FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 1997
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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For Quarter Ended December 31, 1997 Commission file number 011230
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Regis Corporation
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(Exact name of registrant as specified in its charter)
Minnesota 41-0749934
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7201 Metro Boulevard, Edina, Minnesota 55439
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(Address of principal executive offices) (Zip Code)
(612)947-7777
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of February 3, 1998:
Common Stock, $.05 par value 23,369,321
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Class Number of Shares
1
REGIS CORPORATION
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Consolidated Financial Statements:
Balance Sheet as of December 31, 1997
and June 30, 1997 3
Statement of Operations for the three
months ended December 31, 1997 and 1996 4
Statement of Operations for the six
months ended December 31, 1997 and 1996 5
Statement of Cash Flows for the six
months ended December 31, 1997 and 1996 6
Notes to Consolidated Financial Statements 7-8
Review Report of Independent Accountants 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-21
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 22-23
Signature 24
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REGIS CORPORATION
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1997 AND JUNE 30, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
DECEMBER 31, 1997 JUNE 30, 1997
------------------ -------------
ASSETS
Current assets:
Cash $ 10,845 $ 8,935
Accounts receivable, net 13,770 12,388
Inventories 42,232 42,596
Deferred income taxes 6,083 6,335
Other current assets 10,359 6,819
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Total current assets 83,289 77,073
Property and equipment, net 158,965 139,573
Goodwill 99,572 99,818
Other assets 7,659 15,071
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Total assets $ 349,485 $ 331,535
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Long-term debt, current portion $ 39,866 $ 30,722
Accounts payable 16,900 24,111
Accrued expenses 38,505 37,291
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Total current liabilities 95,271 92,124
Long-term debt 83,775 82,740
Other noncurrent liabilities 7,915 7,557
Shareholders' equity:
Common stock, $.05 par value;
issued and outstanding, 23,353,560 and
23,317,924 shares at December 31, 1997
and June 30, 1997, respectively 1,168 1,166
Additional paid-in capital 121,043 120,483
Retained earnings 40,313 27,465
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Total shareholders' equity 162,524 149,114
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Total liabilities and shareholders' equity $ 349,485 $ 331,535
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See accompanying notes to unaudited Consolidated Financial Statements.
3
REGIS CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1997 1996
---- ----
Revenues:
Company-owned salons:
Service $134,032 $120,955
Product 58,288 48,862
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192,320 169,817
Franchise income 6,632 6,641
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198,952 176,458
Operating expenses:
Company-owned:
Cost of service 76,657 70,813
Cost of product 31,828 26,699
Direct salon 17,862 16,905
Rent 26,273 23,510
Depreciation 6,099 5,645
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158,719 143,572
Selling, general and administrative 21,812 19,786
Depreciation and amortization 2,198 1,833
Nonrecurring charges 18,731
Other 402 502
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Total operating expenses 183,131 184,424
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Operating income (loss) 15,821 (7,966)
Other income (expense):
Interest (2,470) (2,524)
Nonrecurring gains 222
Other, net 171 95
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Income (loss) before income taxes 13,522 (10,173)
Income taxes (benefit) 5,565 (1,293)
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Net income (loss) $ 7,957 $ (8,880)
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Net income (loss) per share:
Basic $ .34 $ (.39)
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---------- ----------
Diluted $ .33 $ (.39)
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See accompanying notes to unaudited Consolidated Financial Statements.
4
REGIS CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1997 1996
---- ----
Revenues:
Company-owned salons:
Service $264,110 $242,495
Product 110,152 91,243
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374,262 333,738
Franchise income 13,371 13,325
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387,633 347,063
Operating expenses:
Company-owned:
Cost of service 151,177 140,824
Cost of product 60,422 50,092
Direct salon 35,137 33,137
Rent 51,743 46,579
Depreciation 12,136 10,952
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310,615 281,584
Selling, general and administrative 42,045 37,573
Depreciation and amortization 4,268 3,775
Nonrecurring charges 1,979 18,731
Other 790 1,006
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Total operating expenses 359,697 342,669
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Operating income 27,936 4,394
Other income (expense):
Interest (4,887) (4,974)
Nonrecurring gains 156 440
Other, net 308 305
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Income before income taxes 23,513 165
Income taxes 9,760 4,504
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Net income (loss) $ 13,753 $ (4,339)
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Net income (loss) per share:
Basic $ .59 $ (.19)
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Diluted $ .57 $ (.19)
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See accompanying notes to unaudited Consolidated Financial Statements.
