Equity Research Report: Regis Corporation (NASDAQ: RGS)
Sector: Household Services
Industry: Hair Salons
NASDAQ
Business Description
Regis Corp. engages in the provision of ownership, franchise, and operation of beauty salons. It operates through the Company-Owned Salons and Franchise Salons segments. It also sells hair care and other beauty products. Its brands include Supercuts, SmartStyle Hair Salon, Cost Cutters, First Choice Haircutters, Roosters, Opensalon, and Best Cuts. The company was founded by Paul Kunin and Florence Kunin in 1922 and is headquartered in Minneapolis, MN.
Industry Overview
Ever-evolving consumer preferences and economic conditions shape revenue patterns for hair and nail salons. Salons must adapt to these changes to maintain financial stability by adjusting their service offerings and investing in products that align with current market trends. Small, independent service providers who had previously stopped or scaled back operations due to health and safety mandates have returned, leading to a competitive and thriving market. Increased disposable income amid economic recovery has encouraged spending on discretionary services like manicures and haircuts, boosting industry revenue. Hair and nail salon revenue is estimated to rise at an estimated CAGR of 2.5% and reach $90.6 billion through the end of 2024, with a 1.4% boost in revenue in 2024 alone.
The industry appears set for continued growth over the next five years. Economic expansion will likely raise disposable incomes, encouraging more frequent salon visits. Salon owners are expected to reinvest in their businesses by upgrading equipment and adopting the latest beauty technologies. New salon openings fueled by favorable economic conditions could cause intense competition, compelling existing companies to diversify their offerings. A growing population, particularly women aged 20 to 64, is expected to raise demand for grooming services, positioning salons for sustained success in the coming years. Revenue for hair and nail salons is projected to climb at a five-year CAGR of 1.2% to $96.3 billion by the end of 2029.
Competitive Positioning
Regis Corporation is one of the largest franchised haircare companies in the beauty industry. In North America, they franchise successful concepts including Supercuts, Cost Cutters, and Roosters. Regis Corporation provides their franchisees with a comprehensive system of business training, stylist education, site approval, lease negotiation, professional marketing, promotion and advertising programs, and additional types of support designed to help them build a successful business. This allows Regis Corporation franchisees the highest probability of success, limiting the risk of shutting down.
Regis Corporation has a real competitive advantage, which that it operates at a lower cost, which can be seen by their YOY decreasing Capex and SGA expenses.
Investment Summary
RGS's turnaround/downsizing creates a 100% return opportunity, with large margin of safety
During the recent years, RGS have chosen to close many salons under the franchise with weak sales and profits. This led to SGA expenses and Capex to decrease dramatically. Although they have decreased revenues, they have achived a turnaround to a positive ROIC of 21.75 in June 2024, from -2.29 in June 2023.
Long-term debt has been decreasing YOY, while cash been increasing steadily, giving a impression of a improving balance sheet. With a turnaround in cash flows and achieving a net profit, we can assume that that RGS would pay down the debts.
The company's new lender, TCW Asset Management LLC, provided a $105MM loan at (SOFR) plus 9% and 15% of the company's diluted shares through equity warrants struck at $7.00. This structure should allow the company to retain most of its $646MM tax loss carry forwards. This loan package substantially reduces debt and interest costs, allowing the company to generate significant free cash flow.
RGS's p/e ratio is 0.63, giving us that it is a undervalued stock.
RGS's market cap is 54.37M with shares outstanding of 2.29M, showing it is a micro-cap company and will have large volatility when a catalyst arrives such as earnings announcements. This would give the opportunity for a momentum play of 100% return.
Institutional ownership is small, showing 13.02%.
Financial Analysis
As you can see, RGS has turnaround already by their positive ROIC.
Capex and SGA expenses have dramatically reduced YOY, showing that it has reduced costs, which resulted in a positive net profit. RGS would continue to close down more less profitable salons in the future, to grow their earnings.
Investment Risks
Risk 1 - Decreasing revenues: RGS revenues have been decreasing YOY, which could have a impact on future growth in earnings. Due to closing of stores, customers loyalty to the brand may be tarnished as RGS no longer serve them on a geographic level.
ESG
From the ESG report, it is shown to have a low score, along with a ESG corporate rating of D (Poor). The average age for leadership within the company is 55.43, with an average tenure of 7.37. Insiders own 1.888% of the company shares.