Regis Reports Improved Second Quarter 2018 Results

Second Quarter Diluted Earnings Per Share From Continuing Operations of $0.83, Which Includes A One-Time, Non-Cash Benefit Of Recently Passed Federal Tax Reform Legislation; Second Quarter Adjusted Diluted Earnings Per Share Of $0.06 Increased $0.02 Versus Prior Year

Adjusted EBITDA of $18.2 million is $1.0 million, or 6.0% Favorable Year-Over-Year;

Year-To-Date Adjusted EBITDA of $42.1 million Increased $2.2 million, or 5.5% Year-Over-Year

During the Quarter, the Company Executed Upon Two Major Transformative Events -

The Sale and Subsequent Franchising of Substantially All of Its Mall-Based Salons and U.K. Businesses and the Restructuring of its Company-Owned SmartStyle® Portfolio By Committing to Close Approximately 597 Cash Flow Negative Salons

MINNEAPOLIS--()--Regis Corporation (NYSE: RGS):

  Three Months Ended   Six Months Ended
December 31, December 31,
(Dollars in thousands) 2017   2016(1) 2017   2016(1)
Consolidated Revenue $308,515 $315,249 $618,388 $634,080
Consolidated Same-Store Sales Comps (0.7)% (2.5)% (0.2)% (1.1 )%
 
Net Income From Continuing Operations $39,321 $982 $50,113 $6,722
Diluted Earnings per Share From Continuing Operations $0.83 $0.02 $1.07 $0.14
EBITDA $(16,622) $13,299 $(20,372) $33,592
 
As Adjusted(2)
Net Income, as Adjusted $2,886 $1,655 $7,598 $7,395
Diluted Earnings per Share, as Adjusted $0.06 $0.04 $0.16 $0.16
EBITDA, as Adjusted $18,198 $17,173 $42,135 $39,925

____________________________________

(1) Amounts for fiscal year 2017 have been recast to account for mall-based business and International segment as discontinued operations.

(2) See GAAP to non-GAAP reconciliations, within the attached section titled "Non-GAAP Reconciliations".

Regis Corporation (NYSE: RGS), a leader in the haircare industry, whose primary business is owning, operating and franchising hair salons, today reported second fiscal quarter 2018 net income from continuing operations of $39.3 million, or $0.83 per diluted share as compared to net income from continuing operations of $1.0 million, or $0.02 per diluted share in the second fiscal quarter of 2017. The Company’s reported results include $68.9 million of non-cash, one-time, tax benefits related to the enactment of the Tax Cuts and Jobs Act ("Tax Reform"), partially offset by $37.6 million of one-time lease termination and other non-recurring costs associated with the recently announced restructuring of the Company's SmartStyle® salon portfolio, and $3.5 million of other discrete costs. Excluding these tax benefits, restructuring charges, discrete items, and the loss from discontinued operations, the Company reported second quarter 2018 as adjusted net income of $2.9 million, or $0.06 earnings per diluted share versus net income of $1.7 million, or $0.04 earnings per diluted share, for the same period last year.

Total revenue in the quarter of $308.5 million decreased $6.7 million, or 2.1%, year-over-year driven primarily by the closure, or re-franchising of 448 salons. Second quarter adjusted EBITDA of $18.2 million was $1.0 million, or 6.0% favorable year-over-year.

On a full year basis, the Company reported net income from continuing operations of $50.1 million, or $1.07 per diluted share as compared to net income from continuing operations of $6.7 million, or $0.14 per diluted share in the prior year. On an adjusted basis, EBITDA of $42.1 million increased $2.2 million, or 5.5% versus the same period last year.

Hugh Sawyer, President and Chief Executive Officer, commented, "Restructuring the non-performing elements of our company-owned salon portfolio in order to focus on the performing core, and the growth of our franchise business, has been a key element of our strategy.” Mr. Sawyer continued, “The second quarter represents an important milestone where we substantially completed the restructuring phase of our strategic transformation and operational turnaround. Moreover, we are pleased to report initial signs of progress in both our quarterly and year-over-year adjusted EBITDA results.”

Sale of Company’s Mall-based Salons and U.K. Business
In October 2017, after a comprehensive process, the Company reached the strategic conclusion to sell, and subsequently franchise, substantially all of its mall-based salon business in North America, representing 858 salons, and substantially all of its International segment, representing approximately 250 salons in the U.K. This transaction clarified the Company's strategy by focusing its company-owned salon portfolio in North America on the value segment. At the same time, this outcome was consistent with the Company's previously stated strategic imperative to accelerate the growth of its franchise portfolio.

Due to this transaction, the Company has classified the results of its mall-based business and its International segment as discontinued operations for all periods presented in the Condensed Consolidated Statement of Operations. Included within discontinued operations are the impairment charges, results of operations, and professional fees associated with the transaction, for the three and six months ended December 31, 2017. The operations of the mall-based business and International segment, which were previously recorded in the North American Value, North American Premium and International reporting segments, have been eliminated from ongoing operations of the Company. The new Company-owned segment is comprised of its SmartStyle®, Supercuts® and Signature Style® concepts.

