Item 1. Financial Statements
REGIS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited)
(Dollars in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2018
|
|
June 30,
2017
|
ASSETS
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
105,200
|
|
|
$
|
171,044
|
|
Receivables, net
|
|
33,388
|
|
|
19,683
|
|
Inventories
|
|
81,131
|
|
|
98,392
|
|
Other current assets
|
|
46,488
|
|
|
48,114
|
|
Current assets held for sale (Note 1)
|
|
—
|
|
|
32,914
|
|
Total current assets
|
|
266,207
|
|
|
370,147
|
|
|
|
|
|
|
Property and equipment, net
|
|
104,127
|
|
|
123,281
|
|
Goodwill
|
|
415,503
|
|
|
416,987
|
|
Other intangibles, net
|
|
10,935
|
|
|
11,965
|
|
Other assets
|
|
60,433
|
|
|
61,756
|
|
Noncurrent assets held for sale (Note 1)
|
|
—
|
|
|
27,352
|
|
Total assets
|
|
$
|
857,205
|
|
|
$
|
1,011,488
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
Accounts payable
|
|
50,913
|
|
|
54,501
|
|
Accrued expenses
|
|
101,928
|
|
|
110,435
|
|
Current liabilities related to assets held for sale (Note 1)
|
|
—
|
|
|
13,126
|
|
Total current liabilities
|
|
152,841
|
|
|
178,062
|
|
|
|
|
|
|
Long-term debt, net
|
|
90,000
|
|
|
120,599
|
|
Other noncurrent liabilities
|
|
101,093
|
|
|
197,374
|
|
Noncurrent liabilities related to assets held for sale (Note 1)
|
|
—
|
|
|
7,232
|
|
Total liabilities
|
|
343,934
|
|
|
503,267
|
|
Commitments and contingencies (Note 6)
|
|
|
|
|
|
|
Shareholders’ equity:
|
|
|
|
|
|
|
Common stock, $0.05 par value; issued and outstanding 46,126,249 and 46,400,367 common shares at March 31, 2018 and June 30, 2017 respectively
|
|
2,306
|
|
|
2,320
|
|
Additional paid-in capital
|
|
208,149
|
|
|
214,109
|
|
Accumulated other comprehensive income
|
|
10,407
|
|
|
3,336
|
|
Retained earnings
|
|
292,409
|
|
|
288,456
|
|
|
|
|
|
|
Total shareholders’ equity
|
|
513,271
|
|
|
508,221
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity
|
|
$
|
857,205
|
|
|
$
|
1,011,488
|
|
The accompanying notes are an integral part of the unaudited Condensed Consolidated Financial Statements.
REGIS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
For The Three and
Nine Months Ended March 31, 2018
and
2017
(Dollars and shares in thousands, except per share data amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
Nine Months Ended
March 31,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Revenues:
|
|
|
|
|
|
|
|
|
Service
|
|
$
|
221,926
|
|
|
$
|
237,998
|
|
|
$
|
680,699
|
|
|
$
|
716,698
|
|
Product
|
|
64,887
|
|
|
63,844
|
|
|
197,643
|
|
|
195,789
|
|
Royalties and fees
|
|
13,988
|
|
|
11,636
|
|
|
40,847
|
|
|
35,071
|
|
|
|
300,801
|
|
|
313,478
|
|
|
919,189
|
|
|
947,558
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Cost of service
|
|
132,081
|
|
|
153,008
|
|
|
406,767
|
|
|
454,998
|
|
Cost of product
|
|
37,139
|
|
|
30,989
|
|
|
107,165
|
|
|
96,388
|
|
Site operating expenses
|
|
31,021
|
|
|
30,604
|
|
|
96,443
|
|
|
95,887
|
|
General and administrative
|
|
45,727
|
|
|
45,694
|
|
|
129,485
|
|
|
118,305
|
|
Rent
|
|
39,391
|
|
|
45,821
|
|
|
147,280
|
|
|
137,145
|
|
Depreciation and amortization
|
|
9,558
|
|
|
13,576
|
|
|
46,764
|
|
|
38,331
|
|
Total operating expenses
|
|
294,917
|
|
|
319,692
|
|
|
933,904
|
|
|
941,054
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
5,884
|
|
|
(6,214
|
)
|
|
(14,715
|
)
|
|
6,504
|
|
|
|
|
|
|
|
|
|
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
Interest expense
|
|
(5,095
|
)
|
|
(2,125
|
)
|
|
(9,402
|
)
|
|
(6,441
|
)
|
Interest income and other, net
|
|
1,785
|
|
|
357
|
|
|
5,174
|
|
|
2,136
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
2,574
|
|
|
(7,982
|
)
|
|
(18,943
|
)
|
|
2,199
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit (expense)
|
|
2,225
|
|
|
(3,858
|
)
|
|
73,855
|
|
|
(7,317
|
)
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
4,799
|
|
|
(11,840
|
)
|
|
54,912
|
|
|
(5,118
|
)
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of taxes (Note 1)
|
|
(10,605
|
)
|
|
(6,615
|
)
|
|
(50,973
|
)
|
|
(12,275
|
)
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(5,806
|
)
|
|
$
|
(18,455
|
)
|
|
$
|
3,939
|
|
|
$
|
(17,393
|
)
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share:
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
0.10
|
|
|
$
|
(0.26
|
)
|
|
$
|
1.18
|
|
|
$
|
(0.11
|
)
|
Loss from discontinued operations
|
|
(0.23
|
)
|
|
(0.14
|
)
|
|
(1.09
|
)
|
|
(0.27
|
)
|
Net (loss) income per share, basic (1)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.40
|
)
|
|
$
|
0.08
|
|
|
$
|
(0.38
|
)
|
Diluted:
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
0.10
|
|
|
$
|
(0.26
|
)
|
|
$
|
1.17
|
|
|
$
|
(0.11
|
)
|
Loss from discontinued operations
|
|
(0.22
|
)
|
|
(0.14
|
)
|
|
(1.08
|
)
|
|
(0.27
|
)
|
Net (loss) income per share, diluted (1)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.40
|
)
|
|
$
|
0.08
|
|
|
$
|
(0.38
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average common and common equivalent shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
46,612
|
|
|
46,360
|
|
|
46,684
|
|
|
46,304
|
|
Diluted
|
|
47,153
|
|
|
46,360
|
|
|
47,093
|
|
|
46,304
|
|
_______________________________________________________________________________
|
|
(1)
|
Total is a recalculation; line items calculated individually may not sum to total due to rounding.
|
The accompanying notes are an integral part of the unaudited Condensed Consolidated Financial Statements.
REGIS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE (LOSS) INCOME (Unaudited)
For The Three and
Nine Months Ended March 31, 2018
and
2017
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
Nine Months Ended
March 31,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Net (loss) income
|
|
$
|
(5,806
|
)
|
|
$
|
(18,455
|
)
|
|
$
|
3,939
|
|
|
$
|
(17,393
|
)
|
Other comprehensive (loss) income, net of tax:
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments during the period:
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
(1,382
|
)
|
|
248
|
|
|
919
|
|
|
(4,590
|
)
|
Reclassification adjustments for losses included in net (loss) income (Note 1)
|
|
—
|
|
|
—
|
|
|
6,152
|
|
|
—
|
|
Net current period foreign currency translation adjustments
|
|
(1,382
|
)
|
|
248
|
|
|
7,071
|
|
|
(4,590
|
)
|
Recognition of deferred compensation
|
|
—
|
|
|
(22
|
)
|
|
—
|
|
|
(22
|
)
|
Other comprehensive (loss) income
|
|
(1,382
|
)
|
|
226
|
|
|
7,071
|
|
|
(4,612
|
)
|
Comprehensive (loss) income
|
|
$
|
(7,188
|
)
|
|
$
|
(18,229
|
)
|
|
$
|
11,010
|
|
|
$
|
(22,005
|
)
|
The accompanying notes are an integral part of the unaudited Condensed Consolidated Financial Statements.
REGIS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
For The
Nine Months Ended March 31, 2018
and
2017
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended March 31,
|
|
|
2018
|
|
2017
|
Cash flows from operating activities:
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
3,939
|
|
|
$
|
(17,393
|
)
|
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
|
|
|
|
|
|
Non-cash impairment related to discontinued operations
|
|
37,020
|
|
|
—
|
|
Depreciation and amortization
|
|
29,736
|
|
|
30,709
|
|
Depreciation related to discontinued operations
|
|
3,723
|
|
|
10,642
|
|
Equity in loss of affiliated companies
|
|
—
|
|
|
50
|
|
Deferred income taxes
|
|
(81,006
|
)
|
|
6,419
|
|
Gain on life insurance
|
|
(7,986
|
)
|
|
—
|
|
Gain from sale of salon assets to franchisees, net(1)
|
|
(255
|
)
|
|
(53
|
)
|
Salon asset impairments
|
|
11,099
|
|
|
7,622
|
|
Accumulated other comprehensive income reclassification adjustments (Note 1)
|
|
6,152
|
|
|
—
|
|
Stock-based compensation
|
|
6,483
|
|
|
9,498
|
|
Amortization of debt discount and financing costs
|
|
4,011
|
|
|
1,054
|
|
Other non-cash items affecting earnings
|
|
(286
|
)
|
|
150
|
|
Changes in operating assets and liabilities, excluding the effects of asset sales
|
|
(35,268
|
)
|
|
(1,884
|
)
|
Net cash (used in) provided by operating activities
|
|
(22,638
|
)
|
|
46,814
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Capital expenditures
|
|
(20,065
|
)
|
|
(20,296
|
)
|
Capital expenditures related to discontinued operations
|
|
(1,171
|
)
|
|
(5,124
|
)
|
Proceeds from sale of assets to franchisees(1)
|
|
5,620
|
|
|
594
|
|
Change in restricted cash
|
|
(327
|
)
|
|
999
|
|
Proceeds from company-owned life insurance policies
|
|
18,108
|
|
|
876
|
|
Net cash provided by (used in) investing activities
|
|
2,165
|
|
|
(22,951
|
)
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
Borrowings on revolving credit facility
|
|
90,000
|
|
|
—
|
|
Repayments of long-term debt
|
|
(124,230
|
)
|
|
—
|
|
Repurchase of common stock
|
|
(9,634
|
)
|
|
—
|
|
Taxes paid for shares withheld
|
|
(2,279
|
)
|
|
(1,228
|
)
|
Cash settlement of equity awards
|
|
(550
|
)
|
|
(440
|
)
|
Net cash used in financing activities
|
|
(46,693
|
)
|
|
(1,668
|
)
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
(30
|
)
|
|
(852
|
)
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
(67,196
|
)
|
|
21,343
|
|
|
|
|
|
|
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
|
|
$
|
105,200
|
|
|
$
|
168,689
|
|
__________________________________________________________
(1) Excludes transaction with The Beautiful Group.
The accompanying notes are an integral part of the unaudited Condensed Consolidated Financial Statements.
REGIS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
1.
|
BASIS OF PRESENTATION OF UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
|
The unaudited interim Condensed Consolidated Financial Statements of Regis Corporation (the "Company") as of
March 31, 2018
and for the three and
nine
months ended
March 31, 2018
and
2017
, reflect, in the opinion of management, all adjustments necessary to fairly state the consolidated financial position of the Company as of
March 31, 2018
and its consolidated results of operations,
comprehensive (loss) income
and cash flows for the interim periods. Adjustments consist only of normal recurring items, except for any discussed in the notes below. The results of operations and cash flows for any interim period are not necessarily indicative of results of operations and cash flows for the full year.
The Condensed Consolidated Balance Sheet data for
June 30, 2017
was derived from audited Consolidated Financial Statements, but includes unaudited adjustments for assets and liabilities held for sale and does not include all disclosures required by accounting principles generally accepted in the United States of America (GAAP). The unaudited interim Condensed Consolidated Financial Statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended
June 30, 2017
and other documents filed or furnished with the Securities and Exchange Commission (SEC) during the current fiscal year.
