Regis Corporation - 10-Q quarterly report FY

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended December 31, 2001

OR

For the transition period from                      to                     

Commission file number 011230

Regis Corporation
(Exact name of registrant as specified in its charter)

(952)947-7777
(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     

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of January 31, 2002:

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REGIS CORPORATION

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PART I — FINANCIAL INFORMATION
Item 1. Financial Statements

REGIS CORPORATION
CONSOLIDATED BALANCE SHEET
as of December 31, 2001 and June 30, 2001
(Dollars in thousands, except par value and share amounts)

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

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REGIS CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
for the three months ended December 31, 2001 and 2000
(Dollars in thousands, except per share amounts)

Effective July 1, 2001, Regis changed its accounting for goodwill. For comparability purposes, see Note 2 for pro forma amounts.

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

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REGIS CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
for the six months ended December 31, 2001 and 2000
(Dollars in thousands, except per share amounts)

Effective July 1, 2001, Regis changed its accounting for goodwill. For comparability purposes, see Note 2 for pro forma amounts.

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

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REGIS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
for the six months ended December 31, 2001 and 2000
(Dollars in thousands)

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

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REGIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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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, 2001, and the related consolidated statements of operations and of cash flows for the three and six month periods ended December 31, 2001 and 2000. 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 auditing standards generally accepted in the United States of America, 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 accompanying consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We previously audited in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet as of June 30, 2001, and the related consolidated statements of operations, of changes in shareholders’ equity and of cash flows for the year then ended (not presented herein), and in our report dated August 28, 2001, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the accompanying consolidated balance sheet information as of June 30, 2001, is fairly stated, in all material respects in relation to the consolidated balance sheet from which it has been derived.

PRICEWATERHOUSECOOPERS LLP

Minneapolis, Minnesota
January 23, 2002

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Summary

Regis Corporation (the Company), based in Minneapolis, Minnesota, is the world’s largest owner, operator, franchisor and acquirer of hair and retail product salons. The Regis worldwide operations include 7,365 salons at December 31, 2001 operating in two reportable segments: domestic and international. Each of the Company’s operating segments have generally similar products and services. The Company is organized to manage its operations based on geographical location. The Company’s domestic segment includes 6,434 salons operating primarily under the trade names of Regis Salons, MasterCuts, Trade Secret, SmartStyle, Supercuts and Cost Cutters. The Company’s international operations include 931 salons located primarily in the United Kingdom and France. The Company has over 41,000 employees worldwide.

Second quarter fiscal 2002 revenues grew to a record $358.5 million, including franchise revenues of $18.3 million, a 10.6 percent increase over fiscal 2001 second quarter total revenues of $324.0 million. Revenues for the six months ended December 31, 2001 grew to a record $708.2 million, including franchise revenues of $33.8 million, an 11.6 percent increase over total revenues of $634.8 million in the comparable fiscal 2001 period.

Operating income in second quarter of fiscal 2002 increased to $32.6 million, a 28.1 percent increase over operating income of $25.4 million in the corresponding period of fiscal 2001. For the first six months of fiscal 2002, operating income increased to $62.7, a 22.5 percent increase over operating income of $51.2 million during the same period of fiscal 2001.

Net income in the second quarter of fiscal 2002 increased to a record $17.0 million, or $.39 per diluted share, a net income and earnings per share increase of 40.4 and 34.5 percent, respectively, from second quarter fiscal 2001 net income of $12.1 million, or $.29 per diluted share. For the six months ended December 31, 2001, net income grew to a record $32.3 million, or $.75 per diluted share. This represents a net income and earnings per share increase of $7.5 million, or 30.3 percent, and $.16, or 27.1 percent, respectively.

The Company completed the implementation of the new accounting standard associated with the discontinuance of amortization of goodwill, effective July 1, 2001, as discussed in Note 2 to the Consolidated Financial Statements.

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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 percent of revenues. The percentages are computed as a percent of total Company revenues, except as noted.

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RESULTS OF OPERATIONS

Revenues
Revenues for the second quarter of fiscal 2002 grew to a record $358.5 million, an increase of $34.5 million or 10.6 percent, over the same period in fiscal 2001. Revenues for the first six months of fiscal 2002 grew to a record $708.2 million, an increase of $73.4 million, or 11.6 percent, over the corresponding period in fiscal 2001. For the second quarter and first six months, approximately 50 and 46 percent, respectively, of these increases are attributable to new salon construction, with the remaining increases primarily due to same-store sales increases and salon acquisitions.

For the second quarter and first six months of fiscal 2002 and 2001, respectively, revenues by division were as follows:

Included in the table above are franchise revenues of $18,304 and $33,781 for the three and six months ended December 31, 2001, respectively, and $13,510 and $26,960 for the three and six months ended December 31, 2000, respectively.

