 | | 5.50% | | 5.50% | | $ | 120,599 |
| | $ | 119,606 |
|
Revolving credit facility | | 2018 | | — | | — | | — |
| | — |
|
| | | | | | | | $ | 120,599 |
| | $ | 119,606 |
|
In December 2015,As of June 30, 2022 and 2021, the Company exchanged its $120.0had $180.0 and $186.9 million, 5.75% senior notes due December 2017 for $123.0 million 5.5% senior notes due December 2019. The Senior Term Notes were issued at a $3.0 million discount which is being amortized to interest expense over the termrespectively, of the notes. Interest on the Senior Term Notes is payable semi-annually in arrears on June 1 and December 1 of each year. The Senior Term Notes are unsecured and not guaranteed by any of the Company's subsidiaries or any third parties.
In January 2016, the Company amendedoutstanding borrowings under its revolving credit facility primarily reducing the borrowing capacity from $400.0 to $200.0 million.facility. The five-year revolving credit facility expires in June 2018March 2023 and includes among other things, a maximum leverage ratio covenant, a minimum fixed charge coverage ratioliquidity covenant of $75.0 million, provides the Company's lenders security in substantially all of the Company's assets, adds additional guarantors, and certain restrictions on liens,grants a first priority lien and security interest to the lenders in substantially all of the Company's and the guarantors' existing and future property. Total liquidity per the agreement was $119.8 million as of June 30, 2022. See Note 8 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K. The revolving credit facility includes a $30.0 million sub-facility for the issuance of letters of credit and other indebtedness.a $30.0 million sublimit for swingline loans. The Company may request an increase in revolving credit commitments under the facility of up to $200.0$115.0 million under certain circumstances. Events of default underThe applicable margin for loans bearing interest at the Credit Agreement include a change of controlSecured Overnight Financing Rate (SOFR) ranges from 3.75%-4.25%, the applicable margin for loans bearing interest at the base rate ranges from 2.75%-3.25%, and the facility fee ranges from 0.5%-0.75%, each depending on average utilization of the Company.revolving line of credit.
In August 2022, the Company amended its credit agreement. Under the amendment, the revolving credit facility was converted to a $180.0 million term loan and $55.0 million revolving credit facility. The amendment also extends the maturity date to August 31, 2025 and includes, among other things, financial covenants, including minimum EBITDA, leverage and fixed charge coverage ratios and a minimum liquidity covenant which was reduced from $75.0 million to $10.0 million. The amendment also eliminates the $115.0 million incremental loan facility. See additional discussion in Note 16 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K.
Our debt to capitalization ratio, calculated as the principal amount of debt as a percentage of the principal amount of debt and shareholders' (deficit) equity at fiscal year-end, was as follows: | | | | | | | | | | | | |
As of June 30, | | Debt to Capitalization (1) | | | | |
| | | | | | |
2022 | | 120.8 | % | | | | |
2021 | | 91.6 | % | | | | |
| | | | | | |
_______________________________________________________________________________ (1)Excludes the long-term lease liability as that liability is offset by the ROU asset. |
| | | | | | |
As of June 30, | | Debt to Capitalization | | Basis Point Increase (Decrease)(1) |
2017 | | 19.5 | % | | 40 |
|
2016 | | 19.1 |
| | 300 |
|
2015 | | 16.1 |
| | (1,300 | ) |
| |
(1) | Represents the basis point change in debt to capitalization as compared to prior fiscal year-end (June 30). |
The basis point increase in the debt to capitalization ratio as of June 30, 20172022 compared to June 30, 2016 was primarily due to net reductions to shareholders' equity resulting from net losses and foreign currency translation adjustments.
The basis point increase in the debt to capitalization ratio as of June 30, 2016 compared to June 30, 20152021 was primarily due to the repurchase of 7.6 million shares of common stock for $101.0 million.
The basis point improvementdecrease in the debt to capitalization ratioshareholders' (deficit) equity as of June 30, 2015 compared to June 30, 2014 was primarily due to the $173.8 million repayment of long-term debt, which included $172.5 million in settlementa result of the convertible notes. This was partly offset by the repurchaseloss from operations.
Contractual Obligations and Commercial Commitments
The following table reflects a summary of obligations and commitments outstanding by payment date as of June 30, 2017:
|
| | | | | | | | | | | | | | | | | | | | |
| | | | Payments due by period |
Contractual Obligations | | Total | | Within 1 year | | 1 - 3 years | | 3 - 5 years | | More than 5 years |
| | | | (Dollars in thousands) |
On-balance sheet: | | | | | | | | | | |
Debt obligations | | $ | 123,000 |
| | $ | — |
| | $ | 123,000 |
| | $ | — |
| | $ | — |
|
Other long-term liabilities | | 12,687 |
| | 2,972 |
| | 2,473 |
| | 1,505 |
| | 5,737 |
|
Total on-balance sheet | | 135,687 |
| | 2,972 |
| | 125,473 |
| | 1,505 |
| | 5,737 |
|
Off-balance sheet(a): | | | | | | | | | | |
Operating lease obligations | | 853,594 |
| | 274,921 |
| | 380,614 |
| | 155,842 |
| | 42,217 |
|
Interest on long-term debt | | 16,368 |
| | 6,765 |
| | 9,603 |
| | — |
| | — |
|
Total off-balance sheet | | 869,962 |
| | 281,686 |
| | 390,217 |
| | 155,842 |
| | 42,217 |
|
Total | | $ | 1,005,649 |
| | $ | 284,658 |
| | $ | 515,690 |
| | $ | 157,347 |
| | $ | 47,954 |
|
| |
(a) | In accordance with accounting principles generally accepted in the United States of America, these obligations are not reflected in the Consolidated Balance Sheet. |
On-Balance Sheet Obligations
Our long-termdebt obligations are primarily composed primarily of our Senior Term Notes. There were no outstanding borrowings under our revolving credit facility at June 30, 2017.2022.
Other long-term liabilitiesNon-current deferred benefits of $12.7$6.3 million include $9.6includes $1.8 million related to a Nonqualified Deferred Salary Plan andnon-qualified deferred salary plan, a salary deferral program of $3.1$2.3 million and a bonus deferral plan of $2.2 million related to established contractual payment obligations under retirement and severance agreements for a small number of employees. See Note 4 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K.
This table excludes short-term liabilities disclosed on our balance sheetOperating leases primarily represent long-term obligations for the rental of salons, including leases for company-owned locations, as well as salon franchisee lease obligations, which are reimbursed to the amounts recorded for these items will be paidCompany by franchisees. Regarding franchisee subleases, we generally retain the right to the related salon assets, net of any outstanding obligations, in the next year. We have no unconditional purchase obligations. Also excluded fromevent of a default by a franchise owner. Recent trends in system-wide revenue over the contractual obligations table are payment estimates associated with employee health and workers' compensation claims forpast few years has increased the risk of default by franchisees, which we are self-insured. The majority of our recorded liability for self-insured employee health and workers' compensation losses represents estimated reserves for incurred claims that have yet tomay be filed or settled.material.
The Company has unfunded deferred compensation contracts covering certain management and executive personnel. Because weWe cannot predict the timing or amount of future payments related to these contracts, such amounts were not included in the table above.contracts. See Note 911 to the Consolidated Financial Statements.Statements in Part II, Item 8, of this Form 10-K.
As of June 30, 2017,2022, we have liabilities for uncertain tax positions. We are not able to reasonably estimate the amount by which the liabilities will increase or decrease over time; however, at this time, we do not expect a significant payment related to these obligations within the next fiscal year. See Note 810 to the Consolidated Financial Statements.Statements in Part II, Item 8, of this Form 10-K.
Off-Balance Sheet Arrangements
Operating leases primarily represent long-term obligations for the rental of salons, including leases for company-owned locations, as well as salon franchisee lease payments of approximately $243.2 million, which are reimbursed to the Company by franchisees. Regarding franchisee subleases, we generally retain the right to the related salon assets, net of any outstanding obligations, in the event of a default by a franchise owner. Management has not experienced and does not expect any material loss to result from these arrangements.
Interest payments on long-term debt are calculated based on the Senior Term Notes' agreed uponrevolving credit facility's rates. As of June 30, 2022, the applicable margin for loans bearing interest at SOFR ranges from 3.75%-4.25%, the applicable margin for loans bearing interest at the base rate ranges from 2.75%-3.25% and the facility fee ranges from 0.5%-0.75%, each depending on average utilization of 5.5%the revolving line of credit.
Under the amended credit facility entered into in August 2022, the applicable margins for the loans bearing interest are subject to annual increases. The margin applicable to loans bearing interest at SOFR will initially be 3.875%. Effective March 27, 2023, the margin will increase to 6.25%, of which 4.25% will be paid currently in cash and 2.00% will be paid in kind (PIK) interest (added to the principal balance and thereafter accruing interest). Effective March 27, 2024, the margin will increase to 7.25%, of which 4.25% will be paid currently in cash and 3.00% will be PIK interest. The margin applicable to base rate loans will be 100 basis points (1.00%) less than the margin applicable to SOFR loans. See Note 16 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K.
We are a party to a variety of contractual agreements under whichthat we may be obligated to indemnify the other party for certain matters, which indemnities may be secured by operation of law or otherwise, in the ordinary course of business. These contracts primarily relate to our commercial contracts, operating leases and other real estate contracts, financial agreements, agreements to provide services and agreements to indemnify officers, directors and employees in the performance of their
work. While our aggregate indemnification obligation could result in a material liability, we are not aware of any current matter that we expect towill result in a material liability.
We do not have otherany unconditional purchase obligations or significant other commercial commitments such as commitments under lines of credit and standby repurchase obligations or other commercial commitments.
We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet financial arrangements or other contractually narrow or limited purposes at June 30, 2017.2022. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.
Dividends
In December 2013, the Board of Directors elected to discontinue declaring regular quarterly dividends.
Share Issuance Program
In February 2021, the Company filed a $150.0 million shelf registration statement and $50.0 million prospectus supplement with the SEC under which it may offer and sell, from time to time, up to $50.0 million worth of its common stock in "at-the-market" offerings. As of June 30, 2022, the Company has issued 9.3 million shares for net proceeds of $37.2 million.
Share Repurchase Program
In May 2000, the Company's Board of Directors (Board) approved a stock repurchase program with no stated expiration date. Since that time and through June 30, 2017,2022, the Board has authorized $450.0$650.0 million to be expended for the repurchase of the Company's stock under this program. All repurchased shares become authorized but unissued shares of the Company. The timing and amounts of any repurchases depends on many factors, including the market price of the common stock and overall market conditions. During fiscal year 2022, the Company did not repurchase any shares. As of June 30, 2017, 18.42022, 30.0 million shares have been cumulatively repurchased for $390.0$595.4 million, and $60.0$54.6 million remained outstanding underauthorized for repurchase. The Company does not anticipate repurchasing shares of common stock for the approved stock repurchase program.foreseeable future.
CRITICAL ACCOUNTING POLICIES
The Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States of America.States. In preparing the Consolidated Financial Statements, we are required to make various judgments, estimates and assumptions that could have a significant impact on the results reported in the Consolidated Financial Statements. We base these estimates on historical experience and other assumptions believed to be reasonable under the circumstances. Estimates are considered to be critical if they meet both of the following criteria: (1) the estimate requires assumptions about material matters that are uncertain at the time the accounting estimates are made, and (2) other materially different estimates could have been reasonably made or material changes in the estimates are reasonably likely to occur from period to period. Changes in these estimates could have a material effect on our Consolidated Financial Statements.
Our significant accounting policies can be found in Note 1 to the Consolidated Financial Statements.Statements in Part II, Item 8, of this Form 10-K. We believe the following accounting policies are most critical to aid in fully understanding and evaluating our reported financial condition and results of operations.
Investments In Affiliates
The Company has equity investments in securities of certain privately held entities. The Company accounts for these investments under the equity or cost method of accounting. Investments accounted for under the equity method are recorded at the amount of the Company's investment and adjusted each period for the Company's share of the investee's income or loss. Investments are reviewed for changes in circumstance or the occurrence of events that suggest the Company's investment may not be recoverable.
The table below summarizes losses recorded by the Company related to its investments: |
| | | | | | | | | | | | |
| | Fiscal Year |
| | 2017 | | 2016 | | 2015 |
| | (Dollars in thousands) |
Equity losses (1) | | $ | (81 | ) | | $ | (1,829 | ) | | $ | (8,975 | ) |
Other than temporary impairment | | — |
| | (12,954 | ) | | (4,654 | ) |
Total losses | | $ | (81 | ) | | $ | (14,783 | ) | | $ | (13,629 | ) |
_____________________________ | |
(1) | For fiscal year 2015, includes $6.9 million of expense for a non-cash deferred tax valuation allowance related to EEG. |
Goodwill
As of June 30, 20172022 and 2016,2021, the North American Value reporting unit had $188.9 and $189.2 million of goodwill, respectively, the North American Franchise reporting unit had $228.1$174.4 and $228.2$229.6 million of goodwill, respectively, and the
North American Premium and International reporting units Company-owned segment had no goodwill.goodwill at either period. See Note 35 to the Consolidated Financial Statements.Statements in Part II, Item 8, of this Form 10-K. The Company testsassesses goodwill impairment on an annual basis during the Company’sCompany's fourth fiscal quarter, and between annual testsassessments if an event occurs, or circumstances change, that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
Goodwill impairment testing isassessments are performed at the reporting unit level, which is the same as the Company’sCompany's operating segments. As part of the new simplification guidance issued by the Financial Accounting Standards Board (FASB), theThe goodwill testassessment involves a one-step comparison of the reporting unit’sunit's fair value to its carrying value, including goodwill ("Step 1")(Step 1). The prior guidance required a hypothetical purchase price allocation as the second step of the goodwill impairment test, but this step has been eliminated. If the reporting unit’sunit's fair value exceeds its carrying value, no further procedures are required. However, if the reporting unit’sunit's fair value is less than the carrying value, an impairment charge is recorded for the difference between the fair value and carrying value of the reporting unit. The Company early adopted this guidance when completing the annual fiscal year 2017 impairment analysis and therefore only completed Step 1 of the goodwill impairment test.
In applying the goodwill impairment test,assessment, the Company may assess qualitative factors to determine whether it is more likely than not that the fair value of the reporting units is less than its carrying value (“Step 0”)(Step 0). Qualitative factors may include, but are not limited to, economic, market and industry conditions, cost factors, and overall financial performance of the reporting unit. If after assessing these qualitative factors, the Company determines it is “more-likely-than-not”more likely than not that the carrying value is less than the fair value, then performing Step 1 of the goodwill impairment testassessment is unnecessary.
The carrying value of eachthe reporting unit is based on the assets and liabilities associated with the operations of the reporting unit, including allocation of shared or corporate balances among reporting units. Allocations are generally based on the number of salons in each reporting unit as a percent of total company-owned salons.
salons or expenses of the reporting unit as a percentage of total company expenses.
The Company calculates estimated fair values of the reporting units based on discounted future cash flows utilizing estimates in annual revenue, service and product margins, fixed expense rates, allocated corporate overhead, corporate-owned and franchise salon counts, and long-term growth rates and discount rates for determining terminal value. During fiscal year 2022, our estimates of annual revenue and salon counts were decreased to reflect recent trends in the business and, in fourth quarter, the removal of OSP revenues and expenses from our forecast. In addition, discount rates have increased during this period to reflect changes in the market interest rates. Where available and as appropriate, comparative market multiples are used in conjunction with the results of the discounted cash flows. The Company periodically engages third-party valuation consultants to assist in evaluating the Company's estimated fair value calculations. See Note 1 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K.
Following is a description
Long-Lived Assets, Excluding Goodwill
The Company follows the guidance in ASC 360, Property, Plant, and Equipment and applies the guidance to property, plant, and equipment as well as right of use (ROU) assets. The Company has identified its asset groups at the individual salon level as this represents the lowest level that identifiable cash flows are largely independent of the goodwill impairment assessments for eachcash flows of theother groups of assets and liabilities. Poor salon performance in fiscal years:
Fiscal Year 2017
During the fourth quarter of fiscal year 2017, the Company experienced a triggering eventyears 2022 and 2021, primarily due to the redefining of its operating segments. In connectionCOVID-19 pandemic, resulted in ASC 360-10-35-21 triggering events. As a result, management assessed underperforming salon asset groups, which included the related ROU assets, for impairment in accordance with the changeASC 360.
The first step in operating segment structure, the Company changed its North American reporting units from two reporting units: North American Value and North American Premium, to three reporting units: North American Value, North American Franchise and North American Premium.
Pursuant to the change in operating segments, the Company performed a goodwill impairment test on its North American Value reporting unit. The North American Premium and International units do not have any goodwill. The Company comparedunder ASC 360 is to determine whether the long-lived assets are recoverable, which is determined by comparing the net carrying value of the North American Value reporting unit, including goodwill,salon asset group to its estimated fair value.the undiscounted net cash flows to be generated from the use and eventual disposition of that asset group. Estimating cash flows for purposes of the recoverability test is subjective and requires significant judgment. Estimated future cash flows used for the purposes of the recoverability test were based upon historical cash flows for the salons. The period of time used to determine the estimates of the future cash flows for the recoverability test was based on the remaining useful life of the primary asset of the group, which was the ROU asset in all cases.
The second step of the long-lived asset impairment test requires that the fair value of the reporting unit exceededasset group be estimated when determining the amount of any impairment loss. For the salon asset groups that failed the recoverability test, an impairment loss was measured as the amount by which the carrying amount of the asset group exceeds its fair value. The Company applied the fair value guidance within ASC 820-10 to determine the fair value of the asset group from the perspective of a market-participant considering, among other things, appropriate discount rates, multiple valuation techniques, the most advantageous market, and assumptions about the highest and best use of the asset group. To determine the fair value of the salon asset groups, the Company utilized market-participant assumptions based on the best information available, rather than the Company's own assumptions about how it intends to use the asset group. The significant judgments and assumptions utilized to determine the fair value of the salon asset groups include the market rent of comparable properties and a discount rate.
For fiscal years 2022 and 2021, the Company recognized long-lived asset impairment charges of $0.5 and $13.0 million, respectively, which included $0.5 and $9.5 million, respectively, related to ROU assets on the Consolidated Statement of Operations in Part II, Item 8, of this Form 10-K. The impairment loss for each salon asset group that was recognized was allocated among the long-lived assets of the group on a pro-rata basis using their relative carrying amounts. Additionally, the impairment losses did not reduce the carrying amount of an individual asset below its fair value, by a substantial margin, resultingincluding for the ROU assets included in no goodwill impairment.
the salon asset groups. Assessing goodwillthe long-lived assets for impairment requires management to make assumptions and to apply judgment including forecasting future sales and expenses, and selecting appropriate discount rates, which can be affected by economic conditions and other factors that can be difficult to predict. The Company does not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions it uses to calculate impairment losses of goodwill.for its long-lived asset, including its ROU assets. However, if actual results aremay not be consistent with the estimates and assumptions used in the calculations, the Company may be exposed to future impairment losses that could be material.
Based on the changes to the Company's operating segment structure, goodwill has been reallocated based on relative fair value to the North American Value and North American Franchise reporting units at June 30, 2017 and 2016.
Fiscal Years 2016 and 2015
During the Company’s annual impairment tests, the Company assessed qualitative factors to determine whether it is more likely than not that the fair value of the reporting units were less than their carrying values (“Step 0”). The Company determined it is “more-likely-than-not” that the carrying values of the reporting units were less than the fair values. Accordingly, the Company did not perform a two-step quantitative analysis.
As of June 30, 2017, the Company's estimated fair value, as determined by the sum of our reporting units' fair value, reconciled within a reasonable range of our market capitalization, which included an assumed control premium of 20.0%.
A summary of the Company's goodwill balance by reporting unit is as follows:
|
| | | | | | | | |
| | June 30, |
| | 2017 | | 2016 |
| | (Dollars in thousands) |
North American Value | | $ | 188,888 |
| | $ | 189,218 |
|
North American Franchise | | 228,099 |
| | 228,175 |
|
Total | | $ | 416,987 |
| | $ | 417,393 |
|
Long-Lived Assets, Excluding Goodwill
The Company assesses the impairment of long-lived assets at the individual salon level, as this is the lowest level for which identifiable cash flows are largely independent of other groups of assets and liabilities, when events or changes in circumstances indicate the carrying value of the assets or the asset grouping may not be recoverable. Factors considered in deciding when to perform an impairment review include significant under-performance of an individual salon in relation to expectations, significant economic or geographic trends, and significant changes or planned changes in our use of the assets. Impairment is evaluated based on the sum of undiscounted estimated future cash flows expected to result from use of the long-lived assets that do not recover the carrying values. If the undiscounted estimated cash flows are less than the carrying value of the assets, the Company calculates an impairment charge based on the assets' estimated fair value. The fair value of the long-lived assets is estimated using a discounted cash flow model based on the best information available, including market data and salon level revenues and expenses. Long-lived asset impairment charges are recorded within depreciation and amortization in the Consolidated Statement of Operations.
Judgments made by management related to the expected useful lives of long-lived assets and the ability to realize undiscounted cash flows in excess of the carrying amounts of such assets are affected by factors such as the ongoing maintenance and improvement of the assets, changes in economic conditions and changes in operating performance. As the ongoing expected cash flows and carrying amounts of long-lived assets are assessed, these factors could cause the Company to realize material impairment charges.
A summary of long-lived asset impairment charges follows:
|
| | | | | | | | | | | | |
| | Fiscal Years |
| | 2017 | | 2016 | | 2015 |
| | (Dollars in thousands) |
North American Value | | $ | 8,998 |
| | $ | 8,393 |
| | $ | 9,612 |
|
North American Premium | | 2,105 |
| | 1,924 |
| | 4,804 |
|
International | | 263 |
| | 161 |
| | 188 |
|
Total | | $ | 11,366 |
| | $ | 10,478 |
| | $ | 14,604 |
|
Income Taxes
Deferred income tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the Consolidated Financial Statements or income tax returns. Deferred income tax assets and liabilities are determined based on the differences between the financial statement and tax basis of assets and liabilities using currently enacted tax rates in effect for the years in which the differences are expected to reverse. A valuation allowance is established for any portion of
We recognize deferred tax assets to the extent that we believe these assets are not considered more likely than not to be realized. The Company evaluates all evidence, including recent financial performance, the existence of cumulative year losses and our forecast of future taxable income, to assess the need for a valuation allowance against our deferred tax assets. While the determination of whether or not to record a valuation allowance is not fully governed by a specific objective test, accounting guidance places significant weight on recent financial performance.
