What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-05-06 compared with 2021-02-03 · 119 added, 96 removed, 247 unchanged (47% of the section changed)

4 unchanged sentences

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

As of December 31, 2020, the Company franchised, owned or held ownership interests in 6,384 worldwide locations.

As of March 31, 2021, the Company franchised, owned or held ownership interests in 6,221 worldwide locations.

Our locations consisted of 6,143 system-wide North American and International salons, and in 78 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 December 31, 2020, we had approximately 5,000 corporate employees worldwide.

As of March 31, 2021, we had approximately 4,000 corporate employees worldwide.

Impact of COVID-19 on Business Operations

During the period ended December 31, 2020, the global coronavirus pandemic ("COVID-19") had an adverse impact on operations, including prolonged government mandated salon closures in California and Ontario, in addition to other U.S.

states and Canadian provinces.

As of January 25, 2021, our California salons were allowed to re-open.

During the period ended March 31, 2021, the global coronavirus pandemic (COVID-19) had an adverse impact on operations, including prolonged government-mandated salon closures in California and Ontario, in addition to other U.S.

states and Canadian provinces during the three and nine months ended March 31, 2021.

The COVID-19 pandemic continues to impact salon guest visits resulting in a significant reduction in revenue and traffic.

1 unchanged sentence

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

Merchandising Strategy

As part of the Company's transformation to focus on managing and nurturing brands, and in line with its capital-light business, a new merchandise strategy to outsource product distribution was adopted in the third quarter.

The Company plans to shifts its product business from a whole-sale model to a third-party distribution model.

Management expects the change will positively impact franchisees by providing them access to industry-leading pricing, loyalty programs, promotional benefits, educational assets, and ongoing support.

The change will results in a decrease in revenue, cost of product and general and administrative expense going forward.

CRITICAL ACCOUNTING POLICIES

11 unchanged sentences

Impact of salons sold to franchisees on operations.

In the three and six months ended December 31, 2020, the Company sold 145 and 282, respectively, company-owned salons to franchisees.

In the three and nine months ended March 31, 2021, the Company sold 126 and 408, respectively, company-owned salons to franchisees.

The impact of these transactions are as follows:

Three Months Ended December 31, Increase (Decrease) Six Months Ended December 31, Increase (Decrease)

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

2021 2020 2021 2020

6 unchanged sentences

System-wide results

As we transition to an asset-light franchise platform, our results will be more impacted by our system-wide sales, which include sales by all points of distribution, whether owned by the Company or our franchisees.

As we continue to transition to an asset-light franchise platform, our results will be more impacted by our system-wide sales, which include sales by all points of distribution, whether owned by the Company or our franchisees.

While we do not record sales by franchisees as revenue, and such sales are not included in our consolidated financial statements, we believe that this operating measure is important in obtaining an understanding of our financial performance.

1 unchanged sentence

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

Three Months Ended December 31, Six Months Ended December 31,

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

2021 2020 2021 2020

9 unchanged sentences

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 2021 so they are excluded from fiscal year 2020 same-store sales for comparability.

Condensed Consolidated Results of Operations (Unaudited)

The following table sets forth, for the periods indicated, certain information derived from our unaudited Condensed Consolidated Statement of Operations.

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

Three Months Ended December 31, Six Months Ended December 31,

The percentages are computed as a percent of total consolidated revenues, except as otherwise indicated, and the (decrease) increase is measured in basis points.

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

2021 2020 2021 2020 2021 2021 2020 2021 2020 2021

16 unchanged sentences

TBG restructuring — 0.1 — 0.1 (10) — 2.4 — 0.4 (40)

Goodwill impairment — 40.2 — 26.1 (2,610) — 40.2 — 6.6 (660)

Operating loss (3) (18.5) (59.4) (18.5) (38.6) 2,010 (76.9) (76.8) (24.3) (12.6) (1,170)

15 unchanged sentences

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

Three Months Ended December 31, Six Months Ended December 31,

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

2021 2020 2021 2020

20 unchanged sentences

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 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.