During the second quarter and first six months of fiscal 2002, same-store sales from all domestic company-owned salons open more than 12 months increased 2.9 and 3.1 percent, respectively, compared to increases of 1.4 and 3.2 percent, respectively, in the same periods of fiscal 2001. Same-store sales increases achieved during the three and six months ended December 31, 2001 and 2000 were driven primarily by higher product sales and a shift in the mix of service sales, as well as increased customer transactions. A total of 31.1 million and 61.2 million customers were served system-wide in the second quarter and first six months of fiscal 2002, respectively, compared to 28.4 million and 56.4 million customers served during the same periods of fiscal 2001.

System-wide sales, inclusive of non-consolidated sales generated from franchisee salons, increased to $532.4 million for the second quarter and $1.0 billion for the first six months of fiscal 2002, representing increases of 13.4 and 13.0 percent, respectively, over the same periods last year. System-wide same-store sales increased 3.5 percent in both the second quarter and first six months of fiscal 2002, respectively, compared to 1.4 percent and 3.3 percent in the same periods of fiscal 2001.

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Service Revenues. Service revenues in the second quarter of fiscal 2002 grew to $234.6 million, an increase of $16.3 million or 7.5 percent, over the same period in fiscal 2001. In the first six months of fiscal 2002, service revenues were $468.3 million, an increase of $40.1 million or 9.4 percent, over the same period a year ago. The increase in service revenues is primarily a result of new salon construction, salon acquisitions and same-store sales growth.

Product Revenues. Product revenues in the second quarter of fiscal 2002 grew to $105.6 million, an increase of $13.3 million, or 14.5 percent, over the same period in fiscal 2001. In the first half of fiscal 2002, product revenues increased $26.5 million, or 14.8 percent, to $206.2 million. These increases continue a trend of escalating product revenues due to strong product same-store sales growth of 6.6 percent in both the second quarter and first six months of fiscal 2002, respectively, a reflection of the continuous focus on product awareness, training and acceptance of national label merchandise and opening additional Trade Secret salons through new construction or acquisitions. Product revenues as a percent of total company-owned revenues increased to 31.0 and 30.6 percent for the second quarter and first six months of fiscal 2002, respectively, compared to 29.7 and 29.6 percent for the same periods a year ago.

Franchise Revenues. Franchise revenues, including royalties and initial franchise fees from franchisees, and product and equipment sales made by the Company to franchisees, increased to $18.3 million in the second quarter and $33.8 million in the first six months of fiscal 2002, compared to $13.5 million and $27.0 million, respectively, for the corresponding periods of fiscal 2001. The increase in franchise revenues is primarily the result of increased franchise royalties and fees related to the French franchise company which was acquired in September 2001 and increased sales of product to franchisee salons.

Cost of Revenue
The aggregate cost of service and product revenues for company-owned salons in the second quarter of fiscal 2002 was $189.4 million compared to $175.0 million in the same period in fiscal 2001. During the first half of fiscal 2002, the aggregate cost of service and product revenues were $375.2 million compared to $342.5 million in the same period a year ago. The resulting combined gross margin percentages for the second quarter and first six months of fiscal 2002 improved 60 basis points and 70 basis points to 44.3 percent and 44.4 percent of company-owned revenues, respectively, compared to 43.7 percent in the same periods of fiscal 2001.

Service margins improved to 42.9 percent in the second quarter of fiscal 2002, representing a 50 basis point improvement over service margins of 42.4 percent in the same period of fiscal 2001. For the first six months of fiscal 2002, service margins improved 60 basis points to 43.1 percent from 42.5 percent in the corresponding period last year. These improvements are primarily a result of increased efforts to control payroll and payroll related costs across all of the Company’s divisions.

Product margins improved 80 basis points and 100 basis points to 47.5 percent and 47.3 percent in the second quarter and first six months of fiscal 2002, respectively, from 46.7 percent and 46.3 percent in the same periods of fiscal 2001. These improvements are the result of a shift in the Company’s mix of products sold. Beginning in the latter portion of fiscal 2001, the product mix changed to consist more heavily of products with a higher profit margin. Further, product margins during fiscal 2001 were adversely impacted by retail discounting associated with the introduction of new packaging for several different product lines.

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Direct Salon
This expense category includes direct costs associated with salon operations such as salon advertising, insurance, telephone, utilities and janitorial costs. For the second quarter of fiscal 2002, direct salon expense of $30.2 million increased slightly to 8.9 percent of company-owned revenues from 8.8 percent in the same period a year ago. For the first six months of fiscal 2002, direct salon expense increased to $61.4 million, or 9.1 percent of company-owned revenues, from 8.8 percent in the corresponding period of fiscal 2001. The current year increases of 10 and 30 basis points are primarily a result of higher workers’ compensation costs. Additionally, a portion of the year-to-date increase is the result of higher utility costs during the first quarter as the result of record temperatures in July of 2001.

