What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-02 compared with 2020-06-18 · 129 added, 170 removed, 201 unchanged (60% of the section changed)

4 unchanged sentences

Regis Corporation (RGS) franchises, owns, and operates beauty salons.

As of March 31, 2020, the Company franchised, owned or held ownership interests in 7,026 worldwide locations.

As of September 30, 2020, the Company franchised, owned or held ownership interests in 6,614 worldwide locations.

Our locations consisted of 6,534 system-wide North American and International salons, and in 80 locations we maintained a non-controlling ownership interest less than 100 percent.

Each of the Company’s salon concepts generally offer similar salon products and services and serve the mass market.

As of March 31, 2020, we had approximately 11,000 corporate employees worldwide.

Impact of COVID-19 on Business Operations

During the period ended March 31, 2020, COVID-19 had an adverse impact on operations, including the closure of all company-owned salons and almost all franchise locations in March 2020 due to government mandates.

Salons continued to be closed until April 23, 2020 when franchise salons began re-opening slowly, as government, state and local restrictions eased.

As of June 15, 2020 approximately 76% of Franchise salons were open.

Company-owned salons were closed through May 21, 2020 and are gradually re-opening.

As of June 15, 2020, approximately 45% of company-owned salons were open.

As salons re-open, the Company is taking additional measures across its portfolio of franchise and company-owned salons to facilitate customer and employee safety.

As a result, COVID-19 has and will continue to negatively affect revenue and profitability.

To offset the loss of revenue, in April 2020, the Company implemented a furlough program for a substantial majority of the workforce across the corporate office, field support, and distribution centers;

and reductions in the pay for executives and other working employees.

Despite actions taken to resume business operations, COVID-19, and the volatile regional and global economic conditions stemming from the pandemic, as well as reactions to future pandemics or resurgences of COVID-19, could potentially prolong and intensify the impact of the global crisis on our business.

As of September 30, 2020, we had approximately 7,000 corporate employees worldwide.

Impact of the COVID-19 Pandemic on Business Operations

During the period ended September 30, 2020, the global coronavirus pandemic ("COVID-19") had an adverse impact on operations, including the closure of all salons in California for the majority of the quarter due to government-mandated closures.

These restrictions were lifted in September and as of September 30, 2020, system-wide salons are approximately 95% open.

Management is evaluating the future of the unopened salons, including potential closures.

The COVID-19 pandemic continues to impact guest visits to our salons leading to a significant reduction in revenue.

Due to the economic disruption caused by the COVID-19 pandemic, the Company faces a greater degree of uncertainty than normal in making judgments and estimates needed to apply the Company's significant accounting policies.

Actual results and outcomes may differ from management's estimates and assumptions.

CRITICAL ACCOUNTING POLICIES

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Discussion of each of these policies is contained under “Critical Accounting Policies” in Part II, Item 7 of our June 30, 2020 Annual Report on Form 10-K.

Our updated policies on the amended revenue recognition guidance, ASC Topic 606, can be found in Note 2 to the unaudited Condensed Consolidated Financial Statements.

Recent Accounting Pronouncements

The Company adopted the amended leasing guidance, Topic 842, on July 1, 2019 using the modified retrospective method which required the adjustment of only the current reporting period presented.

Recent accounting pronouncements are discussed in detail in Notes 1 and 10 to the unaudited Condensed Consolidated Financial Statements.

The Company adopted ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350)" for the interim impairment test performed as of March 31, 2020.

Under this accounting standard, the Company performed its interim impairment test and will perform its annual impairment test by comparing the fair value of a reporting unit to its carrying amount.

The Company then records an impairment charge for the amount that the carrying amount exceeds the fair value.

This eliminates Step 2 from the goodwill impairment test to simplify the subsequent measure of goodwill.

Our policies related to revenue recognition guidance, ASC Topic 606, can be found in Note 2 to the unaudited Condensed Consolidated Financial Statements.

RESULTS OF OPERATIONS

Impact of salons sold to franchisees on operations

In the three and nine months ended March 31, 2020, the Company sold 375 and 1,363, respectively, company-owned salons to franchisees.

In the three months ended September 30, 2020, the Company sold 137 company-owned salons to franchisees.

The impact of these transactions are as follows:

Three Months Ended March 31, Increase (Decrease) Nine Months Ended March 31, Increase (Decrease)

2020 2019 2020 2019

Three Months Ended September 30, Increase (Decrease)

(Dollars in thousands)

1 unchanged sentence

Cash proceeds received $ 3,735 $ 37,945 $ (34,210)

Gain on sale of venditions, excluding goodwill derecognition $ 9,628 $ 27,421 $ (17,793) $ 50,841 $ 43,922 $ 6,919

(Loss) gain on sale of venditions, excluding goodwill derecognition $ (662) $ 26,223 $ (26,885)

Non-cash goodwill derecognition — (32,083) 32,083

(Loss) gain from sale of salon assets to franchisees, net $ (10,208) $ 11,489 $ (21,697) $ (21,760) $ 10,394 $ (32,154)

Loss from sale of salon assets to franchisees, net $ (662) $ (5,860) $ 5,198

System-wide results

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System-wide same-store sales by concept are detailed in the table below:

Three Months Ended March 31, Nine Months Ended March 31,

2020 2019 2020 2019

Three Months Ended September 30,

SmartStyle (33.9) % (2.2) %

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(1) System-wide same-store sales are calculated as the total change in sales for system-wide franchise and company-owned locations for more than one year that were open on a specific day of the week during the current period and the corresponding prior period.