5
REGIS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS)
1997 1996
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Cash flows from operating activities:
Net income (loss) $ 13,753 $ (4,339)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 16,572 14,890
Deferred income taxes 8,267 (4,084)
Nonrecurring charges 1,979 18,731
Changes in assets and liabilities, exclusive
of investing and financing activities (8,723) (12,792)
Other 365 751
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Net cash provided by operating activities 32,213 13,157
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Cash flows from investing activities:
Capital expenditures (27,729) (17,333)
Purchases of salon assets, net of cash acquired and
certain obligations assumed (4,251) (6,049)
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Net cash used in investing activities (31,980) (23,382)
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Cash flows from financing activities:
Borrowings on revolving credit facilities 62,194 94,514
Payments on revolving credit facilities (69,896) (117,600)
Proceeds from issuance of long-term debt 13,700 37,000
Repayment of long-term debt (2,892) (6,309)
Decrease in negative book cash balances (797)
Dividends paid (934) (813)
Proceeds from issuance of common stock 359 737
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Net cash provided by financing activities 1,734 7,529
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Effect of exchange rate changes on cash (57) 6
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Increase (decrease) in cash 1,910 (2,690)
Cash:
Beginning of year 8,935 7,558
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End of period $ 10,845 $ 4,868
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Changes in assets and liabilities, exclusive of
investing and financing activities:
Accounts receivable $ (352) $ (1,512)
Inventories 263 (3,170)
Other current assets (3,678) 704
Other assets (1,040) (691)
Accounts payable (6,808) 3,294
Accrued expenses 2,246 (11,313)
Other noncurrent liabilities 646 (104)
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$ (8,723) $ (12,792)
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See accompanying notes to unaudited Consolidated Financial Statements.
6
REGIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION OF INTERIM CONSOLIDATED FINANCIAL STATEMENTS:
The unaudited consolidated statements of operations for the three and six
months ended December 31, 1997 and 1996, reflect, in the opinion of
management, all adjustments (which, with the exception of the matters
discussed in Note 4 herein, include only normal recurring adjustments)
necessary to fairly present the results of operations for the interim
periods. The results of operations for any interim period are not
necessarily indicative of results for the full year.
The year-end balance sheet data was derived from audited financial
statements, but does not include all disclosures required by generally
accepted accounting principles. The unaudited interim consolidated
financial statements should be read in conjunction with Regis Corporation's
(the Company) consolidated financial statements which are incorporated by
reference in the Company's Annual Report on Form 10-K for the year ended
June 30, 1997. Coopers & Lybrand L.L.P., the Company's independent
accountants, have performed limited reviews of the financial data included
herein. Their report on such reviews accompanies this filing.
COST OF PRODUCT SALES. On an interim basis, product costs are determined
by applying an estimated gross profit margin.
2. NONRECURRING GAINS:
For the six month periods ended December 31, 1997 and 1996, the Company
received $156,000 and $440,000, respectively, of principal payments from
Premier Salons. The Company had previously written off the related
receivable and, accordingly, is recording all subsequent principal payments
as nonrecurring gains.
3. FINANCING ARRANGEMENTS:
During the second quarter, the Company entered into an additional credit
facility which allows, at the discretion of the lender, for borrowings up
to $35,000,000. Interest rates and maturity schedules are negotiated
between the Company and the lender and may vary by note issuances under the
facility. In December 1997, the Company borrowed $7,000,000 under this
facility in the form of a senior term note bearing interest at 7.72
percent, payable semi-annually. Principal payments in the amount of
$1,400,000 are due and payable on December 31 in the years 2000 through
2004. The proceeds were used to acquire a controlling interest in
additional home office facilities. Additionally, during the second
quarter, the Company borrowed $4,700,000 under an existing credit facility
to fund construction of a new distribution center.
7
4. NONRECURRING CHARGES:
In the first quarter of fiscal 1998, the Company recorded a special charge
of $1,979,000 associated with the divestiture of the business and assets of
Anasazi Exclusive Salon Products, LLC, (Anasazi) a professional salon
products manufacturing firm the Company acquired in fiscal 1997. Anasazi
was sold to Curtis Acquisition LLC, which is controlled by two members of
the Company's Board of Directors, one of whom is the Chairman.