Rent
Rent expense for the second quarter of fiscal 2002 was $48.3 million or 14.2 percent of company-owned revenues, compared to $43.2 million or 13.9 percent of company-owned revenues in the same period in fiscal 2001. Rent expense was $95.4 million, or 14.2 percent of company-owned revenues, and $84.5 million, or 13.9 percent of company-owned revenues, in the first six months of fiscal 2002 and 2001, respectively. The increase in rent expense as a percentage of company-owned revenues in the second quarter and first six months of fiscal 2002 is primarily a result of higher common area maintenance costs. In regional malls, landlords are experiencing higher utility, maintenance, insurance and security costs which they are passing on to their tenants such as Regis.

Depreciation — Salon Level
Depreciation expense at the salon level remained consistent in the second quarter and first half of fiscal 2002 at 3.4 percent of revenues, compared to the same periods of fiscal 2001.

Direct Salon Contribution
For reasons previously discussed, direct salon contribution, representing company-owned salon revenues less associated operating expenses, increased in the second quarter and first six months of fiscal 2002 to $60.7 million and $119.4 million, respectively, compared to $54.3 million and $106.9 million during the same periods of fiscal 2001. As a percent of sales, direct salon contribution increased 30 basis points to 17.8 percent and ten basis points to 17.7 percent of company-owned revenues during the second quarter and first six months of fiscal 2002, respectively.

Selling, General and Administrative
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). Selling, general and administrative (SG&A) expenses were $39.6 million, or 11.0 percent of total revenues in the second quarter of fiscal 2002, compared to $34.0 million, or 10.5 percent of total revenues in the same period in fiscal 2001. For the first six months of fiscal 2002, SG&A expenses were $77.2 million, or 10.9 percent of total revenues, compared to $66.3 million, or 10.4 percent of total revenues in the corresponding period of fiscal 2001. These 50 basis point increases are primarily due to duplicative costs incurred during the first half of fiscal 2002 associated with operating three distribution centers, prior to closing the Company’s Minneapolis distribution center in December 2001. Further, costs associated with supporting the recent acquisitions of Canadian and international franchising operations are included in SG&A and contributed to the percentage increase referred to above.

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Depreciation and Amortization — Corporate
Corporate depreciation and amortization decreased to 0.8 percent and 0.7 percent of total revenues in the second quarter and first half of fiscal 2002, compared to 1.6 percent in the same periods in fiscal 2001. These decreases are related to the implementation of FAS No. 142 in July 2001, which discontinues the amortization of acquired goodwill, as discussed in Note 2 to the Consolidated Financial Statements.

Operating Income
Operating income in the second quarter of fiscal 2002 improved to $32.6 million, or 9.1 percent of total revenues, an increase of $7.2 million or 28.1 percent over the same period in fiscal 2001. For the first six months of fiscal 2002, operating income increased $11.5 million, or 22.5 percent, to $62.7 million, or 8.9 percent of total revenues.

Interest
Interest expense in the second quarter and first six months of fiscal 2002 declined to $4.7 million and $9.5 million, respectively, representing 1.3 percent of total revenues in both the second quarter and first half of fiscal 2002. The 50 basis point decrease as a percent of total revenues for the quarter and 40 basis point decrease for the first six months of fiscal 2002 are due to lower interest rates and decreased debt in fiscal 2002 when compared to the same periods a year ago.

Income Taxes
The Company’s annual effective income tax rate for the first six months of fiscal 2002 was 39.5 percent, including 39.4 percent in the second quarter, compared to 39.8 percent in the first six months of fiscal 2001. Management expects to recognize a one-time tax benefit of approximately $2.0 million during the third quarter of fiscal 2002 resulting from the implementation of tax planning strategies associated with certain expenses that were not previously deducted for tax purposes. Further, although management expects the Company’s recurring effective tax rate for all of fiscal 2002 to be approximately 39.5 percent, the resulting fiscal 2002 effective tax rate as a result of the one-time benefit discussed in the previous sentence is expected to approximate an estimated 38.0 percent.

Net Income
Net income in the second quarter of fiscal 2002 grew to $17.0 million, or $.39 per diluted share, compared to $12.1 million, or $.29 per diluted share in the same period in fiscal 2001. For the first six months of fiscal 2002, net income grew to $32.3 million, or $.75 per diluted share, compared to $24.8 million, or $.59 per diluted share, in the corresponding period last year. The increases in earnings per diluted share primarily resulted from sales increases, improved gross margins and the change in accounting for goodwill.

