What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-01 compared with 2023-05-03 · 119 added, 146 removed, 151 unchanged (64% of the section changed)

4 unchanged sentences

Regis Corporation (NYSE:RGS) is a leader in the beauty salon industry.

As of March 31, 2023, the Company franchised, owned or held ownership interests in 5,203 worldwide locations.

Our locations consisted of 5,127 system-wide North American and international salons, and 76 locations in which we maintained a non-controlling ownership interest less than 100 percent.

As of September 30, 2023, the Company franchised or owned 4,811 locations, primarily in North America.

Our locations consisted of 4,745 franchised salons and 66 company-owned salons.

Regis’ franchised and corporate locations operate under concepts such as Supercuts ® , SmartStyle ® , Cost Cutters ® , Roosters ® and First Choice Haircutters ® .

Regis maintains an ownership interest in Empire Education Group in the United States.

As of March 31, 2023, the Company had 486 employees worldwide.

Regis maintains an ownership interest in Empire Education Group, Inc.

in the United States.

As of September 30, 2023, the Company had 425 employees worldwide.

Merchandising Strategy

As part of the Company's transformation to focus on managing and nurturing brands, and in line with its capital-light business, the Company shifted its product business from a wholesale model to a third-party distribution model in fiscal year 2022.

As part of the Company's transformation to focus on managing and nurturing its brands, and in line with its capital-light business, the Company shifted its product business from a wholesale model to a third-party distribution model in fiscal year 2022.

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 Company receives a rebate from the third-party distributor, which is included in fees on the interim unaudited Condensed Consolidated Statement of Operations.

As a result of the change, product sales to franchisees will continue to decrease and are expected to provide less revenue and costs in fiscal year 2023 as compared to prior year.

The Company receives a fee from the third-party distributor, which is included in fees on the interim unaudited Condensed Consolidated Statements of Operations.

As a result of the change, product sales to franchisees and cost of products sales to franchisees will continue to decrease and are expected to be immaterial for the remainder of fiscal year 2024.

Corporate Strategy Update

On November 1, 2023, the Company announced that the Board has initiated a strategic review to proactively assess the Company’s capital structure.

The Board has established a Special Committee to evaluate the various strategic alternatives and initiatives.

There is no set timetable for this process, and there can be no assurances as to the results of the review.

The Company does not intend to comment further on developments or status of this process until it deems further disclosure is appropriate or required by law.

The Company is being advised by Jefferies, LLC as its financial advisor and Weil, Gotshal & Manges LLP as its legal advisor.

CRITICAL ACCOUNTING POLICIES

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Changes in these estimates could have a material effect on our interim unaudited Condensed Consolidated Financial Statements.

Our significant accounting policies can be found in Note 1 to the Consolidated Financial Statements contained in Part II, Item 8 of the June 30, 2022 Annual Report on Form 10-K, as well as Notes 1 and 2 to the unaudited Condensed Consolidated Financial Statements contained within this Quarterly Report on Form 10-Q.

We believe the accounting policies related to the valuation of goodwill and the valuation and estimated useful lives of long-lived assets are most critical to aid in fully understanding and evaluating our reported financial condition and results of operations.

Discussion of each of these policies is contained under "Critical Accounting Policies" in Part II, Item 7 of our June 30, 2022 Annual Report on Form 10-K.

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

Our significant accounting policies can be found in Note 1 to the Consolidated Financial Statements contained in Part II, Item 8 of the June 30, 2023 Annual Report on Form 10-K.

There have been no changes to our critical accounting policies from those disclosed on our Form 10-K for the year ended June 30, 2023.

RESULTS OF OPERATIONS

System-wide results

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

Our results are impacted by our system-wide sales, which include sales by all points of distribution, whether owned by our franchisees or the Company.

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

We believe system-wide sales information aids in understanding how we derive royalty revenue and in evaluating performance.

During the three months ended March 31, 2023, system-wide revenue of $299.3 million increased $8.3 million from $291.0 million in the three months ended March 31, 2022.

During the nine months ended March 31, 2023, system wide revenue of $918.7 million increased $7.1 million from $911.6 million in the nine months ended March 31, 2022.

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

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

2023 2022 2023 2022

In the three months ended September 30, 2023, a net 50 franchise salons have closed, which will reduce future royalty income.