In the second quarter of fiscal 1997, the Company recorded $18,731,000 of
merger and restructuring costs associated with the acquisition of
Supercuts.
5. NET INCOME (LOSS) PER SHARE:
During the second quarter the Company adopted Statement of Financial
Accounting Standards No. 128, Earnings per Share (EPS).
Basic EPS is calculated as net income divided by weighted average common
shares outstanding. The Company's only dilutive securities are issuable
under the Company's Stock Option Plan, as amended. Diluted EPS is
calculated as net income divided by weighted average common shares
outstanding, increased to include assumed conversion of dilutive
securities. Dilutive securities are excluded from the calculation of
weighted average common and common equivalent shares outstanding in all
loss periods, as their inclusion would be anti-dilutive.
The following provides information related to the calculation of the
Company's basic and diluted EPS:
FOR THE PERIODS ENDED DECEMBER 31,
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THREE MONTHS SIX MONTHS
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1997 1996 1997 1996
---- ---- ---- ----
Weighted average common shares outstanding 23,344,913 22,600,334 23,339,060 22,584,434
Common equivalent shares assuming conversion of
dilutive securities 592,004 -- 616,652 --
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Weighted average common and common equivalent
shares outstanding 23,936,917 22,600,334 23,955,712 22,584,434
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8
REVIEW REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Directors of Regis Corporation:
We have reviewed the accompanying consolidated balance sheet of Regis
Corporation as of December 31, 1997, and the related consolidated statements of
operations and cash flows for the three and six months ended December 31, 1997
and 1996. These financial statements are the responsibility of the Company's
management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of which
is the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet as of June 30, 1997, and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for the year then ended (not fully presented herein); and in our
report dated August 22, 1997, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying consolidated balance sheet as of June 30, 1997, is fairly
stated, in all material respects, in relation to the consolidated balance sheet
from which it has been derived.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Minneapolis, Minnesota
January 22, 1998
9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SUMMARY
Regis Corporation, based in Minneapolis, is the world's largest owner, operator
and franchisor of hair and retail product salons with 3,355 salons (800
franchised) in 50 states, Puerto Rico, Canada and seven other international
countries at December 31, 1997. Regis operates and franchises salons in six
divisions: Regis Hairstylists, Supercuts, MasterCuts, Trade Secret, Wal-Mart and
International, and has 26,000 employees worldwide.
Second quarter revenues, including franchise income of $6,632,000, grew to a
record $198,952,000, a 12.7 percent increase over fiscal 1997 second quarter
total revenues of $176,458,000. Excluding nonrecurring items in the second
quarter of the prior fiscal year, fiscal 1998 second quarter operating income
grew 47.0 percent to $15,821,000, and net income grew to a record $7,957,000 or
$.33 per share, an earnings per share increase of 57.1 percent.
Revenues for the six months ended December 31, 1997, including franchise income
of $13,371,000, grew to a record $387,633,000, a 11.7 percent increase over
total revenues of $347,063,000 in the comparable fiscal 1997 period. Excluding
nonrecurring items in both periods, six month fiscal 1998 operating income grew
29.4 percent to $29,915,000 and net income grew to $14,865,000 or $.62 per
share, an earnings per share increase of 34.8 percent.
Fiscal 1998 and 1997 results reflect certain previously reported nonrecurring
items comprised primarily of merger and restructuring costs associated with the
acquisition of Supercuts and disposition of Anasazi. As a result, the Company
reported second quarter fiscal 1998 net income of $7,957,000, or $.33 per share,
compared to a net loss of $8,880,000, or $.39 per share, in the second quarter
the previous year. For the first six months of fiscal 1998, the Company
reported net income of $13,753,000, or .57 per share, compared to a net loss of
$4,339,000, or $.19 per share in the first half of fiscal 1997.
10
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain information
derived from the Company's Consolidated Statement of Operations expressed as a
percentage of total revenues, except as noted.