Restructuring of Company-Owned SmartStyle® Portfolio
In December 2017, the Company committed to close 597 non-performing Company-owned SmartStyle® salons in January 2018. The 597 non-performing salons generated negative cash flow of approximately $15 million during the twelve months ended September 30, 2017. The action delivers on the Company's commitment to restructure its salon portfolio to improve shareholder value and position the Company for long-term growth. The Company anticipates this action will allow the Company to reallocate capital and human resources to strategically grow its remaining SmartStyle® salons with creative new offerings.

As part of the agreement, the Company recorded a net $24.0 million charge to rent expense in the second quarter driven primarily by $27.3 million of one-time lease termination and other related closure costs, partially offset by a $3.3 million reversal of deferred rent for the impacted salons. The Company also committed to return the salons to its pre-occupancy condition, or “modified white boxes”, and recorded $7.5 million in depreciation expense. Additionally, as part of the closures, the Company recorded inventory and fixed asset impairments of $0.6 million and $5.4 million, respectively.

Second Quarter Segment Results
Company-Owned Salons

 

Three Months Ended
December 31,

 

(Decrease)
Increase

 

Six Months Ended
December 31,

 

(Decrease)
Increase

(Dollars in millions) (1) 2017   2016(2) 2017   2016(2)
 
Total Revenue $ 280.0 $ 296.2 (5.5)% $ 568.7 $ 595.6 (4.5)%
Same-Store Sales Comps (0.7 )% (2.5 )% 180 bps (0.2 )% (1.1 )% 90 bps
Year-over-Year Ticket change 2.5 % 3.0 %
Year-over-Year Traffic change (3.2 )% (3.2 )%
 
Gross Profit, as Adjusted(3) 117.7 116.3

1.2 %

242.1 239.5

1.1 %

as a percent of revenue 42.0 % 39.2 % 280 bps 42.6 % 40.2 % 240 bps
 
EBITDA, as Adjusted 26.5 26.9 (1.2)% 59.8 59.9 (0.2)%
as a percent of revenue 9.5 % 9.1 % 40 bps 10.5 % 10.1 % 40 bps

____________________________________

(1)   Variances calculated on amounts shown in millions may result in rounding differences.
(2) Amounts for fiscal year 2017 have been revised for discontinued operations due to the October sale of the mall-based business and the International segment.
(3) Gross profit, as Adjusted, excludes depreciation and amortization.
 

Second quarter revenue for the Company-owned salon segment decreased 5.5% versus the prior year to $280.0 million. The year-over-year decline in revenue was driven by the closure of unprofitable salons, the refranchising of salons, and a decrease in same-store sales of 0.7% partially offset by increase in average ticket and a favorable foreign currency impact in the Company’s Canadian business.

Second quarter adjusted EBITDA of $26.5 million declined $0.3 million, or 1.2% versus the same period last year driven primarily by same-store sales declines and investments in a strategic digital marketing campaign, partially offset by the closing of unprofitable salons, benefits from the Company's strategic initiative plan, and a one-time benefit related to the discontinuance of a limited loyalty program test.

Franchise Operations

 

Three Months Ended
December 31,

 

Increase
(Decrease)

 

Six Months Ended
December 31,

 

Increase
(Decrease)

(Dollars in millions) (1) 2017   2016(2) 2017   2016(2)
 
Total Revenue $ 28.6 $ 19.0 50.2% $ 49.6 $ 38.4 29.2%
 
EBITDA, as Adjusted 9.8 8.2 19.5% 19.6 16.7 17.2%
as a percent of revenue 34.3 % 43.1 % (880) bps 39.4 % 43.5 % (410) bps

_____________________

(1)   Variances calculated on amounts shown in millions may result in rounding differences.
(2) Amounts for fiscal year 2017 have been revised for discontinued operations due to the October sale of the mall-based business and the International segment.
 

Second quarter Franchise revenue was $28.6 million, a $9.5 million, or 50.2%, increase compared to the prior year quarter. Royalties and fees were $13.5 million, a $2.1 million, or 18.2% increase versus the same period last year. Royalties increased 9.9% driven primarily by positive same-store revenue and increased franchise salon counts. Initial franchise fees increased $1.2 million as the Company opened, or converted, a net 108 franchised locations in the quarter as compared to 41 in the prior year quarter. Franchise adjusted EBITDA of $9.8 million improved $1.6 million, or 19.5% year-over-year.

Other Company Updates
Consolidated Year-Over-Year General & Administrative ("G&A") Comparability
The Company announced during the first fiscal quarter a realignment of its field leadership team by brand. An outcome of this reorganization is that the costs associated with senior district leaders have been moved out of cost of goods sold and site operating expense, where the expense has historically been recorded, and into G&A. The Company notes that this change does not impact the overall consolidated results but does result in an $8.9 million decrease in cost of goods sold and site expense, and a corresponding $8.9 million increase to G&A this quarter, when compared to the comparable period last year. On a year-to-date basis, this reclassification of expenses decreased cost of goods sold and site expense, and had a corresponding increase to G&A, of $15.1 million versus the same period last year.