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

Three and Six Months Ended December 31, 2020 Compared with Three and Six Months Ended December 31, 2019

Three and Nine Months Ended March 31, 2021 Compared with Three and Nine Months Ended March 31, 2020

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 $104.4 and $240.1 million, or 50.0% and 52.7%, for the three and six months ended December 31, 2020, respectively.

Service revenue and product revenue decreased $72.8 and $20.8 million, respectively, in the three months ended December 31, 2020 and decreased $178.3 million and $41.7 million, respectively, in the six months ended December 31, 2020.

Consolidated revenue decreased $53.5 and $293.6 million, or 34.8% and 48.2%, for the three and nine months ended March 31, 2021, respectively.

Service revenue and product revenue decreased $53.8 and $14.1 million, respectively, in the three months ended March 31, 2021 and decreased $232.1 and $55.8 million, respectively, in the nine months ended March 31, 2021.

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

During the twelve months ended December 31, 2020, 768 salons were sold to franchisees, net of buy backs and 800 and 39 system-wide salons were closed and constructed, respectively (2021 Net Salon Count Changes).

For the three and six months ended December 31, 2020, the impact to consolidated revenue due to the sale of salons to franchisees and closure of salons was $70.0 and $168.6 million, respectively.

System-wide same-store-sales also declined, primarily due to the COVID-19 pandemic, in the three and six months ended December 31, 2020, which also contributed to the decline in service, product and royalties and fees revenue.

During the twelve months ended March 31, 2021, 519 salons were sold to franchisees, net of buy backs and 833 and 35 system-wide salons were closed and constructed, respectively (2021 Net Salon Count Changes).

For the three and nine months ended March 31, 2021, the impact to consolidated revenue due to the sale of salons to franchisees and closure of salons was $44.9 and $214.0 million, respectively.

System-wide sales also declined, primarily due to fewer guest visits and government-mandated closures related to the COVID-19 pandemic, in the three and nine months ended March 31, 2021, which also contributed to the decline in service, product and royalties and fees revenue.

In the three months ended March 31, 2020, the Company refunded $14.9 million of previously collected cooperative advertising fees, which reduced royalties and fees in the prior period.

Service Revenues

The decreases of $72.8 and $178.3 million, or 71.5% and 73.2%, in service revenues during the three and six months ended December 31, 2020, respectively, were primarily due to the 2021 Net Salon Count Changes.

For the three and six months ended December 31, 2020, the impact to service revenue due to the sale of salons to franchisees and closure of salons was $55.5 and $137.1 million, respectively.

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

The decreases of $53.8 and $232.1 million, or 68.6% and 72.0%, in service revenues during the three and nine months ended March 31, 2021, respectively, were primarily due to the 2021 Net Salon Count Changes.

For the three and nine months ended March 31, 2021, the impact to service revenue due to the sale of salons to franchisees and closure of salons was $35.0 and $172.5 million, respectively.

The remaining decrease in service revenue relates primarily to fewer guest visits as a result of the COVID-19 pandemic.

Product Revenues

The decreases of $20.8 and $41.7 million, or 47.4% and 46.6%, in product revenues during the three and six months ended December 31, 2020, respectively, were primarily due to the 2021 Net Salon Count Changes.

For the three and six months ended December 31, 2020, the impact to product revenue due to the sale of salons to franchisees and closure of salons was $14.5 and $31.5 million, respectively.

Additionally, franchise same-store product sales declined 28.1% and 26.3% for the three and six months ended December 31, 2020, respectively, contributing to the decline.

The decreases of $14.1 and $55.8 million, or 40.4% and 44.9%, in product revenues during the three and nine months ended March 31, 2021, respectively, were primarily due to the 2021 Net Salon Count Changes.

For the three and nine months ended March 31, 2021, the impact to product revenue due to the sale of salons to franchisees and closure of salons was $9.9 and $41.5 million, respectively.

Additionally, franchise same-store product sales declined 20.0% and 24.2% for the three and nine months ended March 31, 2021, respectively, contributing to the decline.