The following table summarizes system-wide revenue and system-wide same-store sales by concept (1):

Three Months Ended September 30,

(Dollars in Millions)

System-wide revenue $ 306.6 $ 316.0

Supercuts 2.2 % 8.9 %

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Portfolio Brands 3.7 3.6

Consolidated system-wide same-store sales (1) 6.0 % 8.6 % 5.0 % 17.8 %

Total system-wide same-store sales (1) 1.8 % 4.5 %

_______________________________________________________________________________

(1) System-wide same-store sales are calculated as the total change in sales for system-wide franchise and 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 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.

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

In the nine months ended March 31, 2023, a net 338 franchise salons have closed, which reduces future royalty income.

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

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

Variances calculated on amounts shown in millions may result in rounding differences.

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

Three Months Ended September 30,

2023 2022 2023 2022 2023

($ in millions) % of Total

Revenues (1) Increase (Decrease) ($ in millions) % of Total

Revenues (1) Increase (Decrease)

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Cost of product sales to franchisees 0.4 0.5 100.0 125.0 (2,500)

Inventory reserve — 6.4 — 10.0 (1,000) 1.2 6.4 0.7 3.0 (230)

General and administrative 10.7 14.4 20.1 23.3 (320)

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Depreciation and amortization 0.4 1.3 0.8 2.1 (130)

Long-lived asset impairment — 0.3 — 0.5 (50) — 0.5 — 0.2 (20)

Goodwill impairment — 13.1 — 20.5 (2,050) — 13.1 — 6.2 (620)

Operating income (loss) (2) 2.0 (22.2) 3.6 (34.8) 3,840 5.2 (27.6) 2.9 (13.1) 1,600

Operating income (3) 7.4 2.5 13.9 4.0 990

Interest expense (6.2) (3.8) (11.6) (6.1) (550)

Loss from sale of salon assets to franchisees, net — (0.5) — (0.8) 80 — (2.2) — (1.0) 100

Other, net (0.2) (0.5) (0.4) (0.8) 40

Income tax benefit (3) 0.2 1.3 10.0 4.9 N/A 0.2 1.5 3.2 3.8 N/A

Income (loss) from discontinued operations 0.5 (3.4) 0.9 (5.3) 620 4.0 (5.3) 2.3 (2.5) 480

Net loss (2) (1.6) (27.9) (2.9) (43.7) 4,080 (2.6) (43.2) (1.5) (20.6) 1,910

Income tax benefit (expense) (4) 0.1 — (14.1) (1.5) N/A

Income (loss) from continuing operations 1.2 (1.8) 2.3 (2.9) 520

Income from discontinued operations — 3.3 — 5.3 (530)

Net income (3) 1.2 1.5 2.3 2.4 (10)

_______________________________________________________________________________

(1) Cost of product sales to franchisees is computed as a percent of product sales to franchisees.

(2) Includes cost of service and product sold to guests in our Company-owned salons.

Excludes general and administrative expense, rent and depreciation and amortization related to Company-owned salons.

(3) Total is a recalculation;

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

(3) Computed as a percent of loss from continuing operations before income taxes.

(4) Computed as a percent of income (loss) from continuing operations before income taxes.

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

Three and Nine Months Ended March 31, 2023 Compared with Three and Nine Months Ended March 31, 2022

Consolidated Revenues

Consolidated revenues are comprised of royalties, fees, product sales to franchisees, advertising fund contributions, franchise rental income and company-owned salon revenue.

Consolidated revenue decreased $8.0 and $32.3 million, or 12.5% and 15.4%, for the three and nine months ended March 31, 2023, respectively.

Royalties increased $0.2 and $0.9 million in the three and nine months ended March 31, 2023, respectively, due to higher average royalty rates and improved system-wide same-store sales.

The overall decrease in revenue for the three and nine months ended March 31, 2023 is due to the decrease in company-owned salon revenue of $1.3 and $8.7 million, respectively, due primarily to salon closures, as well as the decline in product sales to franchisees of $0.7 and $9.5 million, respectively, and the decline in franchise rental income of $6.1 and $14.4 million, respectively.

During the twelve months ended March 31, 2023, three salons were sold to franchisees and 512 and 18 system-wide salons were closed and constructed, respectively (2023 Net Salon Count Changes).

