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 December 31, 2024, the Company franchised or owned 4,248 locations, primarily in North America. Our locations consisted of 3,925 franchised salons and 323 company-owned salons. Regis’ franchised and corporate locations operate under concepts such as Supercuts ® , SmartStyle ® , Cost Cutters ® , Roosters ® , and First Choice Haircutters ® . As of December 31, 2024, the Company had 1,945 employees, of which 1,750 were acquired as part of the Alline acquisition. 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. Business Combinations We account for our business combinations using the acquisition method of accounting, which requires, among other things, allocation of the fair value of purchase consideration to the tangible and intangible assets acquired and liabilities assumed at their estimated fair values on the acquisition date. The excess of the fair value of purchase consideration over the values of these identifiable assets and liabilities is recorded as goodwill. When determining the fair value of assets acquired and liabilities assumed, we make significant estimates and assumptions, especially with respect to intangible assets. Our estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Once the purchase accounting is finalized, any subsequent adjustments are reflected in the consolidated statements of operations. Acquisition costs, such as legal and consulting fees, are expensed as incurred. 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 December 31, 2024. As of December 31, 2024, and June 30, 2024, the franchise reporting unit had goodwill of $172.4 million and $173.1 million, respectively, and the company-owned reporting unit had goodwill of $16.6 million and $0 as of December 31, 2024, and June 30, 2024, respectively. 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, except as noted above. 25 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 six months ended December 31, 2024, a net 152 franchise salons have closed, in addition to the 314 salons acquired as part of the Alline Acquisition, which will reduce future royalty income. The Alline acquisition will increase future company-owned salon revenue and expenses. The following table summarizes system-wide revenue and system-wide same-store sales by concept: Three Months Ended December 31, Six Months Ended December 31, 2024 2023 2024 2023 (Dollars in millions) System-wide revenue $ 274.1 $ 292.4 $ 559.7 $ 599.0 Supercuts 0.5 % 2.6 % 0.7 % 2.4 % SmartStyle (6.4) (2.4) (6.5) (2.2) Portfolio Brands (2.4) 3.7 (1.7) 3.7 Total system-wide same-store sales (1) (1.6) % 1.9 % (1.4) % 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. 26 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 December 31, Six Months Ended December 31, 2024 2023 2024 2023 2024 2023 2024 2023 (Dollars in millions) % of Total Revenue (1) (5) Increase (Decrease) (Dollars in millions) % of Total Revenue (1) (5) Increase (Decrease) Royalties $ 14.8 $ 15.8 31.8 % 31.0 % 80 $ 30.5 $ 32.3 32.9 % 31.1 % 180 Fees 2.9 2.5 6.2 4.9 130 5.3 5.1 5.7 4.9 80 Product sales to franchisees — 0.1 — 0.1 (10) — 0.5 — 0.4 (40) Advertising fund contributions 5.5 6.8 11.8 13.3 (150) 11.1 14.0 12.0 13.4 (140) Franchise rental income 20.0 24.1 42.9 47.2 (430) 41.7 48.8 44.9 46.7 (180) Company-owned salon revenue 3.5 1.8 7.4 3.5 390 4.2 3.7 4.6 3.6 100 Cost of product sales to franchisees (1) — 0.1 — 100.0 N/M — 0.4 — 100.0 N/M General and administrative 11.2 11.8 23.9 23.1 80 25.2 22.5 27.1 21.5 560 Rent 2.1 1.4 4.6 2.7 190 3.2 2.5 3.5 2.4 110 Advertising fund expense 5.5 6.8 11.8 13.3 (150) 11.1 14.0 12.0 13.4 (140) Franchise rent expense 20.0 24.1 42.9 47.1 (420) 41.7 48.8 44.9 46.7 (180) Company-owned salon expense (2) 1.9 1.3 4.2 2.6 160 2.7 2.8 2.9 2.7 20 Depreciation and amortization 0.5 0.7 1.0 1.3 (30) 0.9 1.0 1.0 1.0 — Long-lived asset impairment — 0.2 — 0.3 (30) 0.4 0.2 0.4 0.2 20 Operating income (3) 5.5 4.8 11.8 9.4 240 7.6 12.2 8.2 11.7 (350) Interest expense (4.8) (6.2) (10.4) (12.1) (170) (9.7) (12.4) (10.4) (11.9) (150) Other, net (0.3) 0.3 (0.7) 0.6 (130) 0.4 0.1 0.4 0.1 30 Income tax (expense) benefit (4) (0.1) 0.1 39.8 9.6 N/A 0.1 0.3 5.3 398.4 N/A Income (loss) from continuing operations (3) 0.2 (1.0) 0.4 (2.0) 240 (1.6) 0.2 (1.7) 0.2 (190) Income from discontinued operations 7.4 2.0 15.9 3.9 1,200 8.4 2.0 9.0 1.9 710 Net income (3) 7.6 1.0 16.4 2.0 1,440 6.8 2.2 7.3 2.1 520 _______________________________________________________________________________ (1) Cost of product sales to franchisees is computed as a percent of product sales to franchisees. The basis point change is not meaningful (N/M). 