Royalties and Fees

The decreases of $9.4 and $19.5 million, or 32.2% and 34.0%, in royalties and fees for the three and six months ended December 31, 2020, respectively, were primarily due a $6.0 and $11.9 million decline in cooperative advertising funds charged to franchisees during the three and six months ended December 31, 2020, respectively.

Cooperative advertising funds were temporarily reduced as part of our COVID-19 pandemic relief effort and also declined due to lower same-store sales.

During the three months ended March 31, 2021, royalties and fees increased $14.8 million, or 170.6%, primarily due to the Company refunding cooperative advertising fund contributions in the third quarter of fiscal year 2020.

During the nine months ended March 31, 2021, royalties and fees decreased $4.7 million, or 7.1%, primarily due to a $1.5 million decline in cooperative advertising funds charged to franchisees during the nine months ended March 31, 2021.

For the three and nine months ended March 31, 2021, cooperative advertising funds were temporarily reduced as part of our COVID-19 pandemic relief effort and also declined due to lower same-store sales.

The declines in cooperative advertising are offset in site expense and have no impact on operating income.

The declines in royalties and fees are also due to the decrease in franchise same-store sales of 31.1% and 31.5% for the three and six months ended December 31, 2020, respectively, partially offset by an increase in franchise salons.

Total franchised locations open at December 31, 2020 were 5,269 as compared to 4,790 at December 31, 2019.

Royalties and fees were also impacted by the decreases in franchise same-store sales of 19.3% and 27.6% for the three and nine months ended March 31, 2021, respectively, partially offset by an increase in franchise salons.

Total franchised locations open at March 31, 2021 were 5,317 as compared to 5,126 at March 31, 2020.

Franchise Rental Income

The decreases of $1.3 and $0.5 million, or 4.0% and 0.7%, in franchise rental income for the three and six months ended December 31, 2020, respectively, is due to the rental income from TBG salons included in fiscal year 2020.

During the three and nine months ended March 31, 2021, franchise rental income decreased $0.5 and $1.0 million, or 1.6% and 1.0%, respectively.

The decrease in the three months ended March 31, 2021 is primarily due to an increase in rent considered uncollectible and to the change in the lease renewal assumption.

The decrease in the nine months ended March 31, 2021 is due to the rental income from TBG salons included in fiscal year 2020 and an increase in rent considered uncollectible.

Cost of Service

The 1,000 and 1,260 basis point increases in cost of service as a percent of service revenues during the three and six months ended December 31, 2020, respectively, were primarily due to inefficient and non-productive stylist hours as a result of reduced traffic from the COVID-19 pandemic and higher minimum wages.

During the three months ended March 31, 2021, cost of service as a percent of service revenues decreased 570 basis points, primarily due to payroll related COVID-19 relief tax credits.

During the nine months ended March 31, 2021, cost of service as a percent of service revenues increased 780 basis points, primarily due to inefficient and non-productive stylist hours as a result of reduced guest visits related to the COVID-19 pandemic and higher minimum wages.

Cost of Product

The 1,250 and 1,030 basis point increases in cost of product as a percent of product revenues during the three and six months ended December 31, 2020, respectively, were primarily due to the shift to franchise product sales.

Margins on retail product sales were 33.6% and 47.7% in the three months ended December 31, 2020 and 2019, respectively.

Margins on franchise product sales were 20.7% and 22.5% in the three months ended December 31, 2020 and 2019, respectively.

Margins on retail product sales were 41.7% and 49.3% in the six months ended December 31, 2020 and 2019, respectively.

Margins on franchise product sales were 21.5% and 22.1% in the six months ended December 31, 2020 and 2019, respectively.

The 4,020 and 1,930 basis point increases in cost of product as a percent of product revenues during the three and nine months ended March 31, 2021, respectively, were primarily due to a $5.3 million reserve for excess and obsolete inventory related to the change in the Company's merchandising strategy and the shift from retail sales to franchise product sales.

Excluding the excess and obsolescence reserve, margins on retail product sales were 37.4% and 47.7% in the three months ended March 31, 2021 and 2020, respectively.

Margins on franchise product sales were 14.8% and 25.2% in the three months ended March 31, 2021 and 2020, respectively.

