Regis Corp. (NYSE: RGS) has agreed to sell its Trade Secret retail products division to Premier Salons Beauty Inc., a Canadian portfolio company of Falconhead Capital.
Regis Corporation (NYSE:RGS), the global leader in the $170 billion hair care industry, today announced the signing of a definitive agreement to sell its Trade Secret retail product division to Premier Salons Beauty, Inc. In addition, the Company reported financial results for its second fiscal quarter ended December 31, 2008.
“After reviewing our strategic options, we made a decision to sell our Trade Secret division. This division had been highly profitable over many years, but based on current sales trends, Trade Secret was forecasted to have operating losses of over $23 million on a fully allocated basis in fiscal 2009,” commented Paul D. Finkelstein, Chairman and Chief Executive Officer. “This category continues to face many challenges including product diversion and increased competition, and the many new initiatives we have tried have been met with limited success. The decision to sell Trade Secret was difficult; however, with the likelihood of significant ongoing operating losses and capital investments, it is the right decision. The sale of the division will immediately strengthen our financial ratios and improve our overall profitability.”
Highlights of Trade Secret Transaction
* The Company will not receive any proceeds from the sale transaction.
* The Company expects to receive an income tax benefit and corresponding cash refund of $56 million as a result of the transaction. Half of this amount should be realized in fiscal 2009 and the other half in fiscal 2010.
* The Company recorded a $171.8 million pre-tax, non-cash charge within discontinued operations during its second fiscal quarter.
* The sale is primarily a stock transaction and is expected to close on February 15, 2009.
As a result of this pending transaction, the Company will be reporting the Trade Secret operations and non-cash charge as discontinued operations. As required by Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS No. 144”), the results of the Trade Secret operations will be reported in the December 2008 10-Q Unaudited Condensed Consolidated Statement of Operations as discontinued operations for all periods presented.
Second Quarter Results
The Company is reporting a second quarter net loss of $3.34 per diluted share. These results include a primarily non-cash, net pre-tax charge of $217.7 million consisting of several non-operational items, the largest of which relates to the write-off of net assets associated with the sale of Trade Secret. Absent these non-operational items, second quarter operational earnings, including the quarterly operational results of Trade Secret, were $0.36 per diluted share. A complete reconciliation of reported earnings to operational earnings is included in today’s press release. A more comprehensive reconciliation is available on the Company’s website at www.regiscorp.com.
Second quarter non-operational charges, which netted to $217.7 million on a pre-tax basis, consisted of the following items:
* $171.8 million related to the non-cash write-off of net assets associated with sale of Trade Secret (the charge of $115.8 million, net of tax, is included in the loss from discontinued operations);
* Non-cash goodwill impairment of $41.7 million related to the Company’s U.K. salon division;
* Non-cash write-off of $7.8 million related to the Company’s investment in and loans to Intelligent Nutrients (the charge of $4.8 million, net of tax, is included in equity in loss of affiliated companies);
* Lease termination costs of $1.3 million ($0.8 million included in continuing operations, with $0.5 million pre-tax, or $0.3 million net of tax, included in loss from discontinued operations);
* Trade Secret transformation costs of $1.9 million ($1.9 million pre-tax, or $1.2 million net of tax, is included in the loss from discontinued operations); and
* A benefit of $6.8 million to reduce estimated prior years’ workers’ compensation claim reserves ($6.7 million included in continuing operations, with $0.1 million included, net of tax, in loss from discontinued operations).
Commenting on second quarter results, Mr. Finkelstein stated, “The current economic environment creates huge challenges for virtually all industries. However, Regis is financially strong and even in these tough times our operations are very profitable. For the remainder of fiscal 2009 and throughout fiscal 2010, our strategy continues to be strengthening our balance sheet, significantly reducing investments in salon unit growth, reducing debt levels and controlling expenses. We are right on plan to achieve our previously announced target for reducing costs by over $20 million in fiscal 2009, and we expect our debt levels to be below $700 million by the end of our fiscal year on June 30, 2009. We remain in full compliance with all of our debt covenants. At the end of the quarter, our fixed charge coverage ratio stood at 1.59, well above the minimum covenant requirement of 1.50. The Trade Secret sale transaction and the related discontinued operations accounting treatment, coupled with the significant progress we have made on our cost control initiatives, have added additional cushion to this covenant.”
Mr. Finkelstein continued, “In this current economic environment, it is impossible to predict how long and how deep this recession will be. Thus, we have made the decision to discontinue providing quarterly and annual sales and earning guidance, at least until conditions normalize. However, to provide a reference point, our total January same-store sales are currently trending at a negative five percent. If same-store sales were to continue at this level for the entire quarter, operationally, we would expect our earnings per share from continued operations to be in excess of $0.40 for our third quarter.”
In conclusion, Mr. Finkelstein stated, “Regis continues to be the world’s leading beauty salon company, offering affordable services in over 12,700 locations. Although this year will likely be the exception, we have never had a negative same-store service year. We have a great business model as we are in the quintessential replenishment business. We believe it is only a matter of time until our customer visitation patterns normalize. With no threat of technological obsolescence, a highly predictable business model and favorable demographics with an aging population, we are very bullish about our future.”
As of December 31, 2008 Regis Corporation owned, franchised, or held ownership interest in 13,605 worldwide locations including the Trade Secret concept which is expected to be sold as described earlier. In the second quarter, capital expenditures for maintenance and new locations totaled $27.5 million. Acquisition spend was $77,000 in the quarter.
Regis Corporation will host a conference call discussing second quarter results tomorrow, January 28, 2008 at 10 a.m., Central time. Interested parties are invited to listen by logging on to www.regiscorp.com or dialing 800-240-2134. A replay of the call will be available later that day. The replay phone number is 800-405-2236, access code 11124042#.
About Regis Corporation
Regis Corporation (NYSE:RGS) is the beauty industry’s global leader in beauty salons, hair restoration centers and cosmetology education. As of December 31, 2008, the Company owned, franchised or held ownership interests in over 13,600 worldwide locations. Regis’ corporate and franchised locations operate under concepts such as Supercuts, Sassoon Salon, Regis Salons, MasterCuts, SmartStyle, Cost Cutters, Trade Secret, PureBeauty, BeautyFirst and Hair Club for Men and Women. In addition, Regis maintains an ownership interest in Provalliance, which operates salons primarily in Europe, under the brands of Jean Louis David, Franck Provost and Saint Algue. Regis also maintains ownership interests in Empire Education Group and various other salon concepts such as Cool Cuts 4 Kids and the MY Style concepts in Japan. System-wide, these and other concepts are located in the U.S. and in over 30 other countries in North America, South America, Europe, Africa and Asia. Regis also maintains a 49 percent ownership interest in Intelligent Nutrients, a business that provides a wide variety of certified organic products for health and beauty. For additional information about the company, including management’s current financial outlook and a reconciliation of non-GAAP financial information, please visit the Investor Information section of the corporate website at www.regiscorp.com.