The Company has a valuation allowance on the majority of its deferred tax assets amounting to $120.9$201.7 and $110.0$192.5 million at June 30, 20172022 and 2016,2021, respectively.
The Company assesses the realizability of its If we determine that we would be able to realize our deferred tax assets on a quarterly basis and will reversein the future in excess of their net recorded amount, we would make necessary adjustments to the deferred tax asset valuation, which would reduce the provision for income taxes.
Significant components of the valuation allowance which occurred during fiscal year 2022 are as follows:
•The Company determined that it no longer had sufficient U.S. state indefinite-lived taxable temporary differences to support realization of its U.S. state indefinite-lived NOLs and record a tax benefit when the Company generates sufficient sustainable pretax earnings to make the realizability of theits existing U.S. deferred tax assets more likely than not.that upon reversal are expected to generate state indefinite-lived NOLs. As a result, the Company recorded a $4.1 million valuation allowance on its U.S. state indefinite-lived deferred tax assets.
Significant components of the valuation allowance which occurred during fiscal year 2021 are as follows:
•The Company recognized a tax loss on its investment in Luxembourg and established a corresponding valuation allowance of $34.4 million.
The Company reserves for unrecognized tax benefits, interest and penalties related to anticipated tax audit issuespositions in the U.S. and other tax jurisdictions based on an estimate of whether additional taxes will be due. If payment of these amounts ultimately proves to be unnecessary, the reversal of these liabilities would result in tax benefits being recognized in the period in which it is determined that the liabilities are no longer necessary. If the estimate of unrecognized tax benefits, interest and penalties proves to be less than the ultimate assessment, additional expenses would result.
Inherent in the measurement of deferred balances are certain judgments and interpretations of tax laws and published guidance with respect to the Company's operations. Income tax expense is primarily the current tax payable for the period and the change during the period in certain deferred tax assets and liabilities.
Contingencies
The Company is a defendant in various lawsuits and claims arising out of the normal course of business. Like certain other large retail employers, the Company has been faced with allegations of purported class-wide consumer and wage and hour violations. Litigation is inherently unpredictable and the outcome of these matters cannot presently be determined. Although the actions are being vigorously defended, the Company could in the future incur judgments or enter into settlements of claims that could have a material adverse effect on its results of operations in any particular period.
See Note 810 to the Consolidated Financial Statements for discussion regarding certain issues that have resulted from the IRS' auditin Part II, Item 8, of fiscal years 2010 through 2013. Final resolutionthis Form 10-K.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The primary market risk exposure of the Company relates to changes in interest rates in connection with its debt, specifically the revolving credit facility, which bears interest at variable rates based on LIBORSOFR plus an applicable borrowing margin. Additionally, the Company is exposed to foreign currency translation risk related to changes in the Canadian dollar, and to a lesser extent, the British Pound.pound. The Company has established policies and procedures that govern the management of these exposures through the use of derivative financial instrument contracts. By policy, the Company does not enter into such contracts for the purpose of speculation. The following details the Company's policies and use of financial instruments.
Interest Rate Risk:
The Company has established an interest rate management policy that attempts to minimize its overall cost of debt, while taking into consideration earnings implications associated with volatility in short-term interest rates. On occasion,In the past, the Company useshas used interest rate swaps to further mitigate the risk associated with changing interest rates and to maintain its desired balances of fixed and floating rate debt. In addition, access to variable rate debt is available through the Company's revolving credit facility. The Company reviews its policy and interest rate risk management quarterly and makes adjustmentsadjusts in accordance with market conditions and the Company's shortshort- and long-term borrowing needs. As of June 30, 2017,2022, the Company had outstanding variable rate debt of $180.0 million and the Company did not have any outstanding variableinterest rate debt as there were no amounts outstanding onswaps.
In August 2022, the Company amended and extended its revolving credit facility. The Company had an outstanding fixed rate debt balancefacility to convert it to a $180.0 million term loan and $55.0 million revolving credit facility with varying interest rates. See Note 16 to the Consolidated Financial Statements in Part II, Item 8, of $123.0 million at June 30, 2017 and 2016.this Form 10-K.
Foreign Currency Exchange Risk:
Over 85%90% of the Company's revenue, expense and capital purchasing activitiesoperations are transacted in United StatesU.S. dollars. However, because a portion of the Company's operations consistsconsist of activities outside of the United States,U.S., the Company has transactions in other currencies, primarily the Canadian dollar, and to a lesser extent, the British pound. In preparing the Consolidated Financial Statements, the Company is required to translate the financial statements of its foreign subsidiaries from the currency in which they keep their accounting records, generally the local currency, into United StatesU.S. dollars. Different exchange rates from period to period impact the amounts of reported income and the amount of foreign currency translation recorded in accumulated other comprehensive income (AOCI). As part of its risk management strategy, the Company frequently evaluates its foreign currency exchange risk by monitoring market data and external factors that may influence exchange rate fluctuations. As a result, the Company may engage in transactions involving various derivative instruments to hedge assets, liabilities and purchases denominated in foreign currencies. As of June 30, 2017 and 2016,2022, the Company did not have any derivative instruments to manage its foreign currency risk.
During fiscal years 2017, 20162022 and 2015, the2021, a $0.6 million foreign currency (loss)loss and $0.3 million foreign currency gain is included in net loss was $(0.1), $0.3 and $(1.3) million,from continuing operations, respectively.
Item 8. Financial Statements and Supplementary Data
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Index to Consolidated Financial Statements: | | |
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Regis Corporation
In our opinion,Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Regis Corporation (a Minnesota corporation) and subsidiaries (the "Company") as of June 30, 2022 and 2021, the related consolidated statements of operations, comprehensive loss, shareholders' (deficit) equity, and cash flows for the years then ended, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of Regis Corporation and its subsidiaries atthe Company as of June 30, 20172022 and June 30, 2016,2021, and the results of theirits operations and theirits cash flows for each of the three years in the periodthen ended, June 30, 2017 in conformity with accounting principles generally accepted in the United States of America. Also
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of June 30, 2022, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated August 22, 2022 expressed as an unqualified opinion.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Goodwill impairment analysis
As described further in Note 1 to the financial statements, the Company’s consolidated goodwill balance was $174.4 million as of June 30, 2022 and is assigned to the Franchise reporting unit. Goodwill is tested annually for impairment on April 30th or more frequently if events or circumstances indicate that the carrying amount of goodwill may be impaired. At March 31, 2022, a triggering event was identified and a quantitative goodwill impairment test was performed which resulted in impairment expense of $16.0 million. We identified the Company’s March 31, 2022 goodwill impairment analysis as a critical audit matter.
The principal considerations for our determination that the goodwill impairment analysis is a critical audit matter are that the significant estimates and assumptions made by management involve subjectivity and judgment in determining the fair value of the reporting unit using the discounted future cash flows valuation technique. The reporting unit discounted future cash flows include certain management assumptions that are complex and have a higher degree of estimation uncertainty and changes in these assumptions could have a significant impact on the results of the impairment analysis. These assumptions include forward-looking projections related to salon counts, revenue, EBITDA margin and determination of discount rates. Performing audit procedures to evaluate management's assumptions required a high degree of auditor judgement and an increased extent of effort, including the need to involve valuation specialists.
Our audit procedures related to the annual goodwill impairment analysis included the following, among others.
•We tested the design and operating effectiveness of controls relating to management's goodwill impairment test, including the controls over the determination of key inputs such as the forecasting of future cash flows and determination of the discount rate;
•We tested the reasonableness of management's forecasts of future revenues and EBITDA margin by comparing to third-party industry projections and historical operating results;
•We performed sensitivity analysis on the Company's future revenue and salon counts to evaluate the reasonableness of management's forecasts;
•We utilized a valuation specialist to assist in recalculating the Company's discounted future cash flows model and in evaluating the reasonableness of significant assumptions including the discount rate; and
•We evaluated the competency and objectivity of management's specialists who assisted with preparing the discounted cash flow analysis.
Accounting for Discontinued Operations
As discussed in Note 3 of the consolidated financial statements, on June 29, 2022, the Company completed the sale of its OSP software-as-a-service business ("OSP") to Soham Inc. ("Buyer") for $20.0 million in cash plus up to an additional $19.0 million in proceeds contingent upon the number of salons that transition to the Buyer's salon technology platform. In connection with the sale, the Company recognized a pre-tax loss of $36.6 million in discontinued operations. As a result of the discontinued operations classification, the comparative period consolidated financial statements for fiscal year 2021 have been recast to reclassify balance sheet, operations and cash flow amounts related to OSP discontinued operations. We identified the Company’s accounting for the OSP discontinued operations as a critical audit matter.
The principal considerations for our determination that the discontinued operations is a critical audit matter are that auditing the Company's discontinued operations was complex due to judgments made by management in applying the relevant accounting principles including management's determination that OSP is a business, that the sale is a strategic shift, and the fair value determinations used in allocating goodwill attributable to the OSP component of the Franchise reporting unit.
Our audit procedures related to the discontinued operations included the following, among others.
•We tested the design and operating effectiveness of financial reporting controls over the Company's accounting for the discontinued operations.
•We evaluated the appropriateness of the Company's application of the criteria for reporting of discontinued operations by inspecting management's supporting documentation, reading board of directors meeting minutes and other entity information, and evaluating whether there was contrary evidence, based on our understanding of the business.
•We consulted with our national office as to the appropriateness of the conclusion reached regarding discontinued operations treatment.
•To test the allocation of goodwill to the OSP component for purposes of computing the loss, we evaluated the determination of the fair value of OSP based on the terms of the sale and the fair value of the overall Franchise reporting unit based on the most recent fair value determinations used in conjunction with goodwill impairment testing.
•We evaluated the presentation of the discontinued operations in the consolidated financial statements, including testing significant balances for appropriate allocation to discontinued operations in 2022 and 2021 and assessing the reasonableness of key judgments applied by management in allocating expenses to the discontinued operations.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2020.
Minneapolis, Minnesota
August 22, 2022
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Regis Corporation
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of Regis Corporation (a Minnesota Corporation) and subsidiaries (the "Company") as of June 30, 2022, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2017,2022, based on criteria established in the 2013 Internal Control - Control—Integrated Framework (2013) issued by COSO.
We also have audited, in accordance with the Committee of Sponsoring Organizationsstandards of the Treadway Commission (COSO). Public Company Accounting Oversight Board (United States) ("PCAOB"), the consolidated financial statements of the Company as of and for the year ended June 30, 2022, and our report dated August 22, 2022, expressed an unqualified opinion on those financial statements.
Basis for opinion
The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control overOver Financial Reporting appearing under Item 9A.("Management’s Report"). Our responsibility is to express opinions on these financial statements andan opinion on the Company'sCompany’s internal control over financial reporting based on our integrated audits. audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our auditsaudit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the auditsaudit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also includedrisk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audits provideaudit provides a reasonable basis for our opinions.opinion.
Definition and limitations of internal control over financial reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i)(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii)(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii)(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company'scompany’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PRICEWATERHOUSECOOPERSGRANT THORNTON LLP
Minneapolis, Minnesota
August 23, 201722, 2022
REGIS CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in thousands, except per share data) | | | | | | | | | | | | | | |
| | June 30, |
| | 2022 | | 2021 |
| | | | |
ASSETS | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 17,041 | | | $ | 19,191 | |
Receivables, net | | 14,531 | | | 26,270 | |
Inventories | | 3,109 | | | 20,639 | |
Other current assets | | 13,984 | | | 17,017 | |
Current assets related to discontinued operations (Note 3) | | — | | | 3,542 | |
Total current assets | | 48,665 | | | 86,659 | |
| | | | |
Property and equipment, net | | 12,835 | | | 16,906 | |
Goodwill (Note 5) | | 174,360 | | | 188,257 | |
Other intangibles, net | | 3,226 | | | 3,761 | |
Right of use asset (Note 6) | | 493,749 | | | 610,599 | |
Other assets | | 36,465 | | | 41,388 | |
Non-current assets related to discontinued operations (Note 3) | | — | | | 48,813 | |
Total assets | | $ | 769,300 | | | $ | 996,383 | |
| | | | |
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY | | | | |
Current liabilities: | | | | |
Accounts payable | | $ | 15,860 | | | $ | 27,157 | |
Accrued expenses | | 33,784 | | | 51,242 | |
| | | | |
Short-term lease liability (Note 6) | | 103,196 | | | 116,348 | |
Current liabilities related to discontinued operations (Note 3) | | — | | | 3,738 | |
Total current liabilities | | 152,840 | | | 198,485 | |
| | | | |
Long-term debt, net (Note 8) | | 179,994 | | | 186,911 | |
Long-term lease liability (Note 6) | | 408,445 | | | 517,626 | |
| | | | |
Other non-current liabilities | | 58,974 | | | 75,075 | |
Non-current liabilities related to discontinued operations (Note 3) | | — | | | 1,240 | |
Total liabilities | | 800,253 | | | 979,337 | |
Commitments and contingencies (Note 9) | | 0 | | 0 |
Shareholders' (deficit) equity: | | | | |
Common stock, $0.05 par value; issued and outstanding, 45,510,245 and 35,795,844 common shares at June 30, 2022 and 2021, respectively | | 2,276 | | | 1,790 | |
Additional paid-in capital | | 62,562 | | | 25,102 | |
Accumulated other comprehensive income | | 9,455 | | | 9,543 | |
Accumulated deficit | | (105,246) | | | (19,389) | |
Total shareholders' (deficit) equity | | (30,953) | | | 17,046 | |
Total liabilities and shareholders' (deficit) equity | | $ | 769,300 | | | $ | 996,383 | |
The accompanying notes are an integral part of the Consolidated Financial Statements.
|
| | | | | | | | |
| | June 30, |
| | 2017 | | 2016 |
ASSETS | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 172,396 |
| | $ | 147,346 |
|
Receivables, net | | 23,475 |
| | 24,691 |
|
Inventories | | 122,104 |
| | 134,212 |
|
Other current assets | | 52,172 |
| | 51,765 |
|
Total current assets | | 370,147 |
| | 358,014 |
|
Property and equipment, net | | 146,994 |
| | 183,321 |
|
Goodwill | | 416,987 |
| | 417,393 |
|
Other intangibles, net | | 13,634 |
| | 15,185 |
|
Other assets | | 63,726 |
| | 62,019 |
|
Total assets | | $ | 1,011,488 |
| | $ | 1,035,932 |
|
LIABILITIES AND SHAREHOLDERS' EQUITY | | | | |
Current liabilities: | | | | |
Accounts payable | | $ | 56,049 |
| | $ | 59,884 |
|
Accrued expenses | | 122,013 |
| | 135,431 |
|
Total current liabilities | | 178,062 |
| | 195,315 |
|
Long-term debt | | 120,599 |
| | 119,606 |
|
Other noncurrent liabilities | | 204,606 |
| | 201,610 |
|
Total liabilities | | 503,267 |
| | 516,531 |
|
Commitments and contingencies (Note 7) | |
| |
|
Shareholders' equity: | | | | |
Common stock, $0.05 par value; issued and outstanding, 46,400,367 and 46,154,410 common shares at June 30, 2017 and 2016, respectively | | 2,320 |
| | 2,308 |
|
Additional paid-in capital | | 214,109 |
| | 207,475 |
|
Accumulated other comprehensive income | | 3,336 |
| | 5,068 |
|
Retained earnings | | 288,456 |
| | 304,550 |
|
Total shareholders' equity | | 508,221 |
| | 519,401 |
|
Total liabilities and shareholders' equity | | $ | 1,011,488 |
| | $ | 1,035,932 |
|
REGIS CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars and shares in thousands, except per share data) | | | | | | | | | | | | | | | | |
| | Fiscal Years |
| | 2022 | | 2021 | | |
| | | | | | |
Revenues: | | | | | | |
Royalties | | $ | 65,753 | | | $ | 52,357 | | | |
Fees | | 11,587 | | | 10,215 | | | |
Product sales to franchisees | | 15,072 | | | 56,699 | | | |
Advertising fund contributions | | 32,573 | | | 22,023 | | | |
Franchise rental income (Note 6) | | 130,777 | | | 127,392 | | | |
Company-owned salon revenue | | 20,205 | | | 142,965 | | | |
Total revenue | | 275,967 | | | 411,651 | | | |
Operating expenses: | | | | | | |
Cost of product sales to franchisees | | 17,391 | | | 43,756 | | | |
Inventory reserve (1) | | 7,655 | | | — | | | |
General and administrative | | 65,274 | | | 96,427 | | | |
Rent (Note 6) | | 9,357 | | | 40,754 | | | |
Advertising fund expense | | 32,573 | | | 22,023 | | | |
Franchise rent expense | | 130,777 | | | 127,392 | | | |
Company-owned salon expense (2) | | 21,952 | | | 141,204 | | | |
Depreciation and amortization | | 6,224 | | | 21,749 | | | |
Long-lived asset impairment (Note 1) | | 542 | | | 13,023 | | | |
| | | | | | |
Goodwill impairment (Note 5) | | 13,120 | | | — | | | |
Total operating expenses | | 304,865 | | | 506,328 | | | |
| | | | | | |
Operating loss | | (28,898) | | | (94,677) | | | |
| | | | | | |
Other (expense) income: | | | | | | |
Interest expense | | (12,914) | | | (13,163) | | | |
Loss from sale of salon assets to franchisees, net | | (2,334) | | | (16,696) | | | |
Interest income and other, net | | (296) | | | 15,902 | | | |
| | | | | | |
Loss from operations before income taxes | | (44,442) | | | (108,634) | | | |
| | | | | | |
Income tax (expense) benefit | | (2,017) | | | 5,428 | | | |
| | | | | | |
Loss from continuing operations | | (46,459) | | | (103,206) | | | |
| | | | | | |
Loss from discontinued operations, net of income taxes (Note 3) | | (39,398) | | | (10,125) | | | |
| | | | | | |
Net loss | | $ | (85,857) | | | $ | (113,331) | | | |
| | | | | | |
Net loss per share: | | | | | | |
Basic and diluted: | | | | | | |
Loss from continuing operations | | $ | (1.07) | | | $ | (2.87) | | | |
Loss from discontinued operations | | (0.90) | | | (0.28) | | | |
Net loss per share, basic and diluted (3) | | $ | (1.97) | | | $ | (3.15) | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Weighted average common and common equivalent shares outstanding: | | | | | | |
Basic and diluted | | 43,582 | | | 35,956 | | | |
| | | | | | |
(1)Includes charges in the third and fourth quarter associated with liquidation of distribution center inventory. Excludes reserves for inventory at salons.
(2)Includes cost of service and product sold to guests in our Company-owned salons. Excludes general and administrative expense, rent and depreciation and amortization related to Company-owned salons.
(3)Total is a recalculation; line items calculated individually may not sum to total due to rounding.
The accompanying notes are an integral part of the Consolidated Financial Statements.
REGIS CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONSCOMPREHENSIVE LOSS
(Dollars in thousands) | | | | | | | | | | | | | | | | |
| | Fiscal Years |
| | 2022 | | 2021 | | |
| | | | | | |
Net loss | | $ | (85,857) | | | $ | (113,331) | | | |
Other comprehensive (loss) income, net of tax: | | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Net current period foreign currency translation adjustments | | (547) | | | 1,888 | | | |
Recognition of deferred compensation | | 459 | | | 206 | | | |
Other comprehensive (loss) income | | (88) | | | 2,094 | | | |
Comprehensive loss | | $ | (85,945) | | | $ | (111,237) | | | |
The accompanying notes are an integral part of the Consolidated Financial Statements.