Quarterly and year-to-date system-wide same-store sales are the sum of the system-wide same-store sales computed on a daily basis.

Quarterly system-wide same-store sales are the sum of the system-wide same-store sales computed on a daily basis.

Franchise salons that do not report daily sales are excluded from same-store sales.

1 unchanged sentence

System-wide same-store sales are calculated in local currencies to remove foreign currency fluctuations from the calculation.

TBG salons were not a franchise location in fiscal year 2020 so by definition they are not included in system-wide same-store sales.

TBG same-store sales are excluded from fiscal year 2019 same-store sales to be comparative to fiscal year 2020.

TBG salons were not a franchise location in fiscal year 2021 so they are excluded from fiscal year 2020 same-store sales for comparability.

Condensed Consolidated Results of Operations (Unaudited)

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The percentages are computed as a percent of total consolidated revenues, except as otherwise indicated.

For the Three Months Ended March 31, For the Nine Months Ended March 31,

For the Three Months Ended September 30,

2020 2019 2020 2019 2020

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Revenues (1) (Decrease)

Increase ($ in millions) % of Total

Revenues (1) (Decrease)

Service revenues $ 36.4 $ 141.9 32.7 % 57.5 % (2,480)

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Royalties and fees 18.0 28.0 16.1 11.3 480

Franchise rental income 31.8 — 20.7 — N/A 96.9 — 15.9 — N/A

Franchise rental income 32.3 31.4 29.0 12.7 1,630

Cost of service (2) 28.5 90.5 78.3 63.7 1,460

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Rent 13.2 24.3 11.8 9.8 200

Franchise rent expense 31.8 — 20.7 — N/A 96.9 — 15.9 — N/A

Franchise rent expense 32.3 31.4 29.0 12.7 1,630

Depreciation and amortization 7.4 9.4 6.6 3.8 280

Long-lived asset impairment 5.8 — 5.2 N/A N/A

TBG restructuring — 1.5 — 0.6 (60)

Goodwill impairment 44.5 — 28.9 — N/A 44.5 — 7.3 — N/A

Operating loss (4) (31.6) (9.9) (28.4) (4.0) (2,440)

Interest expense (3.8) (1.4) (3.4) (0.6) (280)

(Loss) gain from sale of salon assets to franchisees, net (10.2) 11.5 (6.6) 4.4 (1,100) (21.8) 10.4 (3.6) 1.3 (490)

Loss from sale of salon assets to franchisees, net (0.7) (5.9) (0.6) (2.4) 180

Interest income and other, net 0.1 0.2 0.1 0.1 —

(1.3) 0.5 (0.8) 0.2 (100) 3.2 1.5 0.5 0.2 30

Income tax benefit (expense) (3) 2.3 (3.2) 3.0 28.1 N/A 5.9 (3.0) 5.6 25.2 N/A

Income tax benefit (3) 0.6 2.9 1.7 16.8 N/A

Income from discontinued operations, net of income taxes — 0.4 — 0.2 (20)

_______________________________________________________________________________

(1) Cost of service is computed as a percent of service revenues.

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The income taxes basis point change is noted as not applicable (N/A) as the discussion within MD&A is related to the effective income tax rate.

(4) Total is a recalculation;

line items calculated individually may not sum to total due to rounding.

Consolidated Revenues

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The following tables summarize revenues and same-store sales by concept, as well as the reasons for the percentage change:

Three Months Ended March 31, Nine Months Ended March 31,

2020 2019 2020 2019

Three Months Ended September 30,

(Dollars in thousands)

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Total, Franchise salons $ 63,981 $ 72,546

Franchise salon same-store sales (decrease) increase (1) (4.1) % (1.3) % (1.8) % 0.4 %

Franchise salon same-store sales decrease (1) (31.9) % (0.1) %

Company-owned salons:

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Total, Company-owned salons $ 47,415 $ 174,492

Company-owned salon same-store sales (decrease) increase (2) (7.9) % (2.5) % (3.9) % (0.4) %

Company-owned salon same-store sales decrease (2) (34.8) % (2.0) %

Consolidated revenues $ 111,396 $ 247,038

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(1) Franchise same-store sales are calculated as the total change in sales for salons that have been a franchise location for more than one year that were open on a specific day of the week during the current period and the corresponding prior period.

Quarterly and year-to-date franchise same-store sales are the sum of the franchise same-store sales computed on a daily basis.

Quarterly franchise same-store sales are the sum of the franchise same-store sales computed on a daily basis.

Franchise salons that do not report daily sales are excluded from same-store sales.

1 unchanged sentence

Franchise same-store sales are calculated in local currencies to remove foreign currency fluctuations from the calculation.

TBG salons were not a franchise location in fiscal year 2020 so by definition they are not included in franchise same-store sales.

TBG same-store sales are excluded from fiscal year 2019 same-store sales to be comparative to fiscal year 2020.

TBG salons were not a franchise location in fiscal year 2021 so they are excluded from fiscal year 2020 same-store sales for comparability.

(2) Company-owned same-store sales are calculated as the total change in sales for company-owned locations that were open on a specific day of the week during the current period and the corresponding prior period.

Quarterly and year-to-date company-owned same-store sales are the sum of the company-owned same-store sales computed on a daily basis.

Quarterly company-owned same-store sales are the sum of the company-owned same-store sales computed on a daily basis.

Locations relocated within a one-mile radius are included in same-store sales as they are considered to have been open in the prior period.