Excluding the excess and obsolescence reserve, margins on retail product sales were 46.2% and 48.9% in the nine months ended March 31, 2021 and 2020, respectively.

Margins on franchise product sales were 19.3% and 23.1% in the nine months ended March 31, 2021 and 2020, respectively.

Decreases in franchise product margins were primarily driven by a shift to lower-margin customers and products.

Site Operating Expenses

The decreases of $15.9 and $35.7 million, or 60.7% and 60.2%, in site operating expenses during the three and six months ended December 31, 2020, respectively, were due to a net reduction in salon counts, $6.0 and $11.9 million decreases in cooperative advertising expense for the three and six months ended December 31, 2020, respectively, as noted above in Royalties and fees , and decreases in marketing spend.

Site operating expenses increased $9.7 million, or 265.2%, during the three months ended March 31, 2021 and decreased $25.9 million, or 41.3%, during the nine months ended March 31, 2021.

Site operating expenses during the three months ended March 31, 2020 were reduced by the refunding of $14.9 million of previously collected advertising fees in the prior period, as noted above in Royalties and fees.

Excluding the refund, site operating expenses decreased due to a net reduction in salon counts and decreases in marketing spend.

The decrease in site operating expenses during the nine months ended March 31, 2021 was primarily due to a net reduction in salon counts and decreases in marketing spend, partially offset by a $1.5 million increase in cooperative advertising expense, as noted above in Royalties and fees.

General and Administrative

The decreases of $6.0 and $20.5 million, or 18.4% and 27.9%, in general and administrative (G&A) during the three and six months ended December 31, 2020, respectively, were primarily due to lower administrative and field management salaries due to 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 in the six months ended December 31, 2020.

Additionally, $1.3 million of the decline in the six months ended December 31, 2020 is due to the Company not holding its annual franchise convention in fiscal year 2021 due to the COVID-19 pandemic.

The decreases of $7.6 and $18.7 million, or 37.0% and 41.6%, in rent expense during the three and six months ended December 31, 2020, respectively, were 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.

The decreases of $7.3 and $27.8 million, or 22.9% and 26.4%, in general and administrative (G&A) during the three and nine months ended March 31, 2021, respectively, were primarily due to lower administrative and field management salaries due to 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 in the nine months ended March 31, 2021.

Additionally, $1.3 million of the decline in the nine months ended March 31, 2021 is due to the Company not holding its annual franchise convention in fiscal year 2021 due to the COVID-19 pandemic.

The decreases of $10.7 and $29.3 million, or 57.1% and 46.2%, in rent expense during the three and nine months ended March 31, 2021, respectively, were primarily due to the net reduction in the number of company-owned salons associated with the Company's transformation to a fully-franchised portfolio.

Franchise Rent Expense

In the three and six months ended December 31, 2020, respectively, the decreases of $1.3 and $0.5 million, or 4.0% and 0.7%, in franchise rent expense is due to the rental income from TBG salons included in fiscal year 2020.

During the three and nine months ended March 31, 2021, franchise rent expense decreased $0.5 and $1.0 million, or 1.6% and 1.0%, respectively.

The decrease in the three months ended March 31, 2021 is primarily due to an increase in rent considered uncollectible and the change in the lease renewal assumption.

The decrease in the nine months ended March 31, 2021 is due to the rental income from TBG salons included in fiscal year 2020 and an increase in rent considered uncollectible.

Depreciation and Amortization

The decreases of $1.3 and $3.3 million, or 17.5% and 19.6%, in depreciation and amortization during the three and six months ended December 31, 2020, respectively, were primarily due to the net reduction in company-owned salon counts.

Additionally, salon asset impairment of $1.1 and $2.6 million were recorded to depreciation expense in the three and six months ended December 31, 2019, respectively.

The decreases of $6.8 and $10.1 million, or 65.1% and 36.8%, in depreciation and amortization during the three and nine months ended March 31, 2021, respectively, were primarily due to the net reduction in company-owned salon counts.

Additionally, salon asset impairment of $1.2 and $3.9 million were recorded to depreciation expense in the three and nine months ended March 31, 2020, respectively.