Discontinued Operations:
In October 2017, the Company sold 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 UK, to The Bea
utiful Group ("TBG"), an affiliate of Regent, a private equity firm based in Los Angeles, California, who will operate these locations as franchise locations. As part of the sale of the mall-based business, TBG
agreed to pay for the value of certain inventory and assumed specific liabilities, including lease liabilities. For the International segment, the Company entered into a share purchase agreement with TBG for minimal consideration.
As of September 30, 2017, the Company 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. 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.
In connection with the sale of the mall-based business and the International segment as part of our held for sale assessment at September 30, 2017, the Company performed an impairment assessment of the asset groups. The Company recognized net impairment charges within discontinued operations based on the difference between the expected sale prices and the carrying value of the asset groups.
In March 2018, the Company entered into discussions with TBG regarding a waiver of working capital and prepaid rent payments associated with the original transaction and the financing of certain receivables to assist TBG with its cash flow and operational needs.
Based on the status of these discussions at
March 31, 2018
, the Company fully reserved the working capital and prepaid rent amount of
$11.7 million
, which was recorded within discontinued operations, net of taxes on the Condensed Consolidated Statement of Operations.
In addition, the Company reclassified
$8.0 million
of accounts receivables due from TBG to other assets as these receivables are expected to be collected more than twelve months in the future. Should the Company need to record reserves against its current and future receivables from TBG, these reserves would be recorded within general and administrative expenses.
The following summarizes the results of our discontinued operations for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
For the Nine Months Ended March 31,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
(Dollars in thousands)
|
Revenues
|
|
$
|
—
|
|
|
$
|
99,125
|
|
|
$
|
101,140
|
|
|
$
|
320,130
|
|
Loss from discontinued operations, before income taxes
|
|
(13,545
|
)
|
|
(6,565
|
)
|
|
(57,385
|
)
|
|
(12,225
|
)
|
Income tax benefit on discontinued operations
|
|
2,940
|
|
|
—
|
|
|
6,412
|
|
|
—
|
|
Equity in loss of affiliated companies, net of tax
|
|
—
|
|
|
(50
|
)
|
|
—
|
|
|
(50
|
)
|
Loss from discontinued operations, net of income taxes
|
|
$
|
(10,605
|
)
|
|
$
|
(6,615
|
)
|
|
$
|
(50,973
|
)
|
|
$
|
(12,275
|
)
|
For the three months ended
March 31, 2018
, included within the
$10.6 million
loss from discontinued operations are
$11.7 million
of asset impairment charges as a result of the reserve of the working capital and prepaid rent associated with the original transaction,
$1.2
million of loss from operations primarily associated with prior year reserves adjustments and
$0.6 million
of professional fees associated with the transaction, partly offset by
$2.9 million
income tax benefit. For the
nine
months ended
March 31, 2018
, included within the $
51.0 million
loss from discontinued operations are
$40.8 million
of asset impairment charges,
$6.2 million
of cumulative foreign currency translation adjustment associated with the Company's liquidation of substantially all foreign entities with British pound denominated entities,
$4.0 million
of loss from operations and
$6.4 million
of professional fees associated with the transaction, partly offset by a
$6.4 million
income tax benefit.
Income taxes have been allocated to continuing and discontinued operations based on the methodology required by interim reporting and accounting for income taxes guidance. See Note 5 to the unaudited Condensed Consolidated Financial Statements for further discussion regarding Staff Accounting Bulletin ("SAB") 118.
The Company utilized the consolidation of variable interest entities guidance to determine whether or not TBG was a variable interest entity (VIE), and if so, whether the Company was the primary beneficiary of TBG. As of
March 31, 2018
, the Company concluded that TBG is a VIE based on the fact that the equity investment at risk in TBG is not sufficient. The Company determined that it is not the primary beneficiary of TBG based on its exposure to the expected losses of TBG and as it is not the variable interest holder that is most closely associated within the relationship and the significance of the activities of TBG. The exposure to loss related to the Company's involvement with TBG is the carrying value of the amounts due from TBG and the guarantee of the operating leases.
Within salon asset impairments presented in the Consolidated Statement of Cash Flows for the
nine
months ended
March 31, 2017
,
$2.3 million
of salon asset impairments were related to discontinued operations. Other than the salon asset impairments and the other items presented in the Consolidated Statement of Cash Flows, there were no other significant non-cash operating activities or any significant non-cash investing activities related to discontinued operations for the
nine
months ended
March 31, 2018
and 2017.
SmartStyle
®
Salon Restructuring:
In January 2018 the Company closed
597
non-performing Company owned SmartStyle salons.
A summary of costs associated with the SmartStyle salon restructuring for the three and
nine
months ended
March 31, 2018
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Financial Line Item
|
|
Three Months Ended
March 31, 2018
|
|
Nine Months Ended
March 31, 2018
|
|
|
|
(Dollars in thousands)
|
Inventory reserves
|
Cost of Product
|
|
$
|
—
|
|
|
$
|
585
|
|
Severance
|
General and administrative
|
|
897
|
|
|
897
|
|
Long-lived fixed asset impairment
|
Depreciation and amortization
|
|
42
|
|
|
5,460
|
|
Asset retirement obligation
|
Depreciation and amortization
|
|
—
|
|
|
7,462
|
|
Lease termination and other related closure costs
|
Rent
|
|
—
|
|
|
27,290
|
|
Deferred rent
|
Rent
|
|
—
|
|
|
(3,291
|
)
|
Total
|
|
|
$
|
939
|
|
|
$
|
38,403
|
|
Stock-Based Employee Compensation:
During the three and
nine
months ended
March 31, 2018
, the Company granted various equity awards including restricted stock units (RSUs) and performance-based restricted stock units (PSUs).
A summary of equity awards granted is as follows:
|
|
|
|
|
|
|
|
|
|
For the Periods Ended March 31, 2018
|
|
|
Three Months
|
|
Nine Months
|
Restricted stock units
|
|
10,425
|
|
|
308,394
|
|
Performance-based restricted stock units
|
|
9,960
|
|
|
163,572
|
|
Total compensation cost for stock-based payment arrangements totaled
$1.9
and
$5.1 million
for the three months ended
March 31, 2018
and
2017
, respectively, and
$6.5
and
$9.5 million
for the
nine
months ended
March 31, 2018
and
2017
, respectively, recorded within general and administrative expense on the unaudited Condensed Consolidated Statement of Operations. Total compensation cost for stock-based payment arrangements related to the termination of former executive officers for the three and nine months ended
March 31, 2018
includes
zero
and
$1.2 million
, respectively, and
$2.6 million
and
$2.6 million
for the three and
nine
months ended March 31,
2017
, respectively. In connection with the terminations of former executive officers, the Company settled certain PSUs for cash of
$0.2 million
and
$0.4 million
during the three months ended
March 31, 2018
and
2017
, respectively, and
$0.6 million
and
$0.4 million
during the
nine
months ended
March 31, 2018
and
2017
, respectively.
Long-Lived Asset Impairment Assessments, Excluding Goodwill:
The Company assesses impairment of long-lived assets at the individual salon level, as this is the lowest level for which identifiable cash flows are largely independent of other groups of assets and liabilities, when events or changes in circumstances indicate the carrying value of the assets or the asset grouping may not be recoverable. Factors considered in deciding when to perform an impairment review include significant under-performance of an individual salon in relation to expectations, significant economic or geographic trends, and significant changes or planned changes in our use of the assets. Impairment is evaluated based on the sum of undiscounted estimated future cash flows expected to result from use of the long-lived assets. If the undiscounted estimated cash flows are less than the carrying value of the assets, the Company calculates an impairment charge based on the estimated fair value of the assets. The fair value of the long-lived assets is estimated using a discounted cash flow model based on the best information available, including salon level revenues and expenses. Long-lived asset impairment charges of
$0.3
and
$3.2 million
for the three months ended
March 31, 2018
and
2017
, respectively, and
$9.6 million
and
$7.6 million
for the
nine
months ended
March 31, 2018
and
2017
, respectively, have been recorded within depreciation and amortization in the Consolidated Statement of Operations. As of
March 31, 2018
, the remaining unpaid asset retirement obligation related to the SmartStyle salon restructuring was
$1.5 million
and included in salon assets impairment for the nine months ended
March 31, 2018
on the Condensed Consolidated Statement of Cash Flows.
A
ccounting Standards Recently Issued But Not Yet Adopted by the Company:
Leases
In February 2016, the FASB issued updated guidance requiring organizations that lease assets to recognize the rights and obligations created by those leases on the consolidated balance sheet. The new standard is effective for the Company in the first quarter of fiscal year 2020, with early adoption permitted. The Company is currently evaluating the effect the new standard will have on the Company's consolidated financial statements but expects this adoption will result in a material increase in the assets and liabilities on the Company's consolidated balance sheet.
Revenue from Contracts with Customers
In May 2014, the FASB issued updated guidance for revenue recognition. The updated accounting guidance provides a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the exchange for goods or services to a customer at an amount that reflects the consideration it expects to receive for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. The guidance is effective for the Company in the first quarter of fiscal year 2019, with early adoption permitted at the beginning of fiscal year 2018. The standard allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or modified retrospective adoption, meaning the standard is applied only to the most current period presented in the financial statements. The Company expects to adopt this guidance in fiscal year 2019 using the full retrospective method of adoption.
The Company does not believe the standard will impact its recognition of point-of-sale revenue in company-owned salons, or royalties. The Company believes the standard will impact the recognition of advertising fund contributions, initial franchise fees revenue and gift card breakage. The Company has various franchising programs to support its franchise salon concepts, with most including advertising funds that provide comprehensive advertising and sales promotion support. The Company does not currently recognize franchisee contributions to and subsequent expenditures from advertising funds in its revenues and expenses. Upon adoption of the new standard, the Company will include contributions to and expenditures from the advertising funds within its Consolidated Statements of Operations and of Cash Flows. This change has the potential to materially impact the Company's gross amount of revenues, expenses and net income as a result of timing associated with the collection of contributions and subsequent distributions. The Company licenses intellectual property and trademarks to franchisees through franchise agreements. As part of these agreements, the Company receives an initial franchise fee payment which is currently recognized as revenue when the salon opens. Upon adoption of the new standard initial franchise fees will generally be recognized as revenue over the life of the initial contract. The Company sells gift cards to customers and records the sale as a liability. The liability is released to revenue once the card is redeemed. Historically a portion of these gift card sales have never been redeemed by the customer (“breakage”). Currently the Company recognizes breakage when redemption is considered remote. Upon adoption of the new standard, expected breakage is anticipated to be recognized as customers redeem the gift cards rather than only when redemption is considered remote. The Company is currently in the process of quantifying the consolidated financial statement impact of the areas impacted by the standard.
The Company is continuing its assessment, including the impact on internal controls, which may identify additional impacts this standard will have on its consolidated financial statements and related disclosures.
Intra-Entity Transfers Other Than Inventory
In October 2016, the FASB issued guidance on the accounting for income tax effects of intercompany transfers of assets other than inventory. The guidance requires entities to recognize the income tax impact of an intra-entity transfer of an asset other than inventory when the transfer occurs, rather than when the assets have been sold to an outside party. The guidance is effective for the Company in the first quarter of fiscal year 2019, with early adoption permitted. The Company does not expect the adoption of this standard to have a material impact on the Company's consolidated financial statements.
Restricted Cash
In November 2016, the FASB issued updated cash flow guidance requiring restricted cash and restricted cash equivalents to be included in the cash and cash equivalent balances in the statement of cash flows. Transfers between cash and cash equivalents and restricted cash will no longer be presented in the statement of cash flows and a reconciliation between the balance sheet and statement of cash flows must be disclosed. The guidance is effective for the Company beginning in the first quarter of fiscal year 2019, with early adoption permitted. The Company is currently evaluating the impact this guidance will have on the Company's consolidated statement of cash flows.
Statement of Cash Flows
In August 2016, the FASB issued updated cash flow guidance clarifying cash flow classification and presentation for certain items. The guidance is effective for the Company beginning in the first quarter of fiscal year 2019, with early adoption permitted. The Company does not expect the adoption of this standard to have a material impact on the Company's consolidated statement of cash flows.
2.