During the three and nine months ended March 31, 2023, royalties increased $0.2 and $0.9 million, or 1.3% and 1.9%, respectively, primarily due to higher average royalty rates and improved system-wide same-store sales, partially offset by a decrease in franchise salon count.

During the three months ended March 31, 2023, fees increased $0.1 million, or 4.2%, as compared to the same period in the prior year, primarily due to an increase in the rebate received from the Company's third-party distribution partner.

During the nine months ended March 31, 2023, fees decreased $0.3 million, or 3.5%, compared to the same period in the prior year, primarily due to a decrease in terminated development agreements, partially offset by an increase in the rebate received from the Company's third-party distribution partner.

Three Months Ended September 30, 2023 Compared with Three Months Ended September 30, 2022

During the three months ended September 30, 2023, royalties decreased $0.7 million, or 4.1%, primarily due to a decrease in franchise salon count.

During the three months ended September 30, 2023, fees were consistent with prior period.

An increase in terminated franchise agreement fees was offset by a decline in product fees.

Product Sales to Franchisees

Product sales to franchisees decreased $0.7 and $9.5 million, or 53.8% and 81.2%, respectively, during the three and nine months ended March 31, 2023, primarily due to the Company's shift in its product business to a third-party distribution model.

Product sales to franchisees in the three months ended September 30, 2023 were less than the three months ended September 30, 2022, primarily due to the Company's shift in its product business from a wholesale model to a third-party distribution model.

Product sales to franchisees are not expected to be material in fiscal year 2024.

Advertising Fund Contributions

Advertising fund contributions decreased $0.3 and $0.2 million, or 3.7% and 0.8%, respectively, during the three and nine months ended March 31, 2023, primarily due to the decrease in franchise salon count, partially offset by improved system-wide same-store sales.

Advertising fund contributions decreased $1.1 million, or 13.3%, during the three months ended September 30, 2023, primarily due to the decrease in franchise salon count.

Franchise Rental Income

During the three and nine months ended March 31, 2023, franchise rental income decreased $6.1 and $14.4 million, or 18.7% and 14.4%, respectively, primarily due to a lower franchise salon count.

During the three months ended September 30, 2023, franchise rental income decreased $5.6 million, or 18.5%, primarily due to the decrease in franchise salon count.

Company-Owned Salon Revenue

During the three and nine months ended March 31, 2023, company-owned salon revenue decreased $1.3 and $8.7 million, or 37.1% and 52.4%, respectively, due to the decrease in company-owned salon count and a decline in product sales.

During the three months ended September 30, 2023, company-owned salon revenue decreased $1.2 million, or 38.7%, due to the decrease in company-owned salon count.

Cost of Product Sales to Franchisees

The 2,560 basis point decrease in cost of product as a percent of product revenues during the three months ended March 31, 2023 was primarily due to higher freight expense in fiscal year 2022.

The 1,450 basis point increase in cost of product as a percent of product revenues during the nine months ended March 31, 2023 was primarily due to the Company reducing prices to liquidate distribution center inventory.

Inventory Reserve

In the three months ended March 31, 2023, the Company did not record an inventory reserve charge, and in the nine months ended March 31, 2023, the Company recorded an inventory reserve charge of $1.2 million related to slow moving products.

In the three and nine months ended March 31, 2022, the Company recorded total inventory reserve charges of $7.5 and $9.0 million, respectively.

In the three months ended March 31, 2022, $6.4 and $1.1 million were recorded in inventory reserve and company-owned salon expense, respectively, on the unaudited Condensed Consolidated Statement of Operations.

In the nine months ended March 31, 2022, $6.4 and $2.6 million were recorded in inventory reserve and company-owned salon expense, respectively, on the unaudited Condensed Consolidated Statement of Operations.

See Note 1 to the unaudited Condensed Consolidated Financial Statements.

The decrease in cost of product as a percent of product revenues during the three months ended September 30, 2023 was primarily due to lower freight charges.

Cost of product sales to franchisees is not expected to be material in fiscal year 2024.

General and Administrative

General and administrative expense decreased $1.7 and $11.5 million, or 11.5% and 22.7%, during the three and nine months ended March 31, 2023, respectively.