REGIS CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' (DEFICIT) EQUITY
(Dollars in thousands, except per share data) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income | | Retained Earnings (Deficit) | | Total |
| | Shares | | Amount | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Balance, June 30, 2020 | | 35,625,716 | | | $ | 1,781 | | | $ | 22,011 | | | $ | 7,449 | | | $ | 94,462 | | | $ | 125,703 | |
Net loss | | — | | | — | | | — | | | — | | | (113,331) | | | (113,331) | |
Foreign currency translation (Note 1) | | — | | | — | | | — | | | 1,888 | | | — | | | 1,888 | |
| | | | | | | | | | | | |
Exercise of SARs | | 3,775 | | | — | | | (24) | | | — | | | — | | | (24) | |
Stock-based compensation | | — | | | — | | | 3,254 | | | — | | | — | | | 3,254 | |
Recognition of deferred compensation (Note 11) | | — | | | — | | | — | | | 206 | | | — | | | 206 | |
Net restricted stock activity | | 166,353 | | | 9 | | | (139) | | | — | | | — | | | (130) | |
Minority interest | | — | | | — | | | — | | | — | | | (520) | | | (520) | |
Balance, June 30, 2021 | | 35,795,844 | | | 1,790 | | | 25,102 | | | 9,543 | | | (19,389) | | | 17,046 | |
Net loss | | — | | | — | | | — | | | — | | | (85,857) | | | (85,857) | |
Foreign currency translation (Note 1) | | — | | | — | | | — | | | (547) | | | — | | | (547) | |
Issuance of common stock, net of offering costs | | 9,295,618 | | | 465 | | | 36,720 | | | — | | | — | | | 37,185 | |
| | | | | | | | | | | | |
Stock-based compensation | | — | | | — | | | 1,285 | | | — | | | — | | | 1,285 | |
Recognition of deferred compensation (Note 11) | | — | | | — | | | — | | | 459 | | | — | | | 459 | |
Net restricted stock activity | | 418,783 | | | 21 | | | (545) | | | — | | | — | | | (524) | |
| | | | | | | | | | | | |
Balance, June 30, 2022 | | 45,510,245 | | | $ | 2,276 | | | $ | 62,562 | | | $ | 9,455 | | | $ | (105,246) | | | $ | (30,953) | |
The accompanying notes are an integral part of the Consolidated Financial Statements.
|
| | | | | | | | | | | | |
| | Fiscal Years |
| | 2017 | | 2016 | | 2015 |
Revenues: | | | | | | |
Service | | $ | 1,307,732 |
| | $ | 1,383,663 |
| | $ | 1,429,408 |
|
Product | | 335,865 |
| | 359,683 |
| | 363,236 |
|
Royalties and fees | | 48,291 |
| | 47,523 |
| | 44,643 |
|
| | 1,691,888 |
| | 1,790,869 |
| | 1,837,287 |
|
Operating expenses: | | | | | | |
Cost of service | | 838,192 |
| | 868,188 |
| | 882,717 |
|
Cost of product | | 166,344 |
| | 179,341 |
| | 180,558 |
|
Site operating expenses | | 168,439 |
| | 182,952 |
| | 192,442 |
|
General and administrative | | 174,502 |
| | 178,033 |
| | 186,051 |
|
Rent | | 279,288 |
| | 297,271 |
| | 309,125 |
|
Depreciation and amortization | | 66,327 |
| | 67,470 |
| | 82,863 |
|
Total operating expenses | | 1,693,092 |
| | 1,773,255 |
| | 1,833,756 |
|
Operating (loss) income | | (1,204 | ) | | 17,614 |
| | 3,531 |
|
Other (expense) income: | | | | | | |
Interest expense | | (8,703 | ) | | (9,317 | ) | | (10,206 | ) |
Interest income and other, net | | 3,072 |
| | 4,219 |
| | 1,697 |
|
(Loss) income from continuing operations before income taxes and equity in loss of affiliated companies | | (6,835 | ) | | 12,516 |
| | (4,978 | ) |
Income taxes | | (9,224 | ) | | (9,049 | ) | | (14,605 | ) |
Equity in loss of affiliated companies, net of income taxes | | (81 | ) | | (14,783 | ) | | (13,629 | ) |
Loss from continuing operations | | (16,140 | ) | | (11,316 | ) | | (33,212 | ) |
Loss from discontinued operations, net of income taxes (Note 1) | | — |
| | — |
| | (630 | ) |
Net loss | | $ | (16,140 | ) | | $ | (11,316 | ) | | $ | (33,842 | ) |
Net loss per share: | | | | | | |
Basic and diluted: | | | | | | |
Loss from continuing operations | | $ | (0.35 | ) | | $ | (0.23 | ) | | $ | (0.60 | ) |
Loss from discontinued operations | | — |
| | — |
| | (0.01 | ) |
Net loss per share, basic and diluted (1) | | $ | (0.35 | ) | | $ | (0.23 | ) | | $ | (0.62 | ) |
Weighted average common and common equivalent shares outstanding: | | | | | | |
Basic and diluted | | 46,359 |
| | 48,542 |
| | 54,992 |
|
REGIS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands) | | | | | | | | | | | | | | | | |
| | Fiscal Years |
| | 2022 | | 2021 | | |
| | | | | | |
Cash flows from operating activities: | | | | | | |
Net loss | | $ | (85,857) | | | $ | (113,331) | | | |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | |
Loss from sale of OSP (Note 3) | | 36,143 | | | — | | | |
Depreciation and amortization (Note 1) | | 6,504 | | | 17,871 | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Long-lived asset impairment | | 542 | | | 13,023 | | | |
Deferred income taxes | | 391 | | | (3,388) | | | |
Inventory reserve | | 10,478 | | | 12,068 | | | |
| | | | | | |
Gain from disposal of distribution center assets | | — | | | (14,997) | | | |
| | | | | | |
Loss from sale of salon assets to franchisees, net | | 2,334 | | | 16,696 | | | |
| | | | | | |
Goodwill impairment | | 16,000 | | | — | | | |
| | | | | | |
Stock-based compensation | | 1,334 | | | 3,254 | | | |
Amortization of debt discount and financing costs | | 1,839 | | | 1,839 | | | |
Other non-cash items affecting earnings | | 709 | | | (351) | | | |
Changes in operating assets and liabilities (1): | | | | | | |
Receivables | | 11,896 | | | (279) | | | |
Inventories | | 7,886 | | | 17,879 | | | |
Income tax receivable | | 1,118 | | | 1,295 | | | |
Other current assets | | 2,118 | | | 1,658 | | | |
Other assets | | 2,703 | | | (2,896) | | | |
Accounts payable | | (10,966) | | | (21,669) | | | |
Accrued expenses | | (21,983) | | | 5,296 | | | |
Net lease liabilities | | (5,960) | | | (19,248) | | | |
Other non-current liabilities | | (15,867) | | | (14,603) | | | |
Net cash used in operating activities: | | (38,638) | | | (99,883) | | | |
Cash flows from investing activities: | | | | | | |
Capital expenditures | | (5,316) | | | (11,475) | | | |
| | | | | | |
| | | | | | |
Proceeds from sale of OSP | | 13,000 | | | — | | | |
Proceeds from sale of assets to franchisees | | — | | | 8,437 | | | |
Costs associated with sale of assets to franchisees | | — | | | (261) | | | |
Proceeds from company-owned life insurance policies | | — | | | 1,200 | | | |
Net cash provided by (used in) investing activities: | | 7,684 | | | (2,099) | | | |
Cash flows from financing activities: | | | | | | |
Borrowings on revolving credit facility | | 10,000 | | | 10,000 | | | |
Repayments of revolving credit facility | | (16,916) | | | (589) | | | |
Proceeds from issuance of common stock, net of offering costs | | 37,185 | | | — | | | |
| | | | | | |
| | | | | | |
Taxes paid for shares withheld | | (845) | | | (348) | | | |
Minority interest buyout | | — | | | (562) | | | |
Distribution center lease payments | | — | | | (724) | | | |
| | | | | | |
Net cash provided by financing activities: | | 29,424 | | | 7,777 | | | |
Effect of exchange rate changes on cash and cash equivalents | | (158) | | | 477 | | | |
Decrease in cash, cash equivalents and restricted cash | | (1,688) | | | (93,728) | | | |
Cash, cash equivalents and restricted cash: | | | | | | |
Beginning of year | | 29,152 | | | 122,880 | | | |
| | | | | | |
| | | | | | |
End of year | | $ | 27,464 | | | $ | 29,152 | | | |
| |
(1) | Total is a recalculation; line items calculated individually may not sum to total due to rounding. |
(1)Changes in operating assets and liabilities exclude assets and liabilities sold or acquired.
The accompanying notes are an integral part of the Consolidated Financial Statements.
REGIS CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS
(Dollars in thousands)
|
| | | | | | | | | | | | |
| | Fiscal Years |
| | 2017 | | 2016 | | 2015 |
Net loss | | $ | (16,140 | ) | | $ | (11,316 | ) | | $ | (33,842 | ) |
Other comprehensive (loss) income: | | | | | | |
Foreign currency translation adjustments during the period | | (1,889 | ) | | (4,276 | ) | | (13,515 | ) |
Recognition of deferred compensation | | 157 |
| | (162 | ) | | 370 |
|
Other comprehensive loss | | (1,732 | ) | | (4,438 | ) | | (13,145 | ) |
Comprehensive loss | | $ | (17,872 | ) | | $ | (15,754 | ) | | $ | (46,987 | ) |
REGIS CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Dollars in thousands, except share data)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income | | Retained Earnings | | Total |
| | Shares | | Amount | | | | |
Balance, June 30, 2014 | | 56,651,166 |
| | $ | 2,833 |
| | $ | 337,837 |
| | $ | 22,651 |
| | $ | 350,671 |
| | $ | 713,992 |
|
Net loss | | |
| | |
| | |
| | |
| | (33,842 | ) | | (33,842 | ) |
Foreign currency translation adjustments | | |
| | |
| | |
| | (13,515 | ) | | |
| | (13,515 | ) |
Stock repurchase program | | (3,054,387 | ) | | (153 | ) | | (47,735 | ) | | | | | | (47,888 | ) |
Proceeds from exercise of SARs & stock options | | 623 |
| | — |
| | — |
| | |
| | |
| | — |
|
Stock-based compensation | | |
| | |
| | 8,647 |
| | |
| | |
| | 8,647 |
|
Shares issued through franchise stock incentive program | | 27,276 |
| | 1 |
| | 460 |
| | |
| | |
| | 461 |
|
Recognition of deferred compensation (Note 9) | | |
| | |
| | |
| | 370 |
| | |
| | 370 |
|
Net restricted stock activity | | 39,688 |
| | 2 |
| | (813 | ) | | |
| | |
| | (811 | ) |
Minority interest (Note 1) | | | | | | | | | | 30 |
| | 30 |
|
Balance, June 30, 2015 | | 53,664,366 |
| | 2,683 |
| | 298,396 |
| | 9,506 |
| | 316,859 |
| | 627,444 |
|
Net loss | | |
| | |
| | |
| | |
| | (11,316 | ) | | (11,316 | ) |
Foreign currency translation adjustments | | |
| | |
| | |
| | (4,276 | ) | | |
| | (4,276 | ) |
Stock repurchase program | | (7,647,819 | ) | | (382 | ) | | (100,653 | ) | | |
| | |
| | (101,035 | ) |
Proceeds from exercise of SARs & stock options | | 107 |
| | — |
| | — |
| | |
| | |
| | — |
|
Stock-based compensation | | |
| | |
| | 9,797 |
| | |
| | |
| | 9,797 |
|
Shares issued through franchise stock incentive program | | 22,084 |
| | 1 |
| | 330 |
| | |
| | |
| | 331 |
|
Recognition of deferred compensation (Note 9) | | |
| | |
| | |
| | (162 | ) | | |
| | (162 | ) |
Net restricted stock activity | | 115,672 |
| | 6 |
| | (734 | ) | | |
| | |
| | (728 | ) |
Minority interest (Note 1) | | |
| | |
| | 339 |
| | |
| | (993 | ) | | (654 | ) |
Balance, June 30, 2016 | | 46,154,410 |
| | 2,308 |
| | 207,475 |
| | 5,068 |
| | 304,550 |
| | 519,401 |
|
Net loss | | |
| | |
| | |
| | |
| | (16,140 | ) | | (16,140 | ) |
Foreign currency translation adjustments | | |
| | |
| | |
| | (1,889 | ) | | |
| | (1,889 | ) |
Proceeds from exercise of SARs & stock options | | 4,370 |
| | — |
| | (42 | ) | | |
| | |
| | (42 | ) |
Stock-based compensation | | |
| | |
| | 9,991 |
| | |
| | |
| | 9,991 |
|
Shares issued through franchise stock incentive program | | 27,819 |
| | 1 |
| | 352 |
| | | | | | 353 |
|
Recognition of deferred compensation (Note 9) | | |
| | |
| | |
| | 157 |
| | |
| | 157 |
|
Net restricted stock activity | | 213,768 |
| | 11 |
| | (3,667 | ) | | |
| | |
| | (3,656 | ) |
Minority interest (Note 1) | | |
| | |
| | | | |
| | 46 |
| | 46 |
|
Balance, June 30, 2017 | | 46,400,367 |
| | $ | 2,320 |
| | $ | 214,109 |
| | $ | 3,336 |
| | $ | 288,456 |
| | $ | 508,221 |
|
The accompanying notes are an integral part of the Consolidated Financial Statements.
REGIS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
|
| | | | | | | | | | | | |
| | Fiscal Years |
| | 2017 | | 2016 | | 2015 |
Cash flows from operating activities: | | | | | | |
Net loss | | $ | (16,140 | ) | | $ | (11,316 | ) | | $ | (33,842 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | | | | |
Depreciation and amortization | | 54,961 |
| | 56,992 |
| | 68,259 |
|
Equity in loss of affiliated companies | | 81 |
| | 14,783 |
| | 13,629 |
|
Deferred income taxes | | 7,962 |
| | 7,023 |
| | 11,154 |
|
Gain from sale of salon assets, net | | (492 | ) | | (1,000 | ) | | (1,210 | ) |
Loss on write down of inventories | | 5,905 |
| | — |
| | — |
|
Salon asset impairments | | 11,366 |
| | 10,478 |
| | 14,604 |
|
Stock-based compensation | | 13,142 |
| | 9,797 |
| | 8,647 |
|
Amortization of debt discount and financing costs | | 1,403 |
| | 1,514 |
| | 1,722 |
|
Other non-cash items affecting earnings | | 935 |
| | 310 |
| | 257 |
|
Changes in operating assets and liabilities(1): | | | | | | |
Receivables | | 724 |
| | (577 | ) | | 446 |
|
Inventories | | 4,010 |
| | (7,109 | ) | | 6,197 |
|
Income tax receivable | | (535 | ) | | 501 |
| | 5,298 |
|
Other current assets | | 820 |
| | (460 | ) | | 3,049 |
|
Other assets | | (2,586 | ) | | (1,133 | ) | | (4,480 | ) |
Accounts payable | | (684 | ) | | (4,624 | ) | | (3,261 | ) |
Accrued expenses | | (13,667 | ) | | (14,280 | ) | | 9,031 |
|
Other noncurrent liabilities | | (7,150 | ) | | (5,113 | ) | | (4,756 | ) |
Net cash provided by operating activities | | 60,055 |
| | 55,786 |
| | 94,744 |
|
Cash flows from investing activities: | | | | | | |
Capital expenditures | | (33,843 | ) | | (31,117 | ) | | (38,257 | ) |
Proceeds from sale of salon assets | | 2,253 |
| | 1,740 |
| | 2,986 |
|
Change in restricted cash | | 1,123 |
| | 9,042 |
| | (312 | ) |
Proceeds from company-owned life insurance policies | | 876 |
| | 2,948 |
| | — |
|
Proceeds from sale of investment | | 500 |
| | — |
| | — |
|
Net cash used in investing activities | | (29,091 | ) | | (17,387 | ) | | (35,583 | ) |
Cash flows from financing activities: | | | | | | |
Repayments of long-term debt and capital lease obligations | | — |
| | (2 | ) | | (173,751 | ) |
Repurchase of common stock | | — |
| | (101,035 | ) | | (47,888 | ) |
Purchase of noncontrolling interest | | — |
| | (760 | ) | | — |
|
Employee taxes paid for shares withheld | | (3,698 | ) | | (754 | ) | | (782 | ) |
Settlement of equity awards | | (3,151 | ) | | — |
| | — |
|
Net cash used in financing activities | | (6,849 | ) | | (102,551 | ) | | (222,421 | ) |
Effect of exchange rate changes on cash and cash equivalents | | 935 |
| | (781 | ) | | (3,088 | ) |
Increase (decrease) in cash and cash equivalents | | 25,050 |
| | (64,933 | ) | | (166,348 | ) |
Cash and cash equivalents: | | | | | | |
Beginning of year | | 147,346 |
| | 212,279 |
| | 378,627 |
|
End of year | | $ | 172,396 |
| | $ | 147,346 |
| | $ | 212,279 |
|
| |
(1) | Changes in operating assets and liabilities exclude assets and liabilities sold or acquired. |
The accompanying notes are an integral part of the Consolidated Financial Statements.
Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Description:
Regis Corporation (the Company) owns, operates and franchises hairstyling and hair care salons throughout the United States (U.S.), Canada, Puerto Rico and the United Kingdom (U.K.), Canada. The business is evaluated in 2 segments, Franchise salons and Puerto Rico. Substantially allCompany-owned salons. Franchise salons in operation decreased from 5,563 to 5,395 at June 30, 2021 compared to June 30, 2022, primarily due to the closure of the hairstyling and hair care299 salons, owned and operatedwhich was partially offset by the Companyconversion of 110 salons from company-owned. Company-owned salons in operation decreased from 276 to 105 at June 30, 2021 compared to June 30, 2022, primarily due to the U.S., Canada and Puerto Ricoconversion of 110 salons to franchise. See Note 15 to the Consolidated Financial Statements. Salons are located in leased space in enclosed mall shopping centers, strip shopping centerscenter locations, malls or Walmart Supercenters. Franchised salons throughoutWalmart.
COVID-19 Impact:
During fiscal years 2022 and 2021, the global coronavirus pandemic (COVID-19) had an adverse impact on operations. The COVID-19 pandemic continues to impact salon guest visits and franchisee staffing, resulting in a significant reduction in revenue and profitability. In response to COVID-19, the Company received Canadian rent relief, Canadian wage relief and U.S. are primarily locatedemployee retention payroll tax credits. In fiscal years 2022 and 2021, the Company received the following amounts in strip shopping centersrent and Walmart Supercenters. Salonswage assistance:
| | | | | | | | | | | | | | | | | | | | |
| | | | Fiscal Years |
| | Financial Statement Caption | | 2022 | | 2021 |
| | | | | | |
| | | | (Dollars in thousands) |
Canadian rent relief | | Rent | | $ | 1,235 | | | $ | — | |
Canadian wage relief | | Company-owned salon expense | | 1,966 | | | 1,629 | |
U.S. employee retention payroll tax credit | | Company-owned salon expense | | — | | | 1,547 | |
Additionally, in December 2021 the U.K. are primarily company-ownedCompany paid $2.5 million of social security contributions that had been deferred under the CARES Act. Overall, COVID-19 has, and operatemay continue to have, a negative effect on revenue and profitability. The ultimate impact of the COVID-19 pandemic in malls, leading department stores, mass merchantsboth the short- and high-street locations.
Based onlong-term is not currently estimable due to the wayuncertainty surrounding the chief operating decision maker evaluatesduration of the pandemic, the emergence and impact of new COVID-19 variants and changing government restrictions. Additional impacts to the business the Company has four reportable segments: North American Value, North American Franchise, North American Premium and International salons. See Note 13 to the Consolidated Financial Statements.may arise that we are not aware of currently.
Consolidation:
The Consolidated Financial Statements include the accounts of the Company and its subsidiaries after the elimination of intercompany accounts and transactions. All material subsidiaries are wholly owned. The Company consolidates variable interest entities where it has determined it is the primary beneficiary of those entities' operations.
Variable Interest Entities:
The Company has interests in certain privately heldprivately-held entities through arrangements that do not involve voting interests. Such entities, known as a variable interest entityentities (VIE), are required to be consolidated by its primary beneficiary. The Company evaluates whether or not it is the primary beneficiary for each VIE using a qualitative assessment that considers the VIE's purpose and design, the involvement of each of the interest holders and the risk and benefits of the VIE.
As of June 30, 2017,2022, the Company has one VIE, Roosters MGC International LLC (Roosters),no VIEs where the Company is the primary beneficiary. The Company owns an 84.0% ownership interest in Roosters. As of June 30, 2017, total assets, total liabilities and total shareholders' equity of Roosters were $7.5, $0.8 and $6.7 million, respectively. Net income attributable to the non-controlling interest in Roosters was immaterial for fiscal years 2017, 2016 and 2015. Shareholders' equity attributable to the non-controlling interest in Roosters was $0.9 million as of June 30, 2017 and 2016 and recorded within retained earnings on the Consolidated Balance Sheet.
The Company accountshas an investment in Empire Education Group, Inc. (EEG). During fiscal year 2020, the Company signed an agreement to sell its interest in EEG to the other shareholder. Until the transaction closes, the Company continues to account for EEG as an equity investment under the voting interest model, as themodel. The Company has granted the other shareholder of EEG an irrevocable proxy to vote a certain number of the Company’sCompany's shares such that the other shareholder of EEG has voting control of 51.0% of EEG’sEEG's common stock, as well as the right to appoint four4 of the five5 members of EEG’sEEG's Board of Directors. See Note 4 to the Consolidated Financial Statements.The Company wrote off its investment balance in EEG in fiscal year 2016.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Use of Estimates:
The preparation of Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Due to the economic disruption caused by the COVID-19 pandemic, the Company faces a greater degree of uncertainty than normal in making judgments and estimates needed to apply the Company's significant accounting policies. Actual results couldand outcomes may differ from those estimates.management's estimates and assumptions.
Cash, Cash Equivalents and Cash Equivalents:Restricted Cash:
Cash equivalents consist of investments in short-term, highly liquid securities having original maturities of three months or less, which are made as a part of the Company's cash management activity. The carrying values of these assets approximate their fair market values. The Company primarily utilizes a cash management system with a series of separate accounts consisting of lockbox accounts for receiving cash, concentration accounts that funds are moved to, and several "zero balance" disbursement accounts for funding of payroll and accounts payable. As a result of the Company's cash management system, checks issued, but not presented to the banks for payment, may create negative book cash balances. There were no checks outstanding in excess of related book cash balances at June 30, 20172022 and 2016.2021.
The Company has restrictedRestricted cash within other current assets primarily relatedrelates to consolidated advertising cooperatives funds, which can only be used to settle obligations of the respective cooperatives and contractual obligations to collateralize itsthe Company's self-insurance programs. The self-insurance restricted cash arrangement can be canceled by the Company at any time if substituted with letters of credit. The table below reconciles the cash and cash equivalents balances and restricted cash balance is classifiedbalances, recorded within other current assets on the Consolidated Balance Sheet.
Sheet to the amount of cash, cash equivalents and restricted cash reported on the Consolidated Statement of Cash Flows: | | | | | | | | | | | | | | |
| | June 30, |
| | 2022 | | 2021 |
| | | | |
| | (Dollars in thousands) |
Cash and cash equivalents | | $ | 17,041 | | | $ | 19,191 | |
Restricted cash, included in other current assets | | 10,423 | | | 9,961 | |
Total cash, cash equivalents and restricted cash | | $ | 27,464 | | | $ | 29,152 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Receivables and Allowance for Doubtful Accounts:
The receivable balance on the Company's Consolidated Balance Sheet primarily includes credit card receivables and accounts and notes receivable from franchisees, credit card receivables and receivables related to salons sold to franchisees. The balance is presented net of an allowance for expected losses (i.e., doubtful accounts), primarily related to receivables from the Company's franchisees. The Company monitors the financial condition of its franchisees and records provisions for estimated losses on receivables when it believes franchisees are unable to make their required payments based on factors such as delinquencies and aging trends.
The allowance for doubtful accounts is the Company's best estimate of the amount of probable credit losses related to existing accounts and notes receivables. As of June 30, 20172022 and 2016,2021, the allowance for doubtful accounts was $0.9$6.6 and $2.2$7.8 million, respectively. The allowance for doubtful accounts decreased in fiscal year 2022 due to higher write-offs. See Note 2 to the Consolidated Financial Statements.
Inventories:
Inventories of finished goods consist principally of hair care products for retail product sales. A portion of inventories are also used for salon services consisting of hair color, hair care products including shampoo and conditioner and hair care treatments including permanents, neutralizers and relaxers. Inventories are stated at the lower of cost or market, with cost determined on a weighted average cost basis.