27 (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 income (loss) 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. (5) Amounts from prior periods may not equal those per the prior period financials due to rounding from updating formulas for consistency purposes. 28 Three and Six Months Ended December 31, 2024, Compared with Three and Six Months Ended December 31, 2023 Royalties During the three and six months ended December 31, 2024, royalties decreased $1.0 million and $1.9 million, or 6.3% and 5.9%, respectively, primarily due to a decrease in franchise salon count and negative same-store sales. Fees During the three and six months ended December 31, 2024, fees increased $0.4 million and $0.1 million, or 16.1% and 2.8%, respectively, primarily due to terminated franchise fees related to Alline salons, partially offset by lower option fees and lower rebate fees from franchise product vendors. Advertising Fund Contributions Advertising fund contributions decreased $1.3 million and $2.9 million, or 19.1% and 20.7%, during the three and six months ended December 31, 2024, respectively, primarily due to the decrease in franchise salon count and lower contribution rates. Franchise Rental Income During the three and six months ended December 31, 2024, franchise rental income decreased $4.1 million and $7.1 million, or 17.0% and 14.6%, respectively, primarily due to the decrease in franchise salon count and franchisees signing their own leases. Company-Owned Salon Revenue During the three and six months ended December 31, 2024, company-owned salon revenue increased $1.7 million and $0.5 million, or 95.6% and 13.5%, respectively, primarily due to the acquisition of Alline. General and Administrative General and administrative expense decreased $0.6 million, or 5.1%, for the three months ended December 31, 2024, primarily due to lower headcount resulting in lower compensation expense, partially offset by $1.2 million of acquisition costs associated with the Alline acquisition. General and administrative expense, for the six months ended December 31, 2024, increased $2.7 million, or 11.9%, primarily due to severance costs of $2.3 million and $1.2 million of acquisition costs associated with the Alline acquisition. Rent Rent expense increased $0.8 million and $0.8 million, or 57.4% and 28.1%, during the three and six months ended December 31, 2024, respectively. The increase is primarily due to lapping of prior year franchisee rent benefit resulting from settlements with landlords for less than previously accrued. Advertising Fund Expense Advertising fund expense decreased $1.3 million and $2.9 million, or 19.1% and 20.7%, during the three and six months ended December 31, 2024, respectively, primarily due to the decrease in franchise salon count and lower contribution rates. 29 Franchise Rent Expense During the three and six months ended December 31, 2024, franchise rent expense decreased $4.1 million and $7.1 million, or 17.0% and 14.6%, respectively, primarily due to the decrease in franchise salon count and franchisees signing their own leases. Company-Owned Salon Expense Company-owned salon expense increased $0.6 million, or 45.9%, for the three months ended December 31, 2024, primarily due to the Alline acquisition. Company-owned salon expense for the six months ended December 31, 2024, remained consistent with the same period in the prior year. Depreciation and Amortization Depreciation and amortization decreased $0.2 million and $0.1 million, or 29.5% and 9.6%, for the three and six months ended December 31, 2024, respectively, primarily due to other company-owned salon closures, partially offset by the Alline acquisition. Long-Lived Asset Impairment During the three and six months ended December 31, 2024, the Company recorded long-lived asset impairment charges of $0 and $0.4 million, respectively, related to the right-of-use asset associated with the corporate