FOR THE PERIODS ENDED DECEMBER 31,
----------------------------------
THREE MONTHS SIX MONTHS
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1997 1996 1997 1996
---- ---- ---- ----
Company-owned service revenues (1) 69.7% 71.2% 70.6% 72.7%
Company-owned product revenues (1) 30.3 28.8 29.4 27.3
Franchise income 3.3 3.8 3.4 3.8
Company-owned operations:
Profit margins on service (2) 42.8 41.5 42.8 41.9
Profit margins on product (3) 45.4 45.4 45.1 45.1
Direct salon (1) 9.3 10.0 9.4 9.9
Rent (1) 13.7 13.8 13.8 14.0
Depreciation (1) 3.2 3.3 3.2 3.3
Direct salon contribution (1) 17.5 15.5 17.0 15.6
Selling, general and administrative 11.0 11.2 10.8 10.8
Depreciation and amortization 1.1 1.0 1.1 1.1
Nonrecurring charges 0.0 10.6 0.5 5.4
Operating income (loss) 8.0 (4.5) 7.2 1.3
Income (loss) before income taxes 6.8 (5.8) 6.1 0.0
Net income (loss) 4.0 (5.0) 3.5 (1.3)
Operating income, excluding
nonrecurring items 8.0 6.1 7.7 6.7
Net income, excluding
nonrecurring items 4.0 2.7 3.8 3.1
(1) Computed as a percent of company-owned revenues
(2) Computed as a percent of service revenues
(3) Computed as a percent of product revenues
11
THREE MONTHS ENDED DECEMBER 31, 1997, COMPARED TO THREE MONTHS ENDED DECEMBER
31, 1996:
REVENUES
REVENUES for the second quarter of fiscal 1998 grew to a record $198,952,000, an
increase of $22,494,000 or 12.7 percent, over the same period in fiscal 1997.
System-wide sales, inclusive of non-consolidated sales generated from franchise
salons, increased 11.5 percent in the second quarter of fiscal 1998 to
$262,947,000 from $235,778,000 in the same period in fiscal 1997. These
increases in company-owned and system-wide sales are the result of the total
number of salons added to the system through acquisitions and net salon
openings, as well as same-store sales increases from existing salons.
For the second quarters of fiscal 1998 and 1997, respectively, revenues by
division are as follows:
1998 1997
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Regis Hairstylists $ 74,352 $ 69,153
Supercuts 24,771 22,679
MasterCuts 27,252 23,800
Trade Secret 30,322 23,638
Wal-Mart 9,148 7,547
International 26,475 23,000
Franchise Income 6,632 6,641
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$ 198,952 $ 176,458
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Same-store sales for domestic company-owned salons increased 6.2 percent in the
second quarter of fiscal 1998, compared to 2.2 percent in the same period in
fiscal 1997. System-wide same-store sales for the second quarter of fiscal 1998
increased 5.4 percent, compared to 2.2 percent in the same period a year ago.
Same-store sales increases achieved are primarily due to an increase in the
number of customers served. A total of 17,601,900 customers system-wide were
served during the second quarter of fiscal 1998. The Company utilizes an
audiovisual-based training system in its company-owned salons. Management
believes this training system provides its employees with improved customer
service and technical skills, and positively contributes to the increase in
customers served.
SERVICE REVENUES in the second quarter of fiscal 1998 were $134,032,000, an
increase of $13,077,000 or 10.8 percent, over the same period in fiscal 1997.
This increase is a result of strong service same-store sales increase of 5.8
percent, salon acquisitions the Company has made during the past twelve months
and accelerated new salon construction.
12
PRODUCT REVENUES in the second quarter of fiscal 1998 grew to $58,288,000, an
increase of $9,426,000 or 19.3 percent, over the same period in fiscal 1997.
This increase continues a trend of escalating product revenues due to strong
product same-store sales growth of 7.4 percent, a reflection of the continuous
focus on product awareness, training and acceptance of national label
merchandise and the addition of 8 new Trade Secret salons. Product revenues as
a percent of total company-owned revenues increased to 30.3 percent of revenues
compared to 28.8 percent of revenues in the same period in fiscal 1997.
FRANCHISE INCOME, including royalties, initial franchise fees and product sales
made by the Company to franchisees, were $6,632,000 in the second quarter of
fiscal 1998.
COST OF REVENUES
The aggregate cost of service and product revenues in the second quarter of
fiscal 1998 were $108,485,000, compared to $97,512,000, in the same period in
fiscal 1997. The resulting combined gross margin percentage for the second
quarter of fiscal 1998 improved 100 basis points to 43.6 percent of
company-owned revenues compared to 42.6 percent of company-owned revenues in the
same period in fiscal 1997. As discussed below, this improvement was primarily
due to strong same-store sales and the increased sales leverage in the Company's
fixed cost payroll divisions.