Transformational Strategy Update
The Company continued to make progress implementing its transformational strategy and operational turnaround initiatives focused on improving the performance of company-owned salons, while at the same time accelerating the growth of its franchise portfolio. During the quarter, the Company:

  • Closed on a transaction to sell, and subsequently franchise, substantially all of its mall-based salon business in North America and substantially all of its International segment. This transaction moved approximately 1,100 salons from the company-owned segment to the franchise segment.
  • Committed to closing 597 non-performing, cash flow negative Company-owned SmartStyle® salons in January 2018.
  • Executed a number of operational initiatives, building on its previously discussed 120-day plan, to help stabilize performance and establish a platform for longer-term revenue and earnings growth in Company-owned salons. The Company estimates the initiatives delivered benefit in a range of $7.0 million to $9.0 million in the second quarter of fiscal 2018.
  • Initiated a review of non-core, non-essential, G&A costs associated with the Company’s field and corporate restructuring efforts.
  • Announced its industry-exclusive agreement with LSMx, a Buxton local store marketing application. Buxton is a leading customer analytics provider for over 4,000 retailers. The Company currently intends to use LSMx, and its advanced customer data insights, to drive hyper-local, targeted marketing for its corporate and franchise salons.
  • Entered into an industry-exclusive, multi-year sponsorship with Major League Baseball ("MLB") for the Supercuts® brand. The Supercuts® sponsorship will be implemented throughout MLB’s core marketing platforms including broadcast, digital, mobile and social.
  • Greatly reduced the complexity of the service offerings in its SmartSyle® portfolio with the introduction of “Everyday Simple Pricing” while also introducing a new “Express Haircut” service targeted toward male guests who shop at Walmart®.

Tax Update
As a result of the recently enacted Tax Reform, the Company recognized a one-time, non-cash, tax benefit of $68.9 million in the quarter related to impacts on its deferred tax assets and liabilities. The reduction in U.S. Federal corporate income tax rates, and a change in the net operating loss rules, were the primary drivers of this benefit.

Non-GAAP reconciliations:
For GAAP to non-GAAP reconciliations, please refer to attached section titled "Non-GAAP Reconciliations". A complete reconciliation of reported earnings to adjusted earnings is included in this press release and is available on the Company’s website at www.regiscorp.com.

Earnings Webcast
Regis Corporation will host a conference call via webcast discussing second quarter results today, February 1, 2018, at 9 a.m., Central time. Interested parties are invited to participate in the live webcast by logging on to www.regiscorp.com or participate via telephone by dialing (800) 239-9838 and entering access code 6862837. A replay of the presentation will be available later that day. The replay phone number is (888) 203-1112, access code 6862837.

About Regis Corporation
Regis Corporation (NYSE:RGS) is a leader in beauty salons and cosmetology education. As of December 31, 2017, the Company owned, franchised or held ownership interests in 8,883 worldwide locations. Regis’ corporate and franchised locations operate under concepts such as Supercuts®, SmartStyle®, MasterCuts®, Regis Salons®, Sassoon®, Cost Cutters®, Roosters® and First Choice Haircutters®. Regis maintains an ownership interest in Empire Education Group in the U.S. For additional information about the Company, including a reconciliation of certain non-GAAP financial information and certain supplemental financial information, please visit the Investor Information section of the corporate website at www.regiscorp.com. To join Regis Corporation’s email alert list, click on this link:
http://www.b2i.us/irpass.asp?BzID=913&to=ea&Nav=1&S=0&L=1

This press release 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,” “believe,” “project,” “forecast,” “expect,” “estimate,” “anticipate,” and “plan.” In addition, the following factors could affect the Company’s actual results and cause such results to differ materially from those expressed in forward-looking statements. These factors include the continued ability of the Company to implement its strategy, priorities and initiatives; our ability to attract, train and retain talented stylists; financial performance of our franchisees; acceleration of sale of certain salons to franchisees; the ability of the Company to maintain a satisfactory relationship with Walmart; the success of The Beautiful Group, our largest franchisee; marketing efforts to drive traffic; changes in regulatory and statutory laws including increases in minimum wages; our ability to manage cyber threats and protect the security of sensitive information about our guests, employees, vendors or Company information; reliance on information technology systems; reliance on external vendors; competition within the personal hair care industry; changes in tax exposure; changes in healthcare; changes in interest rates and foreign currency exchange rates; failure to standardize operating processes across brands; consumer shopping trends and changes in manufacturer distribution channels; financial performance of Empire Education Group; the continued ability of the Company to implement cost reduction initiatives; compliance with debt covenants; changes in economic conditions; changes in consumer tastes and fashion trends; exposure to uninsured or unidentified risks; ability to attract and retain key management personnel; reliance on our management team and other key personnel or other factors not listed above. Additional information concerning potential factors that could affect future financial results is set forth in the Company’s Annual Report on Form 10-K for the year ended June 30, 2017. 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.