Company-owned same-store sales are calculated in local currencies to remove foreign currency fluctuations from the calculation.

Three and Nine Months Ended March 31, 2020 Compared with Three and Nine Months Ended March 31, 2019

Three Months Ended September 30, 2020 Compared with Three Months Ended September 30, 2019

Consolidated Revenues

Consolidated revenues are primarily comprised of service and product revenues, as well as franchise royalties and fees, advertising and rental income.

Consolidated revenue decreased $104.6 and $211.3 million for the three and nine months ended March 31, 2020, respectively.

Service revenue and product revenue decreased $103.4 and $18.9 million, respectively, in the three months ended March 31, 2020 and decreased $258.0 million and $48.5 million, respectively, in the nine months ended March 31, 2020.

The decline in service and product revenue is primarily the due to the Company's sale of salons to franchisees.

During the twelve months ended March 31, 2020, 1,581 salons were sold to franchisees, net of buy backs and 524 and 76 system-wide salons were closed and constructed, respectively (2020 Net Salon Count Changes).

For the three and nine months ended March 31, 2020, the impact to consolidated revenue due to the sale of salons to franchisees and closure of salons was $119.1 and $294.1 million, respectively.

Additionally, the decline in revenue was a result of the temporary closure of all company-owned salons and all but an insignificant number of franchise salons in March due to the COVID-19 pandemic.

In the three and nine months ended March 31, 2020, royalties and fees decreased $14.1 and $1.7 million due to the refunding of $14.9 million of previously collected contributions to the cooperative advertising funds.

Additionally, as a result of the Company's adoption of Topic 842, the Company now records revenue related to franchise leases and this adoption resulted in a $31.8 and $96.9 million increase in franchise rental income for the three and nine months ended March 31, 2020.

Consolidated revenue decreased $135.6 million, or 54.9%, for the three months ended September 30, 2020.

Service revenue and product revenue decreased $105.5 and $20.9 million, respectively, in the three months ended September 30, 2020.

The decline in service and product revenue is primarily due to the Company's sale of salons to franchisees.

During the twelve months ended September 30, 2020, 1,056 salons were sold to franchisees, net of buy backs and 729 and 49 system-wide salons were closed and constructed, respectively (2021 Net Salon Count Changes).

For the three months ended September 30, 2020, the impact to consolidated revenue due to the sale of salons to franchisees and closure of salons was $98.7 million.

Due to the COVID-19 pandemic, in the three months ended September 30, 2020, service revenue, product revenue, royalties and fees decreased.

Service Revenues

The decreases of $103.4 and $258.0 million in service revenues during the three and nine months ended March 31, 2020, respectively, were primarily due to the 2020 Net Salon Count Changes.

For the three and nine months ended March 31, 2020, the impact to service revenue due to the sale of salons to franchisees and closure of salons was $101.3 and $252.9 million, respectively.

Additionally, the temporary closure of salons in March 2020 and company-owned same-store service sales decreases also contributed to the decrease in service revenue.

Company-owned same-store service sales decreases of 6.9% and 2.8% during the three and nine months ended March 31, 2020, respectively, were primarily due to a decrease of 10.3% and 6.3% in same-store guest transactions, partially offset by increases of 3.4% and 3.5% in average ticket price, respectively.

The decrease of $105.5 million, or 74.3%, in service revenues during the three months ended September 30, 2020 was primarily due to the 2021 Net Salon Count Changes.

For the three months ended September 30, 2020, the impact to service revenue due to the sale of salons to franchisees and closure of salons was $81.7 million.

Service revenue also decreased due to fewer guest visits as a result of the COVID-19 pandemic.

Product Revenues

The decreases of $18.9 and $48.5 million in product revenues during the three and nine months ended March 31, 2020 were primarily due to 2020 Net Salon Count Changes.

For the three and nine months ended March 31, 2020, the impact to product revenue due to the sale of salons to franchisees and closure of salons was $17.8 and $41.1 million, respectively.

Company-owned same-store product sales decreases of 11.9% and 8.3%, respectively and the temporary closure of salons in March 2020 also contributed to the decrease in product sales.

For the three and nine months ended March 31, 2020, the decreases in company-owned same-store product sales were primarily the result of decreases in company-owned same-store transactions of 16.4% and 12.2%, respectively, partially offset by increases in average ticket price of 4.5% and 3.9%, respectively.

The decrease of $20.9 million, or 45.8%, in product revenues during the three months ended September 30, 2020 was primarily due to 2021 Net Salon Count Changes.

For the three months ended September 30, 2020, the impact to product revenue due to the sale of salons to franchisees and closure of salons was $17.0 million.

Additionally, franchise same store product sales declined 24.0%, contributing to the decline.

Royalties and Fees

The decreases of $14.1 and $1.7 million in royalties and fees for the three and nine months ended March 31, 2020, respectively, were primarily due to the refunding of $14.9 million of previously collected contributions to the cooperative advertising funds to provide temporary relief to our franchisees.

The decrease in advertising fund revenue was partially offset by an increase in royalties due to an increase in franchise locations.

Total franchised locations open at March 31, 2020 were 5,126 as compared to 4,375 at March 31, 2019.

The decrease of $10.0 million, or 35.9%, in royalties and fees for the three months ended September 30, 2020 was primarily due to a $5.9 million decline in cooperative advertising funds charged to franchisees, which were temporarily reduced as part of our COVID-19 pandemic relief effort.

This decline is offset in site expense and has no impact on operating income.