office lease. Long-lived asset impairment charges for the three and six months ended December 31, 2023, were $0.2 million. Interest Expense Interest expense was $4.8 million and $9.7 million, which included non-cash interest of $1.2 million and $2.5 million in the three and six months ended December 31, 2024. The $1.3 million and $2.7 million decreases in interest expense for the three and six months ended December 31, 2024, respectively, were primarily due to less debt outstanding compared to the three and six months ended December 31, 2023. Other, Net Other, net decreased $0.6 million in the three months ended December 31, 2024, primarily due to an unfavorable currency adjustment. Other, net increased $0.3 million in the six months ended December 31, 2024, primarily due to unclaimed property and corporate office sublease income, partially offset by an unfavorable currency adjustment. Income Tax (Expense) Benefit During the three months ended December 31, 2024, the Company recognized a tax expense of $0.1 million, with a corresponding effective tax rate of 39.8%, as compared to recognizing a tax benefit of $0.1 million during the three months ended December 31, 2023, with an effective tax rate of 9.6%. During the six months ended December 31, 2024, the Company recognized a tax benefit of $0.1 million, with a corresponding effective tax rate of 5.3%, as compared to recognizing a tax benefit of $0.3 million, with a corresponding effective tax rate of 398.4% during the six months ended December 31, 2023. See Note 5 to the unaudited Condensed Consolidated Financial Statements. Income from Discontinued Operations Income from discontinued operations increased $5.4 million and $6.4 million in the three and six months ended December 31, 2024, respectively, 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. 30 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 December 31, Six Months Ended December 31, 2024 2023 (Decrease) Increase (1) 2024 2023 (Decrease) Increase (1) (Dollars in millions) (Dollars in millions) Royalties $ 14.8 $ 15.8 $ (1.0) $ 30.5 $ 32.3 $ (1.8) Fees 2.9 2.5 0.4 5.3 5.1 0.2 Product sales to franchisees — 0.1 (0.1) — 0.5 (0.5) Advertising fund contributions 5.5 6.8 (1.3) 11.1 14.0 (2.9) Franchise rental income 20.0 24.1 (4.1) 41.7 48.8 (7.1) Total franchise revenue (1) $ 43.3 $ 49.3 $ (6.0) $ 88.5 $ 100.7 $ (12.2) Franchise same-store sales (2) (1.5) % 1.9 % (1.3) % 1.8 % Franchise adjusted EBITDA $ 6.4 $ 6.6 $ (0.2) $ 14.4 $ 15.2 $ (0.8) Total franchise salons 3,925 4,651 (726) _______________________________________________________________________________ (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 and Six Months Ended December 31, 2024, Compared with Three and Six Months Ended December 31, 2023 Franchise Revenue Franchise revenue decreased $6.0 million and $12.2 million during the three and six months ended December 31, 2024, respectively. The decreases in franchise revenue during the three and six months ended December 31, 2024, were primarily due to the decrease in franchise salon count and negative same-store sales. Franchise Adjusted EBITDA During the three and six months ended December 31, 2024, franchise adjusted EBITDA totaled $6.4 million and $14.4 million, a decrease of $0.2 million and $0.8 million compared to the three and six months ended December 31, 2023, respectively. The decline was primarily due to a decrease in royalties, partially offset by a reduction in general and administrative expenses. 31 Company-Owned Salons Three Months Ended December 31, Six Months Ended December 31, 2024 2023 Increase (1) 2024 2023 Increase (1) (Dollars in millions) (Dollars in millions) Company-owned salon revenue $ 3.5 $ 1.8 $ 1.7 $ 4.2 $ 3.7 $ 0.5 Company-owned salon adjusted EBITDA $ 0.7 $ (0.3) $ 1.0 $ 0.4 $ (0.8) $ 1.2 Total company-owned salons 323 58 265 _______________________________________________________________________________ (1) Total is a recalculation; line items calculated individually may not sum to total due to rounding. Three and Six Months Ended December 31, 2024, Compared with Three and Six Months Ended December 31, 2023 Company-Owned Salon Revenue Company-owned salon revenue increased $1.7 million and $0.5 million during the three and six months ended December 31, 2024, respectively. The increases are primarily driven by the Alline acquisition, partially offset by other company-owned store closures. Company-Owned Salon Adjusted EBITDA In the three and six months ended December 31, 2024, company-owned salon adjusted EBITDA improved $1.0 million and $1.2 million, respectively, primarily due to the Alline acquisition, partially offset by the wind-down of underperforming company-owned stores 32 LIQUIDITY AND CAPITAL RESOURCES The Company has a 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. The agreement was amended in December 2024 in connection with the Alline Acquisition. 