Regis Corp: Earnings Preview

| About: Regis Corporation (RGS)

Regis Corp. (NYSE:RGS), which owns, operates and franchises hair and retail product salons worldwide, is slated to release its first quarter 2011 results on October 28, after market close. The current Zacks Consensus Estimate for the quarter is 30 cents per share, representing an annualized growth of 1.72%.

With respect to earnings surprises over the trailing four quarters, Regis has oscillated greatly from negative 8.1% to positive 38.1%. The average earnings surprise was a positive 13.3%. This implies that the company has beaten the Zacks Consensus Estimate by the same magnitude over the last four quarters.

Preliminary 1Q11 Results

In a pre-earnings announcement, Regis reported its first quarter 2011 revenues of $578 million, down 4.5% over the year, and also below the Zacks Consensus Estimate of $581 million.

The comparable-store sales for the first quarter fell 1.5% year over year. However, this rate of decline was lower than the year-ago quarter’s drop of 4.5%, implying a gradual improvement in the quarter’s same-store sales. Retail same-store sales improved 1.7%, implying that the company is experiencing a rise in traffic.

Domestic same-store sales were down 1.7% year over year while International same-store sales plunged 1.9%. However, Hair Restoration same-store sales upped 1.5% in the quarter.

Results remained weak in the company’s relatively higher-priced, mall-based Regis Salon division but relatively stronger in the value salon concepts due to consumer behavioral changes in this volatile economic scenario. Supercuts (located in strip centers; around $17 average ticket) posted a decrease of 0.2% in comparable-store sales while the higher-end Regis (87% located in malls; around $41 average ticket) posted the largest decline of 3.1%.

In February 2009, Regis divested its Trade Secret retail product division to Premier Salons Beauty Inc. Under the agreement, Regis had agreed to provide certain administrative and support services, such as the supply of some retail products, to Premier during the period of transition.

Consequently, first quarter 2010 product revenues from North America included $20 million of sales to Premier at Regis’ cost. Excluding these sales, first quarter 2011 total revenue dropped by 1.3%.


For fiscal 2011, Regis expects same-store sales in a range of negative -1% to +3%. Regis remains optimistic about its performance build-up in fiscal 2011 with positive comparable-store sales and top-line growth estimated for the second half of the year. EBITDA is expected in a range of $235 million to $270 million.

In fiscal 2011, the company also plans to build 160 new corporate locations, add at least 80 franchise locations and close approximately 175 locations.

Estimates Revisions Trend

Estimates have moved down in the last 30 days, implying that the analysts are negative on the stock. The current Zacks Consensus Estimate is $1.33 for 2011 (reflecting a year-over-year growth of 1.78%) and $1.51 for 2012 (reflecting a year-over-year growth of 13.00%).

Agreement of Estimate Revisions

Over the last 30 days, 2 out of 8 analysts for first quarter 2011, 3 out of 9 analysts for 2011 and 1 out of 6 analysts for 2012 reduced their estimates. None of the analysts have increased their estimates over the last 30 days for the first quarter of 2011 and for fiscal 2012. However, 2 analysts have raised their estimates for fiscal 2011. Hence, a negative inclination can be witnessed among the analysts.

Negative revisions by the analysts are based on a longer recovery to positive comps as customer visits are not improving in a difficult economic environment. Moreover, site operating expense is expected to rise. The company itself expects first quarter 2011 results to be disappointing. It has reported negative same-store sales for eight consecutive quarters.

However, 2 analysts have increased their estimates for fiscal 2011, as the company expects positive comparable-store sales and top-line growth estimated for the second half of the year.The company is taking initiatives to attract new and retain existing customers through a new point of sale (POS) system, coupled with the installation of the Internet in all salons.

Management expects 700-900 salons to be fully equipped by the end of December with roughly 1,000 additional salons awaiting conversion in each subsequent quarter.

Magnitude of Estimate Revisions

There has been no change, in the last 60 days, in the earnings estimate of 30 cents for the first quarter of 2011 as seen from the magnitude of the Zacks Consensus Estimate trend. Therefore, the analysts expect the company to report in line.

In the last 30 days, estimates for fiscal 2011 and 2012 remained unchanged at $1.34 and $1.52, respectively. However, in the last 7 days, estimates declined by 1 cent to $1.33 and $1.51 for fiscal 2011 and 2012, respectively.

Our Take

The first quarter 2011 results are projected to be below estimate as revenues would be lower resulting from sluggish same store sales due to continuous decline in traffic, stemming from rising unemployment and uncertain economic conditions.

We expect Regis to benefit from its cost-saving initiatives, installation of a new POS system, economies of scale and incremental salon closures. Moreover, the company has a proven track record of growth through acquisitions as well as new salon construction. Management expects same-store sales to pick up by the end of 2011, following resurgence in the overall economy.

However, we remain cautious on the stock owing to consumer behavioral changes in this difficult economic environment. People are cutting back on expenditure, slowing down spending and stretching recesses between salon visits. Thus, slower traffic and limited new product introduction due to economic concerns remain a drag on same-store sales.

The company does not face a demand risk stemming from technological innovations or foreign competition. However, it does face the threat of fashion changes. Continuous changes in trends are risky for a company that generates revenues by providing haircuts and styling services.

Regis shares have a Zacks #3 Rank (short-term Neutral recommendation). Our long-term recommendation for the stock also remains Neutral.

Disclosure: None