We are maintaining our long-term Neutral recommendation on Regis Corporation (RGS), the largest hair salon chain in the world.
Regis' fourth quarter 2011 earnings were ahead of the Zacks Consensus Estimate. The company is undertaking a host of initiatives to drive traffic and enhance same-store sales growth.
To attract new customers and retain existing ones, Regis is replacing its earlier POS software with a new point of sale (POS) technology across all of its company-owned salons over the next year.
Regis is excited about the new technology and believes it will provide enhanced functionality at a reduced cost of ownership. The new POS system will also ensure greater success of the customer relationship management program, which targets capturing customer data, permitting the company to interact with its customers directly, thereby developing loyalty programs.
The company also remains committed to restructuring and cost-cutting initiatives, economies of scale and incremental salon closures. Hence, the operating margin of the company expanded 70 basis points during the quarter.
Management also targets shutting down approximately 160 company-owned salons in fiscal 2012. In 2011, Regis closed 305 underperforming stores.
In 2012, Regis aims to reduce incremental expenses by $20–30 million, as well as lower interest expenses. Its aggressive expense control measures benefit its gross margin and operating expenses.
The company also expects its margin to benefit from the mix as value-based brands, which comprise 85% of the worldwide units, are growing faster than higher and lower margin brands.
Moreover, in fiscal 2012, the service margin for North America salons is estimated to improve slightly over the fiscal 2011 rate of 42.1%, while the product margin is anticipated to remain strong, benefiting from lower retail commission programs.
Additionally, we believe increased investment in Provalliance, Europe’s largest salon operator will likely boost the company’s earnings going forward. Moreover, the company has a proven track record of growth through acquisitions and new salon openings. Furthermore, efforts at strengthening the balance sheet by building cash and paying down debt as well as enhancement of shareholder value augur well.
However, slower traffic due to economic concerns remains a drag on same-store sales and has resulted in twelve straight quarters of negative same-store sales. Traffic trends continued to remain choppy, with the highest drop of 6% recorded in January due to inclement weather conditions.
The company continues to view the same trend in the coming quarter as guest count dropped 2.5% and same-store sales declined 3.6% during the first seven weeks of the first quarter of 2012. We believe customer-visit patterns will not rebound as quickly as the company had earlier projected, as Regis has commenced the first quarter of 2012 on a disappointing note.
Additionally, the company faces a lingering risk of changes in fashion and competes with companies like Ulta Salon, Cosmetics & Fragrance, Inc. (ULTA), Cabela’s Inc (CAB) and Sally Beauty Holdings Inc. (SBH).
CABELAS INC (CAB): Free Stock Analysis Report
REGIS CORP/MN (RGS): Free Stock Analysis Report
SALLY BEAUTY CO (SBH): Free Stock Analysis Report
ULTA SALON COSM (ULTA): Free Stock Analysis Report
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