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 December 31, 2024, cash and cash equivalents were $10.2 million, with $9.4 million and $0.8 million within the United States and Canada, respectively. As of December 31, 2024, the Company's borrowing arrangements include a $119.5 million term loan, $2.6 million of paid-in-kind interest and a $25.0 million revolving credit facility that matures in June 2029. As of December 31, 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 $15.9 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 December 31, 2024, the Company has received $28.5 million in cash proceeds related to the sale of and completed migration to the Zenoti platform. 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 December 31, 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. 33 Cash Flows Cash Flows from Operating Activities During the six months ended December 31, 2024, cash provided by operating activities was $0.8 million compared to a $6.9 million cash use in the six months ended December 31, 2023. Cash used in operating activities improved year over year due primarily to our lower cost structure in addition to less cash used for working capital. Cash Flows from Investing Activities During the six months ended December 31, 2024, cash used in investing activities of $10.6 million was primarily due to cash used in the acquisition of Alline of $18.6 million, partially offset by the receipt of OSP sale proceeds of $8.5 million. During the six months ended December 31, 2023, cash used in investing activities of $0.3 million was primarily due to salon capital improvements. Cash Flows from Financing Activities During the six months ended December 31, 2024, cash provided by financing activities was $7.7 million, primarily as a result of $15.0 million in proceeds from issuance of long-term debt, partially offset by net payments on the revolving credit facility of $5.9 million. During the six months ended December 31, 2023, cash provided by financing activities was $2.3 million, primarily as a result of $4.0 million borrowing under the Company's revolving credit facility, partially offset by $0.5 million of debt repayments and $1.2 million used for debt refinancing fees. 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 December 31, 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) December 31, 2024 65.5 % June 30, 2024 67.0 % _______________________________________________________________________________ (1) Excludes the long-term lease liability as that liability is offset by the ROU asset. Share Repurchase Program In May 2000, the Board approved a stock repurchase program with no stated expiration date. Since that time and through December 31, 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 six months ended December 31, 2024, the Company did not repurchase any shares. As of December 31, 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. 34 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; our ability to realize the anticipated benefits of the Alline Acquisition; reliance on franchise royalties and overall success of our franchisees’ salons; our salons' dependence on a third-party supplier agreement for merchandise; our and 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; our ability to minimize risks associated with owning and operating additional salons; 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; potential liabilities related to the employee retention credit received by Alline; changes in trade policies, treaties, tariffs and customs duties and taxes; 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. 35 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.