- RGS reported its Q2/23 earnings, where they achieved their highest first half operating income in five years
- Several announced restructuring efforts and productivity initiatives are expected to support margins and profitability going forward.
- Getting closer to cash flow breakeven and start to pay down debt.
Regis Corporation ($RGS) is a multinational hair and beauty salon chain, headquartered in Edina, Minnesota. The company has been a leader in the hair and beauty industry for several decades. RGS offers a wide range of hair and beauty services, including haircuts, styling, coloring, and other treatments. The company has a strong reputation for providing high-quality services at affordable prices. This makes it a popular choice for consumers looking for a convenient and accessible hair and beauty experience.
RGS faced several difficulties in the past few years, particularly due to the outbreak of the COVID-19 pandemic and the subsequent lockdowns. The pandemic and lockdowns had a severe impact on the global economy, and Regis Corporation was no exception.
In early 2020, when the COVID-19 pandemic started to spread globally, governments around the world imposed lockdowns and restrictions on businesses.This includes hair and beauty salons in an effort to curb the spread of the virus. Regis Corporation’s business was severely impacted by these lockdowns as the company had to close its doors temporarily, leading to a significant loss in revenue.
The lockdowns also resulted in significant supply chain disruptions. This makes it difficult for Regis Corporation to get its hands on the necessary supplies and products to keep its salons running. This further impacted the company’s bottom line and made it difficult for them to keep up with their expenses.
Furthermore, the lockdowns also had a significant impact on consumer confidence and spending, as many people became concerned about their financial future and started to reduce their non-essential spending. This, in turn, led to a decrease in demand for hair and beauty services, further exacerbating the difficulties faced by Regis Corporation.
Despite these difficulties, the company remains optimistic about the future and is confident that it will recover and thrive once again.
The Doctor Is In
RGS welcomed a new management team where they embarked on a transformation process where they transitioned to an asset light recurring revenue business model. In doing so, they are able to streamline their expenses and find a right sized G&A expense for their business.
Under the new leadership, they achieved positive Fiscal 2022 Adjusted EBITDA of $0.5mil vs a loss of $60.2mil in FY21.
In addition, they sold their proprietary POS system to have significant ROI and this improved their balance sheet. The main highlight was the successful credit agreement amendment which extended their debt maturity from March 23 2023 to August 31 2025, which gives them enough breathing space to execute their turnaround.
Latest Financial Results
Indeed, RGS just announced its latest 2Q/23 results. Where they reported their highest first half operating income in five years.
In my opinion, the report significantly contributes to the confirmation of a operational and financial turnaround. Even though management acknowledged that there are still macroeconomic concerns, the way forward is for a leaner and more focused company, which, I feel enables them to be well-positioned to provide higher long-term profitability.
Second quarter 2023 compared to second quarter 2022:
- System-wide same-store sales increased 4.5% in the quarter;
- Operating income improved $1.2 million to $0.7 million, from an operating loss of $0.5 million in the 2022 second quarter; operating income excluding certain non-cash charges was $4.5 million;
- Franchise adjusted EBITDA of $7.5 million compared to $5.7 million in the 2022 second quarter, and was positive for the fifth quarter in a row;
- Net loss of $2.4 million improved $2.5 million from a loss of $4.9 million in the 2022 second quarter; and
- Adjusted EBITDA was $7.8 million compared to $2.6 million in the 2022 second quarter. Adjusted EBITDA includes a $1.1 million grant from the state of North Carolina related to COVID-19 relief and a favorable actuarial adjustment of $0.6 million.
First half 2023 compared to first half 2022:
- System-wide same-store sales increased 4.5% for the year;
- Operating income improved $8.6 million to $3.2 million, from an operating loss of $5.4 million in the 2022 first half;
- Franchise adjusted EBITDA of $12.5 million increased $10.2 million from $2.3 million in the 2022 first half;
- Net loss of $0.9 million improved $14.4 million from a loss of $15.3 million in the 2022 first half; and
- Adjusted EBITDA was $11.7 million compared to a loss of $2.4 million in the 2022 first half. Adjusted EBITDA includes the benefits referenced above.
Earnings Call Discussion
One of the main points of discussion during the earnings conference call was the health of the franchise system and where the management see their franchise system going. In the past few years, RGS’s focus was about cutting cost and shutting down underperforming salons. They have mentioned that a lot of time and resources is spent on cleaning up the base. Part of their recovery plan was also to introduce initiatives to drive their franchisees’ profitability through increasing productivity. Also, once they winded down those salons that are underperforming, they will look to increase franchisee sales which is what will drive their growth.
The more important read is how it ties into the company’s restructuring efforts and ultimately, the debt paydown. RGS is currently focused on bringing the company back to growth. This will help increase their topline, drive profitability and generate cashflow.
Paying down their debt that is a big piece of the value equation here. Doing so will further unlock value for stakeholders.
In the earnings call, Matthew Doctor mentioned 2 ways they are looking to paydown their debt. The first is what I’ve mentioned earlier, which is what they are currently doing in order to move to a cash flow positive position. The second option is through the proceeds they get from Zenoti when additional salons migrate to their POS system.
Some backstory on Zenoti:
After the sale of their old and weak proprietary POS system, Opensalon Pro, to Zenoti, RGS commenced the rollout of the Zenoti platform across their salons. The company received $13 million on June 30, 2022, but will receive up to an additional $26 million depending on adoption by franchisees.
On 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.(Source: Regis FY 2022 10-K (page 30))
What’s Next for Regis
From what is said in the earnings call, RGSs is on track to continue building on the momentum. They have mentioned that there will be a dip in their financial performance for the next 2 quarters but this is due to the timing of investments that they will be making. Together with the first 2 fiscal quarters, RGS is poised to deliver significant EBITDA growth over the course of fiscal 2023 versus our prior years.
What I like about RGS is that the business is resilient, with no online solution with barriers to ecommerce. Their asset light franchise model provides predictable recurring revenue.
This is kind of the most subscription like model without being an official subscription due to the fact that haircare is more of a need versus a want and people look to get their haircut and colored, whatever have you, and they prefer to do that with training professionals. So regardless of the time, regardless of customer behavior, I think there’s really a lot of space for us given that dynamic, and I really like our positioning and prospects to capitalize that.
Given our scale, convenience, value for money, quality of service are salons suffice at attractive price points, what I think this will be resilient through all economic cycles and the incrementality of these initiatives can have regardless on stretching out of cycles here. There’s, a lot of customers to go after attract keep and retain and build loyalty to our brands.Matthew Doctor on 2Q23 Earnings Call
Of course, RGS is still not out of the woods yet. They are still not at cash flow breakeven levels. In terms of risks, the company remains exposed to financial market volatility and macro conditions. A deterioration of the economic environment defined by a deeper recession would impact demand, opening the door for weaker-than-expected results. Staging a business turnaround in a 7% inflation economic environment is not a walk in the park.
RGS received a lifeline when they extended their debt maturity to 2025. Now RGS have to start paying down their debt. This will improve their valuations and I believe that the stock will rerate. Therefore I remain optimistic on its turnaround.