By Matt Doiron
According to a filing with the SEC, Jeffrey Smith's Starboard Value now owns 4.2 million shares of Regis Corporation (RGS), giving it almost 7% of the total shares outstanding. The fund had reported owning 2.8 million shares at the end of September, making it one of the five largest single stock holdings by market value in Starboard's 13F portfolio (see more of Starboard's stock picks). Regis is a $960 million market cap company which operates and franchises hair salons with a focus on the United States. Its brands include Supercuts and MasterCuts as well as Regis Salons itself; the company generates about 20% of its revenue from in-location product sales. Starboard is an activist investor, most notable these days for its position in Office Depot (ODP). The fund had originally gotten involved with Regis in 2011, frustrated that the company did not look more extensively for outside CEO candidates and convinced that it needed to sell non-core assets (something that the company has done since then to some degree).
Revenues slipped 5% in the first quarter of Regis' fiscal year (the company has a June fiscal year end) versus a year earlier. Operating income was flat; net income was reported considerably higher than in the first quarter of the last fiscal year, but that was due to a nonrecurring foreign currency related item. Analyst expectations are for 68 cents per share of earnings in the current fiscal year ending in June 2013, which implies a current-year P/E multiple of 25. We're surprised that the stock is trading that high, as we wouldn't consider hair salons to be a growth industry and certainly Regis' recent performance doesn't suggest that it warrants that kind of a multiple. The forward P/E is 21. There is a case to be made that Regis Corporation isn't that bad a value in terms of cash flow. However, the enterprise value is 5.2x trailing EBITDA, and while that doesn't make it a buy it at least makes for an argument against shorting the stock.
Our database of 13F filings from hedge funds and other notable investors has Starboard as being the largest hedge fund holder of Regis Corporation at the end of September. The company had also been a favorite of Kingstown Capital Management; that fund, which is managed by Michael Blitzer, also had Regis as one of its ten largest holdings. Cliff Asness' AQR Capital Management reported a position of about 650,000 shares (check out Cliff Asness's stock picks).
The company's closest peer is Ulta Salon, Cosmetics & Fragrance (ULTA), though that company is primarily a retailer with a side business as a salon services provider. Ulta Salon also looks pricey, at 40 times trailing earnings. It has been experiencing high growth in revenue and earnings, however, and given that much of its products and services are likely higher-end than Regis' we can see why the company would trade at a premium. Still, in absolute terms it's challenging to see a value case for a stock with a forward P/E of 28 - how much further can the company actually grow its net income?
We can also compare Regis to Steiner Leisure Limited (STNR), a provider of spa services and personal care products, and to Weight Watchers (WTW). Each of these stocks carries a trailing P/E multiple of 13, placing them in more conventional value territory in that regard. Weight Watchers has been struggling, with earnings down last quarter versus a year earlier, but it might be worth a look - we'd certainly expect the market demand to continue to increase. Steiner actually combines its multiple with a decent financial performance: in the third quarter, revenue was up 14% compared to the same period in 2011 and earnings rose 7%. Its market cap is only about $690 million but we think that it could prove a good value opportunity, particularly considering the high multiples we find in Ulta Salon and Regis.