REGIS CORP 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is designed to provide a reader of our consolidated financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. This MD&A should be read in conjunction with the MD&A included in our June 30, 2024, Annual Report on Form 10-K and other documents filed or furnished with the SEC during the current fiscal year. MANAGEMENT'S OVERVIEW Regis Corporation (NasdaqGM:RGS) is a leader in the beauty salon industry. As of September 30, 2024, the Company franchised or owned 4,359 locations, primarily in North America. Our locations consisted of 4,350 franchised salons and 9 company-owned salons. Regis’ franchised and corporate locations operate under concepts such as Supercuts ® , SmartStyle ® , Cost Cutters ® , Roosters ® and First Choice Haircutters ® . As of September 30, 2024, the Company had 203 employees. CRITICAL ACCOUNTING ESTIMATES The interim unaudited Condensed Consolidated Financial Statements are prepared in conformity with U.S. GAAP. In preparing the interim unaudited Condensed Consolidated Financial Statements, we are required to make various judgments, estimates and assumptions that could have a significant impact on the results reported in the interim unaudited Condensed Consolidated Financial Statements. We base these estimates on historical experience and other assumptions believed to be reasonable under the circumstances. Estimates are considered to be critical if they meet both of the following criteria: (1) the estimate requires assumptions about material matters that are uncertain at the time the accounting estimates are made and (2) other materially different estimates could have been reasonably made or material changes in the estimates are reasonably likely to occur from period to period. Changes in these estimates could have a material effect on our interim unaudited Condensed Consolidated Financial Statements. Goodwill The Company assesses goodwill impairment on an annual basis, during the Company's fourth fiscal quarter, and between annual assessments if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. An interim impairment analysis was not required in the three months ended September 30, 2024. As of September 30, 2024, and June 30, 2024, the franchise reporting unit had goodwill of $173.4 million and $173.1 million, respectively, and the company-owned reporting unit had no goodwill for both periods. 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, 2024, 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, 2024. 22 RESULTS OF OPERATIONS System-wide results 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. In the three months ended September 30, 2024, a net 41 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: Three Months Ended September 30, 2024 2023 (Dollars in Millions) System-wide revenue $ 285.6 $ 306.6 Supercuts 0.8 % 2.2 % SmartStyle (6.6) (2.0) Portfolio Brands (1.1) 3.7 Total system-wide same-store sales (1) (1.1) % 1.8 % _______________________________________________________________________________ (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 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. 23 Condensed Consolidated Results of Operations (Unaudited) 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 September 30, 2024 2023 2024 2023 ($ in millions) % of Total Revenue Increase (Decrease) Royalties $ 15.6 $ 16.5 33.9 % 30.9 % 300 Fees 2.4 2.6 5.2 4.9 30 Product sales to franchisees — 0.4 — 0.8 (80) Advertising fund contributions 5.6 7.2 12.2 13.5 (130) Franchise rental income 21.6 24.7 47.0 46.3 70 Company-owned salon revenue 0.8 1.9 1.7 3.6 (190) Cost of product sales to franchisees (1) — 0.4 — 100.0 N/M General and administrative 14.0 10.7 30.4 20.1 1,030 Rent 1.1 1.1 2.4 2.1 30 Advertising fund expense 5.6 7.2 12.2 13.5 (130) Franchise rent expense 21.6 24.7 47.0 46.3 70 Company-owned salon expense (2) 0.8 1.5 1.7 2.8 (110) Depreciation and amortization 0.4 0.4 0.9 0.8 10 Long-lived asset impairment 0.4 — 0.9 — 90 Operating income (3) 2.1 7.4 4.6 13.9 (930) Interest expense (4.8) (6.2) (10.4) (11.6) (120) Other, net 0.7 (0.2) 1.5 (0.4) 190 Income tax benefit (4) 0.2 0.1 11.1 (14.1) N/A (Loss) income from continuing operations (1.8) 1.2 (3.9) 2.3 (620) Income from discontinued operations 1.0 — 2.2 — 220 Net (loss) income (3) (0.9) 1.2 (2.0) 2.3 (430) _______________________________________________________________________________ (1) Cost of product sales to franchisees is computed as a percent of product sales to franchisees. The basis point change is not meaningful. (2) Includes cost of services and products 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. (4) Computed as a percent of (loss) income from continuing operations before income taxes. The income tax basis point change is noted as not applicable (N/A) because the discussion within the MD&A is related to the effective income tax rate. 24 Three Months Ended September 30, 2024, Compared with