The decline is also due to the decrease in franchise same store sales of 31.9%, partially offset by an increase in franchise salons.

Total franchised locations open at September 30, 2020 were 5,226 as compared to 4,456 at September 30, 2019.

Franchise Rental Income

The increases of $31.8 million and $96.9 million in franchise rental income for the three and nine months ended March 31, 2020, respectively, is due to the adoption of Topic 842 in fiscal year 2020.

Prior to the adoption, the Company recorded franchise rental income and expense on a net basis.

The increase of $0.9 million, or 2.7%, in franchise rental income for the three months ended September 30, 2020 is due to the increase in franchise salons.

Cost of Service

The 850 and 600 basis point increases in cost of service as a percent of service revenues during the three and nine months ended March 31, 2020, respectively, were primarily due to higher minimum wages and commissions and inefficient stylist hours in the lead up to salon closures due to COVID-19.

The 1,460 basis point increase in cost of service as a percent of service revenues during the three months ended September 30, 2020 was primarily due to inefficient and non-productive stylist hours as a result of reduced traffic from the COVID-19 pandemic and higher minimum wages.

Cost of Product

The 420 and 290 basis point increases in cost of product as a percent of product revenues during the three and nine months ended March 31, 2020, respectively, were primarily due to the shift into lower margin wholesale product sales.

Margins on retail product sales were 47.7% and 49.3% in the three months ended March 31, 2020 and 2019, respectively.

Margins on wholesale product sales were 25.2% and 22.1% in the three months ended March 31, 2020 and 2019, respectively.

Margins on retail product sales were 48.9% and 50.8% in the nine months ended March 31, 2020 and 2019, respectively.

Margins on wholesale product sales were 23.1% and 20.4% in the nine months ended March 31, 2020 and 2019, respectively.

Increases in wholesale product margins were primarily driven by lower sales to TBG in the current year.

The 870 basis point increase in cost of product as a percent of product revenues during the three months ended September 30, 2020 was primarily due to the shift to franchise product sales.

Margins on retail product sales were 48.3% and 50.7% in the three months ended September 30, 2020 and 2019, respectively.

Margins on franchise product sales were 22.3% and 21.6% in the three months ended September 30, 2020 and 2019, respectively.

The increase in franchise product margins was primarily driven by a shift to higher margin customers and products.

Site Operating Expenses

The decreases of $30.6 and $43.8 million in site operating expenses during the three and nine months ended March 31, 2020, respectively, were due to a net reduction in salon counts and a decrease in cooperative advertising expense due to the refunding of $14.9 million in advertising fees.

The Company records advertising expense as the contributions are received as it has an obligation to spend the funds to support the brands.

Additionally, the decrease was due to the net reduction in company-owned salon counts associated with the Company's franchise strategy

The decrease of $19.7 million, or 59.8%, in site operating expenses during the three months ended September 30, 2020 was due to an $8.0 million decline due to a net reduction in salon counts, a $5.9 million decrease in cooperative advertising expense, which was temporarily reduced as part of our COVID-19 pandemic relief effort, and a decrease in marketing spend.

General and Administrative

The decreases of $9.8 and $30.1 million in general and administrative (G&A) during the three and nine months ended March 31, 2020 were primarily due to lower administrative and field management salaries and bonuses and lower stock compensation expense associated with a change in performance awards assumptions.

The decreases of $13.1 and $39.0 million in rent expense during the three and nine months ended March 31, 2020, respectively, were primarily due to the net reduction in salon counts associated with the Company's franchise strategy, partially offset by rent inflation.

The decrease of $14.5 million, or 35.6%, in general and administrative (G&A) during the three months ended September 30, 2020 was primarily due to lower administrative and field management salaries and reductions in headcount as we align our cost structure with our transition to an asset-light franchise model.

A benefit from the forfeiture of equity awards related to the departure of the Company's former CEO contributed $2.4 million to the decrease.

Additionally, $1.3 million of the decline is due to the Company not holding its annual franchise convention in fiscal year 2021 due to the COVID-19 pandemic.

The decrease of $11.1 million, or 45.5%, in rent expense during the three months ended September 30, 2020 was primarily due to the net reduction in the number of company-owned salons associated with the Company's transformation to a fully-franchised portfolio, partially offset by rent inflation.

Franchise Rent Expense

The increase in franchise rent expense is due to the adoption of Topic 842 in fiscal year 2020.

Prior to the adoption, the Company recorded franchise rental income and expense on a net basis.

In the three months ended September 30, 2020, the increase of $0.9 million, or 2.7%, in franchise rent expense is due to the increase in franchise salons.

Depreciation and Amortization

The increase of $1.8 million in depreciation and amortization during the three months ended March 31, 2020 was primarily due to accelerated depreciation related to the moving of the Company's headquarters and certain salon assets.

The decrease of $0.2 million in depreciation and amortization during the nine months ended March 31, 2020 was primarily due to the reduced salon base, partially offset by the accelerated depreciation related to the moving of the Company's headquarters and certain salon assets.

The decrease of $2.0 million, or 21.4%, in depreciation and amortization during the three months ended September 30, 2020 was primarily due to the net reduction in company-owned salon counts.

Additionally, salon asset impairment of $1.5 million was recorded to depreciation expense in the three months ended September 30, 2019.

Long-Lived Asset Impairment

In the three months ended September 30, 2020, the Company recorded a long-lived asset impairment charge of $5.8 million, which included a right of use asset impairment charge of $4.6 million and salon asset impairment of $1.2 million.