Lower administrative and field management compensation resulting from headcount reductions, lower legal and professional fees and a decrease in expenses associated with the distribution center closures in fiscal year 2022 contributed to the decrease.

Rent expense increased $0.9 million, or 75.0%, during the three months ended March 31, 2023, primarily due to lapping beneficial rent accrual adjustments in the prior year, partially offset by a decrease in the number of company-owned salons.

Rent expense decreased $0.1 million, or 1.7%, during the nine months ended March 31, 2023 as compared to the same period in the prior year.

The decrease is due to a net reduction in the number of company-owned salons, partially offset by a $1.2 million benefit in the nine months ended March 31, 2022 related to Canadian COVID-19 rent relief.

General and administrative expense decreased $3.7 million, or 25.7%, during the three months ended September 30, 2023, primarily due to lower headcount resulting in lower compensation expense and lower legal, insurance and professional fees.

Rent expense decreased $0.7 million, or 38.9%, during the three months ended September 30, 2023, primarily due to a reduction in franchise rent due to lower lease termination fees, settling with landlords for less than previously accrued and the net reduction in the number of company-owned salons, partially offset by a reduction in the lease liability benefit.

See Note 8 to the unaudited Condensed Consolidated Financial Statements.

Advertising Fund Expense

Advertising fund expense decreased $0.3 and $0.2 million, or 3.7% and 0.8%, respectively, during the three and nine months ended March 31, 2023, primarily due to the decrease in franchise salon count, partially offset by improved system-wide same-store sales.

Advertising fund expense decreased $1.1 million, or 13.3%, during the three months ended September 30, 2023, primarily due to the decrease in franchise salon count.

Franchise Rent Expense

During the three and nine months ended March 31, 2023, franchise rent expense decreased $6.1 and $14.4 million, or 18.7% and 14.4%, respectively, primarily due to a lower franchise salon count.

During the three months ended September 30, 2023, franchise rent expense decreased $5.6 million, or 18.5%, primarily due to the decrease in franchise salon count.

Company-Owned Salon Expense

Company-owned salon expense for the three and nine months ended March 31, 2023 decreased $3.2 and $11.0 million, or 60.4% and 60.1%, respectively, primarily due to the reduction in company-owned salon count, a decline in product sales and inventory reserve charges of $1.1 and $2.6 million in the three and nine months ended March 31, 2022, respectively.

These decreases are partially offset by $0.5 and $1.9 million of Canadian COVID-19 wage relief received in the three and nine months ended March 31, 2022, respectively.

Company-owned salon expense for the three months ended September 30, 2023 decreased $1.5 million, or 50.0%, primarily due to the reduction in company-owned salon count.

Depreciation and Amortization

Depreciation and amortization decreased $0.6 million, or 37.5%, during the three months ended March 31, 2023.

The decrease in the three months ended March 31, 2023 was primarily due to lower asset retirement obligations ("white boxing" salons at lease end) and the net reduction in company-owned salon count.

Depreciation and amortization increased $1.3 million, or 27.1%, during the nine months ended March 31, 2023.

The increase in the nine months ended March 31, 2023 was primarily due to a $2.6 million accelerated depreciation charge in the second quarter related to the consolidation of office space within the Company's corporate headquarters, partially offset by lower asset retirement obligations and the net reduction in company-owned salon count.

Long-Lived Asset Impairment

In the three and nine months ended March 31, 2023, the Company recorded a long-lived asset impairment charge of $0.04 million, and in the three and nine months ended March 31, 2022, the Company recorded long-lived asset impairment charges of $0.3 and $0.5 million, respectively.

The decreases in long-lived asset impairment were primarily due to salons being impaired in prior periods.

Goodwill Impairment

In the three and nine months ended March 31, 2023, the Company did not record a goodwill impairment charge, and in the three and nine months ended March 31, 2022, the Company recorded a goodwill impairment charge of $13.1 million.

See Note 1 to the unaudited Condensed Consolidated Financial Statements.

Depreciation and amortization decreased $0.9 million, or 69.2%, during the three months ended September 30, 2023.

The decrease in the three months ended September 30, 2023 was primarily due to a reduction in corporate office and IT assets and a reduction in asset retirement "white boxing" expense.