Three Months Ended September 30, 2023 Royalties During the three months ended September 30, 2024, royalties decreased $0.9 million, or 5.5%, primarily due to a decrease in franchise salon count and negative same-store-sales. Fees During the three months ended September 30, 2024, fees decreased $0.2 million, or 10.6%, primarily due to lower option fees and lower rebate fees from franchise product vendors. Product Sales to Franchisees Product sales to franchisees in the three months ended September 30, 2024, decreased $0.4 million, or 100.0%, compared to the three months ended September 30, 2023, primarily due to the Company's shift in its product business from a wholesale model to a third-party distribution model. Advertising Fund Contributions Advertising fund contributions decreased $1.6 million, or 21.9%, during the three months ended September 30, 2024, primarily due to the decrease in franchise salon count and lower contribution rates. Franchise Rental Income During the three months ended September 30, 2024, franchise rental income decreased $3.1 million, or 12.3%, primarily due to the decrease in franchise salon count and franchisees signing their own leases. Company-Owned Salon Revenue During the three months ended September 30, 2024, company-owned salon revenue decreased $1.1 million, or 59.5%, due to the decrease in company-owned salon count. Cost of Product Sales to Franchisees The decrease in cost of product as a percent of product revenues during the three months ended September 30, 2024, was primarily due to the Company's shift in its product business from a wholesale model to a third-party distribution model. General and Administrative General and administrative expense for the three months ended September 30, 2024, increased $3.3 million, or 30.8%, primarily due to severance costs of $2.3 million and stock-based compensation expense of $0.8 million. Rent Rent expense remained unchanged during the three months ended September 30, 2024. Advertising Fund Expense Advertising fund expense decreased $1.6 million, or 21.9%, during the three months ended September 30, 2024, primarily due to the decrease in franchise salon count and lower contribution rates. 25 Franchise Rent Expense During the three months ended September 30, 2024, franchise rent expense decreased $3.1 million, or 12.3%, primarily due to the decrease in franchise salon count and franchisees signing their own leases. Company-Owned Salon Expense Company-owned salon expense, for the three months ended September 30, 2024, decreased $0.7 million, or 49.5%, primarily due to the reduction in company-owned salon count. Depreciation and Amortization Depreciation and amortization remained unchanged during the three months ended September 30, 2024. Long-Lived Asset Impairment In the three months ended September 30, 2024, the Company recorded a long-lived asset impairment charge of $0.4 million related to the right-of-use asset associated with the corporate office lease. There were no similar charges recorded in the three months ended September 30, 2023. Interest Expense The $1.4 million decrease in interest expense for the three months ended September 30, 2024, was primarily due to less debt outstanding compared to the three months ended September 30, 2023. Cash interest decreased $1.8 million to $3.0 million for the three months ended September 30, 2024. Other, Net Other, net increased $0.9 million in the three months ended September 30, 2024, primarily due to a favorable currency adjustment, unclaimed property, and corporate office sublease income. Income Tax Benefit During the three months ended September 30, 2024, the Company recognized a tax benefit of $0.2 million, with a corresponding effective tax rate of 11.1%, as compared to recognizing a tax benefit of $0.1 million, with a corresponding effective tax rate of (14.1)% during the three months ended September 30, 2023. The negative effective tax rate during the three months ended September 30, 2023 was a result of an income tax benefit during a period in which the Company had income from operations. See Note 5 to the unaudited Condensed Consolidated Financial Statements. Income from Discontinued Operations Income from discontinued operations increased $1.0 million in the three months ended September 30, 2024, due primarily to receiving proceeds from the sale of OSP related to the number of salons migrating to the Zenoti platform. See Note 3 to the unaudited Condensed Consolidated Financial Statements. 