REGIS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited)

(Dollars in thousands, except share data)

   
December 31, June 30,
2017 2017
ASSETS
Current assets:
Cash and cash equivalents $ 163,300 $ 171,044
Receivables, net 31,895 19,683
Inventories 87,347 98,392
Other current assets 47,814 48,114
Current assets held for sale   32,914
Total current assets 330,356 370,147
 
Property and equipment, net 109,448 123,281
Goodwill 417,709 416,987
Other intangibles, net 11,416 11,965
Other assets 52,958 61,756
Noncurrent assets held for sale   27,352
Total assets $ 921,887   $ 1,011,488
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 52,738 $ 54,501
Accrued expenses 107,198 110,435
Current liabilities related to assets held for sale   13,126
Total current liabilities 159,936 178,062
 
Long-term debt, net 121,096 120,599
Other noncurrent liabilities 112,284 197,374
Noncurrent liabilities related to assets held for sale   7,232
Total liabilities 393,316   503,267
Commitments and contingencies
Shareholders’ equity:
Common stock, $0.05 par value; issued and outstanding 46,688,423 and 46,400,367 common shares at December 31, 2017 and June 30, 2017, respectively 2,335 2,320
Additional paid-in capital 216,301 214,109
Accumulated other comprehensive income 11,789 3,336
Retained earnings 298,146   288,456
 
Total shareholders’ equity 528,571   508,221
 
Total liabilities and shareholders’ equity $ 921,887   $ 1,011,488
 

REGIS CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)

For The Three and Six Months Ended December 31, 2017 and 2016

(Dollars and shares in thousands, except per share data amounts)

   
Three Months Ended Six Months Ended
December 31, December 31,
2017   2016 2017   2016
Revenues:
Service $ 223,214 $ 235,609 $ 458,773 $ 478,700
Product 71,816 68,229 132,756 131,945
Royalties and fees 13,485   11,411   26,859   23,435  
308,515   315,249   618,388   634,080  
Operating expenses:
Cost of service 134,850 151,193 274,686 301,990
Cost of product 39,864 34,584 70,026 65,399
Site operating expenses 32,119 32,638 65,422 65,283
General and administrative 48,592 36,695 83,758 72,611
Rent 65,473 45,091 107,889 91,324
Depreciation and amortization 24,951   12,646   37,206   24,755  
Total operating expenses 345,849   312,847   638,987   621,362  
 
Operating (loss) income (37,334 ) 2,402 (20,599 ) 12,718
 
Other (expense) income:
Interest expense (2,169 ) (2,153 ) (4,307 ) (4,316 )
Interest income and other, net 2,362   1,452   3,389   1,779  
 
(Loss) income from continuing operations before income taxes (37,141 ) 1,701 (21,517 ) 10,181
 
Income tax benefit (expense) 76,462   (719 ) 71,630   (3,459 )
 
Income from continuing operations 39,321   982   50,113   6,722  
 
Loss from discontinued operations, net of taxes (6,601 ) (3,201 ) (40,368 ) (5,660 )
 
Net income (loss) $ 32,720   $ (2,219 ) $ 9,745   $ 1,062  
 
Net income (loss) per share:
Basic:
Income from continuing operations $ 0.84 $ 0.02 $ 1.07 $ 0.15
Loss from discontinued operations (0.14 ) (0.07 ) (0.86 ) (0.12 )
Net income (loss) per share, basic (1) $ 0.70   $ (0.05 ) $ 0.21   $ 0.02  
Diluted:
Income from continuing operations $ 0.83 $ 0.02 $ 1.07 $ 0.14
Loss from discontinued operations (0.14 ) (0.07 ) (0.86 ) (0.12 )
Net income (loss) per share, diluted (1) $ 0.69   $ (0.05 ) $ 0.21   $ 0.02  
 
Weighted average common and common equivalent shares outstanding:
Basic 46,821   46,327   46,719   46,277  
Diluted 47,314   46,774   47,053   46,751  

_______________________________________________________________

(1) Total is a recalculation; line items calculated individually may not sum to total due to rounding.

REGIS CORPORATION (NYSE: RGS)

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) (Unaudited)

(Dollars in thousands)

   
Three Months Ended Six Months Ended
December 31, December 31,
2017   2016 2017   2016
Net income (loss) $ 32,720 $ (2,219 ) $ 9,745 $ 1,062
Foreign currency translation adjustments (381 ) (2,322 ) 2,301 (4,838 )
Reclassification adjustments for losses included in net income (loss) 6,152     6,152    
Comprehensive income (loss) $ 38,491   $ (4,541 ) $ 18,198   $ (3,776 )
 

REGIS CORPORATION (NYSE: RGS)

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW (Unaudited)

(Dollars in thousands)

