Investment Thesis: Company is trading at very cheap valuation with 18% trailing fcf yield and 15% forward fcf yield. Investors are concerned about same-store-sales (sss) trending negative for three straight years and see no clear turning points. I believe the same-store-sales are close to bottoming and should begin to turn positive in coming few quarters.
While SSS have shown improvement, the actual underlying trends are masked by changes in company pricing policies. Looking at price and volume separately reveals a clear trend towards significant improvement in volumes and customer visitations. Several brands have started to turn positive as of current quarter while others have improved significantly and are close to turning positive as can be seen from the table below
Customer visits
Service SSS
FY 2006
FY 2007
FY 2008
FY 2009
FY 2010
FY 2011E
Regis Salons
-0.8%
0.2%
-0.1%
-10.0%
-7.7%
-3.8%
Mastercuts
-0.5%
0.4%
5.9%
-1.8%
-1.9%
-2.2%
Supercuts
4.4%
1.1%
0.5%
0.4%
Promenade
3.2%
-3.6%
-3.4%
-3.0%
SmartStyle
5.1%
2.7%
6.5%
0.3%
-2.3%
-1.8%
North America Service Same-store sales
1.1%
1.3%
3.4%
-3.5%
-3.5%
-2.3%
FY 2006
FY 2007
FY 2008
FY 2009
% change in Service ASP ($)
Regis Salons
6.1%
5.7%
5.4%
2.6%
Mastercuts
6.3%
0.0%
5.9%
5.6%
Supercuts
33.3%
-12.5%
7.1%
6.7%
SmartStyle
0.0%
5.9%
5.6%
0.0%
Channel checks indicate that this problem is not specific to Regis brands. Given that this is industry-wide issue, how much more can people delay hair-cuts?
Biggest impact was from higher priced stores which saw down-shift in spending. This is where most of the decline came from but has become less of a drag as economy started to stabilize
Private equity firms had taken a look at RGS in the ~$20/shr and were unwilling to pay the mid-20s share price management was asking for. However at $13.5/shr even $20/shr offer would seem attractive
Detail breakdown of SSS by retail and services
FY 2006
FY 2007
FY 2008
FY 2009
FY 2010
FY 2011E
Service SSS
Regis Salons
-0.8%
0.2%
-0.1%
-10.0%
-7.7%
-3.8%
Mastercuts
-0.5%
0.4%
5.9%
-1.8%
-1.9%
-2.2%
Supercuts
4.4%
1.1%
0.5%
0.4%
Promenade
3.2%
-3.6%
-3.4%
-3.0%
SmartStyle
5.1%
2.7%
6.5%
0.3%
-2.3%
-1.8%
North America Service Same-store sales
1.1%
1.3%
3.4%
-3.5%
-3.5%
-2.3%
Retail SSS
Regis Salons
-1.5%
-1.4%
-5.1%
-16.2%
-9.5%
4.4%
Mastercuts
-3.2%
-3.0%
-6.9%
-7.6%
-1.8%
6.1%
Supercuts
3.1%
-0.1%
3.6%
-2.0%
Promenade
2.8%
-9.4%
-3.4%
0.8%
SmartStyle
2.8%
-1.6%
-2.1%
-0.5%
-0.6%
-2.1%
North America Retail Same-store sales
-0.2%
-2.9%
-2.0%
-5.8%
-2.6%
0.3%
International Service SSS
-5.6%
-4.0%
-4.6%
-7.3%
-3.9%
-4.6%
International retail SSS
3.9%
7.1%
-4.3%
-4.9%
-3.5%
-0.1%
Total Int'l Same-store sales
-3.0%
-0.6%
-4.5%
-6.6%
-3.8%
-3.1%
Hair Restoration Service SSS
7.7%
3.7%
-2.3%
0.6%
1.3%
Hair Restoration retail SSS
10.6%
2.0%
-0.5%
0.3%
1.2%
Hair Restoration SSS
8.7%
2.8%
-1.4%
0.4%
1.2%
Total Service SSS
0.6%
1.0%
2.7%
-3.7%
-3.4%
-2.3%
Total Retail SSS
0.1%
-1.8%
-1.9%
-5.0%
-2.3%
0.4%
Consolidated SSS
0.4%
0.2%
1.7%
-4.0%
-3.2%
-1.7%
Valuation / Target Price: FCF yield (ex-working capital) is at 18% FY2010 and 14% on FY2011. Management has guided to -1% to +1% SSS for FY2012 (as compared to -2.3% for FY 11 and -1.7% for latest quarter). Under management assumptions, FY2012 FCF yield would range from 15.5% - 16.5%. As shown in exhibit 1 even at much worse assumptions of SSS the fcf yield remains very attractive. For example if one were to assume significantly worse SSS at -3 to -4% the FCF yield still remains above 14%.
I believe a 10% fcf yield is conservative for a stable business with little risk for displacement. At that yield I get to $20/shr of fair value or circa 50% upside from current levels.
FY '14 FCF Yield assuming no HC impact (w/o cash build)
13%
Normalized comps (FY '13+)
13.5%
-1.50%
-0.8%
0.0%
0.8%
1.5%
2.3%
3.0%
1.5%
13.2%
14.0%
14.9%
15.7%
16.6%
17.5%
18.4%
FY'12 Comps
1.0%
12.9%
13.8%
14.6%
15.5%
16.3%
17.2%
18.1%
0.5%
12.7%
13.5%
14.3%
15.2%
16.0%
16.9%
17.8%
0.0%
12.4%
13.2%
14.1%
14.9%
15.7%
16.6%
17.5%
-0.5%
12.1%
12.9%
13.8%
14.6%
15.5%
16.3%
17.2%
-1.0%
11.8%
12.7%
13.5%
14.3%
15.2%
16.0%
16.9%
-1.5%
11.6%
12.4%
13.2%
14.0%
14.9%
15.7%
16.6%
-2.0%
11.3%
12.1%
12.9%
13.8%
14.6%
15.4%
16.3%
-2.5%
11.0%
11.8%
12.7%
13.5%
14.3%
15.1%
16.0%
-3.0%
10.8%
11.6%
12.4%
13.2%
14.0%
14.8%
15.7%
Risks/uncertainties: The biggest risk with Regis is continued negative trend in same-store-sales. This would happen if 1) people continue to further delay hair-cuts even more or 2) Regis loses market share to mom-and-pop stores. While there is no current indication of the latter happening, this is a possible risk if Regis increases prices from current levels. The second biggest risk is ability of Regis to deal with healthcare costs. I estimate that company could take a hit of as much as $40m-$60m of net healthcare costs if unable to pass through rise in costs to customers. Under this scenario stock would still be cheap (high single digit / low double digit fcf yield). I believe this is still a few years away (2014) and signficant amount of cash will build-up before that period and hence buying at high single digits fcf yield would still be attractive.
Catalysts: 1) turn-around in same-store-sales likely to happen in next few quarters
Catalyst
Catalysts: 1) turn-around in same-store-sales likely to happen in next few quarters
Are you sure you want to close this position REGIS CORP/MN?
By closing position, I’m notifying VIC Members that at today’s market price, I no longer am recommending this position.
Flag REGIS CORP/MN for Removal
Are you sure you want to Flag this idea REGIS CORP/MN for removal?
Flagging an idea indicates that the idea does not meet the standards of the club and you believe it should be removed from the site. Once a threshold has been reached the idea will be removed.
You Cannot Submit Message ... Yet
You currently do not have message posting privilages, there are
1 way you can get the privilage.
You can apply for full membership by submitting an investment idea of your own. Or if you are in reactivation status, you need to reactivate your full membership.