INVESTMENT IN AFFILIATES:
Empire Education Group, Inc. (EEG)
As of
March 31, 2018
, the Company had a
54.6%
ownership interest in EEG and
no
remaining investment value as the Company fully impaired its investment in EEG as of December 31, 2015. The Company has not recorded any equity income or losses related to its investment in EEG subsequent to the impairment. The Company will record equity income related to the Company's investment in EEG once EEG's cumulative income exceeds its cumulative losses, measured from the date of impairment.
While the Company could be responsible for certain liabilities associated with this venture, the Company does not currently expect them to have a material impact on the Company's financial position.
The table below presents the summarized Statement of Operations information for EEG:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended March 31,
|
|
For the Nine Months
Ended March 31,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
(Unaudited)
|
|
(Dollars in thousands)
|
Gross revenues
|
|
$
|
32,398
|
|
|
$
|
32,660
|
|
|
$
|
97,997
|
|
|
$
|
93,715
|
|
Gross profit
|
|
8,856
|
|
|
10,287
|
|
|
28,254
|
|
|
27,429
|
|
Operating (loss) income
|
|
(1,003
|
)
|
|
554
|
|
|
(142
|
)
|
|
336
|
|
Net (loss) income
|
|
(1,072
|
)
|
|
425
|
|
|
(382
|
)
|
|
(48
|
)
|
The Company’s basic earnings per share is calculated as net income (loss) divided by weighted average common shares outstanding, excluding unvested outstanding restricted stock awards, RSUs and PSUs. The Company’s diluted earnings per share is calculated as net income (loss) divided by weighted average common shares and common share equivalents outstanding, which includes shares issued under the Company’s stock-based compensation plans. Stock-based awards with exercise prices greater than the average market price of the Company’s common stock are excluded from the computation of diluted earnings per share.
For the three and
nine
months ended
March 31, 2018
,
541,405
and
409,646
, respectively, common stock equivalents of dilutive common stock were included in the diluted earnings per share calculations due to the net income from continuing operations. For the three and
nine
months ended March 31,
2017
,
492,524
and
547,171
, respectively, common stock equivalents of dilutive common stock were excluded in the diluted earnings per share calculations due to the net loss from continuing operations.
The computation of weighted average shares outstanding, assuming dilution, excluded
550,948
and
2,239,467
of stock-based awards during the three months ended
March 31, 2018
and
2017
, respectively, and
730,377
and
2,317,889
of stock-based award during the
nine
months ended
March 31, 2018
and
2017
, respectively, as they were not dilutive under the treasury stock method.
Additional Paid-In Capital:
The
$6.0 million
decrease
in additional paid-in capital during the
nine
months ended
March 31, 2018
was primarily due to
$9.6 million
of common stock repurchases and
$2.9 million
of other stock-based compensation activity, primarily shares forfeited for withholdings on vestings, partly offset by
$6.5 million
of stock-based compensation.
During the three and
nine
months ended
March 31, 2018
, the Company repurchased
585,967
shares for
$9.6 million
under a previously approved stock repurchase program. At
March 31, 2018
,
$50.4 million
remains outstanding under the approved stock repurchase program.
A summary of income tax benefit (expense) and corresponding effective tax rates is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended March 31,
|
|
For the Nine Months
Ended March 31,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
(Dollars in thousands)
|
Income tax benefit (expense)
|
|
$
|
2,225
|
|
|
$
|
(3,858
|
)
|
|
$
|
73,855
|
|
|
$
|
(7,317
|
)
|
Effective tax rate
|
|
86.4
|
%
|
|
48.3
|
%
|
|
389.9
|
%
|
|
332.7
|
%
|
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code including, but not limited to, (1) reducing the U.S. federal corporate tax rate from
35 percent
to
21 percent
; (2) changing rules related to net operating losses ("NOL") carryforwards and carrybacks; (3) eliminating the corporate alternative minimum tax (“AMT”) and changing how existing AMT credits can be realized; (4) requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries; (5) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (6) allowing full expensing of qualified property; (7) creating a new base erosion anti-abuse minimum tax (“BEAT”) and provisions designed to tax global intangible low-taxed income (“GILTI”); (8) adding rules that limit the deductibility of interest expense; and (9) adding new provisions that further restrict the deductibility of certain executive compensation.
Due to the Company's fiscal year end, different provisions of the Tax Act will become applicable at varying dates. Nonetheless, the Company is required to recognize the effects of the rate change and enacted legislation on its deferred tax assets and liabilities in the period of enactment.
The SEC staff issued Staff Accounting Bulletin ("SAB") 118, which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under Accounting Standards Codification (ASC) 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
In connection with the Tax Act, the Company recorded a provisional net tax benefit of
$68.9 million
in continuing operations during the nine months ended March 31, 2018. The
$68.9 million
net tax benefit is comprised of
$31.0 million
for the partial
release of the U.S. valuation allowance and
$37.9 million
associated with remeasurement of the deferred tax accounts. The benefit recognized on current losses and the partial valuation allowance release is solely attributable to tax reform and the law change that allows for the indefinite carryforward of NOLs arising in tax years ending after December 31, 2017. Prior law limited the carryforward period to 20 years. As a result of the new tax rules, the Company can now consider its indefinite lived deferred tax liabilities as a source of income to support the realization of its existing deferred tax assets that upon reversal are expected to generate indefinite lived NOLs. Consequently, the Company is able to remove the valuation allowance associated with these deferred tax assets. The Company continues to maintain a valuation allowance on the historical balance of its finite lived federal NOLs, tax credits and various state tax attributes. We are still analyzing certain aspects of the Tax Act and refining our calculations, which could potentially affect the measurement of our deferred tax balances and ultimately cause us to revise our provisional estimate in future periods in accordance with SAB 118. In addition, changes in interpretations, assumptions, and guidance regarding the new tax legislation, as well as the potential for technical corrections to the Tax Act, could have a material impact to the Company’s effective tax rate in future periods.
The IRS examination associated with the Company’s U.S. federal income tax returns for fiscal years 2010 through 2013 was finalized during the period ended March 31, 2018. Closure of the examination resulted in adjustments to existing tax attributes and did not result in any cash outflow. The Company is no longer subject to IRS examinations for years before 2013. Furthermore, with limited exceptions, the Company is no longer subject to state and international income tax examinations by tax authorities for years before 2012.
The recorded tax provisions and effective tax rates for the three and nine months ended March 31, 2018 and three and nine months ended March 31, 2017 were different than what would normally be expected primarily due to the impact of the federal Tax Act and state conformity of the new federal provisions, closure of the IRS examination and the deferred tax valuation allowance. The majority of the tax provision in periods ended prior to December 31, 2017 related to non-cash tax expense for tax benefits on certain indefinite-lived assets that the Company could not recognize for reporting purposes.
|
|
6.
|
COMMITMENTS AND CONTINGENCIES:
|
The Company is a defendant in various lawsuits and claims arising out of the normal course of business. Like certain other large retail employers, the Company has been faced with allegations of purported class-wide consumer and wage and hour violations. Litigation is inherently unpredictable and the outcome of these matters cannot presently be determined. Although the actions are being vigorously defended, the Company could in the future incur judgments or enter into settlements of claims that could have a material adverse effect on its results of operations in any particular period.
7. GOODWILL AND OTHER INTANGIBLES:
During the first quarter of fiscal year
2018
, the Company experienced a triggering event due to the redefining of its operating segments as a result of the sale of the mall-based business and the International segment. See Note 10 to the unaudited Condensed Consolidated Financial Statements. The Company utilized the Step 0 goodwill impairment assessment during the first quarter. As part of this assessment, the Company evaluated qualitative factors to determine whether it was more likely than not that the fair value of the reporting units was less than its carrying value. The Company determined it was "more-likely-than-not" that the carrying values of the reporting units were less than the fair values. The Company now reports its operations in
two
reportable segments: Company-owned salons and Franchise salons. The Company considered whether any goodwill associated with the MasterCuts salons should be allocated as part of the sale of the mall-based business and considered for impairment. The Company determined
no
goodwill should be allocated to the mall-based business because the salons sold were projected to produce operating losses in the future and had minimal fair value. All goodwill associated with the North American Premium and International segments was previously impaired. Pursuant to the change in operating segments, the Company compared the fair value of the remaining salons in the Company-owned reporting unit to its carrying value and concluded the fair value exceeded its carrying value by a substantial margin, resulting in
no
goodwill impairment.
The table below contains details related to the Company's goodwill:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-owned
|
|
Franchise
|
|
Consolidated
|
|
|
(Dollars in thousands)
|
Goodwill, net at June 30, 2017
|
|
$
|
188,888
|
|
|
$
|
228,099
|
|
|
$
|
416,987
|
|
Translation rate adjustments
|
|
104
|
|
|
126
|
|
|
230
|
|
Derecognition related to sale of salon assets to franchisees (1)
|
|
(1,714
|
)
|
|
—
|
|
|
(1,714
|
)
|
Goodwill, net at March 31, 2018
|
|
$
|
187,278
|
|
|
$
|
228,225
|
|
|
$
|
415,503
|
|
_______________________________________________________________________________
|
|
(1)
|
Goodwill is derecognized for salons sold to franchisees with positive cash flows. The amount of goodwill derecognized is determined by a fraction (the numerator of which is the trailing-twelve months EBITDA of the salon being sold and the denominator of which is the estimated annualized EBITDA of the Company-owned reporting unit) that is applied to the total goodwill balance of the Company-owned reporting unit.
|
The table below presents other intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
June 30, 2017
|
|
|
Cost (1)
|
|
Accumulated
Amortization (1)
|
|
Net
|
|
Cost (1)
|
|
Accumulated
Amortization (1)
|
|
Net
|
|
|
(Dollars in thousands)
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brand assets and trade names
|
|
$
|
8,218
|
|
|
$
|
(4,234
|
)
|
|
$
|
3,984
|
|
|
$
|
8,187
|
|
|
$
|
(4,013
|
)
|
|
$
|
4,174
|
|
Franchise agreements
|
|
9,867
|
|
|
(7,708
|
)
|
|
2,159
|
|
|
9,832
|
|
|
(7,433
|
)
|
|
2,399
|
|
Lease intangibles
|
|
14,012
|
|
|
(9,606
|
)
|
|
4,406
|
|
|
14,007
|
|
|
(9,077
|
)
|
|
4,930
|
|
Other
|
|
1,970
|
|
|
(1,584
|
)
|
|
386
|
|
|
1,994
|
|
|
(1,532
|
)
|
|
462
|
|
|
|
$
|
34,067
|
|
|
$
|
(23,132
|
)
|
|
$
|
10,935
|
|
|
$
|
34,020
|
|
|
$
|
(22,055
|
)
|
|
$
|
11,965
|
|
_____________________________
|
|
(1)
|
The change in the gross carrying value and accumulated amortization of other intangible assets is impacted by foreign currency.
|
|
|
8.
|
FINANCING ARRANGEMENTS:
|
The Company’s long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity Dates
|
|
Interest Rate
|
|
March 31,
2018
|
|
June 30,
2017
|
|
|
(fiscal year)
|
|
|
|
(Dollars in thousands)
|
Revolving credit facility (March 2018)
|
|
2023
|
|
3.55%
|
|
$
|
90,000
|
|
|
$
|
—
|
|
Revolving credit facility (June 2011)
|
|
N/A
|
|
—
|
|
—
|
|
|
—
|
|
Senior Term Notes, net
|
|
N/A
|
|
5.50%
|
|
—
|
|
|
120,599
|
|
|
|
|
|
|
|
$
|
90,000
|
|
|
$
|
120,599
|
|
Revolving Credit Facility
In March 2018, the Company entered into a Credit Agreement (Credit Agreement), which provides for a
$260.0 million
unsecured
five
-year revolving credit facility (Revolving Credit Facility) that expires in
March 2023
and includes, among other things, a maximum consolidated net leverage ratio covenant, a minimum fixed charge coverage ratio covenant, and certain restrictions on liens, investments and other indebtedness. The Revolving Credit Facility includes a
$30.0 million
subfacility for the issuance of letters of credit and a
$30.0 million
sublimit for swingline loans. The Company may request an increase in revolving credit commitments under the facility of up to
$150.0 million
under certain circumstances. The revolving credit facility has interest rates tied to LIBOR plus
1.25%
to
1.85%
and includes a facility fee of
0.25%
to
0.40%
. Both the LIBOR credit spread and the facility fee are based on the Company's consolidated net leverage ratio.