Interest Expense

The $1.6 and $3.5 million increases in interest expense for the three and nine months ended March 31, 2023, respectively, were primarily due to the amortization of fees related to the credit amendment that was signed in the first quarter of fiscal year 2023 and a higher interest rate on outstanding borrowings.

Loss from Sale of Salon Assets to Franchisees, Net

There was one salon sold in the nine months ended March 31, 2023 compared to 14 and 108 in the three and nine months ended March 31, 2022, respectively, which resulted in $0.5 and $2.2 million improvements in the loss from sale of salon assets to franchisees, net.

Other, net increased $0.2 and $1.2 million during the three and nine months ended March 31, 2023, respectively.

The increase in the three months ended March 31, 2023, was primarily due to a class action settlement.

The increase in the nine months ended March 31, 2023 was primarily due to a $1.1 million grant received from the state of North Carolina related to COVID-19 relief and the class action settlement.

Income Tax Benefit

During the three months ended March 31, 2023, the Company recognized a tax benefit of $0.2 million, with a corresponding effective tax rate of 10.0%, as compared to recognizing a tax benefit of $1.3 million, with a corresponding effective tax rate of 4.9% during the three months ended March 31, 2022.

During the nine months ended March 31, 2023, the Company recognized a tax benefit of $0.2 million, with a corresponding effective tax rate of 3.2%, as compared to recognizing a tax benefit of $1.5 million, with a corresponding effective tax rate of 3.8% during the nine months ended March 31, 2022.

The $2.4 million increase in interest expense for the three months ended September 30, 2023 was primarily due to the amortization of fees related to the credit amendment that was signed in the first quarter of fiscal year 2023 and a higher weighted average interest rate on outstanding borrowings, including non-cash interest and amortization of debt discount and financing costs of $1.4 million.

Other, net decreased $0.3 million for the three months ended September 30, 2023 primarily due to a lower foreign currency loss.

Income Tax Benefit (Expense)

During the three months ended September 30, 2023, the Company recognized a tax benefit of $0.1 million, with a corresponding effective tax rate of (14.1)%, as compared to recognizing a tax expense of $0.0 million, with a corresponding effective tax rate of (1.5)% during the three months ended September 30, 2022.

See Note 5 to the unaudited Condensed Consolidated Financial Statements.

Income (Loss) from Discontinued Operations

In the three and nine months ended March 31, 2023, the Company recorded a gain from discontinued operations of $0.5 and $4.0 million, respectively, and in the three and nine months ended March 31, 2022, the Company recorded a loss of $3.4 and $5.3 million, respectively.

The gain in fiscal year 2023 is primarily due to receipt of $5.0 million in sales proceeds offset by a $0.5 million transaction fee and other expenses.

The Company received proceeds of $0.5 million in the third quarter, which were previously held back.

Income from Discontinued Operations

In the three months ended September 30, 2022, the Company recorded income from discontinued operations of $3.3 million due primarily to receipt of $4.0 million in sales proceeds.

See Note 3 to the unaudited Condensed Consolidated Financial Statements.

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Significant results of continuing operations are discussed below with respect to each of these segments.

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

2023 2022 Increase (Decrease) (1) 2023 2022 Increase (Decrease) (1)

(Dollars in millions) (Dollars in millions)

Franchise Salons

Three Months Ended September 30,

2023 2022 (Decrease) Increase (1)

(Dollars in millions)

Royalties $ 16.5 $ 17.2 $ (0.7)

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(2) Franchise same-store sales are calculated as the total change in sales for franchise 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 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.

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

Three Months Ended September 30, 2023 Compared with Three Months Ended September 30, 2022

Franchise Revenue

Franchise revenue decreased $6.7 and $23.6 million during the three and nine months ended March 31, 2023, respectively.

The decreases in franchise salon revenue during the three and nine months ended March 31, 2023 were primarily due to the decrease in franchise rental income as a result of lower salon count and the decrease in product sales to franchisees due to the Company's shift to a third-party distributor model.

During the twelve months ended March 31, 2023, franchisees purchased three salons from the Company and constructed (net of relocations) and closed 17 and 467 franchise salons, respectively.

Franchise revenue decreased $7.4 million during the three months ended September 30, 2023.

The decrease in franchise revenue during the three months ended September 30, 2023 was primarily due to the decrease in franchise salon count.

