Regis Corporation (RGS) reported fourth quarter 2012 adjusted earnings of 40 cents per share, surpassing the Zacks Consensus Estimate of 31 cents as well as the year-ago quarter earnings of 37 cents per share. The better-than-expected results were driven by lower tax-rate.

However, the company delivered net loss of $63.6 million or $1.11 per share inclusive of the after-tax non-operational charges of $89.2 million related to goodwill impairment at its Regis salon division and the write-down of the equity investment in Empire Educations, which improved considerably from a net loss of $16.4 million or 29 cents per share posted in the year-ago quarter.

Total revenue slipped 4.0% year over year to $568.2 million in the reported quarter due to sluggish same-store sales.

In full year 2012, the company reported net income of $80.5 million, or $1.30 per share, versus $71.2 million, or $1.16 per share, in the prior year. Total revenue fell 2.2% to $2,325.9 million.

Quarter Performance

Service revenues dipped 5.1% year over year to $429.5 million, while product revenue decreased 0.8% to $128.3 million and fees and royalties climbed 1.7% to $10.3 million.

Consolidated same-store sales plummeted 3.0%. The rate of decline which was steeper than the year-ago drop of 1.7%, marked the 16th straight quarter of negative comps. The continuous deterioration in comps is primarily due to slower customer traffic. During the quarter, guest count declined 4.0%.

As per revenue concept, North America Salons contributed more than 80% of the total revenue and recorded sales of $487.9 million, down 4.7%, attributed to a decrease of 3.3% in same-store sales. International Salons segment, which includes company-owned salons located primarily in the United Kingdom, reported revenues of $41.0 million, down 3.7%. International same-store sales plunged 6.6% as retail environment in the U.K. continues to remain challenged. However, revenue at the Hair restoration centers climbed 4.3% to $39.3 million, benefiting from same-store sales growth of 4.4% in the quarter.

During the quarter, gross margins contracted 40 basis points (bps) to 44.6% and operating margins remained flat year over year at 5.7%.

Store Update

During the quarter, Regis opened 60 company-owned salons and closed or relocated 104 salons. Franchisees opened 26 salons and closed 22.

At the end of 2012, Regis owned, franchised, or held ownership interest at 12,647 locations worldwide.

Liquidity

At the end of 2012, cash and cash equivalents increased to $111.9 million from $96.3 million at the end of 2011. As of June 30, 2012, Regis reduced its long-term debt and capital lease obligations to $258.7 million from $281.2 million as of June 30, 2011.

Our Take

The company’s new CEO Hanrahan is taking all the measures to turnaround Regis’ business. Harahan has started implementing a sound strategy of transformation. The strategy includes simplifying operating model and leveraging the company’s scale, encouraging a performance-driven environment, improving the salon experience and hiring, training and retaining top stylists (supported by new human resource department, which never existed at company previously). Moreover, the sale of Regis’ stake in Provalliance as well as the divestiture of Hair Club remains encouraging, as both the deals will enable it to focus on enhancing the salon experience by offloading non-core assets.

On the flip side, sluggish same-store sales resulting from slower traffic due to economic concerns, lack of visibility and lingering risk from fashion changes remain matters of concern.

Regis which competes with Ulta Salon, Cosmetics & Fragrance Inc. (ULTA) has a Zacks #3 Rank, implying a short-term Hold rating on the stock. Our long-term recommendation for the stock remains Neutral.

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