Regis Corporation – A Simple Strategy For Success

You would be hard pressed to find many companies impacted more by COVID than the leader in value haircutting, Regis Corporation. You know its main brands, the iconic Supercuts, Cost Cutters, and SmartStyle in Walmarts. In Canada, it owns the leading brand, First Choice Haircutters. When COVID hit, Regis was selling off its company stores, moving to a franchise only model. The timing could not have been worse as revenues plummeted and the company was not able to access PPP loans.

 

The company got saddled with 180 million dollars of debt and now has a market cap of less than 20 million. But Regis had a market cap of around 2 billion dollars at one point, and I believe there is significant value to the stock with a simple change in strategy, even as it faces more chain competition.

 The company’s last quarter was very strong, earning 3 cents a share; but the CEO announced Regis was looking into strategic alternatives and considering raising capital with an equity component, even though it has almost 2 years left on the maturity of its debt and expects to meet all covenants for the entire term. The stock has been under tremendous pressure as issuing equity when your market cap is less than 20 million makes no sense, especially when you have one obvious, powerful solution that could potentially increase the stock price by multiples almost instantaneously.

 

As of the last quarter, the company increased its trailing twelve month EBITDA to 25 million, excluding one time items. With net debt of 160 million, including anticipated future incoming payments, the company’s EBITDA was still low relative to its debt. But as an asset-light franchisor, it has virtually no cap-ex and, due to losses inflicted by Covid, won’t be paying taxes for the foreseeable future. So, the expected increasing EBITDA really only needs to cover the onerous interest expense that is expected to be approximately 21 million (including the pay-in-kind portion) next year if interest rates don’t change. But, the company is concerned with the future financing environment.

 

The simple and only sensible solution is to cut unnecessary costs, pushing 25 million in EBITDA to 39 million in EBITDA overnight without impacting franchise revenues at all.

 

With this action, the company could invest in scalable technology and implement debt reduction, leading to refinancing on much better terms. All this, while making a profit equal to its market cap each year. If interest rates come down, they could be making significantly more, and when the environment improves, they could benefit from franchisee growth. This company can be worth a lot of money.

 

The way the current management increased EBITDA was through franchisee price increases and significant cost cuts resulting from the transition from a company to franchisee owned model. But somewhat offsetting the cost cuts, it made large investments in stylist events and significant increases in investments for in-person training, instead of scalable technology solutions that were envisioned by the previous management. Its main scalable technology (Zenoti), that enables the company to communicate with clients and incentivize dissatisfied clients to come back, has been delayed around 1.5 years because of management’s failure to understand the basic downstream requirements of its franchisees as it was too focused on stylist events.

 

So, here are the easy steps to further reduce costs and enhance shareholder equity:

 

1) Eliminate waste (Estimated Annual Savings: 2 million dollars): The company is flying franchisees out for another Las Vegas party in January. Almost 1000 guests attended its January 2023 event which was a sequel to its October 2022 event. It has had at least one more party in Miami. Although there is a training component to these events, those trainings can easily be done locally or through technology. Franchisees that I have spoken to refer to these events as wasteful boondoggles. Flying thousands of people, including the entire Regis management team, around the country and paying for their food, hotel, and entertainment is as unscalable as you can get. There is definitely a shortage of stylists, but thinking someone out of school is going to join Regis because in a few years they might get to go to Vegas for a few days is ridiculous. Even Wall Street banks cut Christmas parties when they ran into trouble during the financial crisis.

 

2) Slash compensation (Estimated Annual Savings: 4+ million dollars): The current CEO, who was originally hired as a consultant 3 years ago earning approximately $300,000 per year, made $2,000,000 in CASH last year. He also made $2,000,000 in his first year as CEO. Other executives have also made much more than justified, especially given the company's size and simplicity. The management team's lack of basic understanding of Zenoti has already permanently cost the company and shareholders millions of dollars in Zenoti migration payments. And management’s rally cry at the end of 2022 to judge their performance on stylist recruiting, customer growth, and marketing progress rings hollow. The board showered management with money.

 

3) Restructure the board (Estimated Annual Savings: 1 million dollars): The 7 independent directors don’t purchase shares in the company and are each paid $200,000 per year. Almost one and a half million dollars is paid to the board each year. The stock component of last year’s board compensation consisted of options that represented almost 1.5 percent of outstanding shares. Comparable companies used in Regis’ proxy to justify this level of pay are much larger than Regis. Its pay rubric is ridiculous and non-sensical. Additionally, the board is in violation of its own Corporate Governance tenure limit guidelines created to encourage new ideas. When the strategy is to pay everyone based upon when it was a billion dollar plus company and move away from using technology, that is not addressing the current environment with new ideas. Three directors have served more than Regis’ corporate governance tenure limit of 10 years, including the Chairman of the Corporate Governance Committee. Another director is over the company’s 75 year age limit at 78 years old and is serving her 9th year. This company requires at most five independent directors, each making significantly less.

 

4) Make stylist training more efficient (Estimated Annual Savings: 5 million dollars): The company has extended its training network significantly, costing millions of dollars. This is a departure from previous management’s vision of leveraging technology. It even sends trainers on a plane costing hundreds of dollars in flight and hotel to train a couple of stylists. This large network is unnecessary and very costly. Technology can replace big pieces of this. If done correctly, seasoned stylists can be trained using technology and these stylists can train junior staff in store.

 

5) Roll-off of Remaining Company Owned Stores (Estimated Savings: 2 million dollars): A large portion of the remaining company owned store leases terminate in January.

 

6) Improve financial stewardship: The management’s contribution of throwing parties and extending the training network is very costly and unnecessary. It is heading the company backwards instead of using technology to push it forward.

 

This does not include other expenses that should be scrutinized such as paying for sponsored research. While savings listed above are all estimates and there are some subtle caveats, the proposed strategy is doable, even if the company ends up with a few less million in EBITDA than mentioned above.

 

I’ve heard too many times in my career that something can’t be done and then technology solves the problem. If you take the view that technology can’t train stylists and optimize the rest of your business, you are doomed for failure.

 

One final thought. The franchisees pay for advertising and pay towards the training of new students out of beauty school. Yet Regis is projecting at least 47 million in SG&A, which doesn't include its own corporate rent. Regis won't break out its SG&A, but if the franchisees are paying for everything, using 47 million to significantly overpay employees, throw parties, and extend an unnecessary training network is irresponsible.

 

Management needs to adopt these changes, or management needs to be changed.

 

Enough with the waste of shareholder’s capital.