SERVICE MARGINS improved to 42.8 percent in the second quarter of fiscal 1998,
compared to 41.5 percent in the same period in fiscal 1997. This 130 basis
point improvement is primarily due to continued sales leverage of fixed cost
payrolls in the Supercuts division, and strong service same-store sales
increases of 5.8 percent.
PRODUCT MARGINS were 45.4 percent in the second quarter of fiscal 1998,
identical to that in the same period a year ago. Although the percentage
remained the same, the second quarter margins in the current year benefitted
from lower product costs in the Supercuts division, offset by increased
discounting costs primarily in the Regis Hairstylists division as the result of
the Company's 75th anniversary sale that took place in October 1997.
DIRECT SALON
This expense category includes direct costs associated with salon operations
such as advertising, promotion, insurance, telephone and utilities. Direct salon
expense of $17,862,000 improved as a percent of company-owned revenues to 9.3
percent in the second quarter of fiscal 1998 from 10.0 percent in the same
period in fiscal 1997. This improvement resulted from an increased ability to
leverage these costs against increased revenues, which were a result of
stronger same-store sales and a maturing salon base, as well as the closures of
under-performing stores, primarily in the Supercuts division.
13
RENT
Rent expense in the second quarter of fiscal 1998 was $26,273,000 or 13.7
percent of company-owned revenues, compared to $23,510,000, or 13.8 percent of
company-owned revenues, in the same period in fiscal 1997. The slight
percentage improvement is primarily due to leveraging this fixed cost against
increasing revenues.
DEPRECIATION - SALON LEVEL
Depreciation expense at the salon level remained fairly consistent at 3.2
percent of company-owned revenues, improving 10 basis points over the second
quarter in fiscal 1997, due to leveraging this fixed cost against increasing
revenues.
DIRECT SALON CONTRIBUTION
For the reasons described above, direct salon contribution, representing
company-owned salon revenues less associated operating expenses, improved in the
second quarter of fiscal 1998 to $33,601,000, or 17.5 percent of company-owned
revenues, compared to $26,245,000 or 15.5 percent of company-owned revenues in
the same period of fiscal 1997.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative (SG&A) expenses were $21,812,000, or 11.0
percent of total revenues in the second quarter of fiscal 1998, compared to
$19,786,000, or 11.2 percent of total revenues in the same period in fiscal
1997. Expenses in this category include field supervision (payroll, related
taxes and travel) and home office administration costs (such as warehousing,
salaries, occupancy costs and professional fees). This 20 basis point
improvement is a result of leveraging fixed costs against increased sales
volumes during the quarter. The dollar increase is primarily driven by the
Supercuts acquisition which resulted in higher warehouse expenses due to volume
increases and additional corporate professional fees, offset by cost reductions
associated with the amalgamation of the Supercuts back office functions.
All direct and indirect expenses associated with franchise operations, other
than the cost of products sold to franchisees, are included in SG&A expense.
The cost of products sold and associated franchise activities remained
relatively consistent in the second quarters of fiscal 1998 and 1997.
DEPRECIATION AND AMORTIZATION - CORPORATE
Depreciation and amortization remained fairly consistent at 1.1 percent of total
revenues in the second quarter of fiscal 1998.
14
OPERATING INCOME
Exclusive of nonrecurring items from the prior year, operating income in the
second quarter of fiscal 1998 improved to $15,821,000, or 8.0 percent of total
revenues, an increase of $5,056,000, or 47.0 percent over the prior year
operating income of $10,765,000, or 6.1 percent of total revenues. This
improvement is attributable primarily to improved gross margins and the
leveraging of direct salon and SG&A expenses.
INTEREST
Interest expense in the second quarter of fiscal 1998 was $2,470,000, or 1.2
percent of total revenues, compared to $2,524,000 or 1.4 percent of total
revenues in the same period in fiscal 1997. Interest expense has remained
relatively consistent between the two periods because, although debt levels have
increased, average interest rates were lower during the period.
