UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

(Mark One)

 For the quarterly period ended March 31,September 30, 2016

 For the transition period from             to            

Commission file number 1-12725

Regis Corporation

(Exact name of registrant as specified in its charter)

 

 (952) 947-7777

N/A

(Former name, former address and former fiscal year, if changed since last report)

REGIS CORPORATION

 

INDEX

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

REGIS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEET

(Dollars in thousands, except share data)

 

 

The accompanying notes are an integral part of the unaudited Condensed Consolidated Financial Statements.

REGIS CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)

(Dollars and shares in thousands, except per share data amounts)

The accompanying notes are an integral part of the unaudited Condensed Consolidated Financial Statements.

REGIS CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSSINCOME (LOSS) (Unaudited)

(Dollars in thousands)

 

 

The accompanying notes are an integral part of the unaudited Condensed Consolidated Financial Statements.

REGIS CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)

(Dollars in thousands)

 

The accompanying notes are an integral part of the unaudited Condensed Consolidated Financial Statements.

REGIS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The unaudited interim Condensed Consolidated Financial Statements of Regis Corporation (the Company) as of March 31,September 30, 2016 and for the three and nine months ended March 31,September 30, 2016 and 2015, reflect, in the opinion of management, all adjustments necessary to fairly state the consolidated financial position of the Company as of March 31,September 30, 2016 and theits consolidated results of its operations, comprehensive loss and its cash flows for the interim periods. Adjustments consist only of normal recurring items, except for any discussed in the notes below. The results of operations and cash flows for any interim period are not necessarily indicative of results of operations and cash flows for the full year.

The Condensed Consolidated Balance Sheet data for June 30, 20152016 was derived from audited Consolidated Financial Statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (GAAP). The unaudited interim Condensed Consolidated Financial Statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended June 30, 20152016 and other documents filed or furnished with the Securities and Exchange Commission (SEC) during the current fiscal year.

Stock-Based Employee Compensation:

During the ninethree months ended March 31,September 30, 2016, the Company granted 308,055334,659 restricted stock units (RSUs), 690,461 equity-based and 393,045 performance-based restricted stock appreciation rights (SARs) and 410,153 performance share units (PSUs), which includes 118,96766,082 incremental performance share unitsPSUs earned in connection with the achievement of fiscal year 20152016 performance metrics. The Company did not grant any equity awards during the three months ended March 31, 2016. During the nine months ended March 31, 2016, the volatility assumption was updated from 38% to 30%. Otherwise there were no significant changes to the assumptions or methodology used in calculating the fair value of SARs. All grants relate to stock incentive plans that have been approved by the shareholders of the Company.

Total compensation cost for stock-based payment arrangements totaled $2.5$1.9 and $2.3$2.5 million for the three months ended March 31, 2016 and 2015, respectively, and $7.5 and $6.3 million for the nine months ended March 31,September 30, 2016 and 2015, respectively, recorded within general and administrative expense on the unaudited Condensed Consolidated Statement of Operations.

Long-Lived Asset Impairment Assessments, Excluding Goodwill:

Recent Accounting Standards Adopted by the Company:

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 Companycompany 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 does not expect the adoption of this updatenew standard to have a material impact on the Company's consolidated financial statements and is evaluating the effect this guidance will have on its related disclosures.disclosures, including the method of adoption.

In April 2015,August 2016, the FASB issued updated cash flow 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.clarifying cash flow classification and presentation for certain items. The guidance is effective for the Company beginning in the first quarter of fiscal year 2017.2019, with early adoption permitted. The Company does not expect the adoption of this guidancestandard to have a material impact on the Company's consolidated financial statements.

As of March 31,September 30, 2016, the Company had a 54.6% ownership interest in EEG and no remaining investment value.

The Company utilized consolidation of variable interest entities guidance to determine whether or not its investment in EEG was a variable interest entity (VIE), and if so, whether the Company was the primary beneficiary of the VIE. The Company concluded that EEG was not a VIE based on the fact that EEG had sufficient equity at risk. The Company accounts for EEG as an equity investment under the voting interest model, as the Company has granted the other shareholder of EEG an irrevocable proxy to vote a certain number of the Company’s shares such that the other shareholder of EEG has voting control of 51.0% of EEG’s common stock, as well as the right to appoint four of the five members of EEG’s Board of Directors.