Salon asset impairment in fiscal year 2021 was recorded to long-lived asset impairment.

Long-Lived Asset Impairment

In the three and six months ended December 31, 2020, the Company recorded a long-lived asset impairment charge of $3.2 and $9.0 million, respectively, which included a right of use asset impairment charge of $1.5 and $6.0 million, respectively, and salon asset impairment of $1.7 and $3.0 million, respectively.

In the three and nine months ended March 31, 2021, the Company recorded a long-lived asset impairment charge of $0.8 and $9.8 million, respectively, which included a right of use asset impairment charge of $0.3 and $6.3 million, respectively, and salon asset impairment of $0.5 and $3.5 million, respectively.

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 six months ended December 31, 2019, the Company recorded $0.7 and $2.2 million, respectively, of TBG restructuring charges, which related to professional fees and the Company assisting TBG with operating expenses to mitigate the risk of default associated with TBG's lease obligations.

TBG Mall Location Restructuring

In the three and nine months ended March 31, 2020, the Company recorded $0.1 and $2.4 million, respectively, of TBG restructuring charges, which related to professional fees and 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.

Goodwill Impairment

The Company recorded $40.2 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.

Interest Expense

The increases of $2.2 and $4.6 million in interest expense for the three and six months ended December 31, 2020, respectively, were primarily due to the increased interest rate and the additional borrowings.

The increases of $1.5 and $6.0 million in interest expense for the three and nine months ended March 31, 2021, respectively, were primarily due to the increased interest rate and greater levels of debt.

Loss from sale of salon assets to franchisees, net

In the three and six months ended December 31, 2020, the loss from sale of salon assets to franchisees was $3.2 and $3.9 million, respectively.

In the three and six months ended December 31, 2019, the loss from the sale of salon assets to franchisees was $12.4 and $18.3 million, respectively, including non-cash goodwill derecognition of $27.4 and $59.5 million, respectively.

In the three and nine months ended March 31, 2021, the loss from sale of salon assets to franchisees was $4.6 and $8.5 million, respectively.

In the three and nine months ended March 31, 2020, the loss from the sale of salon assets to franchisees was $7.9 and $26.1 million, respectively, including non-cash goodwill derecognition of $17.5 and $77.0 million, respectively.

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 decreases of $2.5 and $2.5 million, respectively, in interest income and other, net during the three and six months ended December 31, 2020 was primarily due to the gain from the sale of the Company's headquarters recorded in the period ended December 31, 2019.

During the three and six months ended December 31, 2020, the Company recognized tax benefits of $0.4 and $1.0 million, respectively, with corresponding effective tax rates of 1.2% and 1.5% as compared to recognizing tax benefits of $1.9 and $4.8 million, respectively, with corresponding effective tax rates of 10.5% and 13.5% during the three and six months ended December 31, 2019.

The increases of $15.0 and $12.4 million, respectively, in interest income and other, net during the three and nine months ended March 31, 2021 were primarily due to the gain associated with the leases for the Company's distribution centers (see Note 11 to the unaudited Condensed Consolidated Financial Statements), partially offset by the sale of the Company's headquarters recorded in the period ended December 31, 2019.

During the three and nine months ended March 31, 2021, the Company recognized tax benefits of $0.3 and $1.4 million, respectively, with corresponding effective tax rates of 3.0% and 1.7% as compared to recognizing tax benefits of $1.0 and $5.8 million, respectively, with corresponding effective tax rates of 1.4% and 5.5% during the three and nine months ended March 31, 2020.

See Note 6 to the unaudited Condensed Consolidated Financial Statements.

Income from Discontinued Operations

Income from discontinued operations was $0.1 and $0.5 million during the three and six months ended December 31, 2019, respectively, due to actuarial insurance reserve adjustments.

Similar adjustments did not occur in the three and six months ended December 31, 2020.

Income from discontinued operations was $0.3 and $0.8 million during the three and nine months ended March 31, 2020, respectively, due to actuarial insurance reserve adjustments.

Similar adjustments did not occur in the three and nine months ended March 31, 2021.