Prior to the COVID-19 pandemic that began in fiscal year 2020, the Company had not recorded a right of use asset impairment charge.

TBG Restructuring

In the three and nine months ended March 31, 2020, the Company incurred professional fees associated with acquiring salons from TBG.

In the three and nine months ended March 31, 2019, the Company recorded a reserve against a note receivable of $8.0 million and accounts receivables of $12.7 million due from TBG due primarily for inventory shipments.

Goodwill Impairment

The Company recorded $44.5 million of goodwill impairment for the three and nine months ended March 31, 2020.

Management concluded that the COVID-19 pandemic in March 2020 was a triggering event requiring an assessment of the Company’s goodwill.

The Company concluded the carrying value of the Company-owned reporting unit exceeded its fair value resulting in a full impairment.

For the three months ended September 30, 2019, the Company recorded $1.5 million of TBG restructuring charges which related to the Company assisting TBG with operating expenses to mitigate the risk of default associated with TBG's lease obligations.

See Note 3 to the unaudited Condensed Consolidated Financial Statements.

Interest Expense

The increases of $0.3 and $1.2 million in interest expense for the three and nine months ended March 31, 2020, respectively, were primarily due to interest charges associated with the long-term financing liabilities.

(Loss)/Gain from sale of salon assets to franchisees, net

In the three months ended March 31, 2020, the loss from sale of salon assets to franchisees was $10.2 million, including non-cash goodwill derecognition of $19.8 million.

In the three months ended March 31, 2019, the gain from the sale of salon assets to franchisees was $11.5 million, including non-cash goodwill derecognition of $15.9 million.

In the nine months ended March 31, 2020, the loss from the sale of salons assets to franchisees was $21.8 million, including $72.6 million of non-cash goodwill derecognition.

In the nine months ended March 31, 2019, the gain from sale of salon assets to franchisees was $10.4 million, including non-cash goodwill derecognition of $33.5 million.

The decrease year over year is due to lower proceeds per salon sold in fiscal year 2020 compared to fiscal year 2019 as the Company sold more Supercuts salons in fiscal year 2019, which typically vendition for greater proceeds than other concepts.

The increase of $2.3 million in interest expense for the three months ended September 30, 2020 was primarily due to the increased interest rate and the additional borrowings in the third quarter of fiscal year 2020.

Loss from sale of salon assets to franchisees, net

In the three months ended September 30, 2020, the loss from sale of salon assets to franchisees was $0.7 million.

In the three months ended September 30, 2019, the loss from the sale of salon assets to franchisees was $5.9 million, including non-cash goodwill derecognition of $32.1 million.

There was no goodwill derecognition in fiscal year 2021 due to the company-owned goodwill impairment in the third quarter of fiscal year 2020.

Interest Income and Other, net

The decrease of $1.8 million in interest income and other, net during the three months ended March 31, 2020 was primarily due to an adjustment to the accounting for the sale of the Company's headquarters.

In the three month period ended March 31, 2020, the Company recognized $1.5 million of incremental charges to correct the gain on sale of the Company's former headquarters recorded in the second quarter of fiscal year 2020.

Management evaluated the effect of this out-of-period adjustment on the three and nine months periods ended March 31, 2020, as well as on the previous interim period in which it should have been recognized, and concluded for both quantitative and qualitative reasons that the adjustment is not material to any of the period affected.

The increase of $1.7 million in interest income and other, net during the nine months ended March 31, 2020 was primarily due to the gain on the sale of the Company's headquarters of $2.5 million, partially offset by a decline in interest income.

During the three and nine months ended March 31, 2020, the Company recognized tax benefits of $2.3 and $5.9 million, respectively, with corresponding effective tax rates of 2.9% and 5.6% as compared to recognizing tax expenses of $3.2 and $3.0 million, with corresponding effective tax rates of (28.1%) and (25.2)% during the three and nine months ended March 31, 2019.

The decrease of $0.1 million in interest income and other, net during the three months ended September 30, 2020 was primarily due a decline in interest income.

During the three months ended September 30, 2020 and 2019, the Company recognized a tax benefit of $0.6 and $2.9 million with corresponding effective tax rates of 1.8% and 16.8%.

See Note 6 to the unaudited Condensed Consolidated Financial Statements.

Income from Discontinued Operations

Income from discontinued operations increased $0.1 million during the three months ended March 31, 2020 due to beneficial actuarial adjustments recognized in fiscal year 2020.

For the nine months ended March 31, 2020, income from discontinued operations decreased $5.3 million due to lapping income tax benefits associated with the wind-down and transfer of legal entities related to discontinued operations recognized in the second quarter of fiscal year 2019.

Income from discontinued operations decreased $0.4 million during the three months ended September 30, 2020 due to actuarial insurance reserve adjustments in the prior year.

Results of Operations by Segment

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Franchise Salons

For the Three Months Ended March 31, For the Nine Months Ended March 31,

2020 2019 Increase (Decrease) 2020 2019 Increase (Decrease)

(Dollars in millions) (Dollars in millions)

For the Three Months Ended September 30,

2020 2019 Increase (Decrease)

(Dollars in millions)

Product $ 13.7 $ 11.8 $ 1.9

7 unchanged sentences

Operating loss from TBG restructuring — (1.6) 1.6

Total operating income (loss) (2) $ 11.1 $ (11.2) $ 22.3 $ 33.4 $ 6.8 $ 26.6

Total operating income (1) $ 6.3 $ 10.2 $ (3.9)

_______________________________________________________________________________

(1) Fiscal year 2020 includes the refund of $14.9 million of previously collected cooperative adverting fees, which reduced franchise royalties and fees and site operating expense and had no net impact on the operating loss.