INCOME TAXES
The Company's effective income tax rate for fiscal 1998 is estimated to be
approximately 41.0 percent, compared to 66.6 percent in fiscal 1997. The
Company's effective tax rate for fiscal 1997 was negatively affected by certain
nondeductible merger and transaction costs (nonrecurring charges) associated
with the Supercuts merger. Additionally, as part of the tax provision for the
period ended December 31, 1996, the Company recorded a $1,500,000 charge
associated with the resolution of Supercuts income tax matters related to years
prior to 1996, resulting from the completion of an Internal Revenue Service
examination. Exclusive of the effect of nonrecurring charges and the
$1,500,000 resolution charge, the Company's effective tax rate for fiscal 1997
was 43.1 percent.
NET INCOME (LOSS)
Net income in the second quarter of fiscal 1998 was $7,957,000 or $.33 per
share, compared to a net loss of $8,880,000 or $.39 per share in the same period
in fiscal 1997. Exclusive of nonrecurring items in the prior year, net income
in the second quarter of fiscal 1998 increased to $7,957,000 or $.33 per share,
compared to net income in the same period in fiscal 1997 of $4,790,000 or $.21
per share, an earnings per share increase of 57.1 percent.
15
SIX MONTHS ENDED DECEMBER 31, 1997, COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1996:
REVENUES
REVENUES for the first six months of fiscal 1998 were a record $387,633,000, an
increase of $40,570,000 or 11.7 percent, over the same period in fiscal 1997.
System-wide sales, inclusive of non-consolidated sales generated from franchise
salons, increased 11.0 percent in the first six months of fiscal 1998 to
$516,269,000 from $464,968,000 in the same period in fiscal 1997. These
increases in company-owned and system-wide sales are the result of the total
number of salons added to the system through acquisitions and net salon
openings, as well as same-store sales increases from existing salons.
For the first six months of fiscal 1998 and 1997, respectively, revenues by
division are as follows:
1998 1997
---- ----
Regis Hairstylists $145,782 $136,325
Supercuts 49,582 47,703
MasterCuts 53,190 46,583
Trade Secret 57,408 42,818
Wal-Mart 17,659 14,974
International 50,641 45,335
Franchise Income 13,371 13,325
-------- --------
$387,633 $347,063
-------- --------
-------- --------
Same-store sales for domestic company-owned salons increased 6.0 percent in the
first six months of fiscal 1998, compared to 2.7 percent in the same period in
fiscal 1997. System-wide same-store sales for the first six months of fiscal
1998 increased 5.4 percent, compared to 2.1 percent in the same period in fiscal
1997. Same-store sales increases achieved are primarily due to an increase in
the number of customers served. A total of 35,570,000 customers system-wide
were served during the first half of fiscal 1998. The Company utilizes an
audiovisual-based training system in its company-owned salons. Management
believes this training system provides its employees with improved customer
service and technical skills, and positively contributes to the increase in
customers served.
SERVICE REVENUES in the first six months of fiscal 1998 were $264,110,000, an
increase of $21,615,000 or 8.9 percent, over the same period in fiscal 1997.
This increase is a result of strong service same-store sales growth of 5.6
percent, salon acquisitions the Company has made during the past twelve months
and accelerated new salon construction.
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PRODUCT REVENUES in the first six months of fiscal 1998 were $110,152,000, an
increase of $18,909,000 or 20.7 percent, over the same period in fiscal 1997.
This increase continues a trend of escalating product revenues due to strong
product same-store sales growth of 7.1 percent, a reflection of the continuous
focus on product awareness, training and acceptance of national label
merchandise, and the addition of 29 new Trade Secret salons. Product revenues
as a percent of total company-owned revenues increased to 29.4 percent of
revenues compared to 27.3 percent of revenues in the same period in fiscal 1997.
FRANCHISE INCOME, including royalties, initial franchise fees and product sales
made by the Company to franchisees, increased slightly to $13,371,000 in the
first six months of fiscal 1998.
COST OF REVENUES
The aggregate cost of service and product revenues in the first six months of
fiscal 1998 were $211,599,000, compared to $190,916,000 in the same period in
fiscal 1997. The resulting combined gross margin percentage for the first six
months of fiscal 1998 improved 70 basis points to 43.5 percent of company-owned
revenues compared to 42.8 percent of company-owned revenues in the same period
in fiscal 1997. As discussed below, this improvement was primarily due to
strong same-store sales and the increased sales leverage in the Company's fixed
cost payroll divisions.
