We recently upgraded our rating on Regis Corp. (RGS), which owns, operates and franchises hair and retail product salons worldwide, to Neutral from Underperform. The rating upgrade was based on third quarter 2010 earnings results being modestly ahead of the Zacks Consensus Estimate, primarily due to cost-containment measures taken by the company, which resulted in gross margin improvement.
However, we still remain cautious based on same-store sales, which remain a drag attributed to slower traffic and limited new product introduction due to economic concerns. Although customer visit patterns are expected to become stable in a year or two, currently they are not rebounding as quickly as the company had earlier projected.
Third Quarter Results Ahead of Estimates
Regis’ third quarter adjusted operating earnings of 37 cents per share were ahead of the Zacks Consensus Estimate of 32 cents per share.
Consolidated total same-store sales fell 1.8% due to a 5.8% decline in traffic, partially offset by a 3.6% rise in average tickets, primarily due to price increases.
Outlook for 2010 and 2011
Management expects fiscal 2010 EBITDA to come in at around $250 million, above the high end of the previous guidance range of $200 million – $240 million. Management also expects to generate $235 million-$270 million of EBITDA in fiscal 2011, assuming same-store sales in the range of (1) % to 2%. Free cash flow is expected to be $55 million to $80 million. It expects to spend approximately $95 million in salon and corporate capital expenditures and about $25 million for acquisition purpose.
Zacks Consensus Estimates Increased
After the third quarter results, analysts raised their full-year fiscal 2010 estimates to $1.33 per share compared with $1.30 just 60 days ago based on an improving economic condition and consumer spending.
Company’s Growth Plan
The company maintained its modest growth plan of building 160 new salon locations by fiscal 2010 and proposed a $7.5 million marketing initiative over the next 12 months to enhance the Regis brand and drive traffic, which remains weak due to changes in lifestyle patterns and economic pressure.
In the long run, management expects the mix of organic and acquisition growth to be roughly equal and to build and/or acquire 700 to 1000 salons each year once the economy normalizes.
Value Fundamentals
Regis is also a value stock with a price-to-book ratio of just 1.0, well under the industry average of 1.8. The company also has an attractive valuation. It is trading at 12.8X our 2010 earnings estimate, a 31.0% discount to the industry average. Additionally, trailing 12-months return on equity for the company is significantly better than the negative industry average.
The quantitative Zacks Rank for Regis is currently #3, indicating no directional pressure on the shares over the near term. Thus, we are Neutral on the stock.
Read the full analyst report on “RGS”
Zacks Investment Research