The nine months ended March 31, 2019 includes $1.7 million of royalties related to TBG.

No TBG royalties were recorded in the three months ended March 2019.

(1) Total is a recalculation;

1 unchanged sentence

(2) Franchise same-store sales are calculated as the total change in sales for salons that have been a franchise location for more than one year that were open on a specific day of the week during the current period and the corresponding prior period.

Quarterly and year-to-date franchise same-store sales are the sum of the franchise same-store sales computed on a daily basis.

Quarterly franchise same-store sales are the sum of the franchise same-store sales computed on a daily basis.

Franchise salons that do not report daily sales are excluded from same-store sales.

1 unchanged sentence

Franchise same-store sales are calculated in local currencies to remove foreign currency fluctuations from the calculation.

TBG salons were not a franchise location in fiscal year 2020 so by definition they are not included in franchise same-store sales.

TBG same-store sales are excluded from fiscal year 2019 same-store sales to be comparative to fiscal year 2020.

TBG salons were not a franchise location in fiscal year 2021 so they are excluded from fiscal year 2020 same-store sales for comparability.

Franchise same-store sales by concept are detailed in the table below:

Three Months Ended March 31, Nine Months Ended March 31,

2020 2019 2020 2019

Three Months Ended September 30,

SmartStyle (31.9) % (7.5) %

3 unchanged sentences

Franchise Salon Revenues

Franchise salon revenues increased $18.7 and $92.6 million during the three and nine months ended March 31, 2020.

Excluding franchise rental income recorded in fiscal year 2020 as a result of the adoption of Topic 842, franchise salon revenues decreased $13.1 and $4.2 million during the three and nine months ended March 31, 2020, respectively.

The decreases were due to the refund of previously collected contributions to the cooperative advertising funds as well as decreases in franchise product sales to TBG, partially offset by the increases in royalties and fees due to higher franchise salon counts.

During the twelve months ended March 31, 2020, franchisees constructed (net of relocations) and closed 55 and 316 Franchise-owned salons, respectively, and purchased (net of Company buybacks) 1,581 salons from the Company during the same period.

Franchise salon revenues decreased $8.5 million during the three months ended September 30, 2020.

The decrease was due to decreases in royalties and cooperative advertising fund contributions due to the COVID-19 pandemic.

The decline in royalties and cooperative advertising fund contributions was partially offset by an increase in product sales due to the increase in franchise salons.

During the twelve months ended September 30, 2020, franchisees constructed (net of relocations) and closed 43 and 329 Franchise-owned salons, respectively, and purchased (net of Company buybacks) 1,056 salons from the Company during the same period.

Franchise Salon Operating Income

During the three months ended March 31, 2020, Franchise salon operations generated operating income of $11.1 million, an increase of $22.3 million compared to the prior comparable period.

The increase during the three months ended March 31, 2020 was primarily due to higher royalties, fees and product sales associated with the increase in salon count and a decline in costs associated with TBG.

These increases were partially offset by decreased sales in the three months ended March 31, 2020 due to the closure of a majority of franchise salons in March 2020 due to the COVID-19 pandemic.

During the nine months ended March 31, 2020, Franchise salon operations generated operating income of $33.4 million, an increase of $26.6 million compared to the prior comparable period.

The increase during the nine months ended March 31, 2020 was primarily due to higher royalties, fees and product sales associated with the increase in salon count and a decline in costs associated with TBG.

Franchise salon operating income for the nine months ended March 31, 2020 was also impacted by the closure of a majority of franchise salons in March 2020 due to the COVID-19 pandemic.

During the three months ended September 30, 2020, franchise salon operations generated operating income of $6.3 million, a decrease of $3.9 million compared to the prior comparable period.

The decrease was primarily due to the decrease in royalties due to the COVID-19 pandemic.

Company-owned Salons

For the Three Months Ended March 31, For the Nine Months Ended March 31,

2020 2019 Increase (Decrease) 2020 2019 Increase (Decrease)

(Dollars in millions) (Dollars in millions)

For the Three Months Ended September 30,

2020 2019 Increase (Decrease)

(Dollars in millions)

Total revenue $ 47.4 $ 174.5 $ (127.1)

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Company-owned same-store sales by concept are detailed in the table below:

Three Months Ended March 31, Nine Months Ended March 31,

2020 2019 2020 2019

Three Months Ended September 30,

SmartStyle (35.5) % (1.2) %

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Company-owned Salon Revenues

Company-owned salon revenues decreased $123.3 and $303.9 million during the three and nine months ended March 31, 2020, respectively, primarily due to the closure of a net 187 salons and the sale of 1,581 company-owned salons (net of buybacks) to franchisees during the twelve months ended March 31, 2020.

The decreases were also due to company-owned same-store sale decreases of 7.9% and 3.9% during the three and nine months ended March 31, 2020, respectively.

The company-owned same-store sales decreases were due to decreases of 10.5% and 6.7% in same-store guest transactions, which were negatively impacted by the COVID-19 pandemic.

These decreases were partially offset by increases of 2.6% and 2.8% in average ticket prices during the three and nine months ended March 31, 2020, respectively.

Company-owned salon revenues decreased $127.1 million during the three months ended September 30, 2020 primarily due 2021 Net Salon Count Changes and a decline in sales as a result of the COVID-19 pandemic.