SERVICE MARGINS were 42.8 percent in the first six months of fiscal 1998,
compared to 41.9 percent in the same period in fiscal 1997. This 80 basis point
improvement is primarily due to continued sales leverage of fixed cost payrolls
in the Supercuts division, and strong service same-store sales growth of 5.6
percent.
PRODUCT MARGINS were 45.1 percent in the first six months of fiscal 1998,
identical to that in the same period a year ago. Although the percentage
remained the same, the current year margins benefitted from lower product costs
in the Supercuts division, offset by increased discounting costs primarily in
the Regis Hairstylists division as the result of the Company's 75th anniversary
sale that took place in October 1997.
DIRECT SALON
This expense category includes direct costs associated with salon operations
such as advertising, promotion, insurance, telephone and utilities. Direct salon
expense of $35,137,000 improved as a percent of company-owned revenues to 9.4
percent in the first six months of fiscal 1998 from 9.9 percent in the same
period in fiscal 1997. This improvement resulted from an increased ability to
leverage these costs against increased revenues, which were a result of stronger
same-store sales and a maturing salon base, as well as the closure of
under-performing stores, primarily in the Supercuts division.
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RENT
Rent expense in the first six months of fiscal 1998 was $51,743,000 or 13.8
percent of company-owned revenues, compared to $46,579,000 or 14.0 percent of
company-owned revenues in the same period in fiscal 1997. The percentage
improvement is primarily due to leveraging this fixed cost against increasing
revenues.
DEPRECIATION - SALON LEVEL
Depreciation expense at the salon level remained fairly consistent at 3.2
percent of company-owned revenues, improving 10 basis points over the first six
months in fiscal 1997, due to leveraging this fixed cost against increasing
revenues.
DIRECT SALON CONTRIBUTION
For the reasons described above, direct salon contribution, representing
company-owned salon revenues less associated operating expenses, improved in the
first six months of fiscal 1998 to $63,647,000, or 17.0 percent of company-owned
revenues, compared to $52,154,000 or 15.6 percent of company-owned revenues in
the same period of fiscal 1997.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative (SG&A) expenses were $42,045,000, or 10.8
percent of total revenues in the first six months of fiscal 1998, compared to
$37,573,000, or 10.8 percent of total revenues in the same period in fiscal
1997. Expenses in this category include field supervision (payroll, related
taxes and travel) and home office administration costs (such as warehousing,
salaries, occupancy costs and professional fees). Although the percentage of
SG&A to total revenues remained the same, the dollar increase is primarily
driven by the Supercuts acquisition which resulted in higher warehouse expenses
due to volume increases and additional corporate professional fees, offset by
cost reductions associated with the amalgamation of the Supercuts back office
functions.
All direct and indirect expenses associated with franchise operations, other
than the cost of products sold to franchisees, are included in SG&A expense.
The cost of products sold and associated franchise activities remained
relatively consistent in both periods of fiscal 1998 and 1997.
DEPRECIATION AND AMORTIZATION - CORPORATE
Depreciation and amortization remained consistent at 1.1 percent of total
revenues in both periods.
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NONRECURRING CHARGES
See Note 4 to the unaudited Consolidated Financial Statements.
OPERATING INCOME
Exclusive of nonrecurring items, operating income in the first six months of
fiscal 1998 improved to $29,915,000, or 7.7 percent of total revenues, an
increase of $6,790,000, or 29.4 percent over the prior year period operating
income of $23,125,000, or 6.7 percent of total revenues. This improvement is
attributable primarily to improved gross margins and the leveraging of direct
salon expenses.
INTEREST
Interest expense in the first six months of fiscal 1998 was $4,887,000, or 1.3
percent of total revenues, compared to $4,974,000 or 1.4 percent of total
revenues in the same period in fiscal 1997. Interest expense has remained
relatively consistent between the two periods because, although debt levels have
increased, average interest rates were lower during the period.
INCOME TAXES
The Company's effective income tax rate for fiscal 1998 is estimated to be
approximately 41.0 percent, compared to 66.6 percent in fiscal 1997. The
Company's effective tax rate for fiscal 1997 was negatively affected by certain
nondeductible merger and transaction costs (nonrecurring charges) associated
with the Supercuts merger. Additionally, as part of the tax provision for the
period ended December 31, 1996, the Company recorded a $1,500,000 charge
associated with the resolution of Supercuts income tax matters related to years
prior to 1996, resulting from the completion of an Internal Revenue Service
examination. Exclusive of the effect of nonrecurring charges and the $1,500,000
resolution charge, the Company's effective tax rate for fiscal 1997 was 43.1
percent.