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Effects of Inflation
The Company primarily compensates its Regis Salon and International salon employees with percentage commissions based on the sales they generate, thereby enabling salon payroll expense as a percent of revenues to remain relatively constant. Accordingly, this provides the Company certain protection against inflationary increases as payroll expense and related benefits (the Company’s major expense components) are, with respect to these divisions, variable costs of sales. The Company does not believe inflation, due to its low rate, has had a significant impact on the results of operations associated with hourly paid hairstylists for the remainder of its mall-based and strip center salons.

Recent Accounting Pronouncements
Recent accounting pronouncements are discussed in Note 2 to the Consolidated Financial Statements.

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LIQUIDITY AND CAPITAL RESOURCES
Customers 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 for the first six months of fiscal 2002 increased to $70.3 million compared to $47.0 million during the same period in fiscal 2001. The increase between the two periods is primarily due to improved operating performance and continued improvement related to inventory management.

Capital Expenditures and Acquisitions
During the first six months of fiscal 2002, the Company had worldwide capital expenditures of $36.1 million, of which $2.0 million related to acquisitions. The Company constructed 180 new corporate salons in the first half of fiscal 2002, including 30 new Regis Salons, 22 new MasterCuts salons, 19 new Trade Secret salons, 67 new SmartStyle salons, 30 new Strip Center Salons and 12 new International salons, and completed 71 major remodeling projects. All capital expenditures during the first six months of fiscal 2002 were funded by the Company’s operations and borrowings under its revolving credit facility.

The Company anticipates its worldwide salon development program for fiscal 2002 will include approximately 375 new salons and 150 major remodeling and conversion projects. It is expected that expenditures for these new salons and other projects will be approximately $70 million in fiscal 2002, excluding capital expenditures associated with acquisitions.

During the first half of fiscal 2002, the Company had worldwide expenditures of $17.3 million related to the acquisition of 560 salons, including 517 franchised salons.

Contractual Obligations and Commercial Commitments
As detailed in the Company’s June 30, 2001 annual report to shareholders, and updated for activity through December 31, 2001, the Company has debt obligations, including capital leases, of approximately $255 million, and operating lease obligations of approximately $700 million, including reimbursable franchisee lease obligations of approximately $110 million.

As a part of its salon development program, the Company continues to negotiate and enter into leases and commitments for the acquisition of equipment and leasehold improvements related to future salon locations, and continues to enter into transactions to acquire established hair care salons and businesses.

Financing
Management believes that cash generated from operations and amounts available under its existing debt facilities will be sufficient to fund its anticipated capital expenditures, acquisitions and required debt repayments for the foreseeable future. Additionally, the Company received an investment grade “2” rating from NAIC in December 2001. The change in rating should provide the Company with greater and less expensive access to the long-term senior debt.

The Company operates in international markets and translates the financial statements of its international subsidiaries to U.S. dollars for financial reporting purposes, and ac cordingly is subject to fluctuations in currency exchange rates.

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Dividends
During the first six months of fiscal 2002, the Company paid dividends totaling $2.5 million, or $.06 per share. On January 28, 2002, the Board of Directors of the Company declared a $.03 per share quarterly dividend payable on February 26, 2002 to shareholders of record on February 12, 2002.

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SAFE HARBOR PROVISIONS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This quarterly report on Form 10-Q, as well as information included in, or incorporated by reference from, future filings by the Company with the Securities and Exchange Commission and information contained in written material, press releases and oral statements issued by or on behalf of the Company contains or may contain “forward-looking statements” within the meaning of the federal securities laws, including statements concerning anticipated future events and expectations that are not historical facts. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements in this document reflect management’s best judgment at the time they are made, but all such statements are subject to numerous risks and uncertainties, which could cause actual results to differ materially from those expressed in or implied by the statements herein. Additional information concerning potential factors that could affect future financial results is included in the Company’s Form S-3 Registration Statement filed with the Securities and Exchange Commission on October 25, 2001.

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Item 3. 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, some of which bears interest at floating rates based on LIBOR plus an applicable borrowing margin. To a lesser extent, the Company is also exposed to foreign currency translation risk related to its net investments in its foreign subsidiaries.

As of December 31, 2001, the Company had $136.4 million of floating and $118.6 million of fixed rate debt outstanding. The Company manages its interest rate risk by balancing the amount of fixed and variable debt. In addition, on occasion the Company uses interest rate swaps to further mitigate the risk associated with changing interest rates. Generally, the terms of the interest rate swap agreements range from two to three years with settlement on a quarterly basis. As of December 31, 2001, the Company has entered into interest rate swap agreements covering $66.8 million of the floating rate obligations, as discussed in Note 3 to the Consolidated Financial Statements.

The Company has also entered into a cross currency swap with a notional amount of $21.8 million to hedge its foreign currency exposure in certain of its net investments.

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Part II — Other Information

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits:

Exhibit 15          Letter Re: Unaudited Interim Financial Information.

(b) Reports on Form 8-K:

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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.

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