 
Six Months Ended December 31,
2017   2016
Cash flows from operating activities:
Net income $ 9,745 $ 1,062
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Non-cash impairment related to discontinued operations 25,095
Depreciation and amortization 20,492 20,369
Depreciation related to discontinued operations 3,038 7,220
Deferred income taxes (77,055 ) 3,297
Gain on life insurance (7,986 )
Gain from sale of salon assets to franchisees, net(1) (18 ) (121 )
Salon asset impairments 16,714 4,386
Accumulated other comprehensive income reclassification adjustments 6,152
Stock-based compensation 4,618 4,400
Amortization of debt discount and financing costs 703 703
Other non-cash items affecting earnings (104 ) 64
Changes in operating assets and liabilities, excluding the effects of asset sales (13,647 ) (13,775 )
Net cash (used in) provided by operating activities (12,253 ) 27,605  
 
Cash flows from investing activities:
Capital expenditures (13,773 ) (15,510 )
Capital expenditures related to discontinued operations (1,171 ) (2,893 )
Proceeds from sale of assets to franchisees(1) 2,696 335
Change in restricted cash (542 ) 738
Proceeds from company-owned life insurance policies 18,108    
Net cash provided by (used in) investing activities 5,318   (17,330 )
 
Cash flows from financing activities:
Taxes paid for shares withheld (2,039 ) (1,113 )
Cash settlement of equity awards (375 )  
Net cash used in financing activities (2,414 ) (1,113 )
 
Effect of exchange rate changes on cash and cash equivalents 253   (866 )
 
(Decrease) increase in cash and cash equivalents (9,096 ) 8,296
 
Cash and cash equivalents:
Beginning of period 171,044 147,346
Cash and cash equivalents included in current assets held for sale 1,352    
Beginning of period, total cash and cash equivalents 172,396 147,346
End of period $ 163,300   $ 155,642  

_____________________________

(1) Excludes transaction with The Beautiful Group.

SAME-STORE SALES (1):

 
 
For the Three Months Ended
December 31, 2017   December 31, 2016
Service   Retail   Total Service   Retail   Total
SmartStyle (2.5 ) 0.5 (1.5 ) (1.5 ) (3.8 ) (2.3 )
Supercuts 2.1 (4.8 ) 1.4 (0.4 ) (7.1 ) (1.1 )
Signature Style (1.0 ) (3.4 ) (1.3 ) (3.3 ) (6.3 ) (3.7 )
Consolidated (0.7 )% (0.8 )% (0.7 )% (1.9 )% (4.7 )% (2.5 )%
 
For the Six Months Ended
December 31, 2017 December 31, 2016
Service Retail Total Service Retail Total
SmartStyle (0.8 ) 0.4 (0.5 ) (0.5 ) (2.3 ) (1.1 )
Supercuts 2.3 (5.3 ) 1.6 0.4 (4.2 )
Signature Style (0.6 ) (4.4 ) (1.1 ) (1.8 ) (2.8 ) (1.9 )
Consolidated 0.1 % (1.2 )% (0.2 )% (0.7 )% (2.6 )% (1.1 )%

____________________________________

(1) Same-store sales are calculated on a daily basis as the total change in sales for company-owned locations that were open on a specific day of the week during the current period and the corresponding prior period. Quarterly and year-to-date same-store sales are the sum of the same-store sales computed on a daily basis. Locations relocated within a one-mile radius are included in same-store sales as they are considered to have been open in the prior period. Same-store sales are calculated in local currencies to remove foreign currency fluctuations from the calculation.

REGIS CORPORATION (NYSE: RGS)

System-wide location counts

   
December 31, 2017 June 30, 2017
COMPANY-OWNED SALONS:
 
SmartStyle/Cost Cutters in Walmart Stores (1) 2,497 2,652
Supercuts 954 980
Signature Style 1,414 1,468
Mall locations (Regis and MasterCuts)   898  
Total North American Salons 4,865   5,998  
Total International Salons (2)   275  
Total Company-owned Salons 4,865   6,273  
as a percent of total Company-owned and Franchise salons 55.3 % 70.3 %
 
FRANCHISE SALONS:
 
SmartStyle in Walmart Stores 210 62
Cost Cutters in Walmart Stores 116 114
Supercuts 1,730 1,687
Signature Style 754   770  
Total non-mall franchise locations 2,810   2,633  
Mall franchise locations (Regis and MasterCuts) 849    
Total North American Salons 3,659   2,633  
Total International Salons (2) 270   13  
Total Franchise Salons 3,929   2,646  
as a percent of total Company-owned and Franchise salons 44.7 % 29.7 %
 
OWNERSHIP INTEREST LOCATIONS:
 
Equity ownership interest locations 89 89
   
Grand Total, System-wide 8,883   9,008  

____________________________________

(1) In January 2018, the Company closed 597 non-performing Company-owned SmartStyle salons.

(2) Canadian and Puerto Rican salons are included in the North American salon totals.

Non-GAAP Reconciliations

We believe our presentation of non-GAAP operating income, net income, net income per diluted share, and other non-GAAP financial measures provides meaningful insight into our ongoing operating performance and an alternative perspective of our results of operations. Presentation of the non-GAAP measures allows investors to review our core ongoing operating performance from the same perspective as management and the Board of Directors. These non-GAAP financial measures provide investors an enhanced understanding of our operations, facilitate investors’ analyses and comparisons of our current and past results of operations and provide insight into the prospects of our future performance. We also believe the non-GAAP measures are useful to investors because they provide supplemental information research analysts frequently use to analyze financial performance.