Physical inventory counts are performedis held at salons and a third-party distribution center as of June 30, 2022. A physical inventory count is conducted annually inat the fourth quarter of the fiscal year for salons.third-party distribution center. Product and service inventories are adjusted based on the physical inventory counts. During the fiscal year, cost of retail product sold to salon guests is determined based on the weighted average cost of product sold, adjusted for an estimated shrinkage factor. The cost of product used in salon services is determined by applying an estimated percentage of total cost of service to service revenues. These estimates are updated quarterly based on cycle count results for the distribution centers and salons, service sales mix, discounting, special promotions and other factors.
The Company has inventory valuation reserves for excess and obsolete inventories, or other factors that may render inventories unmarketable at their historical costs. EstimatesIn fiscal year 2021, the Company announced it would transition away from its wholesale product distribution model in favor of a third-party distribution model. As a result, the Company exited its 2 distribution centers in fiscal year 2022 and now stores inventory at a third-party facility. To facilitate the exit of the future demand fordistribution centers, the Company sold and continues to sell inventory at discounts and dispose of hard-to-sell products. Additionally, the reduction in company-owned salons decreases the Company's ability to redistribute inventory from closed locations to other salons to be sold or used. The inventory valuation reserve as of June 30, 2022 and anticipated changes2021 was $1.9 and $11.8 million, respectively. During fiscal year 2022, the Company recorded total inventory reserve charges of $10.5 million, of which $7.7 and $2.8 million were recorded in formulasInventory reserve and packaging are someCompany-owned salon expense, respectively, in the Consolidated Statement of Operations. Included in Company-owned salon expense in the other factors used by management in assessing the net realizable valueConsolidated Statement of inventories.Operations is an inventory reserve charge of $12.1 million during fiscal year 2021.
Property and Equipment:
Property and equipment are carried at cost, less accumulated depreciation and amortization. Depreciation of property and equipment is computed using the straight-line method over their estimated useful asset lives (30(i.e., 30 to 39 years for buildings, 10 years or lease life for improvements and three to ten10 years or lease life for equipment, furniture and software). Depreciation expense was $53.5, $55.5$5.8 and $66.6$20.9 million in fiscal years 2017, 20162022 and 2015,2021, respectively. Depreciation expense for fiscal years 2022 and 2021 include $1.0 and $4.7 million of asset retirement obligations, which are cash expenses.
The Company capitalizes both internal and external costs of developing or obtaining computer software for internal use. Costs incurred to develop internal-use software during the application development stage are capitalized, while data conversion, training and maintenance costs associated with internal-use software are expensed as incurred. Estimated useful lives range from fivethree to seven years.
Expenditures for maintenance and repairs and minor renewals and betterments, which do not improve or extend the life of the respective assets, are expensed. All other expenditures for renewals and betterments are capitalized. The assets and related depreciation and amortization accounts are adjusted for property retirements and disposals with the resulting gain or loss included in operating income. Fully depreciated or amortized assets remain in the accounts until retired from service.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Right of Use Asset, Lease Liabilities and Rent Expense:
At contract inception, the Company determines whether a contract is, or contains, a lease by determining whether it conveys the right to control the use of the identified asset for a period of time. If the contract provides the Company the right to substantially all of the economic benefits from the use of the identified asset and the right to direct the use of the identified asset, the Company considers it to be, or contain, a lease. The Company leases its company-owned salons and some of its corporate facilities under operating leases. The original terms of the salon leases range from 1 to 20 years with many leases renewable for an additional 5 to 10 year term at the option of the Company. In addition to the obligation to make fixed rental payments for the use of the salons, the Company also has variable lease payments that are based on sales levels. For most leases, the Company is required to pay real estate taxes and other occupancy expenses.
The Company leases salon premises in which the majority of its franchisees operate and has entered into corresponding sublease arrangements with franchisees. All lease-related costs are passed through to franchisees. The Company records the rental payments due from franchisees as Franchise rental income and the corresponding amounts owed to landlords as Franchise rent expense on the Consolidated Statement of Operations.
For salon operating leases, the lease liability is initially and subsequently measured at the present value of the unpaid lease payments at the lease commencement date, including one lease term option when the lease is expected to be renewed. The right of use (ROU) asset is initially and subsequently measured throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, less any accrued lease payments and unamortized lease incentives received, if any. For leases classified as operating leases, expense for lease payments is recognized on a straight-line basis over the lease term, including the lease renewal option when the lease is expected to be renewed. Generally, the non-lease components, such as real estate taxes and other occupancy expenses, are separate from rent expense within the lease and are not included in the measurement of the lease liability because these charges are variable.
The discount rate used to determine the present value of the lease payments is the Company's estimated collateralized incremental borrowing rate, based on the yield curve for the respective lease terms, as the interest rate implicit in the lease cannot generally be determined. The Company uses the portfolio approach in applying the discount rate based on the original lease term.
Certain leases provide for contingent rents that are determined as a percentage of revenues in excess of specified levels. The Company records a contingent rent liability in accrued expenses on the Consolidated Balance Sheet, along with the corresponding rent expense in the Consolidated Statement of Operations, when specified levels have been achieved or when management determines that achieving the specified levels during the fiscal year is probable.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Salon Long-Lived Asset and Right of Use Asset Impairment Assessments, Excluding Goodwill:Assessments:
A lessee's ROU asset is subject to the same asset impairment guidance in ASC 360, Property, Plant, and Equipment, applied to other elements of property, plant, and equipment. The Company has identified its asset groups at the individual salon level as this represents the lowest level that identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. Poor salon performance in fiscal years 2022 and 2021, primarily due to the COVID-19 pandemic, resulted in ASC 360-10-35-21 triggering events. As a result, management assessed underperforming salon asset groups, which included the related ROU assets, for impairment in accordance with ASC 360.
The Company assesses the impairment of long-lived salon assets and right of use assets at the individual salon level, as this is the lowest level for which identifiable cash flows are largely independent of other groups of assets and liabilities, when events or changes in circumstances indicate the carrying value of the assets or the asset grouping may not be recoverable. Factors considered in deciding when to perform an impairment review include significant under-performance of an individual salon in relation to expectations, significant economic or geographic trends, and significant changes or planned changes in our use of the assets. ImpairmentThe first step is evaluated based onto assess recoverability, and in doing that, the sum of undiscounted estimated future cash flows expectedare compared to result from use of the long-lived assets that do not recover the carrying values.value. If the undiscounted estimated cash flows are less than the carrying value of the assets, the Company calculates an impairment charge based on the assets' estimateddifference between the carrying value of the asset group and its fair value. The fair value of the salon long-lived assetsasset group is estimated using a discounted cash flow modelmarket participant methods based on the best information available, including salon level revenues and expenses. Long-livedavailable. The fair value of the right of use asset impairment charges are recorded within depreciation and amortizationis estimated by determining what a market participant would pay over the life of the primary asset in the Consolidated Statement of Operations.
Judgments made by management relatedgroup, discounted back to the expected useful lives of long-lived assets and the ability to realize undiscounted cash flows in excess of the carrying amounts of such assets are affected by factors such as the ongoing maintenance and improvement of the assets, changes in economic conditions and changes in operating performance. As the ongoing expected cash flows and carrying amounts of long-lived assets are assessed, these factors could cause the Company to realize material impairment charges.
A summary of long-lived asset impairment charges follows:
|
| | | | | | | | | | | | |
|
| Fiscal Years |
|
| 2017 |
| 2016 |
| 2015 |
|
| (Dollars in thousands) |
North American Value |
| $ | 8,998 |
| | $ | 8,393 |
| | $ | 9,612 |
|
North American Premium |
| 2,105 |
| | 1,924 |
| | 4,804 |
|
International |
| 263 |
| | 161 |
| | 188 |
|
Total |
| $ | 11,366 |
|
| $ | 10,478 |
|
| $ | 14,604 |
|
Goodwill:
As of June 30, 2017 and 2016, the North American Value reporting unit had $188.9 and $189.2 million of goodwill, respectively, the North American Franchise reporting unit had $228.1 and $228.2 million of goodwill, respectively, and the North American Premium and International reporting units had no goodwill.2022. See Note 36 to the Consolidated Financial Statements. Statements for further discussion related to right of use asset impairment.
The Company tests goodwillfirst step in the impairment on an annual basis, duringtest under ASC 360 is to determine whether the Company’s fourth fiscal quarter, and between annual tests if an event occurs, or circumstances change, that would more likely than not reducelong-lived assets are recoverable, which is determined by comparing the fairnet carrying value of a reporting unit below its carrying amount.
Goodwill impairment testing is performed at the reporting unit level, which issalon asset group to the same asundiscounted net cash flows to be generated from the Company’s operating segments. As partuse and eventual disposition of that asset group. Estimating cash flows for purposes of the new simplification guidance issued byrecoverability test is subjective and requires significant judgment. Estimated future cash flows used for the Financial Accounting Standards Board (FASB), the goodwill test involves a one-step comparisonpurposes of the reporting unit’s fair valuerecoverability test were based upon historical cash flows for the salons, adjusted for expected changes in future market conditions related to its carrying value, including goodwill ("Step 1").the COVID-19 pandemic, and other factors. The prior guidance required a hypothetical purchase price allocation asperiod of time used to determine the estimates of the future cash flows for the recoverability test was based on the remaining useful life of the primary asset of the group, which was the ROU asset in all cases.
The second step of the goodwilllong-lived asset impairment test but this step has been eliminated. If the reporting unit’s fair value exceeds its carrying value, no further procedures are required. However, if the reporting unit’s fair value is less than the carrying value, an impairment charge is recorded for the difference between the fair value and carrying value of the reporting unit. The Company early adopted this guidance when completing the annual fiscal year 2017 impairment analysis and therefore only completed Step 1 of the goodwill impairment test.
In applying the goodwill impairment test, the Company may assess qualitative factors to determine whether it is more likely than notrequires that the fair value of the reporting units is less than itsasset group be estimated when determining the amount of any impairment loss. For the salon asset groups that failed the recoverability test, an impairment loss was measured as the amount by which the carrying value (“Step 0”). Qualitative factors may include, but are not limited to, economic, market and industry conditions, cost factors, and overall financial performanceamount of the reporting unit. If after assessing these qualitative factors, theasset group exceeds its fair value. The Company determines it is “more-likely-than-not” that the carrying value is less thanapplied the fair value then performing Step 1 ofguidance within ASC 820-10 to determine the goodwill impairment test is unnecessary.
The carrying value of each reporting unit is based on the assets and liabilities associated with the operations of the reporting unit, including allocation of shared or corporate balances among reporting units. Allocations are generally based on
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
the number of salons in each reporting unit as a percent of total company-owned salons or expenses of the reporting unit as a percent of total company expenses.
The Company calculates estimated fair values of the reporting units based on discounted future cash flows utilizing estimates in annual revenue, service and product margins, fixed expense rates, allocated corporate overhead, corporate-owned and franchise salon counts and long-term growth rates for determining terminal value. Where available and as appropriate, comparative market multiples are used in conjunction with the results of the discounted cash flows. The Company periodically engages third-party valuation consultants to assist in evaluating the Company's estimated fair value calculations.
Following is a description of the goodwill impairment assessments for each of the fiscal years:
Fiscal Year 2017
During the fourth quarter of fiscal year 2017, the Company experienced a triggering event due to the redefining of its operating segments, which also coincided with the annual assessment date. See Note 13 to the Consolidated Financial Statements. In connection with the change in operating segment structure, the Company changed its North American reporting units from two reporting units: North American Value and North American Premium, to three reporting units: North American Value, North American Franchise and North American Premium.
Pursuant to the change in operating segments, the Company performed a goodwill impairment test on its North American Value reporting unit. The North American Premium and International units do not have any goodwill. The Company compared the carrying value of the North American Value reporting unit, including goodwill,asset group from the perspective of a market-participant considering, among other things, appropriate discount rates, multiple valuation techniques, the most advantageous market, and assumptions about the highest and best use of the asset group. To determine the fair value of the salon asset groups, the Company utilized market-participant assumptions rather than the Company's own assumptions about how it intends to its estimateduse the asset group. The significant judgments and assumptions utilized to determine the fair value.value of the salon asset groups include the market rent of comparable properties and a discount rate. The fair value of the reporting unit exceededsalon long-lived asset group is estimated using market participant methods based on the best information available.
For fiscal years 2022 and 2021, the Company recognized long-lived asset impairment charges of $0.5 and $13.0 million, respectively, which included $0.5 and $9.5 million, respectively, related to ROU assets on the Consolidated Statement of Operations. The impairment loss for each salon asset group that was recognized was allocated among the long-lived assets of the group on a pro-rata basis using their relative carrying amounts. Additionally, the impairment losses did not reduce the carrying amount of an individual asset below its carryingfair value, by a substantial margin, resultingincluding for the ROU assets included in no goodwill impairment.
the salon asset groups. Assessing goodwillthe long-lived assets for impairment requires management to make assumptions and to apply judgment including forecasting future sales and expenses, and selecting appropriate discount rates, which can be affected by economic conditions and other factors that can be difficult to predict. The Company does not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions it uses to calculate impairment losses of goodwill. However, iffor its long-lived asset, including its ROU assets. If actual results are not consistent with the estimates and assumptions used in the calculations, the Company may be exposed to future impairment losses that could be material. See Note 6 to the Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Goodwill:
As of June 30, 2022 and 2021, the Franchise reporting unit had $174.4 and $229.6 million, respectively, of goodwill and the Company-owned reporting unit had no goodwill for both periods. See Note 5 to the Consolidated Financial Statements for changes to the goodwill balance. The Company assesses goodwill impairment on an annual basis as of April 30, and between annual assessments if an event occurs, or circumstances change, that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
Goodwill impairment assessments are performed at the reporting unit level, which is the same as the Company's operating segment structure, goodwill has been reallocated based on relativesegments. The Company performed its interim impairment tests and annual impairment tests by comparing the fair value of a reporting unit to its carrying amount. The Company then records an impairment charge for the North American Value and North American Franchise reporting units at June 30, 2017 and 2016.
Fiscal Years 2016 and 2015
Duringamount that the Company’s annualcarrying amount exceeds the fair value. In applying the goodwill impairment tests,assessment, the Company assessedcould assess qualitative factors to determine whether it is more likely than not that the fair value of the reporting units werewas less than theirits carrying value (“Step 0”)(Step 0). TheQualitative factors could include, but were not limited to, economic, market and industry conditions, cost factors and overall financial performance of the reporting unit. If after assessing these qualitative factors, the Company determined it is “more-likely-than-not”more likely than not that the carrying value was less than the fair value, then performing Step 1 of the goodwill impairment assessment was unnecessary.
The carrying value of each reporting unit is based on the assets and liabilities associated with the operations of the reporting unit, including allocation of shared or corporate balances among reporting units. Allocations are generally based on the number of salons in each reporting unit as a percent of total company-owned salons or expenses of the reporting unit as a percent of total company expenses.
The Company calculates estimated fair values of the reporting units were less thanbased on discounted cash flows utilizing estimates in annual revenue, service and product margins, fixed expense rates, allocated corporate overhead, franchise and company-owned salon counts, proceeds from the fair values. Accordingly,sale of company-owned salons to franchisees and long-term growth rates for determining terminal value. Where available and as appropriate, comparative market multiples are used in conjunction with the results of the discounted cash flows. The Company did not perform a two-step quantitative analysis.
As of June 30, 2017,engages third-party valuation consultants to assist in evaluating the Company's estimated fair value ascalculations.
Following is a description of the goodwill impairment assessments for each of the fiscal years:
Fiscal 2022
During fiscal year 2022, the Company performed a quantitative impairment test over goodwill during the second quarter due to a triggering event experienced in the quarter. This determination was made considering the sustained decrease in share price and a change in the Company's chief operating decision maker. In the second quarter, the Franchise reporting unit was determined by the sum of our reporting units'to have a fair value reconciled withinin excess of its carrying value and no impairment was recorded. A quantitative goodwill impairment was performed in the third quarter due to a reasonable range of our market capitalization, which included an assumed control premium of 20.0%.
A summary oftriggering event experienced during the Company's goodwill balance byquarter. This determination was made considering a decrease in forecasted revenue due to slower than expected recovery from COVID-19. In the third quarter, the Franchise reporting unit is as follows:
|
| | | | | | | | |
| | June 30, |
| | 2017 | | 2016 |
| | (Dollars in thousands) |
North American Value | | $ | 188,888 |
| | $ | 189,218 |
|
North American Franchise | | 228,099 |
| | 228,175 |
|
Total | | $ | 416,987 |
| | $ | 417,393 |
|
Investments In Affiliates:was determined to have a carrying value in excess of its fair value, resulting in a goodwill impairment charge of $16.0 million.
The Company has equity investmentsperformed its annual impairment assessment as of April 30. For the goodwill impairment analysis, management utilized a combination of both a discounted cash flows approach and market approach to evaluate the Franchise reporting unit. The discounted cash flows model reflects management's assumptions regarding revenue growth rates, economic and market trends, cost structure, and other expectations about the anticipated short-term and long-term operating results. Management's assumptions related to revenue growth rates were reduced and management increased expected salon closures compared to valuations in securitiesprior years. These changes, along with a decline in value from the market approach, reduced the fair value of certain privately held entities. the reporting unit. The discount rate of 20.0% was also a key assumption utilized in the discounted cash flows, which was an increase of 0.5% from the third quarter valuation due to an increase in market interest rates. As a result of the impairment testing, the Franchise reporting unit was determined to have a fair value in excess of its carrying value.
The Company accounts for these investments underderecognized $38.4 million of goodwill in fiscal year 2022 in connection to the equity or cost methodsale of accounting. Investments accounted for underOSP. The $38.4 million represents the equity method are recorded atportion of goodwill related to the amount ofOSP business based on relative fair value. See Notes 3 and 5 to the Company's investment and adjusted each period for the Company's share of the investee's income or loss. Investments are reviewed for changes in circumstance or the occurrence of events that suggest the Company's investment may not be recoverable.Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fiscal 2021
The table below summarizes losses recorded byDuring fiscal year 2021, the Company relateddid not experience any triggering events that required an interim goodwill analysis. The Company performed its annual impairment assessment as of April 30. For the fiscal year 2021 annual impairment assessment, the Company performed a Step 1 impairment test for the Franchise reporting unit. The Company compared the carrying value of the Franchise reporting unit, including goodwill, to its investments: |
| | | | | | | | | | | | |
| | Fiscal Year |
| | 2017 | | 2016 | | 2015 |
| | (Dollars in thousands) |
Equity losses (1) | | $ | (81 | ) | | $ | (1,829 | ) | | $ | (8,975 | ) |
Other than temporary impairment | | — |
| | (12,954 | ) | | (4,654 | ) |
Total losses | | $ | (81 | ) | | $ | (14,783 | ) | | $ | (13,629 | ) |
the estimated fair value. The results of this assessment indicated that the estimated fair value of the Company's Franchise reporting unit significantly exceeded the carrying value. _____________________________ | |
(1) | For fiscal year 2015, includes $6.9 million of expense for a non-cash deferred tax valuation allowance related to EEG. |
Self-Insurance Accruals:
The Company uses a combination of third partythird-party insurance and self-insurance for a number of risks including workers' compensation, health insurance, employment practice liability and general liability claims. The liability represents the Company's estimate of the undiscounted ultimate cost of uninsured claims incurred as of the balance sheetConsolidated Balance Sheet date.
The Company estimates self-insurance liabilities using a number of factors, primarily based on independent third-party actuarially-determined amounts, historical claims experience, estimates of incurred but not reported claims, demographic factors and severity factors.
Although the Company does not expect the amounts ultimately paid to differ significantly from the estimates, self-insurance accruals could be affected if future claims experience differs significantly from historical trends and actuarial assumptions. For fiscal years 2017, 20162022 and 2015,2021, the Company recorded (decreases) increasesdecreases in expense for changes in estimates related to prior year open policy periods of $(1.3), $(0.8)$0.5 and $0.1$3.6 million, respectively. The Company updates loss projections quarterlybi-annually and adjusts its liability to reflect updated projections. The updated loss projections consider new claims and developments associated with existing claims for each open policy period. As certain claims can take years to settle, the Company has multiple policy periods open at any point in time.
As of June 30, 2017,2022, the Company had $12.4$4.7 and $26.1$9.7 million recorded in current liabilities and noncurrentnon-current liabilities, respectively, related to the Company's workers' compensation and general liability self-insurance accruals. As of June 30, 2016,2021, the Company had $12.7$6.8 and $28.0$12.7 million recorded in current liabilities and noncurrentnon-current liabilities, respectively, related to the Company's workers' compensation and general liability self-insurance accruals.
Deferred Rent and Rent Expense:
The Company leases most salon locations under operating leases. Rent expense is recognized on a straight-line basis over the lease term. Tenant improvement allowances funded by landlord incentives, rent holidays and rent escalation clauses which provide for scheduled rent increases during the lease term or for rental payments commencing at a date other than the date of initial occupancy are recorded in the Consolidated Statements of Operations on a straight-line basis over the lease term (including one renewal period if renewal is reasonably assured based on the imposition of an economic penalty for failure to exercise the renewal option). The difference between the rent due under the stated periods of the lease and the straight-line basis is recorded as deferred rent within accrued expenses and other noncurrent liabilities in the Consolidated Balance Sheet.
For purposes of recognizing incentives and minimum rental expenses on a straight-line basis, the Company uses the date it obtains the legal right to use and control the leased space to begin amortization, which is generally when the Company enters the space and begins to make improvements in preparation of its intended use.
Certain leases provide for contingent rents, which are determined as a percentage of revenues in excess of specified levels. The Company records a contingent rent liability in accrued expenses on the Consolidated Balance Sheet, along with the corresponding rent expense in the Consolidated Statement of Operations, when specified levels have been achieved or when management determines that achieving the specified levels during the fiscal year is probable.
Revenue Recognition and Deferred Revenue:
Franchise revenues primarily include royalties, fees, product sales to franchisees and advertising fund fees. Royalties and advertising fund revenues represent sales-based royalties that are recognized as revenue in the period in which the sales occur. The Company defers franchise fees until the salon is open and then recognizes the revenue over the term of the franchise agreement. See Note 2 to the Consolidated Financial Statements. Product sales by the Company to its franchisees are recorded at the time product is delivered to franchise locations. Company-owned salon revenues are recognized at the time when the services are provided. Product revenues are recognized whenprovided or the guest receives and pays for the merchandise. Revenues from purchases made with gift cards are also recorded when the guest takes possession of the merchandise or services are provided. Gift cards issued by the Company are recorded as a liability (deferred revenue) until they are redeemed.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Classification of Revenue and Expenses:
Product sales byBeginning in the first quarter of fiscal year 2022, the Company toadjusted its franchisees are included within product revenues on the Consolidated Statement of Operations for all periods presented to align the presentation of results to its franchise-focused business. Below is a summary of the changes to the financial statement captions. The change does not have a financial impact on the Company's reported revenue, operating loss, reported net loss or cash flows from operations.
Royalties - sales-based royalty received from franchisees. In prior years, these fees were included in Royalties and recorded atFees and disclosed in the time product is shipped to franchise locations.footnotes.
Franchise revenues primarily include royalties, initialFees - fees received from franchisees and third parties, including franchise fees, software and net rental income. Royalties are recognized as revenuehardware fees related to Opensalon Pro and fees received from the third-party distributors.
Product sales to franchisees - wholesale product sales to franchisees. This caption equates to Product sales in the monthFranchise segment in which franchisee services are rendered.prior years. The Company recognizeschanged its franchise product sales business in fiscal year 2022 from a wholesale distribution model to a third-party distribution model. This revenue was expected to decrease significantly during fiscal year 2022 and into fiscal year 2023.
Advertising fund contributions - sales-based advertising fund contributions received from initial franchisefranchisees. In prior years, these fees atwere included in Royalties and Fees and disclosed in the time franchise locations are opened, as this is generally whenfootnotes.
Company-owned salon revenue - service revenue and revenue derived from sales of product in Company-owned salons. This caption equates to revenue reported in the Company has performed all initial services required under the franchise agreement.Company-owned segment in prior periods.
Classification of Expenses:
The following discussion provides the primary costs classified in each major expense category:
Cost of service— laborproduct sales to franchisees - direct cost of inventory and freight and other costs related to salon employees, costs associated with our field supervision andof sales. In prior years, these sales were included in the Franchise segment cost of product used in providing service.and site operating expenses.
Cost of product—Company-owned salon expense - cost of service and product sold to guests laborin our Company-owned salons and other salon-related costs. In prior years, these costs related to selling retail product and thewere classified as Company-owned segment cost of service, cost of product soldand site operating expenses. Excluded from this caption are general and administrative expense, rent and depreciation and amortization related to franchisees.
Site operating— direct costs incurred by the Company's salons, such as advertising, workers' compensation, insurance, utilities, travel costs associated with our field supervision and janitorial costs.
General and administrative— costs associated with salon training, distribution centers and corporate offices (such as salaries and professional fees), including cost incurred to support franchise operations.company-owned salons.
Consideration Received from Vendors:
The Company receives consideration for a variety of vendor-sponsored programs. These programs primarily include volume rebates and promotion and advertising reimbursements.
With respect to volume rebates, the Company estimates the amount of rebate it will receive and accrues it as a reduction to the cost of inventory over the period in which the rebate is earned based upon historical purchasing patterns and the terms of the volume rebate program. A quarterly analysis is performed in order to ensure the estimated rebate accrued is reasonable and any necessary adjustments are recorded.
Shipping and Handling
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Distribution Costs:
Shipping and handlingDistribution costs are incurred to store, move and ship product from the Company's distribution centers to company-ownedsalons and franchise locations and include an allocation of internalincludes distribution center overhead. Such shipping and handlingdistribution costs related to product shipped to company-owned locations are included in site operatingCompany-owned salon expenses in the Consolidated Statement of Operations. Shipping and handlingDistribution costs, including distribution center overhead, related to shipping product to franchise locations totaled $3.7, $3.6$2.3 and $3.6$12.1 million during fiscal years 2017, 20162022 and 2015,2021, respectively, and are included within general and administrative expenses on the Consolidated Statement of Operations. Any amounts billed to franchisees for shippingIn fiscal year 2022, the Company exited its 2 distribution centers and handling are includedchanged the wholesale product distribution model in product revenues withinfavor of a third-party distribution model, reducing the Consolidated Statement of Operations.cost in fiscal year 2022. The Company now stores inventory at a third-party facility.
Advertising:Advertising and Advertising Funds:
Advertising costs including salon collateral material,consist of the Company's corporate funded advertising costs, the Company's advertising fund contributions and franchisee's advertising fund contributions. Corporate funded advertising costs are expensed as incurred. Advertising costs expensed and included in site operating expenses in fiscal years 2017, 2016 and 2015 was $35.5, $35.5 and $38.7 million, respectively.
Advertising Funds:
The Company has various franchising programs supporting certain of itsspecific franchise salon concepts. Most maintain advertising funds that provide comprehensive advertising and sales promotion support. The Company isAll salons are required to participate in the advertising funds for company-owned locations under the same salon concept. The Company assists inadministers the administration of the advertising funds. However, a group of individuals consisting of franchisee representatives has control over all of the expenditures and operates the funds in accordance with franchise operating and other agreements. Advertising fund contributions are expensed when the contribution is made.
The Company recordsCompany's advertising costs included in the Consolidated Statement of Operations consist of the following: | | | | | | | | | | | | | | | | |
| | Fiscal Years |
| | 2022 | | 2021 | | |
| | | | | | |
| | (Dollars in thousands) |
Advertising fund contributions from franchisees | | $ | 32,573 | | | $ | 22,023 | | | |
Advertising fund contributions from company-owned salons (1) | | 154 | | | 897 | | | |
Corporate funded advertising costs (1) | | 671 | | | 7,015 | | | |
Total advertising costs | | $ | 33,398 | | | $ | 29,935 | | | |
_____________________________________________________________________________ (1)Included in General and administrative expense in the period the company-owned salons make contributions to the respective advertising fund. During fiscal years 2017, 2016 and 2015, total Company contributions to the franchise advertising funds totaled $17.2, $17.5 and $18.0 million, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Operations.
The Company records all advertising funds as assets and liabilities within the Company's Consolidated Balance Sheet. As of June 30, 20172022 and 2016,2021, approximately $21.7$10.5 and $23.3$9.9 million, respectively, representing the advertising funds' assets and liabilities were recorded within total assets and total liabilities in the Company's Consolidated Balance Sheet.
Stock-Based Employee Compensation Plans:
The Company recognizes stock-based compensation expense based on the fair value of the awards at the grant date. Compensation expense is recognized on a straight-line basis over the requisite service period of the award (or to the date a participant becomes eligible for retirement, if earlier). The Company uses option pricingfair value methods that require the input of subjective assumptions, including the expected term, expected volatility, dividend yield and risk-free interest rate.
The Company estimates the likelihood and the rate of achievement for performance sensitive stock-based awards at the end of each reporting period. Changes in the estimated rate of achievement can have a significant effect on the recorded stock-based compensation expense as the effect of a change in the estimated achievement level is recognized in the period the change occurs.
Preopening Expenses:Interest Income and Other, Net:
Non-capital expenditures such as payroll, training costs and promotion incurred priorIn March 2021, the Company recorded a gain of $15.0 million related to the openingCompany's distribution centers. The gain on distribution centers was recorded to Interest income and other, net in the Consolidated Statement of a new location are expensed as incurred.Operations in fiscal year 2021.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Sales Taxes:
Sales taxes are recorded on a net basis (rather than as both revenue and an expense) within the Company's Consolidated Statement of Operations.
Income Taxes:
Deferred income tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the Consolidated Financial Statements or income tax returns. Deferred income tax assets and liabilities are determined based on the differences between the financial statement and tax basis of assets and liabilities using currently enacted tax rates in effect for the years in which the differences are expected to reverse. A valuation allowance is established for any portion of
We recognize deferred tax assets thatto the extent we believe these assets are not considered more likely than not to be realized. The Company evaluates all evidence, including recent financial performance, the existence of cumulative year losses and our forecast of future taxable income, to assess the need for a valuation allowance against our deferred tax assets. While the determination of whether or not to record a valuation allowance is not fully governed by a specific objective test, accounting guidance places significant weight on recent financial performance.
The Company has a valuation allowance on the majority of its deferred tax assets amounting to $120.9of $201.7 and $110.0$192.5 million at June 30, 20172022 and 2016,2021, respectively.
The Company assesses the realizability of its If we determine that we would be able to realize our deferred tax assets on a quarterly basis and will reversein the future in excess of their net recorded amount, we would make necessary adjustments to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
Significant components of the valuation allowance which occurred during fiscal year 2022 are as follows:
•The Company determined that it no longer had sufficient U.S. state indefinite-lived taxable temporary differences to support realization of its U.S. state indefinite-lived NOLs and record a tax benefit when the Company generates sufficient sustainable pretax earnings to make the realizability of theits existing U.S. deferred tax assets more likely than not.that upon reversal are expected to generate state indefinite-lived NOLs. As a result, the Company recorded a $4.1 million valuation allowance on its U.S. state indefinite-lived deferred tax assets.
Significant components of the valuation allowance which occurred during fiscal year 2021 are as follows:
•The Company recognized a tax loss on its investment in Luxembourg and established a corresponding valuation allowance of $34.4 million.
The Company reserves for unrecognized tax benefits, interest and penalties related to anticipated tax audit issuespositions in the U.S. and other tax jurisdictions based on an estimate of whether additional taxes will be due. If payment of these amounts ultimately proves to be unnecessary, the reversal of these liabilities would result in tax benefits being recognized in the period in which it is determined that the liabilities are no longer necessary. If the estimate of unrecognized tax benefits, interest and penalties proves to be less than the ultimate assessment, additional expenses would result.
Inherent in the measurement of deferred balances are certain judgments and interpretations of tax laws and published guidance with respect to the Company's operations. Income tax expense is primarily the current tax payable for the period and the change during the period in certain deferred tax assets and liabilities.
See Note 10 to the Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Net (Loss) IncomeLoss Per Share:
The Company's basic earnings per share is calculated as net (loss) incomeloss divided by weighted average common shares outstanding, excluding unvested outstanding restricted stock awards and restricted stock units. The Company's dilutive earnings per share is calculated as net (loss) income divided by weighted average common shares and common share equivalents outstanding, which includes shares issuable under the Company's stock option plan and long-term incentive plan and dilutive securities. Stock-based awards with exercise prices greater than the average market value of the Company's common stock are
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
excluded from the computation of diluted earnings per share. WhileDue to the Company's convertible debt was outstanding (repaidnet loss in July 2014), dilutedall periods presented, basic and dilutive earnings per share would have also reflected the assumed conversion under the convertible debt if the impact was dilutive, along with the exclusion of related interest expense, net of taxes.are equal.
Comprehensive (Loss) Income:Loss:
Components of comprehensive (loss) incomeloss include net (loss) income,loss, foreign currency translation adjustments and recognition of deferred compensation, net of tax within shareholders' (deficit) equity.
Foreign Currency Translation:
The balance sheet, statementConsolidated Balance Sheet, Consolidated Statement of operationsOperations and statementConsolidated Statement of cash flowsCash Flows of the Company's international operations are measured using local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at the exchange rates in effect at each balance sheetBalance Sheet date. Translation adjustments arising from the use of differing exchange rates from period to period are included in accumulated other comprehensive income within shareholders' (deficit) equity. Statement of Operations accounts are translated at the average rates of exchange prevailing during the year. During fiscal years 2017, 20162022 and 2015, the2021, a $0.6 million foreign currency (loss)loss and $0.3 million foreign currency gain recorded within interest income and other, netis included in the Consolidated Statementloss from continuing operations, respectively.
Discontinued Operations:NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During fiscal year 2015, the Company recorded expenses of $0.6 million in discontinued operations related to Trade Secret legal fees.
Recent
Accounting Standards Recently Adopted by the Company:
Stock Compensation
In March 2016,December 2019, the Financial Accounting Standards Board (FASB)FASB issued updated guidance simplifyingASU 2019-12, "Income Taxes (Topic 740)," which simplifies the accounting for share-based payment transactions, includingincome taxes by removing certain exceptions to the income tax consequences, classificationgeneral principles in Topic 740. The amendments also improve consistent application of awards as either equity or liabilities and classificationsimplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Depending on the consolidated statement of cash flows.amendment, adoption may have been applied on the retrospective, modified retrospective or prospective basis. The Company early adopted this guidance in the first quarter of fiscal year 2017. The Condensed Consolidated Statement of Cash Flows for the twelve months ended June 30, 2016 and June 30, 2015 reflect the reclassification of employee taxes paid for shares withheld of $0.8 million from operating to financing activities, in accordance with this new guidance. The other provisionsadoption of this new guidance during fiscal year 2022 using the prospective method did not have a material impact on our Consolidated Financial Statements.
Recently Issued Accounting Standards Not Yet Adopted:
The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and it does not believe any of these pronouncements will have a material impact to the Company's consolidated financial statements.
Simplifying the Presentation of Debt Issuance Costs
In April 2015, the FASB issued updated guidance requiring debt issuance costs related to a recognized debt liability to be presented in the consolidated balance sheet as a direct reduction from the carrying amount of the debt liability. The Company adopted this standard in the first quarter of fiscal year 2017, applying it retrospectively. The Condensed Consolidated Balance Sheet as of June 30, 2016 reflects the reclassification of debt issuance costs of $0.8 million from other assets to long-term debt, net.
Goodwill Impairment
In January 2017, the FASB issued updated guidance simplifying the accounting for goodwill impairment. The guidance removes Step 2 of the goodwill impairment test, which required a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The Company early adopted this guidance in the fourth quarter of fiscal year 2017 and applied the new guidance to its fiscal year 2017 goodwill impairment assessment.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
2. REVENUE RECOGNITION:
Accounting Standards Recently Issued But Not Yet AdoptedRevenue Recognition and Deferred Revenue:
Revenue recognized at point of sale
Product sales to franchisees are recorded at the time product is delivered to the franchisee. Payment for franchisee product revenue is generally collected 30 to 90 days of delivery. Company-owned salon revenues are recognized at the time when the services are provided or the guest receives and pays for the merchandise. Revenues from purchases made with gift cards are also recorded when the guest takes possession of the merchandise or services are provided. Gift cards issued by the Company:Company are recorded as a liability (deferred revenue) upon sale and recognized as revenue upon redemption by the guest. Gift card breakage, the amount of gift cards which will not be redeemed, is recognized proportional to redemptions using estimates based on historical redemption patterns.
LeasesRevenue recognized over time
In February 2016,Royalty and advertising fund revenues represent sales-based royalties that are recognized in the FASB issued updated guidance requiring organizations that lease assets to recognizeperiod in which the rightssales occur. Generally, royalty and obligations created by thoseadvertising fund revenues are billed and collected monthly in arrears. Advertising fund revenues and expenditures, which must be spent on marketing and related activities per the franchise agreements, are recorded on a gross basis within the Consolidated Statement of Operations. The treatment increases both the gross amount of reported revenue and expense and generally has no impact on operating income and net income. Franchise fees are billed and received upon the signing of the franchise agreement. Recognition of these fees is deferred until the salon opening and is then recognized over the term of the franchise agreement, which is typically 10 years. Franchise rental income is a result of the Company signing leases on behalf of franchisees and entering into sublease arrangements with the consolidated balance sheet. The new standard is effective for the Company in the first quarter of fiscal year 2020, with early adoption permitted.franchisees. The Company recognizes franchise rental income and expense when it is currently evaluatingdue to the effectlandlord.
Information about receivables, broker fees and deferred revenue subject to the new standard will have on the Company's consolidated financial statements but expects this adoption will result in a material increase in the assets and liabilities on the Company's consolidated balance sheet.
Revenue from Contracts with Customers
In May 2014, the FASB issued updated guidance for revenue recognition. The updated accounting guidance provides a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the exchange for goods or services to a customer at an amount that reflects the consideration it expects to receive for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. The guidance is effective for the Company in the first quarter of fiscal year 2019, with early adoption permitted at the beginning of fiscal year 2018. The standard allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or modified retrospective adoption, meaning the standard is applied only to the most current period presented in the financial statements. The Company expects to adopt this guidance in fiscal year 2019 using the modified retrospective method of adoption. While the Company is continuing to assess all potential impacts of the standard, the Company currently believes the most significant impact relates to the timing of recognition for gift card breakage, although it is not expected to have a material impact on the Company's consolidated financial statements. The Company is continuing to evaluate the impact the adoption of this new guidance will have on these and other revenue transactions, in addition to the impact on related disclosures.as follows:
Intra-Entity Transfers Other Than Inventory
In October 2016, the FASB issued guidance on the accounting for income tax effects of intercompany transfers of assets other than inventory. The guidance requires entities to recognize the income tax impact of an intra-entity transfer of an asset other than inventory when the transfer occurs, rather than when the assets have been sold to an outside party. The guidance is effective for the Company in the first quarter of fiscal year 2019, with early adoption permitted. The Company does not expect the adoption of this standard to have a material impact on the Company's consolidated financial statements.
Restricted Cash
In November 2016, the FASB issued updated cash flow guidance requiring restricted cash and restricted cash equivalents to be included in the cash and cash equivalent balances in the statement of cash flows. Transfers between cash and cash equivalents and restricted cash will no longer be presented in the statement of cash flows and a reconciliation between the balance sheet and statement of cash flows must be disclosed. The guidance is effective for the Company beginning in the first quarter of fiscal year 2019, with early adoption permitted. The Company is currently evaluating the impact this guidance will have on the Company's consolidated statement of cash flows.
Statement of Cash Flows
In August 2016, the FASB issued updated cash flow guidance clarifying cash flow classification and presentation for certain items. The guidance is effective for the Company beginning in the first quarter of fiscal year 2019, with early adoption permitted. The Company does not expect the adoption of this standard to have a material impact on the Company's consolidated statement of cash flows.
| | | | | | | | | | | | | | | | | | | | |
| | June 30, 2022 | | June 30, 2021 | | Balance Sheet Classification |
| | | | | | |
| | (Dollars in thousands) | | |
Receivables from contracts with customers, net | | $ | 10,263 | | | $ | 18,011 | | | Receivable, net |
Broker fees | | 15,592 | | | 19,254 | | | Other assets |
| | | | | | |
Deferred revenue: | | | | | | |
Current | | | | | | |
Gift card liability | | $ | 2,037 | | | $ | 2,240 | | | Accrued expenses |
Deferred franchise fees unopened salons | | 16 | | | 40 | | | Accrued expenses |
Deferred franchise fees open salons | | 5,770 | | | 5,884 | | | Accrued expenses |
Total current deferred revenue | | $ | 7,823 | | | $ | 8,164 | | | |
Non-current | | | | | | |
Deferred franchise fees unopened salons | | $ | 3,211 | | | $ | 6,571 | | | Other non-current liabilities |
Deferred franchise fees open salons | | 26,827 | | | 32,365 | | | Other non-current liabilities |
Total non-current deferred revenue | | $ | 30,038 | | | $ | 38,936 | | | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2.Receivables relate primarily to payments due for royalties, franchise fees, advertising fees, rent, franchise product sales and sales of salon services and product paid by credit card. The receivables balance is presented net of an allowance for expected losses (i.e., doubtful accounts), related to receivables from franchisees. The following table is a rollforward of the allowance for doubtful accounts for the periods indicated:
| | | | | | | | | | | | | | |
| | Fiscal Years |
| | 2022 | | 2021 |
| | | | |
| | (Dollars in thousands) |
Balance at beginning of period | | $ | 7,774 | | | $ | 6,899 | |
Provision for doubtful accounts (1) | | 967 | | | 509 | |
Provision for franchisee rent (2) | | 1,421 | | | 1,920 | |
Reclass of accrued rent (3) | | 149 | | | — | |
Write-offs | | (3,752) | | | (1,554) | |
Balance at end of period | | $ | 6,559 | | | $ | 7,774 | |
_____________________________________________________________________________(1)The provision for doubtful accounts is recognized as general and administrative expense in the Consolidated Statement of Operations.
(2)The provision for franchisee rent is recognized as rent in the Consolidated Statement of Operations.
(3)The reclass of accrued rent represents franchisee rent obligations guaranteed by the Company that were unbilled and deemed unrecoverable as of June 30, 2021. The amounts billed in fiscal year 2022 and the related accrual was reclassified to allowance for doubtful accounts.
Broker fees are the costs associated with using external brokers to identify new franchisees. These fees are paid upon the signing of the franchise agreement and recognized as general and administrative expense over the term of the franchise agreement in the Consolidated Statement of Operations. The following table is a rollforward of the broker fee balance for the periods indicated:
| | | | | | | | | | | | | | |
| | Fiscal Years |
| | 2022 | | 2021 |
| | | | |
| | (Dollars in thousands) |
Balance at beginning of period | | $ | 19,254 | | | $ | 20,516 | |
Additions | | 25 | | | 2,112 | |
Amortization | | (3,189) | | | (3,180) | |
Write-offs | | (498) | | | (194) | |
Balance at end of period | | $ | 15,592 | | | $ | 19,254 | |
The decrease in non-current deferred franchise fees for unopened salons in fiscal year 2022 is primarily due to $2.4 million of deferred fees related to terminated development agreements being recognized as fees in the Consolidated Statement of Operations in the year ended June 30, 2022. Deferred revenue includes the gift card liability and deferred franchise fees for unopened salons and open salons. Deferred franchise fees related to open salons are generally recognized on a straight-line basis over the term of the franchise agreement. Franchise fee revenue for fiscal years 2022 and 2021 was $6.5 and $6.6 million, respectively. Estimated revenue expected to be recognized in the future related to deferred franchise fees for open salons as of June 30, 2022 is as follows (in thousands):
| | | | | | | | |
2023 | | $ | 5,770 | |
2024 | | 5,468 | |
2025 | | 5,092 | |
2026 | | 4,618 | |
2027 | | 4,157 | |
Thereafter | | 7,492 | |
Total | | $ | 32,597 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. DISCONTINUED OPERATIONS
Opensalon Pro (OSP):
On June 30, 2022, the Company sold its OSP software-as-a-service solution to Soham Inc. for a purchase price of $20.0 million in cash plus up to an additional $19.0 million in cash contingent upon the number of salons that migrate to Soham's Zenoti product as their salon technology platform. The Company received $13.0 million in proceeds in June 2022. The remaining $7.0 million of the purchase price is subject to holdbacks including $4.0 million of the proceeds retained in escrow to be paid upon completion of the Company's refinancing, $1.0 million once the Company ends its arrangement with ProPoint in December 2022 and $2.0 million of proceeds held back until general indemnity provisions are satisfied within 18 months from closing. As a result of the sale, the Company classified the OSP business as discontinued operations in the financial statements for all years presented. Discontinued operations is included in the Franchise segment in the Consolidated Statement of Operations for all periods presented.
The following summarizes the components of the loss from sale of OSP for fiscal year 2022 included in discontinued operations (in thousands):
| | | | | | | | |
Cash proceeds | | $ | 13,000 | |
Goodwill derecognition | | (38,358) | |
Software write-off (1) | | (8,408) | |
Hardware write-down (2) | | (1,825) | |
Other, net, including professional fees | | (552) | |
Loss from sale of OSP | | $ | (36,143) | |
_______________________________________________________________________________(1)Internally developed capitalized software is included in non-current assets related to discontinued operations as of June 30, 2021 and written off in June 2022 upon completion of the sale.
(2)Prior to the sale, hardware used to run OSP was sold to franchisees. As a result of the sale, the Company wrote-down the value of the hardware to its net realizable value and the charge is included in the loss on the sale of OSP. The hardware is included in inventory as of June 30, 2022 and current assets related to discontinued operations as of June 30, 2021 in the Consolidated Balance Sheet.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following summarizes the results of discontinued operations for the periods presented: | | | | | | | | | | | | | | | | |
| | Fiscal Years |
| | 2022 | | 2021 | | |
| | | | | | |
| | (Dollars in thousands) |
Discontinued operations: | | | | | | |
Fees | | $ | 3,811 | | | $ | 3,461 | | | |
Cost of product sales to franchisees | | (1,037) | | | (2,790) | | | |
General and administrative | | (3,517) | | | (9,006) | | | |
Rent | | (194) | | | (176) | | | |
Depreciation and amortization | | (1,322) | | | (964) | | | |
Goodwill impairment (1) | | (2,880) | | | — | | | |
Interest expense | | (715) | | | (650) | | | |
Loss from sale of OSP | | (36,143) | | | — | | | |
Loss from discontinued operations, before taxes | | (41,997) | | | (10,125) | | | |
Income tax benefit from discontinued operations (2) | | 2,599 | | | — | | | |
Loss from discontinued operations, net of tax | | $ | (39,398) | | | $ | (10,125) | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
_______________________________________________________________________________ (1)Goodwill impairment included in discontinued operations represents the portion of impairment allocated to the OSP business based on relative fair value.
(2)Income taxes have been allocated to continuing and discontinued operations based on the methodology required by accounting for income taxes guidance.
The Company leases office space in Fremont, California. The lease related liabilities are included in long-term lease liability as of June 30, 2022, and the lease related assets and liabilities are included in non-current assets, current liabilities and non-current liabilities related to discontinued operations as of June 30, 2021 in the Consolidated Balance Sheet.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. OTHER FINANCIAL STATEMENT DATA
The following provides additional information concerning selected balance sheet accounts: | | | | | | | | | | | | | | |
| | June 30, |
| | 2022 | | 2021 |
| | | | |
| | (Dollars in thousands) |
Other current assets: | | | | |
Prepaid assets | | $ | 1,816 | | | $ | 4,121 | |
Restricted cash | | 10,423 | | | 9,961 | |
Other | | 1,745 | | | 2,935 | |
Total other current assets | | $ | 13,984 | | | $ | 17,017 | |
| | | | |
Property and equipment: | | | | |
Buildings and improvements | | $ | 8,228 | | | $ | 8,251 | |
Equipment, furniture and leasehold improvements | | 14,260 | | | 28,782 | |
Internal use software | | 34,824 | | | 34,644 | |
Total property and equipment | | 57,312 | | | 71,677 | |
Less accumulated depreciation and amortization | | (44,477) | | | (54,771) | |
Total property and equipment, net | | $ | 12,835 | | | $ | 16,906 | |
| | | | |
Accrued expenses: | | | | |
Payroll and payroll related costs | | $ | 7,767 | | | $ | 16,175 | |
Insurance | | 5,012 | | | 7,525 | |
Rent and related real estate costs | | 4,585 | | | 11,197 | |
Deferred revenue | | 7,823 | | | 8,164 | |
Other | | 8,597 | | | 8,181 | |
Total accrued expenses | | $ | 33,784 | | | $ | 51,242 | |
| | | | |
Other non-current liabilities: | | | | |
Deferred income taxes | | $ | 10,979 | | | $ | 10,650 | |
Insurance | | 9,744 | | | 12,722 | |
Deferred benefits | | 6,308 | | | 10,028 | |
Deferred franchise fees | | 30,038 | | | 38,936 | |
Other | | 1,905 | | | 2,739 | |
Total other non-current liabilities | | $ | 58,974 | | | $ | 75,075 | |
|
| | | | | | | | |
| | June 30, |
| | 2017 | | 2016 |
| | (Dollars in thousands) |
Other current assets: | | | | |
Prepaids | | $ | 31,842 |
| | $ | 30,710 |
|
Restricted cash | | 19,032 |
| | 20,156 |
|
Other | | 1,298 |
| | 899 |
|
| | $ | 52,172 |
| | $ | 51,765 |
|
Property and equipment: | | | | |
Land | | $ | 3,864 |
| | $ | 3,864 |
|
Buildings and improvements | | 47,471 |
| | 47,031 |
|
Equipment, furniture and leasehold improvements | | 645,149 |
| | 694,475 |
|
Internal use software | | 71,495 |
| | 69,045 |
|
Equipment, furniture and leasehold improvements under capital leases | | 57,561 |
| | 61,213 |
|
| | 825,540 |
| | 875,628 |
|
Less accumulated depreciation and amortization | | (623,873 | ) | | (636,222 | ) |
Less amortization of equipment, furniture and leasehold improvements under capital leases | | (54,673 | ) | | (56,085 | ) |
| | $ | 146,994 |
| | $ | 183,321 |
|
Accrued expenses: | | | | |
Payroll and payroll related costs | | $ | 62,680 |
| | $ | 74,013 |
|
Insurance | | 14,876 |
| | 15,559 |
|
Other | | 44,457 |
| | 45,859 |
|
| | $ | 122,013 |
| | $ | 135,431 |
|
Other noncurrent liabilities: | | | | |
Deferred income taxes | | $ | 108,119 |
| | $ | 100,169 |
|
Deferred rent | | 36,271 |
| | 39,057 |
|
Insurance | | 26,112 |
| | 28,019 |
|
Deferred benefits | | 17,302 |
| | 19,490 |
|
Other | | 16,802 |
| | 14,875 |
|
| | $ | 204,606 |
| | $ | 201,610 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. OTHER FINANCIAL STATEMENT DATA (Continued)
The following provides additional information concerning other intangibles, net:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, |
| | 2022 | | 2021 |
| | Weighted Average Amortization Periods (1) | | Cost (2) | | Accumulated Amortization (2) | | Net | | Weighted Average Amortization Periods (1) | | Cost (2) | | Accumulated Amortization (2) | | Net |
| | | | | | | | | | | | | | | | |
| | (In years) | | (Dollars in thousands) | | (In years) | | (Dollars in thousands) |
Brand assets and trade names | | 36 | | $ | 5,421 | | | $ | (3,234) | | | $ | 2,187 | | | 35 | | $ | 6,040 | | | $ | (3,568) | | | $ | 2,472 | |
Franchise agreements | | 20 | | 7,719 | | | (6,756) | | | 963 | | | 19 | | 10,099 | | | (8,901) | | | 1,198 | |
| | | | | | | | | | | | | | | | |
Other | | 20 | | 354 | | | (278) | | | 76 | | | 20 | | 366 | | | (275) | | | 91 | |
Total | | 26 | | $ | 13,494 | | | $ | (10,268) | | | $ | 3,226 | | | 24 | | $ | 16,505 | | | $ | (12,744) | | | $ | 3,761 | |
_______________________________________________________________________________ |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, |
| | 2017 | | 2016 |
| | Weighted Average Amortization Periods (1) | | Cost (2) | | Accumulated Amortization (2) | | Net | | Weighted Average Amortization Periods (1) | | Cost (2) | | Accumulated Amortization (2) | | Net |
| | (In years) | | (Dollars in thousands) | | (In years) | | (Dollars in thousands) |
Brand assets and trade names | | 31 | | $ | 8,187 |
| | $ | (4,013 | ) | | $ | 4,174 |
| | 31 | | $ | 8,206 |
| | $ | (3,746 | ) | | $ | 4,460 |
|
Franchise agreements | | 19 | | 9,832 |
| | (7,433 | ) | | 2,399 |
| | 19 | | 9,853 |
| | (7,116 | ) | | 2,737 |
|
Lease intangibles | | 20 | | 14,501 |
| | (9,356 | ) | | 5,145 |
| | 20 | | 14,535 |
| | (8,649 | ) | | 5,886 |
|
Other | | 21 | | 5,493 |
| | (3,577 | ) | | 1,916 |
| | 21 | | 5,748 |
| | (3,646 | ) | | 2,102 |
|
Total | | 22 | | $ | 38,013 |
| | $ | (24,379 | ) | | $ | 13,634 |
| | 22 | | $ | 38,342 |
| | $ | (23,157 | ) | | $ | 15,185 |
|
(1)All intangible assets have been assigned an estimated finite useful life and are amortized on a straight-line basis over the number of years that approximate their expected period of benefit (ranging from three to 40 years). | |
(1) | All intangible assets have been assigned an estimated finite useful life and are amortized on a straight-line basis over the number of years that approximate their expected period of benefit (ranging from three to 40 years). |
| |
(2) | The change in the gross carrying value and accumulated amortization of other intangible assets is impacted by foreign currency. |
(2)The change in the gross carrying value and accumulated amortization of other intangible assets is impacted by foreign currency.
Total amortization expense related to intangible assets during fiscal years 2017, 20162022 and 20152021 was approximately $1.5, $1.5$0.4 and $1.7$0.8 million, respectively. As of June 30, 2017,2022, future estimated amortization expense related to intangible assets is estimated to be:as follows (in thousands):
| | | | | | | | |
2023 | | $ | 365 | |
2024 | | 302 | |
2025 | | 302 | |
2026 | | 302 | |
2027 | | 302 | |
Thereafter | | 1,653 | |
Total | | $ | 3,226 | |
|
| | | |
Fiscal Year | (Dollars in thousands) |
2018 | $ | 1,473 |
|
2019 | 1,466 |
|
2020 | 1,463 |
|
2021 | 1,335 |
|
2022 | 1,288 |
|
Thereafter | 6,609 |
|
Total | $ | 13,634 |
|
The following provides supplemental disclosures of cash flow activity: | | | | | | | | | | | | | | | | |
| | Fiscal Years |
| | 2022 | | 2021 | | |
| | | | | | |
| | (Dollars in thousands) |
Cash paid (received) for: | | | | | | |
Interest | | $ | 11,786 | | | $ | 11,940 | | | |
Taxes and penalties, net | | (1,400) | | | (2,636) | | | |
Non-cash investing activities: | | | | | | |
Unpaid capital expenditures | | 35 | | | 312 | | | |
|
| | | | | | | | | | | | |
| | Fiscal Years |
| | 2017 | | 2016 | | 2015 |
| | (Dollars in thousands) |
Cash paid (received) for: | | | | | | |
Interest | | $ | 7,293 |
| | $ | 7,660 |
| | $ | 12,336 |
|
Income taxes, net | | 2,314 |
| | 2,237 |
| | (1,371 | ) |
Noncash investing activities: | | | | | | |
Unpaid capital expenditures | | 2,774 |
| | 6,627 |
| | 5,034 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3.5. GOODWILL
The table below contains details related to the Company's goodwill:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, |
| | 2022 | | 2021 |
| | | | | | | | | | | | |
| | Gross Carrying Value (1) | | Accumulated Impairment | | Net | | Gross Carrying Value (1) | | Accumulated Impairment | | Net |
| | | | | | | | | | | | |
| | (Dollars in thousands) |
Goodwill | | $ | 304,624 | | | $ | (130,264) | | | $ | 174,360 | | | $ | 343,846 | | | $ | (114,264) | | | $ | 229,582 | |
_______________________________________________________________________________ |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, |
| | 2017 | | 2016 |
| | Gross Carrying Value (3) | | Accumulated Impairment (1) | | Net | | Gross Carrying Value (3) | | Accumulated Impairment (1) | | Net |
| | (Dollars in thousands) |
Goodwill | | $ | 670,648 |
| | $ | (253,661 | ) | | $ | 416,987 |
| | $ | 671,054 |
| | $ | (253,661 | ) | | $ | 417,393 |
|
| |
(1) | The table below contains additional information regarding accumulated impairment losses: |
(1)The change in the gross carrying value of goodwill relates to foreign currency translation adjustments. |
| | | | | | |
Fiscal Year | | Impairment Charge | | Reporting Unit (2) |
| | (Dollars in thousands) | | |
2009 | | $ | (41,661 | ) | | International |
2010 | | (35,277 | ) | | North American Premium |
2011 | | (74,100 | ) | | North American Value |
2012 | | (67,684 | ) | | North American Premium |
2014 | | (34,939 | ) | | North American Premium |
Total | | $ | (253,661 | ) | | |
| |
(2) | See Note 13 to the Consolidated Financial Statements. |
| |
(3) | The change in the gross carrying value of goodwill relates to foreign currency translation adjustments. |
The table below contains details related to the Company's goodwill:
|
| | | | | | | | | | | | |
| | North American Value | | North American Franchise | | Consolidated |
| | (Dollars in thousands) |
Goodwill, net at June 30, 2015 | | $ | 189,925 |
| | $ | 229,028 |
| | $ | 418,953 |
|
Translation rate adjustments | | (707 | ) | | (853 | ) | | (1,560 | ) |
Goodwill, net at June 30, 2016 | | 189,218 |
| | 228,175 |
| | 417,393 |
|
Translation rate adjustments | | (63 | ) | | (76 | ) | | (139 | ) |
Derecognition related to venditioned salons (1) | | (267 | ) | | — |
| | (267 | ) |
Goodwill, net at June 30, 2017 | | $ | 188,888 |
| | $ | 228,099 |
| | $ | 416,987 |
|
| |
(1) | Goodwill is derecognized for salons sold to franchisees with positive cash flows. The amount of goodwill derecognized is determined by a fraction (the numerator of which is the EBITDA of the salon being sold and the denominator of which is the EBITDA of the North American Value reporting unit) that is applied to the total goodwill balance of the North American Value reporting unit. |
4. INVESTMENTS IN AFFILIATES
Investment in Empire Education Group, Inc.
The Company accounts for its 54.6% ownership interest in EEG as an equity method investment under the voting interest model. As EEG was a significant subsidiary for the fiscal year 2016 financial statements, the separate financial statements of EEG are included subsequentgoodwill related to the
Company's financial statements.Franchise reporting unit: | | | | | | | | | | | | | | |
| | Fiscal Years |
| | 2022 | | 2021 |
| | | | |
| | (Dollars in thousands) |
Balance at beginning of period (1) | | $ | 229,582 | | | $ | 227,457 | |
Derecognition of OSP goodwill | | (38,358) | | | — | |
Goodwill impairment related to continuing operations | | (13,120) | | | — | |
Goodwill impairment related to discontinued operations | | (2,880) | | | — | |
Translation rate adjustments | | (864) | | | 2,125 | |
| | | | |
Balance at end of period (1) | | $ | 174,360 | | | $ | 229,582 | |
_______________________________________________________________________________
(1)The goodwill balance as of June 30, 2021 includes $41.3 million related to discontinued operations.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. INVESTMENTS IN AFFILIATES (Continued)
6. LEASES
The table below summarizes financial information recorded byAt contract inception, the Company relateddetermines whether a contract is, or contains, a lease by determining whether it conveys the right to its investment in EEG: |
| | | | | | | | | | | | |
| | Fiscal Year |
| | 2017 | | 2016 | | 2015 |
| | (Dollars in thousands) |
Equity losses (1) | | $ | — |
| | $ | (1,832 | ) | | $ | (8,958 | ) |
Other than temporary impairment | | — |
| | (12,954 | ) | | (4,654 | ) |
Total losses related to EEG | | $ | — |
| | $ | (14,786 | ) | | $ | (13,612 | ) |
Investment balance | | $ | — |
| | $ | — |
| | $ | 14,786 |
|
_____________________________ | |
(1) | For fiscal year 2015, includes $6.9 million of expense for a non-cash deferred tax valuation allowance related to EEG. |
The other than temporary impairment charges resulted from EEG's significantly lower financial projections in fiscal years 2016 and 2015 due to continued declines in enrollment, revenue and profitability. The full impairmentcontrol the use of the investment followed previous non-cash impairment charges, EEG's impairmentidentified asset for a period of goodwilltime. If the contract provides the Company the right to substantially all of the economic benefits from the use of the identified asset and its establishmentthe right to direct the use of the identified asset, the Company considers it to be, or contain, a deferred tax valuation allowance in prior quarters.lease. The Company has not recorded any equity income or losses relatedleases its company-owned salons and some of its corporate facilities under operating leases. The original terms of the salon leases range from one to its investment in EEG subsequent20 years with many leases renewable for an additional five to 10-year term at the option of the Company. In addition to the impairment. The Company will record equity income relatedobligation to make fixed rental payments for the Company's investment in EEG once EEG's cumulative income exceeds its cumulative losses, measured fromuse of the date of impairment.
Whilesalons, the Company could be responsible for certain liabilities associated with this venture,also has variable lease payments that are based on sales levels. For most leases, the Company does not currently expect themis required to have a material impact onpay real estate taxes and other occupancy expenses. Total rent includes the Company's financial position.following:
Investment in MY Style | | | | | | | | | | | | | | | | |
| | Fiscal Years |
| | 2022 | | 2021 | | |
| | | | | | |
| | (Dollars in thousands) |
Office and warehouse rent | | $ | 4,575 | | | $ | 5,234 | | | |
Lease termination expense (1) | | 1,835 | | | 13,544 | | | |
Lease liability benefit (2) | | (3,620) | | | (20,022) | | | |
Franchise salon rent | | 1,695 | | | 3,376 | | | |
Company-owned salon rent | | 4,872 | | | 38,622 | | | |
Total | | $ | 9,357 | | | $ | 40,754 | | | |
_______________________________________________________________________________(1)During fiscal year 2017,2022, lease termination expense includes $0.9 million to exit the Company's distribution centers before the lease end dates and $0.9 million to exit salons before the lease end dates in order to relieve the Company sold its 27.1% ownership interestof future lease obligations. During fiscal year 2021, lease termination fees include $8.3 million of early termination payments to close salons before the lease end date to relieve the Company of future lease obligations and $5.3 million to accrue future lease payments for salons that are no longer operating.
(2)Upon termination of previously impaired leases, the Company derecognizes the corresponding ROU assets and lease liabilities which results in MY Style to MY Style's parent company, Yamano Holdings Corporationa net gain. In addition, the Company recognizes a benefit from lease liabilities decreasing in excess of previously impaired ROU assets for $0.5 million. This ownership interest wasongoing leases that were previously accounted for as a cost method investment. Associated with the sale, foreign currency translation loss of $0.4 million previously classified within accumulated other comprehensive income was recognized in earnings. impaired.
The Company also reported a $0.2 million gain associatedleases salon premises in which the majority of its franchisees operate and has entered into corresponding sublease arrangements with franchisees. All lease-related costs are passed through to the sale within interestfranchisees. The Company records the rental payments due from franchisees as franchise rental income and other, netthe corresponding amounts owed to landlords as franchise rent expense on the Consolidated Statement of Operations. In fiscal years 2022 and 2021, Franchise rental income and Franchise rent expense were $130.8 and $127.4 million, respectively. These leases generally have lease terms of approximately five years. The Company expects to renew SmartStyle and some franchise leases upon expiration. Some other leases are expected to be renewed by the franchisee upon expiration.
For salon operating leases, the lease liability is initially and subsequently measured at the present value of the unpaid lease payments at the lease commencement date, including 1 lease term option when the lease is expected to be renewed. The ROU asset is initially and subsequently measured throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, less any accrued lease payments and unamortized lease incentives received, if any. For leases classified as operating leases, expense for lease payments is recognized on a straight-line basis over the lease term, including the lease renewal option when the lease is expected to be renewed. Generally, the non-lease components, such as real estate taxes and other occupancy expenses, are separate from rent expense within the lease and are not included in the measurement of the lease liability because these charges are variable.
The discount rate used to determine the present value of the lease payments is the Company's estimated collateralized incremental borrowing rate, based on the yield curve for the respective lease terms, as the interest rate implicit in the lease cannot generally be determined. The Company uses the portfolio approach in applying the discount rate based on the original lease term. The weighted average remaining lease term was 6.02 and 6.44 years and the weighted average discount rate was 4.25% and 4.11% for all salon operating leases as of June 30, 2022 and 2021, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A lessee's ROU asset is subject to the same asset impairment guidance in ASC 360, Property, Plant, and Equipment, applied to other elements of property, plant, and equipment. The Company has identified its asset groups at the individual salon level as this represents the lowest level that identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. Poor salon performance in fiscal years 2022 and 2021 resulted in ASC 360-10-35-21 triggering events. As a result, management assessed underperforming salon asset groups, which included the related ROU assets, for impairment in accordance with ASC 360.
The first step in the impairment test under ASC 360 is to determine whether the long-lived assets are recoverable, which is determined by comparing the net carrying value of the salon asset group to the undiscounted net cash flows to be generated from the use and eventual disposition of that asset group. Estimating cash flows for purposes of the recoverability test is subjective and requires significant judgment. Estimated future cash flows used for the purposes of the recoverability test were based upon historical cash flows for the salons, adjusted for expected changes in future market conditions related to the COVID-19 pandemic, and other factors. The period of time used to determine the estimates of the future cash flows for the recoverability test was based on the remaining useful life of the primary asset of the group, which was the ROU asset in all cases.
The second step of the long-lived asset impairment test requires that the fair value of the asset group be estimated when determining the amount of any impairment loss. For the salon asset groups that failed the recoverability test, an impairment loss was measured as the amount by which the carrying amount of the asset group exceeds its fair value. The Company applied the fair value guidance within ASC 820-10 to determine the fair value of the asset group from the perspective of a market-participant considering, among other things, appropriate discount rates, multiple valuation techniques, the most advantageous market, and assumptions about the highest and best use of the asset group. To determine the fair value of the salon asset groups, the Company utilized market-participant assumptions rather than the Company's own assumptions about how it intends to use the asset group. The significant judgments and assumptions utilized to determine the fair value of the salon asset groups include the market rent of comparable properties and a discount rate.
The fair value of the salon long-lived asset group is estimated using market participant methods based on the best information available. The Company engaged a third-party valuation specialist to assist with the research related to inputs used in their determination of the fair value of the ROU asset which included providing information related to significant inputs and assumptions utilized in the measurement of the impairment loss.
For fiscal years 2022 and 2021, the Company recognized long-lived impairment charges of $0.5 and $13.0 million, respectively, which included $0.5 and $9.5 million, respectively, related to ROU assets on the Consolidated Statement of Operations. The impairment loss for each salon asset group that was recognized was allocated among the long-lived assets of the group on a pro-rata basis using their relative carrying amounts. Additionally, the impairment losses did not reduce the carrying amount of an individual asset below its fair value, including for the ROU assets included in the salon asset groups. Assessing the long-lived assets for impairment requires management to make assumptions and to apply judgment, which can be affected by economic conditions and other factors that can be difficult to predict. The Company does not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions it uses to calculate impairment losses for its long-lived asset, including its ROU assets. If actual results are not consistent with the estimates and assumptions used in the calculations, the Company may be exposed to future impairment losses that could be material.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of June 30, 2022, future operating lease commitments, including one renewal option for leases expected to be renewed, to be paid and received by the Company were as follows (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fiscal Year | | Leases For Franchise Salons | | Leases For Company-Owned Salons | | Corporate Leases | | Total Operating Lease Payments | | Sublease Income To Be Received From Franchisees | | Net Rent Commitments |
| | | | | | | | | | | | |
2023 | | $ | 116,644 | | | $ | 3,590 | | | $ | 2,229 | | | $ | 122,463 | | | $ | (116,644) | | | $ | 5,819 | |
2024 | | 102,360 | | | 2,049 | | | 1,301 | | | 105,710 | | | (102,360) | | | 3,350 | |
2025 | | 85,788 | | | 710 | | | 1,334 | | | 87,832 | | | (85,788) | | | 2,044 | |
2026 | | 72,155 | | | 385 | | | 1,367 | | | 73,907 | | | (72,155) | | | 1,752 | |
2027 | | 61,698 | | | 143 | | | 1,401 | | | 63,242 | | | (61,698) | | | 1,544 | |
Thereafter | | 122,570 | | | 256 | | | 4,417 | | | 127,243 | | | (122,570) | | | 4,673 | |
Total future obligations | | $ | 561,215 | | | $ | 7,133 | | | $ | 12,049 | | | $ | 580,397 | | | $ | (561,215) | | | $ | 19,182 | |
Less amounts representing interest | | 66,693 | | | 361 | | | 1,702 | | | 68,756 | | | | | |
Present value of lease liabilities | | $ | 494,522 | | | $ | 6,772 | | | $ | 10,347 | | | $ | 511,641 | | | | | |
Less current lease liabilities | | 97,954 | | | 3,399 | | | 1,843 | | | 103,196 | | | | | |
Long-term lease liabilities | | $ | 396,568 | | | $ | 3,373 | | | $ | 8,504 | | | $ | 408,445 | | | | | |
Supplemental operating cash flow information and non-cash activity related to our operating leases are as follows (in thousands):
| | | | | | | | | | | | | | | | |
| | Fiscal Years |
| | 2022 | | 2021 | | |
| | | | | | |
| | (Dollars in thousands) |
Cash paid for amounts included in the measurement of lease liabilities (1) | | $ | 74,507 | | | $ | 130,039 | | | |
Right of use assets obtained in exchange for new lease liabilities | | 2,011 | | | 4,242 | | | |
_______________________________________________________________________________(1)Cash paid for amounts included in the measurement of lease liabilities includes rent, termination fees, settlements and legal fees, and commission payments.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. FAIR VALUE MEASUREMENTS
Fair value measurements are categorized into one of three levels based on the lowest level of significant input used: Level 1 (unadjusted quoted prices in active markets); Level 2 (observable market inputs available at the measurement date, other than quoted prices included in Level 1); and Level 3 (unobservable inputs that cannot be corroborated by observable market data).
Assets and Liabilities Measured at Fair Value on a Recurring Basis
TheAs of June 30, 2022 and 2021, the estimated fair valuesvalue of the Company's cash, cash equivalents, restricted cash, receivables, inventory, deferred compensation assets, debt and accounts payable approximated their carrying values as of June 30, 2017 and 2016. As of June 30, 2017, the estimated fair value of the Company's debt was $125.9 million and the carrying value was $123.0 million, excluding the $1.8 million unamortized debt discount and $0.6 million unamortized debt issuance costs. As of June 30, 2016, the estimated fair value of the Company's debt approximated its carrying value. The estimated fair value of the Company's debt is based on Level 2 inputs.values.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
We measure certain assets, including the Company’sCompany's equity method investments, tangible fixed and other assets and goodwill, at fair value on a nonrecurring basis when they are deemed to be other than temporarily impaired. The fair values of these assets are determined, when applicable, based on valuation techniques using the best information available, and may include quoted market prices, market comparables and discounted cash flow projections.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. FAIR VALUE MEASUREMENTS (Continued)
The following impairment charges were based on fair values using Level 3 inputs:inputs (1): | | | | | | | | | | | | | | | | |
| | Fiscal Years |
| | 2022 | | 2021 | | |
| | | | | | |
| | (Dollars in thousands) |
Goodwill impairment | | $ | 16,000 | | | $ | — | | | |
Long-lived asset impairment | | 542 | | | 13,023 | | | |
_______________________________________________________________________________ |
| | | | | | | | | | | | |
| | Fiscal Year |
| | 2017 | | 2016 | | 2015 |
| | (Dollars in thousands) |
Long-lived assets (1) | | $ | (11,366 | ) | | $ | (10,478 | ) | | $ | (14,604 | ) |
Investment in EEG (2) | | — |
| | (12,954 | ) | | (4,654 | ) |
_____________________________
| |
(1) | (1)See Note 1 to the Consolidated Financial Statements. |
| |
(2) | See Note 4 to the Consolidated Financial Statements. |
6. FINANCING ARRANGEMENTS
The Company's long-term debt consists of the following:
|
| | | | | | | | | | | | | | |
| | | | Interest rate % | | | | |
| | | | Fiscal Years | | June 30, |
| | Maturity Dates | | 2017 | | 2016 | | 2017 | | 2016 |
| | (fiscal year) | | | | | | (Dollars in thousands) |
Senior Term Notes, net | | 2020 | | 5.50% | | 5.50% | | $ | 120,599 |
| | $ | 119,606 |
|
Revolving credit facility | | 2018 | | — | | — | | — |
| | — |
|
| | | | | | | | $ | 120,599 |
| | $ | 119,606 |
|
The debt agreements contain covenants, including limitations on incurrence of debt, granting of liens, investments, merger or consolidation, certain restricted payments and transactions with affiliates. In addition, the Company must adhere to specified fixed charge coverage and leverage ratios. The Company was in compliance with all covenants and other requirements of our financing arrangements as of June 30, 2017.
Senior Term Notes
In December 2015, the Company exchanged its $120.0 million 5.75% senior notes due December 2017 for $123.0 million 5.5% senior notes due December 2019 (Senior Term Notes). The Senior Term Notes were issued at a $3.0 million discount which is being amortized to interest expense over the term of the notes. The Company accounted for this non-cash exchange as a debt modification, as it was with the same lenders and the changes in terms were not considered substantial. Interest on the Senior Term Notes is payable semi-annually in arrears on June 1 and December 1 of each year. The Senior Term Notes are unsecured and not guaranteed by any of the Company's subsidiaries or any third party.
The following table contains details related5 to the Company's Senior Term Notes:Consolidated Financial Statements.
|
| | | | | | | | |
| | June 30, |
| | 2017 | | 2016 |
| | (Dollars in thousands) |
Principal amount on the Senior Term Notes | | $ | 123,000 |
| | $ | 123,000 |
|
Unamortized debt discount | | (1,815 | ) | | (2,565 | ) |
Unamortized debt issuance costs | | (586 | ) | | (829 | ) |
Senior Term Notes, net | | $ | 120,599 |
| | $ | 119,606 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6.8. FINANCING ARRANGEMENTS (Continued)
The Company's debt consists of the following:
Revolving Credit Facility | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | June 30, |
| | Maturity Date (1) | | 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | | | | |
| | (Fiscal year) | | (Interest rate %) | | (Dollars in thousands) |
Revolving credit facility | | 2023 | | 5.50% | | 5.00% | | $ | 179,994 | | | $ | 186,911 | |
_______________________________________________________________________________ In January 2016,(1)As of June 30, 2022 the Company's borrowings matured in March 2023. On August 12, 2022, the Company amended its revolving credit facility primarily reducingagreement. In connection with the borrowing capacity from $400.0 to $200.0 million. The revolving credit facility expires in June 2018 and has rates tied to a LIBOR credit spread and a quarterly facility fee onamendment, the average daily amountmaturity of the facility (whether used or unused). Both the LIBOR credit spread and the facility fee are based on the Company's debt to EBITDA ratio at the end of each fiscal quarter. In addition, the Company may request an increase in revolving credit commitments under the facility of up to $200.0 million under certain circumstances. Events of default under the credit agreement include change of control ofwas extended to August 31, 2025. Accordingly, the Companydebt is classified as non-current on the Consolidated Balance Sheet. See Note 16 to the Consolidated Financial Statements.
At June 30, 2022, cash and the Company's default with respect to other debt exceeding $10.0cash equivalents totaled $17.0 million. As of June 30, 2017 and 2016,2022, the Company had no$180.0 million of outstanding borrowings under thisthe original $295.0 million revolving credit facility. Additionally,facility, of which $277.5 million was available as of June 30, 2022. The credit facility decreased $16.9 million from $294.4 million as of June 30, 2021, in accordance with the bulk sale provisions in the revolving credit facility agreement, due to the sale of OSP and secured inventory related to our transition to a third-party distribution partner. At June 30, 2022, the Company had outstanding standby letters of credit under the revolving credit facility of $1.5 and $1.6$15.7 million, at June 30, 2017 and 2016, respectively, primarily related to itsthe Company's self-insurance program. UnusedThe unused available credit under the facility was $81.9 million at June 30, 20172022. Total liquidity per the agreement was $119.8 million as of June 30, 2022. As of June 30, 2022, the Company had cash, cash equivalents and 2016 was $198.5restricted cash of $27.5 million and $198.4 million, respectively.current liabilities of $152.8 million.
7. COMMITMENTS AND CONTINGENCIES
Operating Leases:
The Company leases most of its company-owned salons and some of its corporate facilities and distribution centers under operating leases. The originalUnder the terms of the salon leases range from one to 20 years, with many leases renewable for additional five to ten year terms at the optionrevolving credit facility as of the Company. For most leases,June 30, 2022, the Company is required to pay real estate taxesmaintain a minimum liquidity of $75.0 million and the Company's lenders are secured in the Company's assets. The applicable margin for loans bearing interest at SOFR ranges from 3.75%-4.25%, the applicable margin for loans bearing interest at the base rate ranges from 2.75%-3.25% and the facility fee ranges from 0.50%-0.75%, each depending on average utilization of the revolving line of credit. The Company was in compliance with all covenants and other occupancy expenses. Rent expense forrequirements of the Company's international department store salons is based primarily onfinancing arrangements as of June 30, 2022. On August 12, 2022, the Company amended and extended its credit facility which, among other things, converted the revolving credit facility to a percentage of sales.
$180.0 million term loan and $55.0 million revolving credit facility. The Companyamendment also leasesextends the premises in which the majority of its franchisees operate and has entered into corresponding sublease arrangements with franchisees. These leases, generally with terms of approximately five years, are expectedmaturity date to be renewed on expiration. All additional lease costs are passed throughAugust 31, 2025. See Note 16 to the franchisees.
Sublease income was $31.5, $31.4 and $30.9 million in fiscal years 2017, 2016 and 2015, respectively. Rent expense on premises subleased was $31.1, $30.9 and $30.5 million in fiscal years 2017, 2016 and 2015, respectively. Rent expense and related rental income on sublease arrangements with franchisees is netted within the rent expense line item on the Consolidated Statement of Operations. In most cases, the amount of rental income related to sublease arrangements with franchisees approximates the amount of rent expense from the primary lease, thereby having no net impact on rent expense or net (loss) income. However, in limited cases, the Company charges a 10.0% mark-up in its sublease arrangements. The net rental income resulting from such arrangements totaled $0.4, $0.5, and $0.4 million for fiscal years 2017, 2016 and 2015, respectively, and was classified in the royalties and fees caption of the Consolidated Statement of Operations.
The Company has a sublease arrangement for a leased building the Company previously occupied. The aggregate amount of lease payments to be made over the remaining lease term are approximately $2.4 million. The amount of rental income approximates the amount of rent expense, thereby having no material impact on rent expense or net (loss) income.
Total rent expense, excluding rent expense on premises subleased to franchisees, includes the following:Financial Statements.
|
| | | | | | | | | | | | |
| | Fiscal Years |
| | 2017 | | 2016 | | 2015 |
| | (Dollars in thousands) |
Minimum rent | | $ | 217,738 |
| | $ | 228,580 |
| | $ | 236,137 |
|
Percentage rent based on sales | | 7,215 |
| | 8,256 |
| | 8,238 |
|
Real estate taxes and other expenses | | 54,335 |
| | 60,435 |
| | 64,750 |
|
| | $ | 279,288 |
| | $ | 297,271 |
| | $ | 309,125 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7.9. COMMITMENTS AND CONTINGENCIES (Continued)
As of June 30, 2017, future minimum lease payments (excluding percentage rents based on sales) due under existing noncancelable operating leases with remaining terms of greater than one year are as follows:
|
| | | | | | | | |
Fiscal Year | | Corporate leases | | Franchisee leases |
| | (Dollars in thousands) |
2018 | | $ | 205,901 |
| | $ | 69,020 |
|
2019 | | 160,388 |
| | 59,194 |
|
2020 | | 115,398 |
| | 45,634 |
|
2021 | | 72,448 |
| | 31,289 |
|
2022 | | 34,502 |
| | 17,603 |
|
Thereafter | | 21,781 |
| | 20,436 |
|
Total minimum lease payments | | $ | 610,418 |
| | $ | 243,176 |
|
Contingencies:
The Company is self-insured for most workers' compensation, employment practice liability and general liability. Workers' compensation and general liability losses are subject to per occurrence and aggregate annual liability limitations. The Company is insured for losses in excess of these limitations. The Company is also self-insured for health care claims for eligible participating employees subject to certain deductibles and limitations. The Company determines its liability for claims incurred but not reported on an actuarial basis.
Litigation and Settlements:
The Company is a plaintiff or defendant in various lawsuits and claims arising out of the normal course of business. Like certain other franchisors, the Company has faced allegations of franchise regulation and agreement violations. Additionally, because the Company may be the tenant under a master lease for a location subleased to a franchisee, the Company has faced allegations of nonpayment of rent and associated charges. Further, similar to other large retail employers, the Company has been faced with allegations of purported class-wide consumer and wage and hour violations.
During fiscal year 2022, the Company recorded $2.2 million of expense related to litigation, of which $1.7 million was paid during the year. The Company's accrual related to potential settlement liability was $0.5 million as of June 30, 2022. Included in the expense is litigation brought in the 11th Judicial Circuit, St. Charles County, Missouri, in which the Company challenged a landlord regarding a lease the Company secured but the landlord leased to another tenant. The landlord in the case prevailed and the court ordered the Company to pay the landlord $0.5 million in attorney's fees. The Company requested leave to appeal and plans to vigorously pursue overturning this judgment.
The Company's previous point-of-sale system supplier had challenged the development of certain parts of the Company's technology systems in litigation brought in the Northern District of California. The Company and the supplier entered into an agreement, effective June 25, 2021, that provided for the dismissal of the lawsuit and set forth a Transition Services Agreement pursuant to which the supplier will assist in the transfer of franchise salons from its point-of-sale system to the Company's salon management system, OSP. The Company and the supplier entered into an amendment to the Settlement Agreement, effective June 15, 2022, in which the Company agreed to pay $2.0 million to the supplier in installments commencing on June 15, 2022, and ending on December 10, 2022, in consideration of a release of claims arising out of or related to the Transition Services Agreement and for the supplier to continue to provide the services set forth in that agreement.
Litigation is inherently unpredictable, and the outcome of these matters cannot presently be determined. Although the actions are being vigorously defended, the Company could incur judgments in the future incur judgments or enter into settlements of claims that could have a material adverse effect on its results of operations in any particular period.
See Note 8 to the Consolidated Financial Statements for discussion regarding certain issues that have resulted from the IRS' audit of fiscal years 2010 through 2013. Final resolution of these issues is not expected to have a material impact on the Company’s financial position.
8. INCOME TAXES
The components of (loss) income before income taxes are as follows:
|
| | | | | | | | | | | | |
| | Fiscal Years |
| | 2017 | | 2016 | | 2015 |
| | (Dollars in thousands) |
(Loss) income before income taxes: | | | | | | |
U.S. | | $ | (7,759 | ) | | $ | 12,481 |
| | $ | (6,630 | ) |
International | | 924 |
| | 35 |
| | 1,652 |
|
| | $ | (6,835 | ) | | $ | 12,516 |
| | $ | (4,978 | ) |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8.10. INCOME TAXES (Continued)
The components of loss from continuing operations before income taxes are as follows: | | | | | | | | | | | | | | | | |
| | Fiscal Years |
| | 2022 | | 2021 | | |
| | | | | | |
| | (Dollars in thousands) |
Loss before income taxes | | | | | | |
U.S. | | $ | (41,231) | | | $ | (143,104) | | | |
International | | (3,211) | | | 34,470 | | | |
| | $ | (44,442) | | | $ | (108,634) | | | |
The provision (benefit) for income taxes consists of: | | | | | | | | | | | | | | | | |
| | Fiscal Years |
| | 2022 | | 2021 | | |
| | | | | | |
| | (Dollars in thousands) |
Current: | | | | | | |
U.S. | | $ | (535) | | | $ | (620) | | | |
International | | (425) | | | (1,421) | | | |
Deferred: | | | | | | |
U.S. | | 3,130 | | | (3,701) | | | |
International | | (153) | | | 314 | | | |
| | $ | 2,017 | | | $ | (5,428) | | | |
|
| | | | | | | | | | | | |
| | Fiscal Years |
| | 2017 | | 2016 | | 2015 |
| | (Dollars in thousands) |
Current: | | | | | | |
U.S. | | $ | 994 |
| | $ | 819 |
| | $ | 1,670 |
|
International | | 268 |
| | 1,207 |
| | 1,781 |
|
Deferred: | | | | | | |
U.S. | | 7,901 |
| | 6,997 |
| | 9,439 |
|
International | | 61 |
| | 26 |
| | 1,715 |
|
| | $ | 9,224 |
|
| $ | 9,049 |
|
| $ | 14,605 |
|
The provision (benefit) for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory rate to earnings (loss)loss from continuing operations before income taxes, as a result of the following: | | | | | | | | | | | | | | | | |
| | Fiscal Years |
| | 2022 | | 2021 | | |
| | | | | | |
U.S. statutory rate | | 21.0 | % | | 21.0 | % | | |
State income taxes, net of federal income tax benefit | | 1.4 | | | 7.9 | | | |
Valuation allowance (1) | | (6.6) | | | (61.5) | | | |
Foreign income taxes at other than U.S. rates | | 3.0 | | | 9.4 | | | |
| | | | | | |
| | | | | | |
Uncertain tax positions | | (17.9) | | | 0.2 | | | |
Stock-based compensation | | (2.8) | | | (0.7) | | | |
| | | | | | |
Loss on investment in Luxembourg | | — | | | 29.3 | | | |
Other, net (2) | | (2.6) | | | (0.6) | | | |
Effective tax rate | | (4.5) | % | | 5.0 | % | | |
_______________________________________________________________________________ |
| | | | | | | | | |
| | Fiscal Years |
| | 2017 | | 2016 | | 2015 |
U.S. statutory rate | | 35.0 | % | | 35.0 | % | | 35.0 | % |
State income taxes, net of federal income tax benefit | | (2.2 | ) | | 5.4 |
| | (3.7 | ) |
Valuation allowance (1) | | (168.0 | ) | | 66.5 |
| | (362.8 | ) |
Foreign income taxes at other than U.S. rates | | (2.0 | ) | | 2.5 |
| | (5.3 | ) |
Officer life insurance | | 6.8 |
| | (7.6 | ) | | 9.6 |
|
Work Opportunity and Welfare-to-Work Tax Credits | | 23.2 |
| | (24.7 | ) | | 53.3 |
|
Expiration of capital loss carryforward | | — |
| | — |
| | (9.5 | ) |
Other, net (2) | | (27.8 | ) | | (4.8 | ) | | (10.0 | ) |
| | (135.0 | )% |
| 72.3 | % |
| (293.4 | )% |
(1)See Note 1 to the Consolidated Financial Statements.
(2)The (27.8)(2.6)% of Other, net in fiscal year 20172022 includes the rate impact of meals and entertainment expense disallowance, adjustments resulting from charitable contributions, employee share-based compensation payments,the federal provision to return true-up and miscellaneous items of (5.5)(2.0)%, (8.6)%, (21.8)%, and 8.1%(0.6)%, respectively. Miscellaneous items do not include any items in excess of 5% of computed tax.
The 4.8%(0.6)% of Other, net in fiscal year 20162021 does not include the rate impact of any items in excess of 5% of computed tax.
The (10.0)% of Other, net in fiscal year 2015 includes the rate impact of meals and entertainment expense disallowance and miscellaneous items of (6.0)% and (4.0)%, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. INCOME TAXES (Continued)
The components of the net deferred tax assets and liabilities are as follows: | | | | | | | | | | | | | | |
| | June 30, |
| | 2022 | | 2021 |
| | | | |
| | (Dollars in thousands) |
Deferred tax assets: | | | | |
| | | | |
Payroll and payroll related costs | | $ | 5,267 | | | $ | 8,523 | |
Net operating loss carryforwards | | 153,190 | | | 145,823 | |
Tax credit carryforwards | | 37,664 | | | 37,433 | |
Capital loss carryforwards | | 5,338 | | | 14,179 | |
Deferred franchise fees | | 8,694 | | | 10,153 | |
Operating lease liabilities | | 124,905 | | | 154,255 | |
| | | | |
Other (1) | | 17,542 | | | 12,608 | |
Subtotal | | 352,600 | | | 382,974 | |
Valuation allowance (1) | | (201,731) | | | (192,522) | |
Total deferred tax assets | | $ | 150,869 | | | $ | 190,452 | |
| | | | |
Deferred tax liabilities: | | | | |
Goodwill and intangibles | | $ | (33,466) | | | $ | (43,375) | |
Operating lease assets | | (123,333) | | | (150,573) | |
Other | | (5,049) | | | (7,154) | |
Total deferred tax liabilities | | (161,848) | | | (201,102) | |
Net deferred tax liability | | $ | (10,979) | | | $ | (10,650) | |
_______________________________________________________________________________ (1)The $17.5 million of Other in fiscal year 2022 includes $5.3 million of deferred tax assets with a corresponding valuation allowance of the same amount related to discontinued operations.
Significant components of the valuation allowance which occurred during fiscal year 2022 are as follows:
•The Company determined that it no longer had sufficient U.S. state indefinite-lived taxable temporary differences to support realization of its U.S. state indefinite-lived NOLs and its existing U.S. deferred tax assets that upon reversal are expected to generate state indefinite-lived NOLs. As a result, the Company recorded a $4.1 million valuation allowance on its U.S. state indefinite-lived deferred tax assets.
Significant components of the valuation allowance which occurred during fiscal year 2021 are as follows:
•The Company recognized a tax loss on its investment in Luxembourg and established a corresponding valuation allowance of $34.4 million.
|
| | | | | | | | |
| | June 30, |
| | 2017 | | 2016 |
| | (Dollars in thousands) |
Deferred tax assets: | | | | |
Deferred rent | | $ | 13,216 |
| | $ | 14,542 |
|
Payroll and payroll related costs | | 24,666 |
| | 27,066 |
|
Net operating loss carryforwards | | 29,171 |
| | 22,433 |
|
Tax credit carryforwards | | 32,852 |
| | 30,386 |
|
Inventories | | 1,914 |
| | 2,369 |
|
Fixed assets | | 7,982 |
| | 82 |
|
Accrued advertising | | 2,723 |
| | 3,076 |
|
Insurance | | 4,153 |
| | 4,285 |
|
Other | | 7,494 |
| | 7,809 |
|
Subtotal | | $ | 124,171 |
|
| $ | 112,048 |
|
Valuation allowance | | (120,903 | ) | | (110,046 | ) |
Total deferred tax assets | | $ | 3,268 |
|
| $ | 2,002 |
|
Deferred tax liabilities: | | | | |
Goodwill and intangibles | | $ | (103,889 | ) | | $ | (95,451 | ) |
Other | | (7,498 | ) | | (6,720 | ) |
Total deferred tax liabilities | | $ | (111,387 | ) | | $ | (102,171 | ) |
Net deferred tax liability | | $ | (108,119 | ) | | $ | (100,169 | ) |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
At June 30, 2017,2022, the Company has tax effectedtax-effected federal, state, Canada, and U.K. net operating loss carryforwards of approximately $21.4, $6.6, $0.2$116.8, $28.1, $7.8 and $1.0$0.5 million, respectively. The Company's federal loss carryforward consists of $27.3 million that will expire from fiscal years 2034 to 2038 and $89.5 million that has no expiration. The state loss carryforwards consist of $24.4 million that will expire from fiscal years 2023 to 2042 and $3.7 million that has no expiration. The Canada loss carryforward will expire from fiscal years 20342036 to 2037. The state loss carryforwards will expire from fiscal years 2018 to 2037. The Canada loss carryforward will expire in fiscal years 2036 and 2037.2042. The U.K. loss carryforward has no expiration.
The Company's tax credit carryforward of $32.9$37.7 million primarily consists of $30.9 millionWork Opportunity Tax Credits that will expire from fiscal years 20302031 to 2037, $0.52042.
The Company's capital loss carryforward of $5.3 million that will expire fromin fiscal years 2020year 2025.
We consider the earnings of certain non-U.S. subsidiaries to 2027be indefinitely invested outside the U.S. Accordingly, we have not recorded deferred taxes related to the U.S. federal and $1.5state income taxes and foreign withholding taxes on approximately $7.8 million of carryforward that has no expiration date.
As of June 30, 2017, undistributed earnings of internationalforeign subsidiaries, of approximately $10.2 million were considered towhich have been reinvested indefinitelyoutside the U.S. As a result of the Tax Cuts and accordingly,Jobs Act of 2017, taxes payable on the Company has not provided for U.S. income taxes onremittance of such earnings. Itearnings is not practicable for the Companyexpected to determine the amount of unrecognized deferred tax liabilities on these indefinitely reinvested earnings.be minimal.
The Company files tax returns and pays tax primarily in the U.S., Canada, the U.K. and Luxembourg, as well as states, cities, and provinces within these jurisdictions. The Company’s U.S. federal income tax returns for fiscal year 2010 through 2013 have been examined by theCompany is no longer subject to Internal Revenue Service (IRS) and were moved to the IRS Appeals Divisionexaminations for outstanding IRS proposed audit adjustments. The Company believes its income tax positions and deductions will be sustained and will continue to vigorously defend such positions. All earlier tax years are closed to examination.before 2014. With limited exceptions, the Company is no longer subject to state and international income tax examination by tax authorities for years before 2012.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. INCOME TAXES (Continued)
A rollforward of the unrecognized tax benefits is as follows:
|
| | | | | | | | | | | | |
| | Fiscal Years |
| | 2017 | | 2016 | | 2015 |
| | (Dollars in thousands) |
Balance at beginning of period | | $ | 1,357 |
| | $ | 1,496 |
| | $ | 1,468 |
|
Additions based on tax positions related to the current year | | 259 |
| | 138 |
| | 37 |
|
Additions based on tax positions of prior years | | 80 |
| | 170 |
| | 352 |
|
Reductions on tax positions related to the expiration of the statute of limitations | | (179 | ) | | (207 | ) | | (361 | ) |
Settlements | | (129 | ) | | (240 | ) | | — |
|
Balance at end of period | | $ | 1,388 |
| | $ | 1,357 |
| | $ | 1,496 |
|
| | | | | | | | | | | | | | | | |
| | Fiscal Years |
| | 2022 | | 2021 | | |
| | | | | | |
| | (Dollars in thousands) |
Balance at beginning of period | | $ | 13,858 | | | $ | 14,045 | | | |
Additions based on tax positions related to the current year, primarily salon vendition activity and tax positions related to a capital loss | | 8,636 | | | 292 | | | |
Additions based on tax positions of prior years | | 81 | | | 50 | | | |
Reductions on tax positions related to the expiration of the statute of limitations | | (402) | | | (529) | | | |
| | | | | | |
Balance at end of period | | $ | 22,173 | | | $ | 13,858 | | | |
If the Company were to prevail on all unrecognized tax benefits recorded, a net benefit of approximately $0.9$1.0 million would be recorded in the effective tax rate. Interest and penalties associated with unrecognized tax benefits are recorded within income tax expense. During each of the fiscal years 2017, 20162022 and 2015, we2021, the Company recorded interest and penalties of approximately $0.1$0.2 million as additionsreductions to the accrual, net of the respective reversal of previously accrued interest and penalties. As of June 30, 2017,2022, the Company had accrued interest and penalties related to unrecognized tax benefits of $1.1$0.7 million. This amount is not included in the gross unrecognized tax benefits noted above.
It is reasonably possible the amount of the unrecognized tax benefit with respect to certain of our unrecognized tax positions will increase or decrease during the next fiscal year. However, an estimate of the amount or range of the change cannot be made at this time.
9.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. BENEFIT PLANS
Regis Retirement Savings Plan:
The Company maintains a defined contribution 401(k) plan, the Regis Retirement Savings Plan (RRSP). The RRSP is a defined contribution profit sharing plan with a 401(k) feature that is intended to qualify under Section 401(a) of the Internal Revenue Code (Code)(the Code) and is subject to the Employee Retirement Income Security Act of 1974 (ERISA).
The 401(k) portion of the RRSP is a cash or deferred arrangement intended to qualify under section 401(k) of the Code and under which eligible employees may elect to contribute a percentage of their eligible compensation. Employees who are 18 years of age or older and who were not highly compensated employees as defined by the Code during the preceding RRSP year are eligible to participate in the RRSP commencing with the first day of the month following their completion of one month of service.
The discretionary employer contribution profit sharing portion of the RRSP is a noncontributory defined contribution component covering full-time and part-time employees of the Company who have at least one year of eligible service, defined as 1,000 hours of service during the RRSP year, are employed by the Company on the last day of the RRSP year and are employed at Salon Support employees, distribution centers, ascenter employees, field leaders, artistic directors or consultants, and that are not highly compensated employees as defined by the Code. Participants' interest in the noncontributory defined contribution component become 20.0% vested after completing two years of service with vesting increasing 20.0% for each additional year of service and with participants becoming fully vested after six full years of service.
Nonqualified Deferred Salary Plan:
The Company maintains a Nonqualified Deferred Salary Plan (Executive Plan), which covers Company officers and all other employees who are highly compensated as defined by the Code. The discretionary employer contribution portion of the Executive Plan is a profit sharing component in which a participant's interest becomes 20.0% vested after completing two years of service with vesting increasing 20.0% for each additional year of service and with participants becoming fully vested after six full years of service. Certain participants within the Executive Plan also receive a matching contribution from the Company.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. BENEFIT PLANS (Continued)
Regis Individual Secured Retirement Plan (RiSRP):
The Company maintains a Regis Individual Secured Retirement Plan (RiSRP), pursuant to which eligible employees may use post-tax dollars to purchase life insurance benefits. Salon Support employees at the director level and above as well as regional vice presidents, are eligible to participate.qualify. The Company may make discretionary contributions on behalf of participants within the RiSRP, which may be calculated as a matching contribution. The participant is the owner of the life insurance policy under the RiSRP.
Stock Purchase Plan:
The Company has an employee stock purchase plan (ESPP) available to qualifying employees. Under the terms of the ESPP, eligible employees may purchase the Company's common stock through payroll deductions. The Company contributes an amount equal to 15.0% of the purchase price of the stock to be purchased on the open market and pays all expenses of the ESPP and its administration, not to exceed an aggregate contribution of $11.8 million.$14.0 million or when 4.6 million shares registered under the SEC for issuance under the plan have been purchased. As of June 30, 2017,2022, the Company's cumulative contributions to the ESPP totaled $10.6$11.2 million.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Deferred Compensation Contracts:
The Company has unfunded deferred compensation contracts covering certain current and former key executives. Effective June 30, 2012, these contracts were amended and the benefits were frozen.
Expense associated with the deferred compensation contracts included in general and administrative expenses on the Consolidated Statement of Operations totaled $0.2, $0.2 and $0.4 million for fiscal years 2017, 2016 and 2015, respectively.
The table below presents the projected benefit obligation of these deferred compensation contracts in the Consolidated Balance Sheet: |
| | | | | | | | |
| | June 30, |
| | 2017 | | 2016 |
| | (Dollars in thousands) |
Current portion (included in accrued liabilities) | | $ | 1,658 |
| | $ | 1,353 |
|
Long-term portion (included in other noncurrent liabilities) | | 5,163 |
| | 5,898 |
|
| | $ | 6,821 |
| | $ | 7,251 |
|
| | | | | | | | | | | | | | |
| | June 30, |
| | 2022 | | 2021 |
| | | | |
| | (Dollars in thousands) |
Current portion (included in accrued expenses) | | $ | 303 | | | $ | 1,660 | |
Long-term portion (included in other non-current liabilities) | | 2,320 | | | 3,115 | |
Total | | $ | 2,623 | | | $ | 4,775 | |
The accumulated other comprehensive income (loss)loss for the deferred compensation contracts, consisting of primarily unrecognized actuarial income, was $0.7 and $0.5$0.3 million at June 30, 20172022 and 2016,2021, respectively.
TheAdditionally, the Company had previously agreed to pay the former Vice Chairman and his spouse an annual amountbenefit for the remainder of his life. Additionally, the Company has a survivorCosts associated with this benefit plan for the former Vice Chairman's spouse. In October 2013, the former Vice Chairman passed away and the Company began paying survivor benefits to his spouse. Estimated associated costs included in general and administrative expensesexpense on the Consolidated Statement of Operations totaled $0.3, $0.2$0.5 and $0.8$0.4 million for fiscal years 2017, 20162022 and 2015,2021, respectively. RelatedThe fair value of the related obligations totaled $2.8$2.3 and $3.0$2.3 million at June 30, 20172022 and 2016,2021, respectively, with $0.5 million within accrued expenses at June 30, 20172022 and 2016, respectively2021, and the remainder included in other noncurrentnon-current liabilities in the Consolidated Balance Sheet.
In connection with the passing of two former employees in January 2016, the Company received $2.9 million in life insurance proceeds. The Company recorded a gain of $1.2 million in general and administrative in the Consolidated Statement of Operations associated with the proceeds.In connection with the passing of a former employee in January 2017, the Company received $0.9 million in life insurance proceeds. The Company recorded a gain of $0.1 million in general and administrative in the Consolidated Statement of Operations associated with the proceeds.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. BENEFIT PLANS (Continued)
Compensation expense included in (loss) income before income taxes and equity in loss of affiliated companies related to the aforementioned plans, excluding amounts paid for expenses and administration of the plans included the following:
|
| | | | | | | | | | | | |
| | Fiscal Years |
| | 2017 | | 2016 | | 2015 |
| | (Dollars in thousands) |
Executive plans | | $ | 249 |
| | $ | 289 |
| | $ | 224 |
|
ESPP | | 284 |
| | 307 |
| | 325 |
|
Deferred compensation contracts | | 514 |
| | 402 |
| | 1,195 |
|
10.12. EARNINGS PER SHARE
The Company’sCompany's basic earnings per share is calculated as net income (loss)loss divided by weighted average common shares outstanding, excluding unvested outstanding stock options (SOs), outstanding stock appreciation rights (SARs), restricted stock awards, RSUsunits (RSUs) and PSUs.stock-settled performance units (PSUs). The Company’sCompany's diluted earnings per share is calculated as net income divided by weighted average common shares and common share equivalents outstanding, which includes shares issued under the Company’sCompany's stock-based compensation plans. Stock-based awards with exercise prices greater than the average market price of the Company’sCompany's common stock are excluded from the computation of diluted earnings per share. In fiscal year 2015,As the Company’s dilutedCompany is in a net loss position, basic earnings per share would have reflected the assumed conversion under the Company’s convertible debt, if the impact wasis equivalent to dilutive along with the exclusion of interest expense, net of taxes.earnings per share.
For fiscal years 2017, 20162022 and 2015, 728,223, 446,992,2021, 608,503 and 251,763, respectively,636,310 of common stock equivalents of potentially dilutive common stock, respectively, were not included inexcluded from the diluted earnings per share calculation due to the net loss from continuing operations.
The computation of weighted average shares outstanding, assuming dilution, excluded the following sharesstock-based awards as they were not dilutive:dilutive under the treasury stock method: | | | | | | | | | | | | | | | | |
| | Fiscal Years |
| | 2022 | | 2021 | | |
| | | | | | |
Equity-based compensation awards | | 2,269,335 | | | 2,322,006 | | | |
|
| | | | | | | | | |
| | Fiscal Year |
| | 2017 | | 2016 | | 2015 |
Equity-based compensation awards | | 2,407,158 |
| | 2,133,675 |
| | 1,948,507 |
|
Shares from convertible debt | | — |
| | — |
| | 465,055 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11.13. STOCK-BASED COMPENSATION
The Company grants long-term equity-based awards under the 20162018 Long Term Incentive Plan (the 20162018 Plan). The 20162018 Plan, which was approved by the Company's shareholders at its 20162018 Annual Meeting, provides for the granting of nonqualified stock options (SOs), equity-based stock appreciation rights (SARs), restrictedand cash-settled stock awards (RSAs)appreciation rights (SARs), restricted stock units (RSUs) and stock-settled performance units (PSUs), as well as cash-based performance grants, to employees and non-employee directors of the Company. Under the 20162018 Plan, a maximum of 3,500,0003,818,895 shares wereare approved for issuance. The 20162018 Plan incorporates a fungible share design, under which full value awards (such as RSUs and PSUs) count against the shares reserved for issuance at a rate 2.42.0 times higher than appreciation awards (such as SARs and stock options)SOs). As of June 30, 2017,2022, a maximum of 4,324,8552,793,494 shares were available for grant under the 20162018 Plan. All unvested awards are subject to forfeiture in the event of termination of employment, unless accelerated. SAR and RSU awards granted under the 20162018 Plan generally include various acceleration terms, including upon retirement for participants aged sixty-two62 years or older or who are aged fifty-five55 years or older and have fifteen15 years of continuous service.
The Company also has outstanding awards under the 2016 Long Term Incentive Plan (the 2016 Plan), although the 2016 Plan terminated in October 2018 and no additional awards have since been or will be made under the 2016 Plan. The 2016 Plan provided for the granting of SARs, restricted stock awards (RSAs), RSUs and PSUs, as well as cash-based performance grants, to employees and non-employee directors of the Company.
The Company also has outstanding awards under the Amended and Restated 2004 Long Term Incentive Plan (the "2004 Plan")2004 Plan), although the 2004 Plan terminated in October 2016 and no additional awards have since been or will be made under the 2004 Plan. The 2004 Plan provided for the granting of nonqualified stock options, equity-based stock appreciation rights (SARs), restricted stock awards (RSAs), restricted stock units (RSUs)SOs, SARs, RSAs, RSUs and stock-settled performance share units (PSUs),PSUs, as well as cash-based performance grants, to employees and non-employee directors of the Company.
The Company also has outstanding stock options under the 2000 Stock Option Plan (the "2000 Plan"), although the 2000 Plan terminated in 2010 and no additional awards have since been or will be made under the 2000 Plan. The 2000 Plan allowed the Company to grant both incentive and nonqualified stock options and replaced the Company's 1991 Stock Option Plan.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. STOCK-BASED COMPENSATION (Continued)
Under the 20162018 Plan, the 20042016 Plan and the 20002004 Plan, stock-based awards are granted at an exercise price or initial value equal to the fair market value on the date of grant. The fair value of cash-settled SARs granted in fiscal year 2022 are re-valued on a quarterly basis.
Using the fair value of each grant on the date of grant, the weighted average fair values per stock-based compensation award granted during fiscal years 2017, 20162022 and 20152021 were as follows:follows (1): | | | | | | | | | | | | | | | | |
| | Fiscal Years |
| | 2022 | | 2021 | | |
| | | | | | |
SARs | | $ | 2.56 | | | $ | — | | | |
SOs | | 1.82 | | | 2.89 | | | |
RSUs | | 2.69 | | | 7.15 | | | |
PSUs | | — | | | 5.83 | | | |
_______________________________________________________________________________ |
| | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
SARs | | $ | 3.68 |
| | $ | 3.51 |
| | $ | 6.16 |
|
RSAs & RSUs | | 11.73 |
| | 11.18 |
| | 15.95 |
|
PSUs | | 12.28 |
| | 12.11 |
| | 15.15 |
|
(1)The fair value of cash-settled SARs granted are estimated on the date of grant using a Black-Scholes valuation model, with the Black-Scholes-Merton (BSM) optionfair value recalculated on a quarterly basis. The fair value of market-based SOs granted are estimated on the date of grant using either a Monte Carlo valuation model or a Black-Scholes valuation model. The fair value of market-based RSUs and PSUs granted are estimated on the date of grant using a Monte Carlo valuation model. The significant assumptions used in determining the estimated fair value of SARsthe market-based awards granted during fiscal years 2017, 20162022 and 20152021 were as follows:
| | | | Fiscal Years |
| | | | | | | | 2022 | | 2021 | |
| | 2017 | | 2016 | | 2015 | | | | | |
Risk-free interest rate | | 1.99% | | 1.71% | | 1.53 - 1.84% | Risk-free interest rate | | 1.25 - 3.04% | | 0.16 - 0.78% | |
Expected term (in years) | | 6.50 | | 6.00 | | 6.00 | |
Expected volatility | | 31.50% | | 30.00% | | 38.00 - 44.00% | Expected volatility | | 58.3 - 64.5% | | 44.9 - 66.8% | |
Expected dividend yield | | 0% | | 0% | | 0% | Expected dividend yield | | — | % | | — | % | |
Expected term of share options | | Expected term of share options | | 6.1 - 7.7 years | | 7.0 years | |
PSUs are grants of restricted stock units which are earned based on the achievement of performance goals established by the Compensation Committee over a performance period.period, typically three years. There were no PSUs granted in fiscal year 2022.
In May 2000, the Company's Board approved a stock repurchase program with no stated expiration date. Originally, the program authorized up to $50.0 million to be expended for the repurchase of the Company's stock. The Board elected to increase this maximum to $100.0 million in August 2003, to $200.0 million in May 2005, to $300.0 million in April 2007, to $350.0 million in April 2015, to $400.0 million in September 2015, and to $450.0 million in January 2016.2016, and to $650.0 million in August 2018. All repurchased shares become authorized but unissued shares of the Company. The timing and amounts of any repurchases depends on many factors, including the market price of the common stock and overall market conditions. As of June 30, 2017, 18.42022, 30.0 million shares have been cumulatively repurchased for $390.0$595.4 million, and $60.0$54.6 million remained outstanding underauthorized for repurchase. The Company does not anticipate repurchasing shares of common stock for the approved stock repurchase program.foreseeable future.
Segment information is prepared on the same basis the chief operating decision maker (CODM) reviews financial information for operational decision-making purposes. During the fourth quarter of fiscal year 2017, the Company redefined its operating segments to reflect how the chief operating decision maker now evaluates the business as a result of the increased focus on the franchise business as a result of a number of factors including appointing a President of Franchise in April 2017. The Company now reports its operations in four operating segments: North American Value, North American Franchise, North American Premium and International. The Company's operating segments are its reportable operating segments. Prior to this change, the Company had three operating segments: North American Value, North American Premium, and International. The Company did not operate under the realigned operating segment structure prior to the fourth quarter of fiscal year 2017.