As of March 31, 2018, the Company has
$90.0 million
of outstanding borrowings under the Revolving Credit Facility. At March 31, 2018, the Company has outstanding standby letters of credit under the Revolving Credit Facility of
$1.6 million
,
primarily related to the Company's self-insurance program, therefore, unused available credit under the facility was
$168.4 million
.
In connection with entering into the Credit Agreement, the Company terminated its previous
$200.0 million
revolving credit facility. As a result of terminating the
$200.0 million
revolving credit facility, the Company recognized
$0.1 million
of additional interest expense related to unamortized commitment fees during the three and nine months ended March 31, 2018. The Company previously had outstanding letters of credit under the facility of
$1.5 million
, primarily related to the Company's self-insurance program, therefore the unused available credit under the facility at June 30, 2017 was
$198.5 million
.
In April 2018, the Company amended and restated the Credit Agreement which increases the Revolving Credit Facility under the Credit Agreement by
$35.0 million
. After giving effect to the amendment, the revolving commitment under the Credit Facility is
$295.0 million
.
Senior Term Notes
In March 2018, the Company redeemed all of its
5.5%
senior term notes that were due December 2019 (Senior Term Notes) for
$124.2 million
, which included a
$1.2 million
premium. The Company utilized
$90.0 million
under the Revolving Credit Facility and cash on hand of
$34.2 million
to repay the Senior Term Notes. As a result of redeeming the Senior Term Notes, the Company recorded
$1.7 million
of additional interest expense related to the unamortized debt discount and debt issuance costs during the three and nine months ended March 31, 2018.
The Company was in compliance with all covenants and requirements of its financing arrangements as of and during the three months ended
March 31, 2018
.
|
|
9.
|
FAIR VALUE MEASUREMENTS:
|
Fair value measurements are categorized into one of three levels based on the lowest level of significant input used: Level 1 (unadjusted quoted prices in active markets); Level 2 (observable market inputs available at the measurement date, other than quoted prices included in Level 1); and Level 3 (unobservable inputs that cannot be corroborated by observable market data).
Assets and Liabilities Measured at Fair Value on a Recurring Basis
As of
March 31, 2018
and
June 30, 2017
, the estimated fair value of the Company’s cash, cash equivalents, restricted cash, receivables and accounts payable approximated their carrying values. As of
March 31, 2018
, the estimated fair value of the Company's debt was
$90.0 million
and the carrying value was
$90.0 million
. As of
June 30, 2017
, the estimated fair value of the Company's debt was
$125.9 million
and the carrying value was
$123.0 million
, excluding the
$1.8 million
unamortized debt discount and
$0.6 million
unamortized debt issuance costs. The estimated fair value of the Company's debt is based on Level 2 inputs.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
We measure certain assets, including the Company’s equity method investments, tangible fixed and other assets and goodwill, at fair value on a nonrecurring basis when they are deemed to be other than temporarily impaired. The fair values of these assets are determined based on valuation techniques using the best information available, and may include quoted market prices, market comparables, and discounted cash flow projections.
The following impairments were based on fair values using Level 3 inputs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended March 31,
|
|
For the Nine Months
Ended March 31,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
(Dollars in thousands)
|
|
|
|
|
Long-lived assets (1)
|
|
$
|
313
|
|
|
$
|
3,236
|
|
|
$
|
9,565
|
|
|
$
|
7,622
|
|
_____________________________
|
|
(1)
|
See Note 1 to the unaudited Condensed Consolidated Financial Statements.
|
10.
SEGMENT INFORMATION:
Segment information is prepared on the same basis the chief operating decision maker reviews financial information for operational decision-making purposes. During the first quarter of fiscal year 2018, the Company redefined its operating segments to reflect how the chief operating decision maker now evaluates the business as a result of the Company's Board of Directors' approval of the mall-based business and International segment sale. See Note 1 to the unaudited Condensed Consolidated Financial Statements. The Company now reports its operations in
two
operating segments: Company-owned salons and Franchise salons. The Company's operating segments are its reportable operating segments. Prior to this change, the Company had
four
operating segments: North American Value, North American Premium, North American Franchise, and International. The Company did not operate under the realigned operating segment structure prior to the first quarter of fiscal year 2018.
The Company’s reportable operating segments consisted of the following salons:
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
June 30, 2017
|
COMPANY-OWNED SALONS:
|
|
|
|
|
|
|
|
|
|
SmartStyle/Cost Cutters in Walmart Stores
|
|
1,782
|
|
|
2,652
|
|
Supercuts
|
|
946
|
|
|
980
|
|
Signature Style
|
|
1,387
|
|
|
1,468
|
|
Mall locations (Regis and MasterCuts)
|
|
13
|
|
|
898
|
|
Total North American Salons
|
|
4,128
|
|
|
5,998
|
|
Total International Salons (1)
|
|
—
|
|
|
275
|
|
Total Company-owned Salons
|
|
4,128
|
|
|
6,273
|
|
as a percent of total Company-owned and Franchise salons
|
|
50.7
|
%
|
|
70.3
|
%
|
|
|
|
|
|
FRANCHISE SALONS:
|
|
|
|
|
|
|
|
|
|
SmartStyle/Cost Cutters in Walmart Stores
|
|
442
|
|
|
176
|
|
Supercuts
|
|
1,732
|
|
|
1,687
|
|
Signature Style
|
|
755
|
|
|
770
|
|
Total non-mall franchise locations
|
|
2,929
|
|
|
2,633
|
|
Mall franchise locations (Regis and MasterCuts)
|
|
821
|
|
|
—
|
|
Total North American Salons
|
|
3,750
|
|
|
2,633
|
|
Total International Salons (1)
|
|
262
|
|
|
13
|
|
Total Franchise Salons
|
|
4,012
|
|
|
2,646
|
|
as a percent of total Company-owned and Franchise salons
|
|
49.3
|
%
|
|
29.7
|
%
|
|
|
|
|
|
OWNERSHIP INTEREST LOCATIONS:
|
|
|
|
|
|
|
|
|
|
Equity ownership interest locations
|
|
88
|
|
|
89
|
|
|
|
|
|
|
Grand Total, System-wide
|
|
8,228
|
|
|
9,008
|
|
____________________________________
|
|
(1)
|
Canadian and Puerto Rican salons are included in the North American salon totals.
|
As of
March 31, 2018
, the Company-owned operating segment is comprised primarily of SmartStyle
®
, Supercuts
®
, Cost Cutters
®
, and other regional trade names and the Franchise operating segment is comprised primarily of Supercuts, Regis
®
, MasterCuts
®
, SmartStyle
®
, Cost Cutters
®
, First Choice Haircutters
®
, Roosters
®
and Magicuts
®
concepts. The Corporate segment represents home office and other unallocated costs.
Concurrent with the change in reportable segments, the Company recast its prior period financial information to reflect comparable financial information for the new segment structure. Historical financial information shown in the following table and elsewhere in this filing reflects this change. Financial information concerning the Company's reportable operating segments is shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, 2018
|
|
|
Company-owned
|
|
Franchise
|
|
Corporate
|
|
Consolidated
|
|
|
(Dollars in thousands)
|
Revenues:
|
|
|
|
|
|
|
|
|
Service
|
|
$
|
221,926
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
221,926
|
|
Product
|
|
49,956
|
|
|
14,931
|
|
|
—
|
|
|
64,887
|
|
Royalties and fees
|
|
—
|
|
|
13,988
|
|
|
—
|
|
|
13,988
|
|
|
|
271,882
|
|
|
28,919
|
|
|
—
|
|
|
300,801
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Cost of service
|
|
132,081
|
|
|
—
|
|
|
—
|
|
|
132,081
|
|
Cost of product
|
|
25,137
|
|
|
12,002
|
|
|
—
|
|
|
37,139
|
|
Site operating expenses
|
|
31,021
|
|
|
—
|
|
|
—
|
|
|
31,021
|
|
General and administrative
|
|
18,051
|
|
|
6,590
|
|
|
21,086
|
|
|
45,727
|
|
Rent
|
|
39,094
|
|
|
51
|
|
|
246
|
|
|
39,391
|
|
Depreciation and amortization
|
|
7,276
|
|
|
92
|
|
|
2,190
|
|
|
9,558
|
|
Total operating expenses
|
|
252,660
|
|
|
18,735
|
|
|
23,522
|
|
|
294,917
|
|
Operating income (loss)
|
|
19,222
|
|
|
10,184
|
|
|
(23,522
|
)
|
|
5,884
|
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
Interest expense
|
|
—
|
|
|
—
|
|
|
(5,095
|
)
|
|
(5,095
|
)
|
Interest income and other, net
|
|
—
|
|
|
—
|
|
|
1,785
|
|
|
1,785
|
|
Income (loss) from continuing operations before income taxes
|
|
$
|
19,222
|
|
|
$
|
10,184
|
|
|
$
|
(26,832
|
)
|
|
$
|
2,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, 2017
|
|
|
Company-owned
|
|
Franchise
|
|
Corporate
|
|
Consolidated
|
|
|
(Dollars in thousands)
|
Revenues:
|
|
|
|
|
|
|
|
|
Service
|
|
$
|
237,998
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
237,998
|
|
Product
|
|
56,326
|
|
|
7,518
|
|
|
—
|
|
|
63,844
|
|
Royalties and fees
|
|
—
|
|
|
11,636
|
|
|
—
|
|
|
11,636
|
|
|
|
294,324
|
|
|
19,154
|
|
|
—
|
|
|
313,478
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Cost of service
|
|
153,008
|
|
|
—
|
|
|
—
|
|
|
153,008
|
|
Cost of product
|
|
25,499
|
|
|
5,490
|
|
|
—
|
|
|
30,989
|
|
Site operating expenses
|
|
30,604
|
|
|
—
|
|
|
—
|
|
|
30,604
|
|
General and administrative
|
|
11,883
|
|
|
5,013
|
|
|
28,798
|
|
|
45,694
|
|
Rent
|
|
45,606
|
|
|
44
|
|
|
171
|
|
|
45,821
|
|
Depreciation and amortization
|
|
11,195
|
|
|
89
|
|
|
2,292
|
|
|
13,576
|
|
Total operating expenses
|
|
277,795
|
|
|
10,636
|
|
|
31,261
|
|
|
319,692
|
|
Operating income (loss)
|
|
16,529
|
|
|
8,518
|
|
|
(31,261
|
)
|
|
(6,214
|
)
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
Interest expense
|
|
—
|
|
|
—
|
|
|
(2,125
|
)
|
|
(2,125
|
)
|
Interest income and other, net
|
|
—
|
|
|
—
|
|
|
357
|
|
|
357
|
|
Income (loss) from continuing operations before income taxes
|
|
$
|
16,529
|
|
|
$
|
8,518
|
|
|
$
|
(33,029
|
)
|
|
$
|
(7,982
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended March 31, 2018
|
|
|
Company-owned
|
|
Franchise
|
|
Corporate
|
|
Consolidated
|
|
|
(Dollars in thousands)
|
Revenues:
|
|
|
|
|
|
|
|
|
Service
|
|
$
|
680,699
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
680,699
|
|
Product
|
|
159,922
|
|
|
37,721
|
|
|
—
|
|
|
197,643
|
|
Royalties and fees
|
|
—
|
|
|
40,847
|
|
|
—
|
|
|
40,847
|
|
|
|
840,621
|
|
|
78,568
|
|
|
—
|
|
|
919,189
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Cost of service
|
|
406,767
|
|
|
—
|
|
|
—
|
|
|
406,767
|
|
Cost of product
|
|
77,628
|
|
|
29,537
|
|
|
—
|
|
|
107,165
|
|
Site operating expenses
|
|
96,443
|
|
|
—
|
|
|
—
|
|
|
96,443
|
|
General and administrative
|
|
51,822
|
|
|
19,005
|
|
|
58,658
|
|
|
129,485
|
|
Rent
|
|
146,376
|
|
|
168
|
|
|
736
|
|
|
147,280
|
|
Depreciation and amortization
|
|
39,224
|
|
|
275
|
|
|
7,265
|
|
|
46,764
|
|
Total operating expenses
|
|
818,260
|
|
|
48,985
|
|
|
66,659
|
|
|
933,904
|
|
Operating income (loss)
|
|
22,361
|
|
|
29,583
|
|
|
(66,659
|
)
|
|
(14,715
|
)
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
Interest expense
|
|
—
|
|
|
—
|
|
|
(9,402
|
)
|
|
(9,402
|
)
|
Interest income and other, net
|
|
—
|
|
|
—
|
|
|
5,174
|
|
|
5,174
|
|
Income (loss) from continuing operations before income taxes
|
|
$
|
22,361
|
|
|
$
|
29,583
|
|
|
$
|
(70,887
|
)
|
|
$
|
(18,943
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended March 31, 2017
|
|
|
Company-owned
|
|
Franchise
|
|
Corporate
|
|
Consolidated
|
|
|
(Dollars in thousands)
|
Revenues:
|
|
|
|
|
|
|
|
|
Service
|
|
$
|
716,698
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
716,698
|
|
Product
|
|
173,275
|
|
|
22,514
|
|
|
—
|
|
|
195,789
|
|
Royalties and fees
|
|
—
|
|
|
35,071
|
|
|
—
|
|
|
35,071
|
|
|
|
889,973
|
|
|
57,585
|
|
|
—
|
|
|
947,558
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Cost of service
|
|
454,998
|
|
|
—
|
|
|
—
|
|
|
454,998
|
|
Cost of product
|
|
79,629
|
|
|
16,759
|
|
|
—
|
|
|
96,388
|
|
Site operating expenses
|
|
95,887
|
|
|
—
|
|
|
—
|
|
|
95,887
|
|
General and administrative
|
|
35,314
|
|
|
15,378
|
|
|
67,613
|
|
|
118,305
|
|
Rent
|
|
136,499
|
|
|
127
|
|
|
519
|
|
|
137,145
|
|
Depreciation and amortization
|
|
30,993
|
|
|
268
|
|
|
7,070
|
|
|
38,331
|
|
Total operating expenses
|
|
833,320
|
|
|
32,532
|
|
|
75,202
|
|
|
941,054
|
|
Operating income (loss)
|
|
56,653
|
|
|
25,053
|
|
|
(75,202
|
)
|
|
6,504
|
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
Interest expense
|
|
—
|
|
|
—
|
|
|
(6,441
|
)
|
|
(6,441
|
)
|
Interest income and other, net
|
|
—
|
|
|
—
|
|
|
2,136
|
|
|
2,136
|
|
Income (loss) from continuing operations before income taxes
|
|
$
|
56,653
|
|
|
$
|
25,053
|
|
|
$
|
(79,507
|
)
|
|
$
|
2,199
|
|
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 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, 2017
Annual Report on Form 10-K and other documents filed or furnished with the Securities and Exchange Commission (SEC) during the current fiscal year.
MANAGEMENT’S OVERVIEW
Regis Corporation (RGS) owns, franchises and operates beauty salons. As of
March 31, 2018
, the Company owned, franchised or held ownership interests in
8,228
worldwide locations. Our locations consisted of
8,140
system-wide North American and International salons, and in
88
locations we maintain a non-controlling ownership interest less than 100 percent. Each of the Company’s salon concepts generally offer similar salon products and services and serve the mass market. As of
March 31, 2018
, we had approximately
28,000
corporate employees worldwide.
In October
2017, the Company sold substantially all of
its mall-based salon business in
North America, representing
858
company-owned salons, and substantially all of its International segment, representing approximately
250
company-owned salons, to TBG, who will operate these locations as franchise locations.
See Note 1 to the unaudited Condensed Consolidated Financial Statements as the results of operations for the mall-based business and International segment are accounted for as discontinued operations for all periods presented.
Discontinued operations are discussed at the end of this section.
In January 2018, the Company closed
597
non-performing Company owned SmartStyle salons. 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. A summary of costs associated with the SmartStyle salon restructuring for the three and
nine
months ended
March 31, 2018
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Financial Line Item
|
|
Three Months Ended
March 31, 2018
|
|
Nine Months Ended
March 31, 2018
|
|
|
|
(Dollars in thousands)
|
Inventory reserves
|
Cost of Product
|
|
$
|
—
|
|
|
$
|
585
|
|
Severance
|
General and administrative
|
|
897
|
|
|
897
|
|
Long-lived fixed asset impairment
|
Depreciation and amortization
|
|
42
|
|
|
5,460
|
|
Asset retirement obligation
|
Depreciation and amortization
|
|
—
|
|
|
7,462
|
|
Lease termination and other related closure costs
|
Rent
|
|
—
|
|
|
27,290
|
|
Deferred rent
|
Rent
|
|
—
|
|
|
(3,291
|
)
|
Total
|
|
|
$
|
939
|
|
|
$
|
38,403
|
|
CRITICAL ACCOUNTING POLICIES
The interim unaudited Condensed Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States of America. 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.
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, 2017
Annual Report on Form 10-K, as well as Note 1 to the unaudited Condensed Consolidated Financial Statements contained within this Quarterly Report on Form 10-Q. We believe the accounting policies related to investment in affiliates, the valuation of goodwill, the valuation and estimated useful lives of long-lived assets, estimates used in relation to tax liabilities and deferred taxes and legal contingencies are most critical to aid in fully understanding and evaluating our reported financial condition and results of operations. Discussion of each of these policies is contained under “Critical Accounting Policies” in Part II, Item 7 of our
June 30, 2017
Annual Report on Form 10-K.
Recent Accounting Pronouncements
Recent accounting pronouncements are discussed in Note 1 to the unaudited Condensed Consolidated Financial Statements.
RESULTS OF OPERATIONS
Beginning in the first quarter of fiscal year 2018, the Company redefined its operating segments to reflect how the chief operating decision maker evaluates the business as a result of the sale of the mall-based business (primarily comprised of MasterCuts and Regis branded salons) and International segment.
The Company now reports its operations in two operating segments: Company-owned salons and Franchise salons. The Company's operating segments are its reportable operating segments. Prior to this change, the Company had four operating segments: North American Value, North American Premium, North American Franchise, and International.
Beginning with the period ended September 30, 2017, the mall-based business and International segment were accounted for as discontinued operations for all periods presented. Discontinued operations are discussed at the end of this section.
See Note 1 to the unaudited Condensed Consolidated Financial Statements for further discussion on this transaction.
Beginning in the first quarter of fiscal year 2018, costs associated with field leaders that were previously recorded within Cost of Service and Site Operating expense are now categorized within General and Administrative expense as a result of the field reorganization that took place in the first quarter of fiscal year 2018. The estimated impact of the field reorganization
(decreased) increased
Cost of Service, Site Operating expense and General and Administrative expense by
$(7.0)
,
$(1.5)
and
$8.5 million
, respectively, for the three months ended
March 31, 2018
and
$(19.3)
,
$(4.3)
and
$23.6 million
, respectively, for the
nine
months ended
March 31, 2018
. This expense classification does not have a financial impact on the Company's reported
operating income (loss)
, reported
net (loss) income
or cash flows from operations.
In the past field leaders were responsible for a geographical area that included a variety of brands, with different business models, services, pay plans and guest expectations. They also served as salon managers with a home salon that they spent a large portion of their time serving guests rather than field leadership. Post-reorganization, each field leader is dedicated to a specific brand/concept, as well as geography, and are focused solely on field leadership.
Condensed Consolidated Results of Operations (Unaudited)
The following table sets forth, for the periods indicated, certain information derived from our unaudited Condensed Consolidated Statement of Operations. The percentages are computed as a percent of total consolidated revenues, except as otherwise indicated.
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Periods Ended March 31,
|
|
Three Months
|
|
Nine Months
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
($ in millions)
|
|
% of Total
Revenues (1)
|
|
Basis Point
(Decrease)
Increase
|
|
($ in millions)
|
|
% of Total
Revenues (1)
|
|
Basis Point
(Decrease)
Increase
|
Service revenues
|
$
|
221.9
|
|
|
$
|
238.0
|
|
|
73.8
|
%
|
|
75.9
|
%
|
|
(210
|
)
|
|
(40
|
)
|
|
$
|
680.7
|
|
|
$
|
716.7
|
|
|
74.1
|
%
|
|
75.6
|
%
|
|
(150
|
)
|
|
—
|
|
Product revenues
|
64.9
|
|
|
63.8
|
|
|
21.6
|
|
|
20.4
|
|
|
120
|
|
|
40
|
|
|
197.6
|
|
|
195.8
|
|
|
21.5
|
|
|
20.7
|
|
|
80
|
|
|
—
|
|
Franchise royalties and fees
|
14.0
|
|
|
11.6
|
|
|
4.6
|
|
|
3.7
|
|
|
90
|
|
|
—
|
|
|
40.8
|
|
|
35.1
|
|
|
4.4
|
|
|
3.7
|
|
|
70
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (2)
|
132.1
|
|
|
153.0
|
|
|
59.5
|
|
|
64.3
|
|
|
(480
|
)
|
|
170
|
|
|
406.8
|
|
|
455.0
|
|
|
59.8
|
|
|
63.5
|
|
|
(370
|
)
|
|
100
|
|
Cost of product (2)
|
37.1
|
|
|
31.0
|
|
|
57.2
|
|
|
48.5
|
|
|
870
|
|
|
40
|
|
|
107.2
|
|
|
96.4
|
|
|
54.2
|
|
|
49.2
|
|
|
500
|
|
|
30
|
|
Site operating expenses
|
31.0
|
|
|
30.6
|
|
|
10.3
|
|
|
9.8
|
|
|
50
|
|
|
—
|
|
|
96.4
|
|
|
95.9
|
|
|
10.5
|
|
|
10.1
|
|
|
40
|
|
|
(40
|
)
|
General and administrative
|
45.7
|
|
|
45.7
|
|
|
15.2
|
|
|
14.6
|
|
|
60
|
|
|
290
|
|
|
129.5
|
|
|
118.3
|
|
|
14.1
|
|
|
12.5
|
|
|
160
|
|
|
20
|
|
Rent
|
39.4
|
|
|
45.8
|
|
|
13.1
|
|
|
14.6
|
|
|
(150
|
)
|
|
30
|
|
|
147.3
|
|
|
137.1
|
|
|
16.0
|
|
|
14.5
|
|
|
150
|
|
|
20
|
|
Depreciation and amortization
|
9.6
|
|
|
13.6
|
|
|
3.2
|
|
|
4.3
|
|
|
(110
|
)
|
|
20
|
|
|
46.8
|
|
|
38.3
|
|
|
5.1
|
|
|
4.0
|
|
|
110
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
5.9
|
|
|
(6.2
|
)
|
|
2.0
|
|
|
(2.0
|
)
|
|
400
|
|
|
(470
|
)
|
|
(14.7
|
)
|
|
6.5
|
|
|
(1.6
|
)
|
|
0.7
|
|
|
(230
|
)
|
|
(60
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
5.1
|
|
|
2.1
|
|
|
1.7
|
|
|
0.7
|
|
|
100
|
|
|
—
|
|
|
9.4
|
|
|
6.4
|
|
|
1.0
|
|
|
0.7
|
|
|
30
|
|
|
—
|
|
Interest income and other, net
|
1.8
|
|
|
0.4
|
|
|
0.6
|
|
|
0.1
|
|
|
50
|
|
|
(10
|
)
|
|
5.2
|
|
|
2.1
|
|
|
0.6
|
|
|
0.2
|
|
|
40
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit (expense) (3)
|
2.2
|
|
|
(3.9
|
)
|
|
86.4
|
|
|
48.3
|
|
|
N/A
|
|
|
N/A
|
|
|
73.9
|
|
|
(7.3
|
)
|
|
389.9
|
|
|
332.7
|
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of taxes
|
(10.6
|
)
|
|
(6.6
|
)
|
|
(3.5
|
)
|
|
(2.1
|
)
|
|
(140
|
)
|
|
(120
|
)
|
|
(51.0
|
)
|
|
(12.3
|
)
|
|
(5.5
|
)
|
|
(1.3
|
)
|
|
(420
|
)
|
|
(80
|
)
|
_____________________________
|
|
(1)
|
Cost of service is computed as a percent of service revenues. Cost of product is computed as a percent of product revenues.
|
|
|
(2)
|
Excludes depreciation and amortization expense.
|
|
|
(3)
|
Computed as a percent of income (loss) from continuing operations before income taxes. The income taxes basis point change is noted as not applicable (N/A) as the discussion within MD&A is related to the effective income tax rate.
|
Consolidated Revenues
Consolidated revenues primarily include revenues of company-owned salons, product and equipment sales to franchisees, and franchise royalties and fees. The following tables summarize revenues and same-store sales by concept as well as the reasons for the percentage change:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended March 31,
|
|
For the Nine Months
Ended March 31,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
(Dollars in thousands)
|
Company-owned salons:
|
|
|
|
|
|
|
|
|
|
|
SmartStyle
|
|
$
|
112,857
|
|
|
$
|
132,069
|
|
|
$
|
361,555
|
|
|
$
|
392,009
|
|
Supercuts
|
|
70,448
|
|
|
70,651
|
|
|
212,914
|
|
|
216,566
|
|
Signature Style
|
|
88,577
|
|
|
91,604
|
|
|
266,152
|
|
|
281,398
|
|
Total Company-owned salons
|
|
271,882
|
|
|
294,324
|
|
|
840,621
|
|
|
889,973
|
|
Franchise salons:
|
|
|
|
|
|
|
|
|
Product
|
|
14,931
|
|
|
7,518
|
|
|
37,721
|
|
|
22,514
|
|
Royalties and fees
|
|
13,988
|
|
|
11,636
|
|
|
40,847
|
|
|
35,071
|
|
Total Franchise salons
|
|
28,919
|
|
|
19,154
|
|
|
78,568
|
|
|
57,585
|
|
Consolidated revenues
|
|
$
|
300,801
|
|
|
$
|
313,478
|
|
|
$
|
919,189
|
|
|
$
|
947,558
|
|
Percent change from prior year
|
|
(4.0
|
)%
|
|
(2.8
|
)%
|
|
(3.0
|
)%
|
|
(2.0
|
)%
|
Salon same-store sales increase (decrease) (1)
|
|
1.6
|
%
|
|
(1.7
|
)%
|
|
0.4
|
%
|
|
(1.3
|
)%
|
_____________________________
|
|
(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.
|
Decreases in consolidated revenues were driven by the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended March 31,
|
|
For the Nine Months
Ended March 31,
|
Factor
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Same-store sales
|
|
1.6
|
%
|
|
(1.7
|
)%
|
|
0.4
|
%
|
|
(1.3
|
)%
|
Closed salons
|
|
(9.2
|
)
|
|
(1.9
|
)
|
|
(5.9
|
)
|
|
(1.7
|
)
|
New company-owned stores
|
|
0.1
|
|
|
0.5
|
|
|
0.2
|
|
|
0.5
|
|
Franchise
|
|
3.0
|
|
|
(0.1
|
)
|
|
2.2
|
|
|
—
|
|
Foreign currency
|
|
0.3
|
|
|
0.2
|
|
|
0.3
|
|
|
—
|
|
Other
|
|
0.2
|
|
|
0.2
|
|
|
(0.2
|
)
|
|
0.5
|
|
|
|
(4.0
|
)%
|
|
(2.8
|
)%
|
|
(3.0
|
)%
|
|
(2.0
|
)%
|
Same-store sales by concept are detailed in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended March 31,
|
|
For the Nine Months
Ended March 31,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
SmartStyle
|
|
0.6
|
%
|
|
(1.5
|
)%
|
|
(0.1
|
)%
|
|
(1.2
|
)%
|
Supercuts
|
|
3.5
|
|
|
(1.0
|
)
|
|
2.2
|
|
|
(0.4
|
)
|
Signature Style
|
|
1.5
|
|
|
(2.5
|
)
|
|
(0.2
|
)
|
|
(2.1
|
)
|
Consolidated same-store sales
|
|
1.6
|
%
|
|
(1.7
|
)%
|
|
0.4
|
%
|
|
(1.3
|
)%
|
The same-store sales
increases
of
1.6%
and
0.4%
during the three and
nine
months ended
March 31, 2018
, respectively, were due to
increases
of
3.3%
and
3.1%
, respectively, in average ticket price, partly offset by
decreases
of
1.7%
and
2.7%
, respectively, in same-store guest visits. The Company estimates the shift of Easter from April 2017 to March 2018 favorably impacted same-store sales approximately 0.9% during the three months ended
March 31, 2018
. The Company constructed (net of relocations) and closed
4
and
740
company-owned salons, respectively, during the twelve months ended
March 31, 2018
and sold (net of buybacks), excluding the salons previously included in the Company's previous mall-based business and International segment,
376
company-owned salons to franchisees during the same period (2018 Net Salon Count Changes). Revenue related to franchised locations
increased
$9.8
and
$21.0 million
during the three and
nine
months ended
March 31, 2018
, respectively, primarily as a result of product sold to TBG and increased number of franchised locations during the twelve months ended
March 31, 2018
. Also impacting revenues for the
nine
months ended
March 31, 2018
, was a cumulative adjustment related to discontinuing a piloted loyalty program, partly offset by unfavorable impact by hurricanes in the southern United States.
The same-store sales
decrease
of
1.7%
and
1.3%
during the three and
nine
months ended
March 31, 2017
, respectively, were due to
decreases
of
5.1%
and
5.3%
, respectively, in same-store guest visits, partly offset by
increases
of
3.4%
and
4.0%
, respectively, in average ticket price. The shift of Easter from March 2016 to April 2017 negatively impacted same-store sales during the three months ended March 31, 2017. The Company constructed (net of relocations) and closed
53
and
151
company-owned salons, respectively, during the twelve months ended
March 31, 2017
and sold (net of buybacks)
30
company-owned salons to franchisees during the same period (2017 Net Salon Count Changes).
Consolidated revenues are primarily comprised of service and product revenues, as well as franchise royalties and fees. Fluctuations in these three major revenue categories, operating expenses and other income and expense were as follows:
Service Revenues
Decreases
of
$16.1
and
$36.0 million
in service revenues during the three and
nine
months ended
March 31, 2018
, respectively, were primarily due to the 2018 Net Salon Count Changes. Same-store service sales
increases
of
1.4%
and
0.5%
during the three and
nine
months ended
March 31, 2018
, respectively, were primarily the result of
3.6%
and
3.5%
increases
in average ticket price, respectively, and
decreases
of
2.2%
and
3.0%
, respectively, in same-store guest visits. Also impacting service revenues during the three and
nine
months ended
March 31, 2018
, was a favorable foreign currency. The
nine
months ended
March 31, 2018
were also impacted by a favorable cumulative adjustment related to discontinuing a piloted loyalty program, partly offset by unfavorable impact by hurricanes in the southern United States.
Decreases
of
$8.0
and
$14.6 million
in service revenues during the three and
nine
months ended
March 31, 2017
, respectively, were primarily due to the 2017 Net Salon Count Changes, same-store service sales
decreases
of
1.8%
and
1.1%
, respectively. Decreases in same-store service sales were primarily the result of
4.9%
and
5.0%
decreases
in same-store guest visits, respectively, partly offset by
3.1%
and
3.9%
increases
in average ticket price, respectively, during the three and
nine
months ended
March 31, 2017
.
Product Revenues
Increases
of
$1.0
and
$1.9 million
in product revenues during the three and
nine
months ended
March 31, 2018
were primarily due to product sold to TBG and same-store product sales
increases
of
2.5%
and
0.0%
, respectively, partly offset by the 2018 Net Salon Count Changes. For the three months ended
March 31, 2018
, the
increase
in same-store product sales was primarily the result of
an increase
in average ticket price of
4.4%
, partly offset by
a decrease
in same-store transactions of
1.9%
. For the
nine
months ended
March 31, 2018
, same-store product sales remained
flat
primarily by the result of
an increase
in average ticket price of
3.7%
, partly offset by
a decrease
in same-store transactions of
3.7%
. The
nine
months ended
March 31, 2018
were also negatively impacted by hurricanes in the southern United States.
Decreases
of
$0.8
and
$4.8 million
in product revenues during the three and
nine
months ended
March 31, 2017
, respectively, were primarily due to the 2017 Net Salon Count Changes and same-store product sales
decreases
of
1.1%
and
2.1%
, respectively. The decrease in same-store product sales was primarily the result of
decreases
in same-store transactions of
3.9%
and
3.8%
, respectively, partly offset by
increases
in average ticket price of
2.8%
and
1.7%
during the three and
nine
months ended
March 31, 2017
, respectively.
Royalties and Fees
Total franchised locations open at
March 31, 2018
were
4,012
as compared to
2,561
at
March 31, 2017
. The
increases
of
$2.4
and
$5.8 million
in royalties and fees for the three and
nine
months ended
March 31, 2018
, respectively, was primarily due to higher franchise fees due to an increase in the number of new salons opened in fiscal 2018 compared to the prior year and higher royalties due to the increased number franchise openings and increased store counts.
Total franchised locations open at
March 31, 2017
were
2,561
compared to
2,454
at
March 31, 2016
. The
decrease
of
$0.1 million
in royalties and fees for the three months ended
March 31, 2017
was primarily due to higher level of franchise termination fees in the prior year quarter and lower initial franchise fees. While the number of new salons opened in the quarter was flat to last year, the mix of franchisees opening salons in the quarter shifted to existing franchisees, who pay lower fees for opening additional salons. The
$0.4 million
decrease
in royalties and fees for the
nine
months ended
March 31, 2017
compared to the prior year period was primarily due to a lower level of initial franchise fees due to the timing of salon openings and higher franchise termination fees in the prior year. These decreases were partly offset by the increased number of franchised locations and same-store sales increases at franchised locations.
Cost of Service
The
480
and
370
basis point
decreases
in cost of service as a percent of service revenues during the three and
nine
months ended
March 31, 2018
, respectively, were primarily due to the change in expense categorization as a result of the field reorganization that took place during the first quarter of fiscal year 2018. After considering this change in expense categorization, cost of service as a percent of service revenues
decreased
190
and
100
basis points for the three and
nine
months ended
March 31, 2018
, respectively, as a result of improved stylist productivity and cost savings associated with salon tools, partly offset by state minimum wage increases, higher commissions rates as a result of same-store sales increases and higher health insurance costs. Cost of service in the
nine
months ended
March 31, 2018
, was also negatively impacted by hurricanes in the southern United States.
The
170
and
100
basis point
increases
in cost of service as a percent of service revenues during the three and
nine
months ended
March 31, 2017
, respectively, were primarily the result of lower stylist productivity, state minimum wage increases, and a non-recurring rebate in the prior year, partly offset by lower incentive expenses.
Cost of Product
The
870
and
500
basis point
increases
in cost of product as a percent of product revenues during the three and
nine
months ended
March 31, 2018
, respectively, were primarily due to franchise product sold to TBG and shift into lower margin product revenue to franchisees. The nine months ended
March 31, 2018
, were also negatively impacted by inventory reserves related to the SmartStyle restructure.
The
40
and
30
basis point
increases
in cost of product as a percent of product revenues during the three and
nine
months ended
March 31, 2017
were primarily due to mix shift into lower margin product sales to franchisees and inventory write-offs associated with salon closures and obsolescence.
Site Operating Expenses
Site operating expenses
increased
$0.4
and
$0.6 million
during the three and
nine
months ended
March 31, 2018
. After considering the change in expense categorization as a result of the field reorganization that took place during the first quarter of fiscal year 2018, site operating expenses
increased
$2.0
and
$4.8 million
during the three and
nine
months ended
March 31, 2018
, respectively, primarily as a result of the SmartStyle marketing campaign, marketing costs associated with a major league sporting organization, unfavorable actuarial adjustments related to workers' compensation accruals, and contract maintenance, repair and services expenses, partly offset by a net reduction in salon counts.
Site operating expenses
decreased
by
$0.9
and
$6.0 million
during the three and
nine
months ended
March 31, 2017
, respectively, primarily due to a net reduction in salon counts and cost savings salon telecom costs, partly offset by a favorable self-insurance reserve adjustment in the prior year and increase in repairs and service expense.
General and Administrative
General and administrative (G&A) remained
flat
during the three months ended
March 31, 2018
and
increased
$11.2 million
during the
nine
months ended
March 31, 2018
. After considering the change in expense categorization as a result of the field reorganization that took place during the first quarter of fiscal year 2018, G&A
decreased
$8.5
and
$12.5
million during the three and
nine
months ended
March 31, 2018
, respectively, primarily as a result of the prior year including severance related to the termination of former executive officers including the Company's Chief Executive Officer and professional fees. The remaining decrease in G&A during the
nine
months ended
March 31, 2018
after considering the change in expense categorization was primarily the result of a gain associated with life insurance proceeds in connection with the passing of a former executive officer, partially offset by severance payments related to terminations of former executives and increases in incentive compensation accruals.
General and administrative (G&A)
increased
$7.9 million
during the three months ended
March 31, 2017
primarily due to severance related to the termination of former executive officers including the Company's Chief Executive Officer, expense associated with legal settlements, higher professional fees and planned strategic investments in Technical Education, partly offset by lower incentive compensation. G&A
decreased
$0.9 million
during the
nine
months ended
March 31, 2017
primarily due to lower incentive compensation and cost savings, partly offset by severance related to the termination of former executive officers, expense associated with legal settlements, higher professional fess and planned strategic investments in technical education.
Rent
Rent expense
(decreased) increased
$(6.4)
and
$10.1 million
during the three and
nine
months ended
March 31, 2018
, respectively. The rent decrease during the three months ended
March 31, 2018
was primarily due to the net reduction in salon counts, partly offset by rent inflation. The rent increase during the
nine
months ended
March 31, 2018
was primarily due to lease termination fees and other related closure costs associated with the SmartStyle restructuring, rent inflation, partly offset by a deferred rent adjustment related to the SmartStyle restructuring and a net reduction in salon counts.
Rent expense
decreased
$0.3
and
$1.3 million
during the three and
nine
months ended
March 31, 2017
, respectively, due to a net reduction in salon counts, partly offset by rent inflation and lease termination fees.
Depreciation and Amortization
Depreciation and amortization (D&A)
(decreased) increased
$(4.0)
and
$8.4 million
during the three and
nine
months ended
March 31, 2018
, respectively. The D&A decrease during the three months ended
March 31, 2018
was primarily due to lower fixed asset impairment charges and depreciation on a reduced salon based. The D&A increase during the
nine
months ended
March 31, 2018
was primarily due to costs associated with returning SmartStyle locations to their pre-occupancy condition in connection with the SmartStyle restructuring and higher fixed asset impairment charges, partly offset by lower depreciation on a reduced salon base.
Depreciation and amortization (D&A)
increased
$0.4 million
during the three months ended
March 31, 2017
primarily due to higher fixed asset impairment charges, partly offset by lower depreciation on a reduced salon based. D&A
decreased
$2.1 million
during the
nine
months ended
March 31, 2017
primarily due to lower depreciation on a reduced salon base.
Interest Expense
Interest expense
increased
$3.0 million
for the three and
nine
months ended
March 31, 2018
, primarily due to the premium and unamortized debt discount associated with paying off the senior term note.
Interest expense
decreased
$0.3
and
$0.6 million
for the three and
nine
months ended
March 31, 2017
, respectively, primarily due to the senior term note modification and the amendment to the revolving credit facility in fiscal year 2016.
Interest Income and Other, net
The
$1.4
and
$3.0 million
increases
in interest income and other, net during the three and
nine
months ended
March 31, 2018
, respectively, was primarily due to income for transition services related to TBG and incremental interest income. The
nine
months ended
March 31, 2018
also benefited from increased gift card breakage, partly offset by a prior year insurance recovery benefit.
The
$0.4 million
decreases
in interest income and other, net during the three and
nine
months ended
March 31, 2017
, respectively, were primarily due to prior year gains on salon assets sold in the prior year.
Income Taxes
During the three and
nine
months ended
March 31, 2018
, the Company recognized tax benefit of
$2.2
and
$73.9 million
, respectively, with corresponding effective tax rates of
86.4%
and
389.9%
.
During the three and
nine
months ended
March 31, 2017
, the Company recognized tax expense of
$3.9
and
$7.3 million
, respectively, with corresponding effective tax rates of
48.3%
and
332.7%
.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). In connection with the Tax Act, the Company recorded a provisional net tax benefit of $68.9 million in continuing operations during the nine months ended
March 31, 2018
. The net tax benefit is primarily attributable to the impact of the corporate rate reduction on our deferred tax assets and liabilities along with a partial release of the U.S. valuation allowance. The benefit recognized on current losses and the partial valuation allowance release is solely attributable to tax reform and the law change that allows for the indefinite carryforward of NOLs arising in tax years ending after December 31, 2017. Prior law limited the carryforward period to 20 years. As a result of the new tax rules, the Company can now consider its indefinite lived deferred tax liabilities as a source of income to support the realization of its existing deferred tax assets that upon reversal are expected to generate indefinite lived NOLs. Consequently, the Company was able to remove the valuation allowance associated with these deferred tax assets. The Company continues to maintain a valuation allowance on the historical balance of its finite lived federal NOLs, tax credits and various state tax attributes. We are still analyzing certain aspects of the Tax Act and refining our calculations, which could potentially affect the measurement of our deferred tax balances and ultimately cause us to revise our provisional estimate in future periods in accordance with SAB 118. In addition, changes in interpretations, assumptions, and guidance regarding the new tax legislation, as well as the potential for technical corrections to the Tax Act, could have a material impact to the Company’s effective tax rate in future periods.
The recorded tax provisions and effective tax rates for the three and nine months ended March 31, 2018 and three and nine months ended March 31, 2017 were different than what would normally be expected primarily due to the impact of the Tax Act and state conformity of the new federal provisions, closure of the IRS examination and the deferred tax valuation allowance. The majority of the tax provision in periods ended prior to December 31, 2017 related to non-cash tax expense for tax benefits on certain indefinite-lived assets that the Company could not recognize for reporting purposes.
Additionally, the Company is currently paying taxes in Canada and certain states in which it has profitable entities.
See Note 5 to the unaudited Condensed Consolidated Financial Statements.
Loss from Discontinued Operations
Loss associated with the discontinued operations of the mall-based business and International segment during the three months ended
March 31, 2018
and
2017
, was
$10.6
and
$6.6 million
, respectively, and during the
nine
months ended
March 31, 2018
and
2017
,
$51.0
and
$12.3 million
, respectively. The
increase
in the loss during the three months ended
March 31, 2018
is primarily due to asset impairment charges based on the expected sales price. The
increase
in the loss during the
nine
months ended
March 31, 2018
was primarily due to asset impairment charges based on the expected sales price and the carrying value of the International segment, the recognition of net loss of amounts previously classified within accumulated other comprehensive income and professional fees associated with the successful completion of the transaction. The recognition of the net loss of amounts previously classified within accumulated other comprehensive income into earnings was the result of the Company's liquidation of substantially all foreign entities with British pound denominated entities. See Note 1 to the unaudited Condensed Consolidated Financial Statements.
Results of Operations by Segment
Based on our internal management structure, we now report two segments: Company-owned salons and Franchise salons. See Note 10 to the Consolidated Financial Statements. Significant results of operations are discussed below with respect to each of these segments.
Company-owned Salons
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
For the Nine Months Ended March 31,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
(Dollars in millions)
|
|
(Decrease) Increase
|
|
(Dollars in millions)
|
|
(Decrease) Increase
|
Total revenue
|
$
|
271.9
|
|
|
$
|
294.3
|
|
|
$
|
(22.4
|
)
|
|
$
|
(8.8
|
)
|
|
$
|
840.6
|
|
|
$
|
890.0
|
|
|
$
|
(49.4
|
)
|
|
$
|
(18.7
|
)
|
Same-store sales
|
1.6
|
%
|
|
(1.7
|
)%
|
|
330 bps
|
|
|
(330 bps)
|
|
|
0.4
|
%
|
|
(1.3
|
)%
|
|
170 bps
|
|
|
(370 bps)
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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Operating (loss) income
|
$
|
19.2
|
|
|
$
|
16.5
|
|
|
$
|
2.7
|
|
|
$
|
(8.4
|
)
|
|
$
|
22.4
|
|
|
$
|
56.7
|
|
|
$
|
(34.3
|
)
|
|
$
|
(6.1
|
)
|
Company-owned Salon Revenues
Decreases in Company-owned salon revenues were driven by the following:
|
|
|
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|
Three Months Ended
March 31,
|
|
For the Nine Months
Ended March 31,
|
Factor
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Same-store sales
|
|
1.6
|
%
|
|
(1.7
|
)%
|
|
0.4
|
%
|
|
(1.3
|
)%
|
Closed salons
|
|
(9.8
|
)
|
|
(2.0
|
)
|
|
(6.2
|
)
|
|
(1.9
|
)
|
New stores
|
|
0.1
|
|
|
0.5
|
|
|
0.2
|
|
|
0.5
|
|
Foreign currency
|
|
0.3
|
|
|
0.1
|
|
|
0.3
|
|
|
—
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|
Other
|
|
0.2
|
|
|
0.2
|
|
|
(0.2
|
)
|
|
0.6
|
|
|
|
(7.6
|
)%
|
|
(2.9
|
)%
|
|
(5.5
|
)%
|
|
(2.1
|
)%
|
Company-owned salon revenues
decreased
$22.4
and
$49.4 million
during the three and
nine
months ended
March 31, 2018
, respectively, primarily due to the closure of
740
salons and the sale of
376
company-owned salons (net of buybacks) to franchisees during the twelve months ended
March 31, 2018
, partly offset by same-store sale
increases
of
1.6%
and
0.4%
during the three and
nine
months ended
March 31, 2018
, respectively. The same-store sales
increases
were due to
increases
of
3.3%
and
3.1%
in average ticket prices, partly offset by
decreases
of
1.7%
and
2.7%
in same-store guest visits during the three and
nine
months ended
March 31, 2018
, respectively. The Company estimates the shift of Easter from April 2017 to March 2018 favorably impacted same-store sales approximately 0.9% during the three months ended
March 31, 2018
. Partly offsetting the decrease was revenue growth from construction (net of relocations) of
4
salons during the twelve months ended
March 31, 2018
.
Company-owned salon revenues
decreased
$8.8
and
$18.7 million
during the three and
nine
months ended
March 31, 2017
, respectively, primarily due to the closure of
151
salons and the sale of
35
company-owned salons (net of buybacks) to franchisees during the twelve months ended
March 31, 2017
and same-store sales
decrease
s of
1.7%
and
1.3%
, respectively, partly offset by revenue growth from construction (net of relocations) of
53
salons during the twelve months ended
March 31, 2017
. The same-store sales
decrease
s were due to
5.1%
and
5.3%
decreases
in same-store guest visits, partly offset by
3.4%
and
4.0%
increases
in average ticket price.
Company-owned Salon Operating Income
During the three and
nine
months ended
March 31, 2018
, Company-owned salon operations generated operating income of
$19.2
and
$22.4 million
, an
increase (decrease)
of
$2.7
and
$(34.3) million
, respectively, compared to the prior comparable period. The increase during the three months ended
March 31, 2018
was primarily due to improved stylist productivity, closure of underperforming salons and prior year inventory expense related to salon tools, partly offset by state minimum wage increases, costs associated with the SmartStyle marketing campaign and higher health insurance costs. The decrease during the
nine
months ended
March 31, 2018
was primarily due to SmartStyle restructuring charges consisting of lease termination and other related closure costs and costs associated with returning the salons to pre-occupancy condition and non-cash fixed asset impairment costs. Also contributing to the decrease were state minimum wage increases, costs associated with the SmartStyle marketing campaign, the hurricanes in the southern United States and higher health insurance costs, partly offset by improved stylist productivity, the closure of underperforming salons and prior year inventory expense related to salon tools.
Company-owned salon operating income
decreased
$8.4 million
and
$6.1 million
during the three and
nine
months ended
March 31, 2017
primarily due to the same-store sales decreases, state minimum wage increases, lowered stylist productivity, a non-recurring rebate in prior year, inventory write-offs and rent inflation, partly offset by cost savings associated with salon telecom, utilities costs and lower incentives expense.
Franchise Salons
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|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
For the Nine Months Ended March 31,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
(Dollars in millions)
|
|
Increase (Decrease)
|
|
(Dollars in millions)
|
|
Increase (Decrease)
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
$
|
8.4
|
|
|
$
|
7.5
|
|
|
$
|
0.9
|
|
|
$
|
—
|
|
|
$
|
24.8
|
|
|
$
|
22.5
|
|
|
$
|
2.3
|
|
|
$
|
(0.7
|
)
|
Product sold to TBG
|
6.5
|
|
|
—
|
|
|
6.5
|
|
|
—
|
|
|
12.9
|
|
|
—
|
|
|
12.9
|
|
|
—
|
|
Total Product
|
$
|
14.9
|
|
|
$
|
7.5
|
|
|
$
|
7.4
|
|
|
$
|
—
|
|
|
$
|
37.7
|
|
|
$
|
22.5
|
|
|
$
|
15.2
|
|
|
$
|
(0.7
|
)
|
Royalties and fees (1)
|
14.0
|
|
|
11.6
|
|
|
2.4
|
|
|
(0.1
|
)
|
|
40.8
|
|
|
35.1
|
|
|
5.8
|
|
|
(0.4
|
)
|
Total franchise salons revenue (2)
|
$
|
28.9
|
|
|
$
|
19.2
|
|
|
$
|
9.8
|
|
|
$
|
(0.1
|
)
|
|
$
|
78.6
|
|
|
$
|
57.6
|
|
|
$
|
21.0
|
|
|
$
|
(1.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
$
|
9.9
|
|
|
$
|
8.5
|
|
|
$
|
1.4
|
|
|
$
|
(0.2
|
)
|
|
$
|
29.0
|
|
|
$
|
25.1
|
|
|
$
|
3.9
|
|
|
$
|
0.3
|
|
Operating income from TBG
|
0.3
|
|
|
—
|
|
|
0.3
|
|
|
—
|
|
|
0.6
|
|
|
—
|
|
|
0.6
|
|
|
—
|
|
Total operating income
|
$
|
10.2
|
|
|
$
|
8.5
|
|
|
$
|
1.7
|
|
|
$
|
(0.2
|
)
|
|
$
|
29.6
|
|
|
$
|
25.1
|
|
|
$
|
4.5
|
|
|
$
|
0.3
|
|
_______________________________________________________________________________
|
|
(1)
|
Total includes $0.4 and $0.7 million of royalties related to TBG during the three and nine months ended March 31, 2018, respectively.
|
|
|
(2)
|
Total is a recalculation; line items calculated individually may not sum to total due to rounding.
|
Franchise Salon Revenues
Franchise salon revenues
increased
$9.8
and
$21.0 million
during the three and
nine
months ended
March 31, 2018
, respectively, due to
increases
of
$7.4
and
$15.2 million
, respectively, in franchise product sales primarily due to product sold to TBG and
increases
of
$2.4
and
$5.8 million
, respectively, in royalties and fees, primarily as a result of increased franchised locations. The increase in royalties and fees was also due to an increase in the number of new salons opened in the first
nine
months compared to the prior year. During the twelve months ended
March 31, 2018
, franchisees constructed (net of relocations) and closed
97
and
154
franchise-owned salons, respectively, and purchased (net of Company buybacks)
376
salons from the Company and
1,132
salons previously included in the Company's previous mall-based business and International segment during the same period.
Franchise salon revenues
decreased
$0.1
and
$1.1 million
during the three and
nine
months ended
March 31, 2017
, respectively, due to
$0.1
and
$0.4 million
decreases
in royalties and fees, respectively, and a
$0.7 million
decrease
in franchise product sales for the
nine
months ended
March 31, 2017
. The decreases in royalties and fees were primarily due to higher level of franchise termination fees in the prior year quarter and lower initial franchise fees. While the number of new salons opened in the quarter was flat to last year, the mix of franchisees opening salons in the quarter shifted to existing franchisees, who pay lower fees for opening additional salons. The
$0.4 million
decrease
in royalties and fees for the
nine
months ended
March 31, 2017
compared to the prior year period was primarily due to a lower level of initial franchise fees due to the timing of salon openings and higher franchise termination fees in the prior year. These decreases were partly offset by the increased number of franchised locations and same-store sales increases at franchised locations. During the twelve months ended
March 31, 2017
, franchisees constructed (net of relocations) and closed
157
and
85
franchise-owned salons, respectively, and purchased (net of Company buybacks)
35
salons from the Company during the same period.
Franchise Salon Operating Income
Franchise salon operating income
increased
$1.7
and
$4.5 million
during the three and
nine
months ended
March 31, 2018
, respectively, primarily due to the increased number of new franchised locations and increased franchise product sales.
Franchise salon operating income
decreased
$0.2 million
during the three months ended
March 31, 2017
primarily due to lower franchise fees. Franchise salon operating income
increased
$0.3 million
during the
nine
months ended
March 31, 2017
primarily due to the prior year including bad debt expense and one-time compensation benefits during the period, partly offset by lower franchise product sales and franchise fees.
Corporate
Corporate Operating Loss
Corporate operating loss
decreased
$7.7
and
$8.5 million
during the three and
nine
months ended
March 31, 2018
, respectively, primarily driven by the prior year including severance related to the termination of former executive officers including the Company's Chief Executive Officer, partly offset by increases in incentive compensation accruals. The nine months ended
March 31, 2018
decrease was also impacted by a gain associated with life insurance proceeds in connection with the passing of a former executive officer, savings realized from Company initiatives, partly offset by, severance associated with terminations of former executives and professional fees.
Corporate operating loss
increased
$6.4 million
during the three months ended
March 31, 2017
primarily due to severance related to the termination of former executive officers including the Company's Chief Executive Officer, expense associated with legal settlements, higher professional fees and planned strategic investments in technical education, partly offset by lower incentive compensation. Corporate operating loss
decreased
$0.2 million
during the
nine
months ended
March 31, 2017
primarily due to one-time compensation benefits, and cost savings, partly offset by severance related to the termination of former executive officers including the Company's Chief Executive Officer, expense associated with legal settlements, higher professional fees and the planned strategic investments in technical education.
LIQUIDITY AND CAPITAL RESOURCES
Sources of Liquidity
Funds generated by operating activities, available cash and cash equivalents, and our borrowing agreements are our most significant sources of liquidity.
As of
March 31, 2018
, cash and cash equivalents were
$105.2
million, with
$91.1
and
$14.1
within the United States and Canada, respectively.
The Company's borrowing arrangements include a
$260.0 million
five-year unsecured revolving credit facility that expires in
March 2023
, of which
$168.4 million
was available as of
March 31, 2018
. In April 2018, the Company amended and restated the Credit Agreement which increases the Revolving Credit Facility under the Credit Agreement by
$35.0 million
. After giving effect to the amendment, the revolving commitment under the Credit Facility is
$295.0 million
. See Note 8 to the unaudited Condensed Consolidated Financial Statements.
Uses of Cash
The Company closely manages its liquidity and capital resources. The Company's liquidity requirements depend on key variables, including the level of investment needed to support its business strategies, the performance of the business, capital expenditures, credit facilities and borrowing arrangements and working capital management. Capital expenditures are a component of the Company's cash flow and capital management strategy which can be adjusted in response to economic and other changes to the Company's business environment. The Company has a disciplined approach to capital allocation, which focuses on investing in key priorities to support the Company's multi-year strategic plan as discussed within Part I, Item 1 of our Annual Report on Form 10-K for the fiscal year ended June 30, 2017.
Cash Flows
Cash Flows from Operating Activities
During the
nine
months ended
March 31, 2018
, cash
used in
operating activities of
$22.6 million
, a
decrease
of
$69.5
million compared to the prior comparable period, was primarily due to the payment of lease termination and other related closure costs associated with the Company's SmartStyle restructuring and lower cash volumes generated from salon operations.
During the
nine
months ended
March 31, 2017
, cash
provided by
operating activities of
$46.8 million
increased
by
$7.2 million
compared to the prior comparable period, primarily due to higher inventory purchases in the prior year.
Cash Flows from Investing Activities
During the
nine
months ended
March 31, 2018
, cash
provided by
investing activities of
$2.2
million, an
increase
of
$25.1 million
compared to the prior comparable period, was primarily from proceeds from company-owned life insurance policies of
$18.1 million
and cash proceeds from sale of salon assets of
$5.6 million
, partly offset by capital expenditures of
$21.2 million
and a change in restricted cash of
$0.3 million
.
During the
nine
months ended
March 31, 2017
, cash
used in
investing activities of
$23.0 million
was primarily for capital expenditures of
$25.4 million
, partly offset by a change in restricted cash of
$1.0 million
, cash proceeds from company-owned life insurance policies of
$0.9 million
and cash proceeds from the sale of salon assets of
$0.6 million
.
Cash Flows from Financing Activities
During the
nine
months ended
March 31, 2018
, cash
used in
financing activities of
$46.7 million
,
an increase
of
$45.0 million
compared to the prior comparable period, was primarily for repayments of long-term debt relating to the 5.5% senior term notes of
$124.2 million
, repurchase of common stock of
$9.6 million
, employee taxes paid for shares withheld of
$2.3 million
and settlement of equity awards of
$0.6 million
, partly offset by borrowings on the revolving credit facility of
$90.0 million
.
During the
nine
months ended
March 31, 2017
, cash used in financing activities of
$1.7 million
was for employee taxes paid for shares withheld of
$1.2 million
and settlement of equity awards of
$0.4 million
.
Financing Arrangements
See Note 8 of the Notes to the unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for the quarter ended
March 31, 2018
and Note 6 of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended
June 30, 2017
, for additional information regarding our financing arrangements.
Debt to Capitalization Ratio
Our debt to capitalization ratio, calculated as the principal amount of debt as a percentage of the principal amount of debt and shareholders’ equity at fiscal quarter end, were as follows:
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As of
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Debt to
Capitalization
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Basis Point
(Decrease) Increase (1)
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March 31, 2018
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14.9
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%
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(460
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)
|
June 30, 2017
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19.5
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%
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40
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_____________________________
(1)
Represents the basis point change in debt to capitalization as compared to the prior fiscal year end (
June 30, 2017
).
The
460
basis point
decrease
in the debt to capitalization ratio as of
March 31, 2018
as compared to
June 30, 2017
was primarily due to the retirement of the Company's $123.0 million 5.5% senior notes due December 2019 (Senior Term Notes) and increases to shareholders equity resulting from the impact of changes in federal tax legislation during the
nine
months ended
March 31, 2018
, partly offset by the non-cash impairment charge associated with the franchising the Company's previously owned mall-based and International segment, costs associated with the Company's restructuring of its SmartStyle portfolio, and
$90.0 million
of outstanding borrowings under the March 2018 revolving credit facility.
The
40
basis point
increase
in the debt to capitalization ratio as of
June 30, 2017
compared to
June 30, 2016
was primarily due to net reductions to shareholders' equity resulting from net losses and foreign currency translation adjustments.
Share Repurchase Program
In May 2000, the Company’s Board of Directors (Board) approved a stock repurchase program with no stated expiration date. Since that time and through
March 31, 2018
, the Board has authorized $450.0 million to be expended for the repurchase of the Company's stock under this program. All repurchased shares become authorized but unissued shares of the Company. The timing and amounts of any repurchases depend on many factors, including the market price of the common stock and overall market conditions. During the three and
nine
months ended
March 31, 2018
, the Company repurchased
585,967
shares for
$9.6 million
. As of
March 31, 2018
, a total accumulated
19.0 million
shares have been repurchased for
$399.6 million
. At
March 31, 2018
,
$50.4 million
remained outstanding under the approved stock repurchase program.
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,” “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; 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.