The method we use to produce non-GAAP results is not in accordance with U.S. GAAP and may differ from methods used by other companies. These non-GAAP results should not be regarded as a substitute for corresponding U.S. GAAP measures but instead should be utilized as a supplemental measure of operating performance in evaluating our business. Non-GAAP measures do have limitations in that they do not reflect certain items that may have a material impact upon our reported financial results. As such, these non-GAAP measures should be viewed in conjunction with both our financial statements prepared in accordance with U.S. GAAP and the reconciliation of the selected U.S. GAAP to non-GAAP financial measures, which are located in the Investor Information section of the corporate website at www.regiscorp.com.

Non-GAAP reconciling items for the three and six months ended December 31, 2017 and 2016:

The following information is provided to give qualitative and quantitative information related to items impacting comparability. Items impacting comparability are not defined terms within U.S. GAAP. Therefore, our non-GAAP financial information may not be comparable to similarly titled measures reported by other companies. We determine which items to consider as “items impacting comparability” based on how management views our business, makes financial, operating and planning decisions and evaluates the Company’s ongoing performance. The following items have been excluded from our non-GAAP results:

  • SmartStyle restructuring costs.
  • Severance expense for former executive officers.
  • Professional fees.
  • Executive transition costs.
  • Gain on life insurance proceeds.
  • Goodwill derecognition.
  • Impact of tax reform.
  • Discontinued operations.

REGIS CORPORATION

Reconciliation of selected U.S. GAAP to non-GAAP financial measures

(Dollars in thousands, except per share data)

(unaudited)

 
Reconciliation of U.S. GAAP operating (loss) income and net income (loss) to equivalent non-GAAP measures
    Three Months Ended   Six Months Ended
December 31, December 31,
U.S. GAAP financial line item 2017   2016 2017   2016
U.S. GAAP revenue $ 308,515 $ 315,249 $ 618,388 $ 634,080
 
U.S. GAAP operating (loss) income $ (37,334 ) $ 2,402 $ (20,599 ) $ 12,718
 
Non-GAAP operating adjustments (1)
SmartStyle restructuring costs Cost of product 585 585
Severance General and administrative 2,295 2,828
Professional fees General and administrative 806 673 1,636 673
Executive transition costs General and administrative 146 418
SmartStyle restructuring costs General and administrative 117 117
Gain on life insurance proceeds General and administrative (7,986 )
SmartStyle restructuring costs, net Rent 23,999 23,999
SmartStyle restructuring costs Depreciation and amortization 12,880     12,880  
Non-GAAP operating adjustments 40,828   673   34,477   673
Non-GAAP operating income (1) $ 3,494   $ 3,075   $ 13,878   $ 13,391
 
U.S. GAAP net income (loss) $ 32,720 $ (2,219 ) $ 9,745 $ 1,062
 
Non-GAAP net (loss) income adjustments:
Non-GAAP operating adjustments 40,828 673 34,477 673
Goodwill derecognition Interest income and other, net 271 542
Tax impact of non-GAAP adjustments (2) Income taxes (8,631 ) (8,631 )
Impact of tax reform Income taxes (68,903 ) (68,903 )
Discontinued operations

Loss from discontinued
operations, net of tax

6,601   3,201   40,368   5,660
Total non-GAAP net income adjustments (29,834 ) 3,874   (2,147 ) 6,333
Non-GAAP net income $ 2,886   $ 1,655   $ 7,598   $ 7,395

____________________________________

Notes:

(1)  

Adjusted operating margins for the three months ended December 31, 2017, and 2016, were 1.1% and 1.0%, respectively, and were 2.2% and 2.1% for the six months ended December 31, 2017, and 2016, respectively, and are calculated as non-GAAP operating income divided by U.S. GAAP revenue for each respective period.

(2) Based on projected statutory effective tax rate analyses, the non-GAAP tax provision was calculated to be approximately 21% for the three months ended December 31, 2017, for all non-GAAP operating expense adjustments. Non-GAAP operating expense adjustments recognized during the first quarter of fiscal year 2018 were not tax effected as a result of the valuation allowance. As a result of the valuation allowance, non-GAAP adjustments were not tax effected for the three and six months ended December 31, 2016.
 