During the twelve months ended September 30, 2023, franchisees purchased zero salons from the Company and constructed (net of relocations) and closed 11 and 589 franchise salons, respectively.

Franchise Adjusted EBITDA

During the three and nine months ended March 31, 2023, franchise adjusted EBITDA totaled $4.8 and $17.3 million, respectively, an improvement of $1.9 and $12.1 million compared to the three and nine months ended March 31, 2022, respectively.

The improvements are primarily due to an increase in average royalty revenues and a decrease in general and administrative expense.

During the three months ended September 30, 2023, franchise adjusted EBITDA totaled $8.0 million, an improvement of $3.0 million compared to the three months ended September 30, 2022.

The improvement was primarily due to a decrease in general and administrative expense due primarily to lower headcount, resulting in lower compensation expense, lower professional fees and a benefit in rent expense related to settling with landlords for less than previously accrued.

Company-Owned Salons

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

2023 2022 (Decrease) Increase (1) 2023 2022 (Decrease) Increase (1)

(Dollars in millions) (Dollars in millions)

Three Months Ended September 30,

2023 2022 (Decrease) Increase (1)

(Dollars in millions)

Total revenue $ 1.9 $ 3.1 $ (1.2)

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

Three Months Ended September 30, 2023 Compared with Three Months Ended September 30, 2022

Company-Owned Salon Revenue

Company-owned salon revenue decreased $1.3 and $8.7 million during the three and nine months ended March 31, 2023, respectively, primarily due to the 2023 Net Salon Count Changes and a decline in product sales in salons.

Company-owned salon revenue decreased $1.2 million during the three months ended September 30, 2023, primarily due to the decrease in company-owned salon count.

Company-Owned Salon Adjusted EBITDA

During the three and nine months ended March 31, 2023, company-owned salon adjusted EBITDA improved $2.7 and $6.5 million, respectively, primarily due to the closure of unprofitable salons.

The nine months ended March 31, 2023 also benefited from a $1.1 million grant received from the state of North Carolina related to COVID-19 relief in the second quarter.

During the three months ended September 30, 2023, company-owned salon adjusted EBITDA improved $0.7 million, primarily due to the closure of loss-generating company-owned salons.

LIQUIDITY AND CAPITAL RESOURCES

In August 2022, the Company reached an agreement to amend its credit agreement and extend the maturity to August 2025 from March 2023.

Under the amendment, the $295.0 million revolving credit facility was converted to a $180.0 million term loan and $55.0 million revolving credit facility with the minimum liquidity covenant reduced to $10.0 million from $75.0 million.

The amended credit agreement includes typical provisions and financial covenants, including minimum EBITDA, leverage and fixed-charge coverage ratio covenants, the latter two of which are not tested until December 31, 2023.

Following the amendment of the Company's credit agreement in August 2022, the facility matures in August 2025.

In addition to a $10.0 million minimum liquidity covenant, the amended credit agreement includes typical provisions and financial covenants, including minimum EBITDA, leverage and fixed-charge coverage ratio covenants, the latter two of which are not tested until December 31, 2023.

See Note 9 to the unaudited Condensed Consolidated Financial Statements.

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Funds generated by operating activities, available cash and cash equivalents and our borrowing agreements are our most significant sources of liquidity.

The Company believes it has sufficient liquidity, cash on hand and borrowing capacity, to meet its obligations in the next twelve months and beyond.

As of March 31, 2023, cash and cash equivalents were $8.8 million, with $7.7 and $1.1 million within the United States and Canada, respectively.

As of March 31, 2023, the Company's borrowing arrangements include a $172.9 million term loan and a $55.0 million revolving credit facility that expires in August 2025.

As of March 31, 2023, the unused available credit under the revolving credit facility was $34.3 million, the credit agreement has a minimum liquidity covenant of $10.0 million, and total liquidity per the agreement was $43.0 million.

The Company believes it has sufficient liquidity, cash on hand and borrowing capacity to meet its obligations in the next twelve months and until maturity of the credit agreement in August 2025.

In conducting the Company’s current operations, all cash in excess of the amounts needed to support existing operating activities is used to pay the interest on the amounts outstanding under the credit agreement, and we are periodically borrowing additional amounts to cover these costs.