Results of Operations by Segment

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Franchise Salons

Three Months Ended December 31, Six Months Ended December 31,

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

2021 2020 Increase (Decrease) 2021 2020 Increase (Decrease)

1 unchanged sentence

Product 13.1 15.3 (2.2) 41.1 45.3 (4.2)

Product sold to TBG — 0.7 (0.7) — 2.0 (2.0)

Total product 14.2 16.9 (2.7) 28.0 30.0 (2.0)

Royalties and fees 23.5 8.7 14.8 61.4 66.1 (4.7)

13 unchanged sentences

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 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 December 31, Six Months Ended December 31,

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

2021 2020 2021 2020

4 unchanged sentences

Franchise Salon Revenues

Franchise salon revenues decreased $13.4 and $22.0 million during the three and six months ended December 31, 2020, respectively.

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

During the twelve months ended December 31, 2020, franchisees constructed (net of relocations) and closed 34 and 323 Franchise-owned salons, respectively, and purchased (net of Company buybacks) 768 salons from the Company during the same period.

Franchise salon revenues increased $12.1 million during the three months ended March 31, 2021 and decreased $9.9 million during the nine months ended March 31, 2021.

The increase in franchise salon revenue during the three months ended March 31, 2021 was primarily due to the refund of previously collected contributions to the cooperative advertising funds in the third quarter of fiscal year 2020.

The decrease in franchise salon revenue during the nine months ended March 31, 2021 was primarily due to decreases in royalties and cooperative fund contributions due to the COVID-19 pandemic.

During the twelve months ended March 31, 2021, franchisees constructed (net of relocations) and closed 31 and 359 Franchise-owned salons, respectively, and purchased (net of Company buybacks) 519 salons from the Company during the same period.

Franchise Salon Operating Income

During the three months ended December 31, 2020, Franchise salon operations generated operating income of $10.4 million, a decrease of $1.7 million compared to the prior comparable period.

During the six months ended December 31, 2020, Franchise salon operations generated operating income of $16.8 million, a decrease of $5.5 million compared to the prior comparable period.

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

During the three months ended March 31, 2021, franchise salon operations generated operating income of $12.0 million, an increase of $0.9 million compared to the prior comparable period.

During the nine months ended March 31, 2021, franchise salon operations generated operating income of $28.7 million, a decrease of $4.7 million compared to the prior comparable period.

The increase in the three months ended March 31, 2021 was primarily due to an increase in franchise fees due to the increase in salon count.

The decrease in the nine months ended March 31, 2021 was primarily due to the decrease in royalties due to the COVID-19 pandemic.

Company-owned Salons

Three Months Ended December 31, Six Months Ended December 31,

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

2021 2020 Increase (Decrease) (1) 2021 2020 Increase (Decrease) (1)

2 unchanged sentences

Company-owned same-store sales (28.8) % (7.9) % (33.8) % (3.9) %

Operating (loss) income $ (17.4) $ (1.1) $ (16.3) $ (38.1) $ 4.3 $ (42.4)

Operating loss $ (12.6) $ (50.7) $ 38.0 $ (50.7) $ (46.4) $ (4.4)

_______________________________________________________________________________

(1) Total is a recalculation;

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

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

Three Months Ended December 31, Six Months Ended December 31,

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

2021 2020 2021 2020

4 unchanged sentences

Company-owned Salon Revenues

Company-owned salon revenues decreased $91.0 and $218.1 million during the three and six months ended December 31, 2020, respectively, primarily due to the 2021 Net Salon Count Changes and a decline in sales as a result of the COVID-19 pandemic.

Company-owned same-store sale decreased 36.2% and 35.4% during the three and six months ended December 31, 2020, respectively, due to decreases of 47.0% and 47.7% in same-store guest transactions during the three and six months ended December 31, 2020, respectively, which were negatively impacted by the COVID-19 pandemic.

These decreases were partially offset by increases of 10.8% and 12.3% in average ticket prices during the three and six months ended December 31, 2020, respectively.