REGIS CORPORATION

Reconciliation of selected U.S. GAAP to non-GAAP financial measures

(Dollars in thousands, except per share data)

(Unaudited)

 
Reconciliation of U.S. GAAP net income (loss) per diluted share to non-GAAP net income per diluted share
  Three Months Ended   Six Months Ended
December 31, December 31,
2017   2016 2017   2016
U.S. GAAP net income (loss) per diluted share $ 0.692 $ (0.047 ) $ 0.207 $ 0.023
SmartStyle restructuring costs, net (1) 0.628 0.631
Severance (1) 0.038 0.050
Professional fees (1) 0.013 0.014 0.031 0.014
Executive transition costs (1) 0.002 0.008
Gain on life insurance proceeds (1) (0.170 )
Goodwill derecognition (1) 0.005 0.010
Impact of tax reform (1.456 ) (1.464 )
Discontinued operations, net of tax 0.140   0.068   0.858   0.121
Non-GAAP net income per diluted share (2) $ 0.061   $ 0.035   $ 0.161   $ 0.158
 
U.S. GAAP Weighted average shares - basic 46,821 46,327 46,719 46,277
U.S. GAAP Weighted average shares - diluted 47,314 46,774 47,053 46,751
 

____________________________________

Notes:

(1)  

Based on projected statutory effective tax rate analyses, the non-GAAP tax provision was calculated to be approximately 21% for the three months ended December 31, 2017, for all non-GAAP operating expense adjustments. Non-GAAP operating expense adjustments recognized during the first quarter of fiscal year 2018 were not tax effected as a result of the valuation allowance. As a result of the valuation allowance, non-GAAP adjustments were not tax effected for the three and six months ended December 31, 2016.

(2) Total is a recalculation; line items calculated individually may not sum to total due to rounding.
 

REGIS CORPORATION

Summary of Pre-Tax, Income Taxes and Net Income Impact for Q2 FY18 Discrete Items

(Dollars in thousands)

(Unaudited)

     
Pre-Tax Income Taxes Net Income
SmartStyle restructuring costs $ 37,581 $ (7,891 ) $ 29,690
Severance 2,295 (483 ) 1,812
Professional fees 806 (169 ) 637
Executive transition costs 146 (31 ) 115
Goodwill derecognition 271 (57 ) 214
Impact of tax reform   (68,903 ) (68,903 )
$ 41,099   $ (77,534 ) $ (36,435 )
     
Discontinued operations, net of tax $   $   $ 6,601  
     
Total $ 41,099   $ (77,534 ) $ (29,834 )
 

REGIS CORPORATION
Reconciliation of reported U.S. GAAP net income (loss) to adjusted EBITDA, a non-GAAP financial measure
(Dollars in thousands)
(unaudited)

Adjusted EBITDA
EBITDA represents U.S. GAAP net income (loss) for the respective period excluding interest expense, income taxes and depreciation and amortization expense. The Company defines adjusted EBITDA, as EBITDA excluding identified items impacting comparability for each respective period. For the three and six months ended December 31, 2017 and 2016, the items impacting comparability consisted of the items identified in the non-GAAP reconciling items for the respective periods. The impacts of the income tax provision adjustments associated with the above items, impact of tax reform and the SmartStyle restructuring costs included within depreciation and amortization are already included in the U.S. GAAP reported net income (loss) to EBITDA reconciliation, therefore there is no adjustment needed for the reconciliation from EBITDA to adjusted EBITDA.

  Three Months Ended December 31, 2017
Company-      
owned Franchise Corporate Consolidated
Consolidated reported net income (loss), as reported (U.S. GAAP) $ (20,211 ) $ 9,703 $ 43,228 $ 32,720
Interest expense, as reported 2,169 2,169
Income taxes, as reported (76,462 ) (76,462 )
Depreciation and amortization, as reported   22,054   91   2,806     24,951  
EBITDA (as defined above) $ 1,843   $ 9,794 $ (28,259 ) $ (16,622 )
 
SmartStyle restructuring costs, net 24,686 15 24,701
Severance 2,295 2,295
Professional fees 806 806
Executive transition costs 146 146
Goodwill derecognition 271 271
Discontinued operations, net of tax       6,601     6,601  
Adjusted EBITDA, non-GAAP financial measure $ 26,529   $ 9,794 $ (18,125 ) $ 18,198  
 
Three Months Ended December 31, 2016
Company-
owned Franchise Corporate Consolidated
Consolidated reported net income (loss), as reported (U.S. GAAP) $ 16,658 $ 8,105

$

(26,982

)

$

(2,219

)

Interest expense, as reported 2,153 2,153
Income taxes, as reported 719 719
Depreciation and amortization, as reported   10,203   89   2,354     12,646  
EBITDA (as defined above) $ 26,861   $ 8,194

$

(21,756

)

$

13,299

 
 
Professional fees 673 673
Discontinued operations, net of tax       3,201     3,201  
Adjusted EBITDA, non-GAAP financial measure $ 26,861   $ 8,194

$

(17,882

)

$

17,173

 
 
  Six Months Ended December 31, 2017
Company-      
owned Franchise Corporate Consolidated
Consolidated reported net income (loss), as reported (U.S. GAAP) $ 3,139 $ 19,399 $ (12,793 ) $ 9,745
Interest expense, as reported 4,307 4,307
Income taxes, as reported (71,630 ) (71,630 )
Depreciation and amortization, as reported 31,948   183   5,075   37,206  
EBITDA (as defined above) $ 35,087 $ 19,582 $ (75,041 ) $ (20,372 )
 