NET INCOME (LOSS)
Net income in the first six months of fiscal 1998 was $13,753,000 or $ .57 per
share, compared to a net loss of $4,339,000 or $.19 per share in the same period
in fiscal 1997. Exclusive of nonrecurring items in both periods, net income in
the first six months of fiscal 1998 increased to $14,865,000 or $.62 per share,
compared to net income in the same period in fiscal 1997 of $10,701,000 or $.46
per share, an earnings per share increase of 34.8 percent.
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LIQUIDITY AND CAPITAL RESOURCES
Customers generally pay for salon services and merchandise in cash at the time
of sale, which reduces the Company's working capital requirements. Net cash
provided by operating activities in the first six months of fiscal 1998 was
$30,948,000 compared to $13,157,000 during the same period in fiscal 1997. The
increase between the two periods is due to improved operating performance in the
current year and the merger and transaction costs associated with the Supercuts
merger in the prior year period.
During the first six months of fiscal 1998, the Company had worldwide capital
expenditures of $33,221,000, of which $1,193,000 related to acquisitions,
$4,299,000 of capital lease obligations that were entered into during the
current year, $5,142,000 for the Company's new distribution center and
$6,950,000 for the purchase of additional home office facilities. The Company
constructed 18 new Regis Hairstylists salons, 26 new MasterCuts salons, 24 new
Trade Secret salons, 23 new Wal-Mart salons and 8 new International salons, and
completed 35 major remodeling projects. All salon capital expenditures during
the first six months of fiscal 1998 were funded primarily by cash flow from the
Company's operations and borrowings under its revolving credit facilities.
The Company anticipates its worldwide salon development program for fiscal
1998 will include the construction of approximately 200 new company-owned
salons, and 60 major remodeling and conversion projects. It is expected the
Company's total capital expenditures in fiscal 1998 will be approximately
$63,000,000, excluding acquisitions, with approximately $41,000,000 related
to new salon construction and renovations. The remaining $22,000,000 is
related to the construction of the Company's new distribution center and the
purchase of additional home office facilities. Expenditures will be funded in
part through borrowings under existing credit facilities and capital lease
arrangements.
FINANCING
See Note 3 to the unaudited Consolidated Financial Statements.
Management believes that cash generated from operations and amounts available
under its revolving credit facilities will be sufficient to fund its anticipated
capital expenditures and required debt repayments for the foreseeable future.
DIVIDENDS
During the first six months of fiscal 1998, the Company paid quarterly dividends
of $933,595 or $.02 per share. In February 1998, the Board of Directors of the
Company approved the payment of a $.02 per share dividend payable to
shareholders of record of February 16, 1998.
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YEAR 2000
The Company has already begun the necessary software conversion and programming
modifications necessary to comply with the Year 2000 computer software issues
for significant portions of its software and computer systems. Based on the
Company's most recent assessment, the associated costs to be incurred are
estimated to be approximately $5,000,000. Such costs are estimated to be
incurred and charged to earnings over the next twenty-four months.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 10 (ff) Modifications of Private Shelf Agreement in 10(dd) dated
October 1, 1997.
(gg) Private Shelf Agreement dated as of December 19, 1997 between
the registrant, Life Insurance Company of Georgia and ING
Affiliates.
(hh) Series R-1 Senior Note drawn from Private Shelf dated as of
December 19, 1997, between the registrant and ING Affiliate.
(ii) Series R-2 Senior Note drawn from Private Shelf dated as of
December 19, 1997 between the registrant and ING Affiliates.
(jj) Modifications to Revolving Credit agreement in 10 (cc) dated
December 30, 1997.
Exhibit 15 Letter Re: Unaudited Interim Financial Information.
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the six months ended
December 31, 1997.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REGIS CORPORATION
Date: February 9, 1998 By: /s/ Randy L. Pearce
------------------------------------
Randy L. Pearce
Senior Vice President, Finance
Chief Financial Officer
Signing on behalf of the
registrant and as principal
accounting officer
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