Company-owned Salon Operating (Loss) Income

During the three and six months ended December 31, 2020, company-owned salon operations operating income decreased $16.3 and $42.4 million, respectively, to a loss of $17.4 and $38.1 million, respectively, compared to the prior comparable period.

The decreases during the three and six months ended December 31, 2020 were 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.

Company-owned salon revenues decreased $65.6 and $283.7 million during the three and nine months ended March 31, 2021, respectively, primarily due to the 2021 Net Salon Count Changes and a decline in sales as a result of the COVID-19 pandemic.

Company-owned same-store sales decreased 28.8% and 33.8% during the three and nine months ended March 31, 2021, respectively, due primarily to decreases in same-store guest transactions.

Company-owned Salon Operating Loss

During the three months ended March 31, 2021, company-owned salon operating loss decreased $38.0 million to a loss of $12.6 million, and during the nine months ended March 31, 2021, company-owned salon operating loss increased $4.4 million to a loss of $50.7 million compared to the prior comparable period.

The decrease in the loss during the three months ended March 31, 2021 was primarily due to the goodwill impairment of $40.2 million recorded in the third quarter of fiscal year 2020.

The increase in the loss during the nine months ended March 31, 2021 was primarily due to the overall decline in margin related primarily to COVID-19 and a $5.3 million inventory reserve charge recorded in the third quarter of fiscal year 2021, partially offset by the goodwill impairment recorded in the third quarter of fiscal year 2020.

Corporate Operating Loss

Corporate operating loss increased $1.3 million during the three months ended December 31, 2020, primarily driven by lapping stock compensation benefits associated with a change in performance awards assumptions and executive departures in fiscal year 2020 as well as higher severance costs in fiscal year 2021.

Corporate operating loss decreased $7.0 million during the six months ended December 31, 2020, primarily driven by lower general and administrative salaries due to lower headcount and the cancellation of the traditional in-person franchise convention in fiscal year 2021.

Corporate operating loss decreased $1.9 million during the three months ended March 31, 2021, primarily driven by lapping stock compensation benefits associated with a change in performance awards assumptions and executive departures in fiscal year 2020, as well as higher severance costs in fiscal year 2021.

Corporate operating loss decreased $8.9 million during the nine months ended March 31, 2021, primarily driven by lower general and administrative salaries due to lower headcount and the cancellation of the traditional in-person 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 December 31, 2020, cash and cash equivalents were $50.9 million, with $49.1 and $1.8 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 December 31, 2020.

The Company's liquidity, which includes the unused available balance under the credit facility and unrestricted cash and cash equivalents, totaled $149.7 million as of December 31, 2020.

The revolving credit facility has a minimum liquidity covenant of $75.0 million (see Note 11 to the unaudited Condensed Consolidated Financial Statements).

On February 3, 2021, the Company filed a $150 million shelf registration and $50 million prospectus supplement with the Securities and Exchange Commission under which it may offer and sell, from time to time, up to $50 million worth of its of its Class A common stock in “at-the-market offerings.” Net proceeds from sales of shares under the “at-the-market” program, if any, may be used, among other things, to fund working capital requirements, repay debt and support of our growth strategies.

As of March 31, 2021, cash and cash equivalents were $34.5 million, with $32.0 and $2.5 million within the United States and Canada, respectively.

The Company's borrowing arrangements include a $295.0 million five-year revolving credit facility that expires in March 2023, of which $98.8 million was available as of March 31, 2021.

The Company's liquidity, which includes the unused available balance under the credit facility and unrestricted cash and cash equivalents, totaled $133.3 million as of March 31, 2021.

As of March 31, 2021, the revolving credit facility has a minimum liquidity covenant of $75.0 million (see Note 11 to the unaudited Condensed Consolidated Financial Statements).

In accordance with the credit agreement, beginning with periods ending June 30, 2021, the Company’s minimum liquidity calculation will be adjusted related to certain net cash proceeds generated from historical venditions.

The Company expects that as of June 30, 2021, after using the vendition proceeds adjustment, the minimum liquidity covenant will change such that the unused available balance under the credit facility and unrestricted cash and cash equivalents be in the range of $53-$55 million.