26 Results of Operations by Segment Based on our internal management structure, we report two segments: franchise and company-owned salons. See Note 12 to the unaudited Condensed Consolidated Financial Statements. Significant results of continuing operations are discussed below with respect to each of these segments. Franchise Salons Three Months Ended September 30, 2024 2023 Decrease (1) (Dollars in millions) Royalties $ 15.6 $ 16.5 $ (0.9) Fees 2.4 2.6 (0.2) Product sales to franchisees — 0.4 (0.4) Advertising fund contributions 5.6 7.2 (1.6) Franchise rental income 21.6 24.7 (3.1) Total franchise revenue (1) $ 45.3 $ 51.4 $ (6.1) Franchise same-store sales (2) (1.2) % 1.7 % Franchise adjusted EBITDA $ 8.0 $ 8.6 $ (0.6) Total franchise salons 4,350 4,745 (395) _______________________________________________________________________________ (1) Total is a recalculation; line items calculated individually may not sum to total due to rounding. (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 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, 2024, Compared with Three Months Ended September 30, 2023 Franchise Revenue Franchise revenue decreased $6.1 million during the three months ended September 30, 2024. The decrease in franchise revenue during the three months ended September 30, 2024, was primarily due to the decrease in franchise salon count and negative same-store-sales. Franchise Adjusted EBITDA During the three months ended September 30, 2024, franchise adjusted EBITDA totaled $8.0 million, a decrease of $0.6 million compared to the three months ended September 30, 2023. The decline was primarily due to a decrease in royalties and fees. 27 Company-Owned Salons Three Months Ended September 30, 2024 2023 (Decrease) Increase (1) (Dollars in millions) Company-owned salon revenue $ 0.8 $ 1.9 $ (1.1) Company-owned salon adjusted EBITDA $ (0.3) $ (0.5) $ 0.2 Total company-owned salons 9 66 (57) _______________________________________________________________________________ (1) Total is a recalculation; line items calculated individually may not sum to total due to rounding. Three Months Ended September 30, 2024, Compared with Three Months Ended September 30, 2023 Company-Owned Salon Revenue Company-owned salon revenue decreased $1.1 million during the three months ended September 30, 2024, primarily due to the decrease in company-owned salon count. Company-Owned Salon Adjusted EBITDA In the three months ended September 30, 2024, company-owned salon adjusted EBITDA loss improved $0.2 million, primarily due to the wind-down of under performing salons. 28 LIQUIDITY AND CAPITAL RESOURCES In June 2024, the Company entered into a new credit agreement with TCW Asset Management Company, LLC, and MidCap Financial Trust, which matures in June 2029. In addition to a $10.0 million minimum liquidity covenant, the agreement includes typical provisions and financial covenants, including leverage and fixed-charge coverage ratio covenants. Sources of Liquidity Funds generated by operating activities, available cash and cash equivalents and our credit agreement 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 until maturity of the credit agreement in June 2029. As of September 30, 2024, cash and cash equivalents were $6.3 million, with $5.4 million and $0.9 million within the United States and Canada, respectively. As of September 30, 2024, the Company's borrowing arrangements include a $104.7 million term loan, $1.3 million of paid-in-kind interest and a $25.0 million revolving credit facility that matures in June 2029. As of September 30, 2024, the unused available credit under the revolving credit facility was $15.7 million, the credit agreement has a minimum liquidity covenant of $10.0 million, and total available liquidity per the agreement was $11.9 million. See Note 9 to the unaudited Condensed Consolidated Financial Statements. On June 30, 2022, the Company sold its OSP software-as-a-service solution to Soham, Inc., for a purchase price of $20.0 million in cash plus additional cash proceeds contingent upon the number of salons that migrate to Soham's Zenoti product as their salon technology platform. As of September 30, 2024, the Company has received $21.0 million in cash proceeds. The Company expects additional proceeds in fiscal year 2025 of approximately $7.0 to $7.5 million. Uses of Cash The Company closely manages its liquidity and capital resources. 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. Cash Requirements The Company's most significant contractual cash requirements as of September 30, 2024, 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. 29 Cash Flows Cash Flows from Operating Activities During the three months ended September 30, 2024, cash used in operating activities was $1.3 million compared to a $2.8 million cash use in the three months ended September 30, 2023. Cash used in operating activities improved year over year due primarily to our lower cost structure, resulting primarily from a lower headcount in addition to less cash used for working capital. Cash Flows from Investing Activities During the three months ended September 30, 2024, cash provided by investing activities of $0.9 million was primarily due to OSP sale proceeds of $957 thousand. During the three months ended September 30, 2023, cash used in investing activities of $0.2 million was primarily due to salon capital improvements. Cash Flows from