Company-owned same-store sales decreased 34.8% during the three months ended September 30, 2020, due to a decrease of 48.2% in same-store guest transactions, which were negatively impacted by the COVID-19 pandemic.

These decreases were partially offset by an increase of 13.4% in average ticket prices during the three months ended September 30, 2020.

Company-owned Salon Operating (Loss) Income

During the three and nine months ended March 31, 2020, company-owned salon operations operating income decreased $66.3 and $96.2 million, respectively, compared to the prior comparable period.

The decreases during the three and nine months ended March 31, 2020 were primarily due to the recording of a $44.5 million goodwill impairment charge due to the economic disruption of COVID-19, the net reduction in company-owned salons, the closure of company-owned salons due to the COVID-19 pandemic towards the end of March 2020, and same-store sales decline.

These declines were partially offset by a $1.5 million benefit to marketing expense due to the refunding of the some of the company-owned salons' contributions to the cooperative advertising funds as well as an overall decline in general and administrative expense and marketing spend.

During the three months ended September 30, 2020, company-owned salon operating income decreased $26.1 million to a loss of $20.7 million compared to the prior period.

The decrease during the three months ended September 30, 2020 was primarily due to the COVID-19 pandemic and the right of use asset impairment.

These declines were partially offset by an overall decline in general and administrative expense and marketing spend.

Corporate Operating Loss

Corporate operating loss decreased $1.9 million during the three months ended March 31, 2020 primarily driven by lower stock compensation benefits associated with a change in performance awards assumptions during the quarter.

Corporate operating loss decreased $8.1 million during the nine months ended March 31, 2020 primarily driven by lower general and administrative salaries and stock compensation benefits associated with a change in performance awards assumptions during the quarter, partially offset by the prior year's franchise convention cost, which was recorded as Corporate expenses in fiscal year 2020 compared to Franchise expense in fiscal year 2019.

Corporate operating loss decreased $8.3 million during the three months ended September 30, 2020 primarily driven by lower general and administrative salaries due to lower headcount, lower severance, lower stock compensation and the cancellation of the franchise convention in fiscal year 2021.

LIQUIDITY AND CAPITAL RESOURCES

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Funds generated by operating activities, available cash and cash equivalents, proceeds from sale of salon assets to franchisees, and our borrowing agreements are our most significant sources of liquidity.

As of March 31, 2020, cash and cash equivalents were $241.0 million, with $237.7 and $3.3 million within the United States and Canada, respectively.

The Company's borrowing arrangements include a $295.0 million five-year unsecured revolving credit facility that expires in March 2023, of which $0.5 million was available as of March 31, 2020.

See Note 11 to the unaudited Condensed Consolidated Financial Statements.

As of September 30, 2020, cash and cash equivalents were $85.0 million, with $82.0 and $3.0 million within the United States and Canada, respectively.

The Company's borrowing arrangements include a $295.0 million five-year unsecured revolving credit facility that expires in March 2023, of which $98.8 million was available as of September 30, 2020.

The Company's liquidity, which includes the unused available balance under the credit facility and unrestricted cash and cash equivalents, totaled $183.8 million as of September 30, 2020.

The revolving credit facility has a minimum liquidity covenant of $75 million (see Note 11 to the unaudited Condensed Consolidated Financial Statements).

The Company closely manages its liquidity and capital resources.

In March 2020, the Company drew $183 million from its line of credit in order to increase its cash position and preserve financial flexibility in light of the uncertainty in the global economy due to the COVID-19 pandemic.

The Company's liquidity requirements depend on key variables, including the level of investment needed to support its business strategies, the performance of the business, capital expenditures, credit facilities and borrowing arrangements, and working capital management.

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Cash Flows from Operating Activities

During the nine months ended March 31, 2020, cash used in operating activities was $51.0 million, an increase of $30.7 million compared to the prior comparable period.

Cash from operations declined due to lower revenues and margins and the refunding of the cooperative advertising funds to Franchisees as a direct result of the COVID-19 pandemic as well as lower same-store sales, partially offset by the elimination of certain general and administrative costs.

During the three months ended September 30, 2020, cash used in operating activities was $28.9 million, an increase of $15.4 million compared to the prior comparable period.

Cash used in operations increased due to lower revenues and margins as well as lower same-store sales due to the COVID-19 pandemic, partially offset by delaying payment of $6.5 million of first quarter rent, the decision to delay $4.8 million of fiscal year 2020 bonus payments to December 2020 and the elimination of certain general and administrative costs.

Cash Flows from Investing Activities

During the nine months ended March 31, 2020, cash provided by investing activities of $62.7 million, an increase of $6.6 million compared to the prior comparable period, was primarily from proceeds from the sale of salon assets of $87.9 million and the sale of the company's headquarters of $9.0 million, partially offset by capital expenditures of $32.3 million.

During the three months ended September 30, 2020, cash used in investing activities of $0.2 million, a decrease of $32.2 million compared to the prior comparable period, was primarily from capital expenditures of $3.8 million, partially offset by proceeds from the sale of salon assets of $3.7 million.

Cash Flows from Financing Activities

During the nine months ended March 31, 2020, cash provided by financing activities was $152.1 million compared cash used in financing activities of $89.7 million in the prior comparable period.

The Company drew $183 million from its line of credit in the nine months ended March 31, 2020 and used $28.2 million to purchase common stock.