SmartStyle restructuring costs, net 24,686 15 24,701
Severance 2,828 2,828
Professional fees 1,636 1,636
Executive transition costs 418 418
Gain on life insurance proceeds (7,986 ) (7,986 )
Goodwill derecognition 542 542
Discontinued operations, net of tax     40,368   40,368  
Adjusted EBITDA, non-GAAP financial measure $ 59,773 $ 19,582 $ (37,220 ) $ 42,135  
 
Six Months Ended December 31, 2016
Company-
owned Franchise Corporate Consolidated
Consolidated reported net income (loss), as reported (U.S. GAAP) $ 40,124 $ 16,535 $ (55,597 ) $ 1,062
Interest expense, as reported 4,316 4,316
Income taxes, as reported 3,459 3,459
Depreciation and amortization, as reported 19,798   179   4,778   24,755  
EBITDA (as defined above) $ 59,922 $ 16,714 $ (43,044 ) $ 33,592  
 
Professional fees 673 673
Discontinued operations, net of tax     5,660   5,660  
Adjusted EBITDA, non-GAAP financial measure $ 59,922 $ 16,714 $ (36,711 ) $ 39,925  
 

REGIS CORPORATION
Reconciliation by reportable segment of reported U.S. GAAP gross profit (excluding depreciation and amortization) to adjusted gross profit (excluding depreciation and amortization), a non-GAAP financial measure
(Dollars in thousands)
(Unaudited)

Gross profit
The Company defines gross profit as service and product revenues less cost of service and cost of product, excluding depreciation and amortization. Non-GAAP gross profit is gross profit, as defined by the Company, adjusted for items impacting comparability for each respective period.

  Three Months Ended December 31, 2017
Company-      
owned Franchise Corporate Consolidated
Revenues:
Service $ 223,214 $ $ $ 223,214
Product 56,748 15,068 71,816
279,962 15,068 295,030
 
Cost of service 134,850 134,850
Cost of product 28,044 11,820 39,864
162,894 11,820 174,714
 
U.S. GAAP gross profit(1) $ 117,068 $ 3,248 $ $ 120,316
 
Non-GAAP gross profit adjustments:
SmartStyle restructuring costs 585 585
Non-GAAP gross profit(1) $ 117,653 $ 3,248 $ $ 120,901
 

____________________________________

(1) Gross profit excludes depreciation and amortization.

  Three Months Ended December 31, 2016
Company-      
owned Franchise Corporate Consolidated
Revenues:
Service $ 235,609 $ $ $ 235,609
Product 60,636   7,593     68,229
296,245 7,593 303,838
 
Cost of service 151,193 151,193
Cost of product 28,783   5,801     34,584
179,976   5,801     185,777
       
U.S. GAAP and Non-GAAP gross profit(1) $ 116,269   $ 1,792   $   $ 118,061
 

____________________________________

(1) Gross profit excludes depreciation and amortization.

  Six Months Ended December 31, 2017
Company-      
owned Franchise Corporate Consolidated
Revenues:
Service $ 458,773 $ $ $ 458,773
Product 109,966 22,790 132,756
568,739 22,790 591,529
 
Cost of service 274,686 274,686
Cost of product 52,491 17,535 70,026
327,177 17,535 344,712
       
U.S. GAAP and Non-GAAP gross profit(1) $ 241,562 $ 5,255 $ $ 246,817
 
Non-GAAP gross profit adjustments:
SmartStyle restructuring costs 585 585
Non-GAAP gross profit(1) $ 242,147 $ 5,255 $ $ 247,402
 

____________________________________

(1) Gross profit excludes depreciation and amortization.

  Six Months Ended December 31, 2016
Company-      
owned Franchise Corporate Consolidated
Revenues:
Service $ 478,700 $ $ $ 478,700
Product 116,949 14,996 131,945
595,649 14,996 610,645
 
Cost of service 301,990 301,990
Cost of product 54,130 11,269 65,399
356,120 11,269 367,389
       
U.S. GAAP and Non-GAAP gross profit(1) $ 239,529 $ 3,727 $ $ 243,256
 

____________________________________

(1) Gross profit excludes depreciation and amortization.

REGIS CORPORATION

Reconciliation of reported U.S. GAAP revenue change to same-store sales

(unaudited)

   
Three Months Ended Six Months Ended
December 31, December 31,
2017   2016 2017   2016
Revenue decline, as reported (U.S. GAAP) (2.1 )% (2.2 )% (2.5 )% (1.7 )%
Effect of new stores and conversions (0.6 ) (0.5 ) (0.6 ) (0.5 )
Effect of closed salons 4.8 1.5 4.2 1.7
Franchise (2.5 ) 0.1 (1.5 )
Foreign currency (0.4 ) (0.3 )
Other 0.1   (1.4 ) 0.5   (0.6 )
Same-store sales, non-GAAP (0.7 )% (2.5 )% (0.2 )% (1.1 )%

Contacts

Regis Corporation:
Paul Dunn, 952-947-7915
VP, Finance and Investor Relations

Contacts

Regis Corporation:
Paul Dunn, 952-947-7915
VP, Finance and Investor Relations