Financing Activities During the three months ended September 30, 2024, cash used in financing activities was $6.5 million, primarily as a result of the repayment of long-term debt of $0.3 million and repayments of the revolving credit facility of $10.2 million, partially offset by $4.3 million of borrowings under the 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 debt refinancing fees of $0.2 million, partially offset by $2.0 million in borrowings 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 September 30, 2024 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, 2024 for additional information regarding our financing arrangements. Debt to Capitalization Ratio 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' equity (deficit) at fiscal quarter end, was as follows: Debt to Capitalization (1) September 30, 2024 66.2 % June 30, 2024 67.0 % _______________________________________________________________________________ (1) Excludes the long-term lease liability as that liability is offset by the ROU asset. 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 could offer and sell, from time to time, up to $50.0 million worth of its common stock in "at-the-market" offerings. The Share Issuance Program expired on February 10, 2024. Share Repurchase Program In May 2000, the Board approved a stock repurchase program with no stated expiration date. Since that time and through September 30, 2024, the Board has authorized $650.0 million to be expended for the repurchase of the Company's stock under this program. All repurchased shares become authorized but unissued shares of the Company. The timing and amounts of any repurchases depend on many factors, including the market price of the common stock and overall market conditions. During the three months ended September 30, 2024, the Company did not repurchase any shares. As of September 30, 2024, approximately 1.5 million shares have been cumulatively repurchased for $595.4 million, and $54.6 million remain outstanding under the approved stock repurchase program. The Company does not anticipate repurchasing shares of common stock for the foreseeable future. 30 SAFE HARBOR PROVISIONS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This Quarterly Report on Form 10-Q, as well as information included in, or incorporated by reference from, future filings by the Company with the Securities and Exchange Commission and information contained in written material, press releases and oral statements issued by or on behalf of the Company contains or may contain "forward-looking statements" within the meaning of the federal securities laws, including statements concerning anticipated future events and expectations that are not historical facts. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. 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," "will," "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 including increases in minimum wages; changes in general economic environment; changes in consumer tastes, hair product innovation, fashion trends and consumer spending patterns; compliance with Nasdaq listing requirements; reliance on franchise royalties and overall success of our franchisees’ salons; 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; 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; marketing efforts to drive traffic to our franchisees' salons; our ability to maintain and enhance the value of our brands; reliance on legacy information technology systems; reliance on external vendors; the use of social media; the effectiveness of our enterprise risk management program; ability to generate sufficient cash flow to satisfy our debt service obligations; compliance with covenants in our financing arrangement; premature termination of agreements with our franchisees; the continued ability of the Company to implement cost reduction initiatives and achieve expected cost savings; continued ability to compete in our business markets; reliance on our management team and other key personnel; the continued ability to maintain an effective system of internal control over financial reporting; changes in tax exposure; the ability of our Tax Preservation Plan to protect the future availability of the Company's tax assets; potential litigation and other legal or regulatory proceedings; 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. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. However, your attention is directed to any further disclosures made in our subsequent annual and periodic reports filed or furnished with the SEC on Forms 10-K, 10-Q, and 8-K and Proxy Statements on Schedule 14A. 31 Item 3. Quantitative and Qualitative Disclosures About Market Risk We are exposed to market risk from changes in interest rates and changes in foreign currency exchange rates. There has been no material change to the factors discussed within Part II, Item 7A in the Company's June 30, 2024, Annual Report on Form 10-K.