During the three months ended September 30, 2020, cash used in financing activities was $0.4 million compared to cash used in financing activities of $30.3 million in the prior comparable period.

In the three months ended September 30, 2019, the Company used $28.2 million to purchase common stock.

Financing Arrangements

See Note 11 of the Notes to the unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 and Note 7 of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019, for additional information regarding our financing arrangements.

See Note 11 of the Notes to the unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2020 and Note 8 of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2020, for additional information regarding our financing arrangements.

Debt to Capitalization Ratio

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Capitalization (1) Basis Point Increase (Decrease) (2)

March 31, 2020 60.4 % 3,360

September 30, 2020 69.6 % 760

June 30, 2020 62.0 % 3,520

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It excludes long-term lease liability as that liability is offset by

the right of use asset and does not impact the Company's debt covenants.

the right of use asset.

(2) Represents the basis point change in debt to capitalization as compared to the prior fiscal year end (June 30, 2020 and

June 30, 2019, respectively).

The 3,360 basis point increase in the debt to capitalization ratio as of March 31, 2020 as compared to June 30, 2019, was primarily due to the drawing of $183 million from the line of credit in March 2020 in response to the COVID-19 pandemic, partially offset by decreases in shareholders' equity resulting from the repurchase of 1.5 million of the Company's shares for $26.4 million.

The 760 basis point increase in the debt to capitalization ratio as of September 30, 2020 as compared to June 30, 2020, was primarily due to decreases in shareholders' equity as a result of the loss from operations.

Share Repurchase Program

In May 2000, the Company’s Board of Directors (Board) approved a stock repurchase program with no stated expiration date.

Since that time and through March 31, 2020, the Board has authorized $650.0 million to be expended for the repurchase of the Company's stock under this program.

Since that time and through September 30, 2020, the Board has authorized $650.0 million to be expended for the repurchase of the Company's stock under this program.

All repurchased shares become authorized, but unissued shares of the Company.

The timing and amounts of any repurchases depend on many factors, including the market price of the common stock and overall market conditions.

During the three months ended March 31, 2020, the Company did not repurchase any shares.

During the nine months ended March 31, 2020, the Company repurchased 1.5 million shares for $26.4 million.

As of March 31, 2020, 30.0 million shares have been cumulatively repurchased for $595.4 million, and $54.6 million remains outstanding under the approved stock repurchase program.

During the three months ended September 30, 2020, the Company did not repurchase any shares.

As of September 30, 2020, 30.0 million shares have been cumulatively repurchased for $595.4 million, and $54.6 million remains outstanding under the approved stock repurchase program.

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

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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.

Such forward-looking statements are often identified herein by use of words including, but not limited to, “may,” “believe,” “project,” “forecast,” “expect,” “estimate,” “anticipate,” and “plan.” In addition, the following factors could affect the Company's actual results and cause such results to differ materially from those expressed in forward-looking statements.

These factors include a potential material reduction in revenue from our company-owned and franchised salons as a result of the uncertain duration and severity of the COVID-19 pandemic, as well as the health of our stylists, customers and employees;

Such forward-looking statements are often identified herein by use of words including, but not limited to, “may,” “believe,” “project,” “forecast,” “expect,” “estimate,” “anticipate,” and “plan.” These factors include a potential material adverse impact on our business and results of operations as a result of the uncertain duration and severity of the COVID-19 pandemic, as well as the health and risk appetite of our stylists, customers and employees to return to the salon environment;

the continued ability of the Company to implement its strategy, priorities and initiatives including the re-engineering of our corporate and field infrastructure;

our franchisee's ability to attract, train and retain talented stylists;

our new company-owned back office management system may not yield the intended results on timing and amounts due to the COVID-19 pandemic, efforts by our current third-party back office management system vendor to make it difficult for our franchisees to convert to our new company-owned system, and the pending litigation with that third-party vendor;

the impact of the COVID-19 pandemic on our key suppliers;

the ability to address rent obligations incurred during the government-mandated hibernation of our salons related to the COVID-19 pandemic and the ability to obtain long-term rent concessions;

the ability to operate or sell the salons transferred back from TBG;

the outcome of the review by the administrator in TBG's insolvency proceedings in the United Kingdom;

compliance with credit facility covenants and access to the existing revolving credit facility;

our and our franchisees' ability to attract, train and retain talented stylists;

financial performance of our franchisees;

acceleration of sale of salons to franchisees;

success of the sale of salons to franchisees;

if our capital investments in technology do not achieve appropriate returns;

our ability to manage cyber threats and protect the security of potentially sensitive information about our guests, employees, vendors or Company information;

the ability to operate or sell the salons transferred back from TBG;

the outcome of the review by the administrator in TBG's insolvency proceedings in the United Kingdom;

the ability of the Company to maintain a satisfactory relationship with Walmart;

marketing efforts to drive traffic;

the impact of recent actions by Walmart;

marketing efforts to drive traffic to our franchisees' salons;

changes in regulatory and statutory laws including increases in minimum wages;

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competition within the personal hair care industry;

continued ability to compete in our business markets;

the continued ability to maintain an effective system of internal controls over financial reporting;

changes in tax exposure;

changes in healthcare;

changes in interest rates and foreign currency exchange rates;

failure to standardize operating processes across brands;

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the continued ability of the Company to implement cost reduction initiatives;

compliance with debt covenants and access to existing revolving credit facility;

changes in economic conditions;

changes in consumer tastes and fashion trends;

failure at our distribution centers;

exposure to uninsured or unidentified risks;

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis