Lower Guest Count Widens Regis' Q2 Loss - Analyst Blog

The owner, operator and franchisor of hairstyling and hair-care salons Regis Corp.'s (RGS) second-quarter fiscal 2014 adjusted loss of 4 cents per share compared unfavorably with the Zacks Consensus Estimate of earnings of a penny due to lower than expected same-store sales.

Loss during in the quarter also compared unfavorably with earnings of 3 cents in the year-ago quarter. The loss was due to the decline in comparable store sales and lower operating margin.

Total revenue declined 7.5% year over year to $468.4 million and missed the Zacks Consensus Estimate of $480 million by 2.5%. Revenues decreased due to the decline in comps and lower traffic.

Performance in Detail

Service revenues dropped 7.6% year over year to $360.9 million, mainly due to a decrease in North American salon revenues and a 5.5% decline in service same-store sales (due to 6.6% fall in guest counts). A decline of 1.5% in net store count due to lower discretionary spending by consumers also hampered total sales during the quarter.

Product revenues declined 9.7% year over year to $97.8 million owing to a 9.2% fall in same-store sales. Royalties and fees revenues were $9.6 million, flat year over year.

Consolidated comps in the quarter were down 6.2% due to a 7.4% decrease in guest count, partly offset by 1.2% rise in average ticket price. The rate of decline in comps was also worse than the year-ago quarter drop of 1.9%.

Cost of service as a percent of service revenues expanded 160 basis points (bps) to 59.9% due to the adverse impact of negative service comps and higher healthcare costs.  

Store Update

During the quarter, Regis built 49 company-owned salons, while closing down or transferring 62 company-owned locations. On Sep 30, 2013, the company had 9,752 salons, of which 7,403 were company-owned and the rest were franchised.

Our Take

Regis' earnings missed the Zacks Consensus Estimate as well as the year-ago earnings due to lower same-store sales during the quarter. The company's earnings have been reeling under pressure for quite some time now due to lower top line, higher labor costs and mounting retail expenses. Owing to the continuous fall in guest count, the company has been witnessing declining comps for several past quarters. Although the company has undertaken various sales-building initiatives, we believe the sluggish comps trend will continue to affect its performance until the customer-visit patterns completely rebound. Apart from this, in the coming quarters, the company's profit is expected to be under pressure due to higher labor costs.

Other Stocks to Consider

Regis currently carries a Zacks Rank #5 (Strong Sell). Investors interested in the retail industry may consider stocks like Staples Inc. (SPLS), Coastal Contacts Inc. (COA) and Sally Beauty Holdings Inc. (SBH). All these companies hold a Zacks Rank #2 (Buy).