As of September 30, 2023, cash and cash equivalents were $9.3 million, with $8.6 and $0.7 million within the United States and Canada, respectively.

As of September 30, 2023, the Company's borrowing arrangements include a $172.1 million term loan, $2.0 million of paid-in-kind interest and a $55.0 million revolving credit facility that expires in August 2025.

As of September 30, 2023, the unused available credit under the revolving credit facility was $33.1 million, the credit agreement has a minimum liquidity covenant of $10.0 million, and total liquidity per the agreement was $42.4 million.

See Note 9 to the unaudited Condensed Consolidated Financial Statements.

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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.

During the three and nine months ended March 31, 2023, the Company did not issue shares under the prospectus supplement.

During the nine months ended March 31, 2022, the Company issued 9.3 million shares and received net proceeds of $37.2 million.

As of March 31, 2023, $11.6 million remains outstanding under the share issuance program.

During the three months ended September 30, 2023 and 2022, the Company did not issue shares under the prospectus supplement.

As of September 30, 2023, $11.6 million remains outstanding under the share issuance program.

The Company closely manages its liquidity and capital resources.

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, credit facilities and borrowing arrangements, and working capital management.

The Company has a disciplined approach to capital allocation, which focuses on investing in key priorities as discussed within Part I, Item 1 of our Annual Report on Form 10-K for the fiscal year ended June 30, 2022.

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

The Company has a disciplined approach to capital allocation, which focuses on ensuring we can meet our interest obligations and investing in key priorities to support the Company's strategic plan as discussed within Part I, Item 1 of our Annual Report on Form 10-K for the fiscal year ended June 30, 2023.

Cash Requirements

The Company's most significant contractual cash requirements as of March 31, 2023 were lease commitments and interest payments.

See Note 8 to the unaudited Condensed Consolidated Financial Statements for further lease commitment detail.

The Company's most significant contractual cash requirements as of September 30, 2023 were lease commitments and interest payments.

See Notes 8 and 9 to the unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

Cash Flows from Operating Activities

During the nine months ended March 31, 2023, cash used in operating activities was $8.5 million compared to $34.4 million in the prior year.

Cash used in operations improved due to lower general and administrative expense, a $1.1 million cash grant received from the state of North Carolina related to COVID-19 relief, $0.6 million received related to COVID-19 employee retention credits and less cash used for working capital.

Cash used in fiscal year 2023 included a $2.5 million payment of previously deferred social security contributions.

During the three months ended September 30, 2023, cash used in operating activities was $2.8 million compared to $5.1 million in the prior year.

Cash used in operating activities improved due primarily to our lower cost structure.

Cash Flows from Investing Activities

During the nine months ended March 31, 2023, cash provided by investing activities of $4.2 million primarily related to cash received of $5.0 million from the sale of OSP, partially offset by a $0.5 million transaction fee.

During the nine months ended March 31, 2022, cash used in investing activities of $4.3 million was primarily due to capital expenditures, primarily related to internally-developed capitalized software.

During the three months ended September 30, 2023, cash used in investing activities of $0.2 million primarily related to a salon capital improvements.

During the three months ended September 30, 2022, cash provided by investing activities of $3.3 million was primarily due to cash received of $4.0 million from the sale of OSP, net of a $0.5 million transaction fee.

Cash Flows from Financing Activities

During the nine months ended March 31, 2023, cash used in financing activities was $2.6 million, primarily as a result of debt refinancing fees of $4.4 million, partially offset by a net $1.9 million borrowing under the Company's revolving credit facility.

During the nine months ended March 31, 2022, cash provided by financing activities was $43.2 million, primarily as a result of net proceeds related to the issuance of common stock and a net draw on the Company's revolving credit facility.

During the three months ended September 30, 2023, cash provided by financing activities was $1.7 million, primarily as a result of a net $1.8 million borrowing under the Company's revolving credit facility.

During the three months ended September 30, 2022, cash used in financing activities was $3.8 million, primarily as a result of debt refinancing fees of $4.3 million, partially offset by a net $0.6 million borrowing under the Company's revolving credit facility.

Financing Arrangements

See Note 9 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, 2023 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, 2022, for additional information regarding our financing arrangements.

See Note 9 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, 2023 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, 2023 for additional information regarding our financing arrangements.

Debt to Capitalization Ratio

Our debt to capitalization ratio, calculated as the principal amount of debt as a percentage of the principal amount of debt and shareholders' deficit at fiscal quarter end, was as follows:

Our debt to capitalization ratio, calculated as the principal amount of debt, including paid-in-kind interest accrued, as a percentage of the principal amount of debt and shareholders' deficit at fiscal quarter end, was as follows:

Capitalization (1)

March 31, 2023 122.0 %

September 30, 2023 123.4 %

June 30, 2023 125.1 %

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(1) Excludes the long-term lease liability as that liability is offset by the ROU asset.

The increase in the debt to capitalization ratio as of March 31, 2023 was primarily due to an increase in outstanding borrowings compared to June 30, 2022.

The decrease in the debt to capitalization ratio as of September 30, 2023 was primarily due to the increase in outstanding debt.

Share Issuance Program

In February 2021, the Company filed a $150.0 million shelf registration statement and $50.0 million prospectus supplement with the SEC under which it may offer and sell, from time to time, up to $50.0 million worth of its Class A common stock in "at-the-market" offerings.

During the nine months ended March 31, 2023, the Company did not issue shares under the prospectus supplement.

As of March 31, 2023, 9.3 million shares have been cumulatively issued for $38.4 million, and $11.6 million remains outstanding under the share issuance program.

During the three months ended September 30, 2023, the Company did not issue shares under the prospectus supplement.

As of September 30, 2023, 9.3 million shares have been cumulatively issued for $38.4 million, and $11.6 million remains outstanding under the share issuance program.

Share Repurchase Program

In May 2000, the Board approved a stock repurchase program with no stated expiration date.

Since that time and through March 31, 2023, 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, 2023, 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 nine months ended March 31, 2023, the Company did not repurchase any shares.

As of March 31, 2023, 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, 2023, the Company did not repurchase any shares.

As of September 30, 2023, 30.0 million shares have been cumulatively repurchased for $595.4 million, and $54.6 million remains outstanding under the approved stock repurchase program.

The Company does not anticipate repurchasing shares of common stock for the foreseeable future.

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." These uncertainties include a potential material adverse impact on our business and results of operations as a result of the COVID-19 pandemic, including any adverse impact from variants;

consumer shopping trends and changes in manufacturer distribution channels;

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

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 uncertainties include a potential material adverse impact on our business and results of operations as a result of changes in consumer shopping trends and changes in manufacturer distribution channels;

laws and regulations could require us to modify current business practices and incur increased costs;

changes in economic conditions;

changes in consumer tastes, fashion trends and consumer spending patterns;

our potential responsibility for Empire Education Group, Inc.'s liabilities;

changes in general economic environment;

changes in consumer tastes, hair product innovation, fashion trends and consumer spending patterns;

compliance with New York Stock Exchange listing requirements;

reliance on franchise royalties and overall success of our franchisees’ salons;

the return of sales at franchise locations to pre-pandemic levels;

new merchandising strategy that utilizes third-party preferred supplier arrangements;

our salons' dependence on a third-party supplier agreement for merchandise;

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

the success of our franchisees, which operate independently;

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

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

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

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the use of social media;

failure to standardize operating processes across brands;

exposure to uninsured or unidentified risks;

the effectiveness of our enterprise risk management program;

compliance with covenants in our financing arrangement, access to the existing revolving credit facility, and we may face an accelerated obligation to repay our indebtedness;

our capital investments in technology may not achieve appropriate returns;

ability to generate sufficient cash flow to satisfy our debt service obligations ;

compliance with covenants in our financing arrangement, access to the existing revolving credit facility, and acceleration of our obligation to repay our indebtedness;

the completion and/or results of the strategic alternatives review;

limited resources to invest in our business;

premature termination of agreements with our franchisees;

financial performance of Empire Education Group, Inc.;

our ability to close the sale of our ownership stake in Empire Education Group, Inc.;

the continued ability of the Company to implement cost reduction initiatives and achieve expected cost savings;

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reliance on our management team and other key personnel;

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

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

changes in tax exposure;

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net operating loss carryforwards;

potential litigation and other legal or regulatory proceedings could have an adverse effect on our business;

potential litigation and other legal or regulatory proceedings;

or other factors not listed above.

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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