On February 3, 2021, the Company filed a $150 million shelf registration and $50 million prospectus supplement with the Securities and Exchange Commission under which it may offer and sell, from time to time, up to $50 million worth of its of its Class A common stock in “at-the-market offerings.” Net proceeds from sales of shares under the “at-the-market” program, if any, may be used to, among other things, fund working capital requirements, repay debt and support of our growth strategies.

Such strategies may include positioning the Company for potential expansion through targeted industry acquisitions and alternatives to fund additional capital investment requirements related to potential partnership opportunities to facilitate continued growth of our proprietary technology, Opensalon® Pro.

The timing and amount of sales of shares, if any, will depend on a variety of factors, including prevailing market conditions, the trading price of shares, and other factors as determined by the Company.

No shares have been issued under the shelf registration.

The Company closely manages its liquidity and capital resources.

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Cash Flows from Operating Activities

During the six months ended December 31, 2020, cash used in operating activities was $65.5 million, an increase of $46.1 million compared to the prior comparable period.

Cash used in operations increased due to lower revenues and margins, payments of $11.0 million to catch up on payables related to fiscal year 2020, CEO sign-on bonus of $2.5 million and $4.5 million of bonus payments related to fiscal year 2020 and payments for prepaid insurance of $1.2 million, partially offset by the elimination of certain general and administrative costs.

During the nine months ended March 31, 2021, cash used in operating activities was $80.0 million.

Cash used in operations increased due to lower revenues and margins, payments of $14.0 million to catch up on payables related to fiscal year 2020, and the CEO sign-on bonus of $2.5 million, partially offset by the elimination of certain general and administrative costs and a $0.8 million COVID-19 payroll relief payment from the Canadian government received in the third quarter of fiscal year 2021.

Cash Flows from Investing Activities

During the six months ended December 31, 2020, cash provided by investing activities of $0.6 million was primarily proceeds from the sale of salon assets of $7.1 million, partially offset by capital expenditures of $7.5 million.

During the nine months ended March 31, 2021, cash used in investing activities of $0.9 million was primarily capital expenditures of $9.6 million, of which approximately $3.0 million was internally developed capitalized software, partially offset by proceeds from the sale of salon assets of $7.7 million.

Cash Flows from Financing Activities

During the six months ended December 31, 2020, cash used in financing activities was $1.3 million compared to cash used in financing activities of $60.5 million in the prior comparable period.

In the six months ended December 31, 2019, the Company used $30.0 million to repay long-term debt and $28.2 million to purchase common stock.

During the nine months ended March 31, 2021, cash used in financing activities was $1.6 million compared to cash provided by financing activities of $152.1 million in the prior comparable period.

In the nine months ended March 31, 2020, the Company borrowed a net $183.0 million and 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 December 31, 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.

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, 2021 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)

December 31, 2020 77.8 % 1,580

March 31, 2021 78.2 % 1,620

June 30, 2020 62.0 % 3,520

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(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 1,580 basis point increase in the debt to capitalization ratio as of December 31, 2020 as compared to June 30, 2020, was primarily due to the decreases in shareholders' equity as a result of the loss from operations.

The 1,620 basis point increase in the debt to capitalization ratio as of March 31, 2021 as compared to June 30, 2020, was primarily due to the decreases in shareholders' equity as a result of the loss from operations, partially offset by the decrease in debt as a result of the derecognition of the Company's financing lease liability (see Note 11 to the unaudited Condensed Consolidated Financial Statements).

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 December 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 March 31, 2021, 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 and six months ended December 31, 2020, the Company did not repurchase any shares.

As of December 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 and nine months ended March 31, 2021, the Company did not repurchase any shares.

As of March 31, 2021, 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 continued ability of the Company to implement its strategy, priorities and initiatives including the re-engineering of our corporate and field infrastructure;

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;

Opensalon® Pro 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;

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exposure to uninsured or unidentified risks;

reliance on our management team and other key personnel or other factors not listed above.

reliance on our management team and other key personnel;

new merchandising strategy or other factors not listed above.

Additional information concerning potential factors that could affect future financial results is set forth under Item 1A on Form 10-K.

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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