The Company’s basic earnings per share is calculated as net income (loss) divided by weighted average common shares outstanding, excluding unvested outstanding restricted stock awards, RSUs and PSUs. The Company’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’s stock-based compensation plans. Stock-based awards with exercise prices greater than the average market price of the Company’s common stock are excluded from the computation of diluted earnings per share. In fiscal year 2015, the Company’s diluted earnings per share would have reflected the assumed conversion under the Company’s convertible debt, if the impact was dilutive, along with the exclusion of interest expense, net of taxes.

For the three months ended March 31, 2016 andSeptember 30, 2015, 587,992 and 210,023, respectively, and for the nine months ended March 31, 2016 and 2015, 497,715 and 187,959, respectively,217,501 of common stock equivalents of potentially dilutive common stock were excluded 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 2,075,2642,505,850 and 1,481,206835,822 of stock-based awards during the three months ended March 31, 2016 and 2015, respectively, and 2,166,338 and 1,176,364 of stock-based awards during the nine months ended March 31,September 30, 2016 and 2015, respectively, as they were not dilutive under the treasury stock method. The computation of weighted average shares outstanding for the nine months ended March 31, 2015 also excluded 619,507 of shares from convertible debt as they were not dilutive.

Additional Paid-In Capital:

The $89.2$0.8 million decreaseincrease in additional paid-in capital during the ninethree months ended March 31,September 30, 2016 was primarily due to $97.0stock-based compensation expense of $1.9 million, of common stock repurchases, partlypartially offset by $7.5 millionother stock-based compensation activity of stock-based compensation.$1.1 million.

During the three and nine months ended March 31,September 30, 2016 and 2015, the Company recognized tax expense of $6.3$2.7 and $4.9$2.8 million, respectively, with corresponding effective tax rates of 149.2%45.5% and 174.0%. During the three and nine months ended March 31, 2015, the Company recognized tax expense of $8.0 and $16.8 million, respectively, with corresponding effective tax rates of 227.3% and (658.3)%98.3%.

The recorded income tax expense and effective tax ratesrate for the three and nine months ended March 31,September 30, 2016 and 2015 were different than what would normally be expected primarily due to the impact of the deferred tax valuation allowance. The majority of the tax expense related to non-cash tax expense for tax benefits on certain indefinite-lived assets that the Company cannot recognize for reporting purposes. This non-cash impact will continue as long as the Company has a valuation allowance in place against most of its deferred tax assets and is expected to approximate $8.0$7.8 million of expense for the fiscal year ending June 30, 2016.2017.

The Company’s U.S. federal income tax returns for the fiscal years 2010 through 2013 have been examined by the Internal Revenue Service (IRS) and are movingwere moved to the IRS Appeals Division 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 earlie

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 5 to the unaudited Condensed Consolidated Financial Statements for discussion regarding the status of certain issues that have resulted from the IRS' audits. In addition,examination of fiscal 2010 through 2013 federal income tax returns. Final resolution of these issues is not expected to have a material impact on the Company is currently under payroll tax examination by the IRS for calendar years 2012 through 2014.Company's financial position.

_____________________________

The Company’s long-term debt consists of the following:

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 will be 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’sCompany's subsidiaries or any third parties.

As of March 31,September 30, 2016 and June 30, 2015,2016, the Company had no outstanding borrowings under this facility. Additionally, the Company had outstanding standby letters of credit under the facility of $1.6$1.5 and $2.1$1.6 million at March 31,September 30, 2016 and June 30, 2015,2016, respectively, primarily related to the Company's self-insurance program. In January 2016, the Company amended its revolving credit facility primarily reducing the borrowing capacity from $400.0 to $200.0 million. Unused available credit under the facility at March 31,September 30, 2016 and June 30, 20152016 was $198.4$198.5 and $397.9$198.4 million, respectively.

The Company was in compliance with all covenants and requirements of its financing arrangements as of and during the three months ended March 31,September 30, 2016.

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).

As of March 31,September 30, 2016 and June 30, 2015,2016, the Company’s cash, cash equivalents, restricted cash, receivables, accounts payable and debt approximated their carrying values. The estimated fair value of the Company's debt is based on Level 2 inputs.

We measure certain assets, including the Company’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 the Company’s investments are determined based on valuation techniques using the best information available, and may include quoted market prices, market comparables, and discounted cash flow projections.

During the three months ended September 30, 2016, the Company recorded $1.9 million of long-lived asset impairment charges which were based on fair values using Level 3 inputs:inputs. See Note 1 to the unaudited Condensed Consolidated Financial Statements.

As of March 31,September 30, 2016, the Company’s reportable operating segments consisted of the following salons:

Item 2.  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. This MD&A should be read in conjunction with the MD&A included in our June 30, 20152016 Annual Report on Form 10-K and other documents filed or furnished with the Securities and Exchange Commission (SEC) during the current fiscal year.

 

MANAGEMENT’S OVERVIEW

 

Regis Corporation (RGS) owns, franchises and operates beauty salons. Our long-term mission is to create guests for life. To successfully achieve our mission and build a winning organization, we must help our stylists have successful and satisfying careers, which will drive great guest experiences and in turn, guests for life. We are investing in a number of areas focused on providing an outstanding guest experience and helping our stylists have successful careers, including investments in people, training and technology.

 

As of March 31,September 30, 2016, we owned, franchised or held ownership interests in 9,5089,455 worldwide locations. Our locations consisted of 9,3109,260 system-wide North American and International salons, and 198195 locations in which we maintain a non-controlling ownership interest less than 100 percent. Each of the Company’sour salon concepts generally offer similar salon products and services and serve the mass market. As of March 31,September 30, 2016, we had approximately 46,00045,000 corporate employees worldwide.

 

CRITICAL ACCOUNTING POLICIES

 

The interim unaudited Condensed Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States of America. In preparing the interim unaudited Condensed 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 interim unaudited Condensed 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 interim unaudited Condensed Consolidated Financial Statements.

 

Our significant accounting policies can be found in Note 1 to the Consolidated Financial Statements contained in Part II, Item 8 of the June 30, 20152016 Annual Report on Form 10-K, as well as Note 1 to the unaudited Condensed Consolidated Financial Statements contained within this Quarterly Report on Form 10-Q. We believe the accounting policies related to investmentinvestments in affiliates, the valuation of goodwill, the valuation and estimated useful lives of long-lived assets, estimates used in relation to tax liabilities and deferred taxes and legal contingencies are most critical to aid in fully understanding and evaluating our reported financial condition and results of operations. Discussion of each of these policies is contained under “Critical Accounting Policies” in Part II, Item 7 of our June 30, 20152016 Annual Report on Form 10-K.

 

Recent Accounting Pronouncements

 

Recent accounting pronouncements are discussed in Note 1 to the unaudited Condensed Consolidated Financial Statements.

 

RESULTS OF OPERATIONS

Explanations are primarily for North American Value, unless otherwise noted.

Condensed Consolidated Results of Operations (Unaudited)

 

The following table sets forth, for the periods indicated, certain information derived from our unaudited Condensed Consolidated Statement of Operations. The percentages are computed as a percent of total consolidated revenues, except as otherwise indicated.

_____________________________

Consolidated revenues primarily include revenues of company-owned salons, product and equipment sales to franchisees, and franchise royalties and fees. The following tables summarize revenues and same-store sales by concept as well as the reasons for the percentage change:

_____________________________

Decreases in consolidated revenues were driven by the following:

Same-store sales by concept are detailed in the table below:

 

 

The same-store sales (decrease) increasedecrease of (0.4)% and 0.8% during the three and nine months ended March 31, 2016, respectively, were due to decreases of 3.0% and 2.1%, respectively, in guest visits and increases of 2.6% and 2.9%, respectively, in average ticket. The shift of Easter from April 2015 to March 2016 positively impacted same-store sales by approximately 40 basis points1.0% during the three months ended March 31, 2016. The Company constructed (net of relocations) and closed 74 and 220 company-owned salons, respectively, during the twelve months ended March 31,September 30, 2016 and sold (net of buybacks) 77 company-owned salons to franchisees during the same period (2016 Net Salon Count Changes).

Consolidated revenues are primarily comprised of service and product revenues, as well as franchise royalties and fees. Fluctuations in these three major revenue categories, operating expenses and other income and expense were as follows:

Decreases of $8.0 and $32.3The $14.6 million decrease in service revenues during the three and nine months ended March 31,September 30, 2016, respectively, werewas primarily due to the Fiscal Year 2017 Net Salon Count Changes, a same-store service sales decrease of 0.8% and foreign currency fluctuations. The decrease in same-store service revenues was primarily the result of a 4.9% decrease in same-store guest visits, partly offset by a 4.1% increase in average ticket during the three months ended September 30, 2016.