REGIS CORP/MN RGS
January 13, 2012 - 9:46am EST by
jaff1035
2012 2013
Price: 15.10 EPS -$0.04 $1.09
Shares Out. (in M): 62 P/E -327.0x 12.6x
Market Cap (in $M): 942 P/FCF 8.0x 7.2x
Net Debt (in $M): 259 EBIT 205 239
TEV ($): 1,201 TEV/EBIT 5.8x 5.0x

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  • Turnaround
  • SSS decline

Description

Regis

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
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