Regis Corporation Stock: Still Attempting a Turnaround

Turnaround investing is difficult. But I like buying stocks with a weary investor base when they’re finally starting to turn around. ValueInvestorsClub.com has Regis Corporation (NASDAQ:RGS) Presentations over the past 10 years:

Adjusted for the reverse split, RGS was trading at around $350 per share when the first offering was made in 2010, and over $20 per share in 2010. Most recent announcement for 2023. That said, everyone who has been here for a long time is having a hard time investing. However, I’m not sure if the latest pitch was a misplaced opportunity, but it was definitely early.

the company

Regis is primarily a hair salon franchiser for Supercuts and Smart Style (inside Walmart (WMT) stores) and owns brands including Roosters, Cost Cutters, Borics and First Choice. The company Having previously owned a salon, they were quickly transitioning to a franchise model, but faced predictable challenges when COVID-19 hit during the transition. Many of its less profitable stores have closed over the past few years, and there are currently fewer than 100 company-owned stores. Most of the remaining company-owned branches will be closed through June (per call in the second quarter).

As the transition to a full franchise model nears completion, Regis is betting on a new business model that will reap rewards from a market it doubted every step of the way.

activist

Two activist groups have emerged in Regis recently. Galloway Capital Partners by Bruce Galloway and Gary Weitzner, Stephen Salvador, Aurora Salvador, Barbara Salvador, William Charters (13D filing). A key concern for each actor is dilution. With a current market capitalization of $23 million and debt of approximately $190 million, an equity deal would be dilutive to common shareholders with relatively little cash. This will increase the risk of harm to the company’s ~$646 million federal NOLs, which must avoid changes in control to protect tax benefits. To this end, the company has recently taken the following actions: Tax Advantage Preservation Plan. I believe management is well aware of these factors and will do the right thing for shareholders. We are also pleased to see that there is external pressure to ensure shareholder alignment.

For absolute clarity: I do not collaborate with or work in groups with activists.

problem

Despite being newly introduced CEO Matt Doctor To navigate its final refinancing and complete the transition, Regis closed its owned locations and became a pure franchise, struggling to become profitable. As activists have highlighted, Regis is making less than $300,000 in revenue per salon and is experiencing delays in the rollout of its new CRM system, Zenoti. The company sold Zenoti to help with leverage, and has received about $2 million in payments since the end of last quarter, with the remaining payments likely to be $10 million. Migration of salons to the system is expected to be completed this summer.

There are currently around 1,600 salons on the Zenoti platform, with another 900 expected to migrate by March 31 and the rest by June 30 of this year.

Regis posted adjusted EBITDA of $13.5 million in the first half of the fiscal year, so its debt-to-EBITDA ratio qualifies as approximately 7:1. Investors expected more EBITDA growth than materialized. I think the cap on shares will remain in place until the market gets some sort of “absolute confidence” from Regis that common stockholders will not be forgotten. recent Tax Advantage Preservation Plan Regis seems to be making it clear that it is trying to protect ownership changes that could be stymied by significant dilution. The good news is that solid sales trends were highlighted in the Q2-24 conference call (October < November < December). We expect it will take a significant amount of time for store numbers to stabilize and EBITDA to grow. Leadership is focused on managing change and will soon be able to focus more on operations. The company closed. 800 locations over 18 months, this trend has moderated but has not yet stabilized. A potential highlight here is that the company’s existing franchisees have signed on. At least 100 units developed in India For the next 5 years. So there may be a return to unit growth soon.

solution

My guess is that Regis will normalize about 4,500 locations and generate $75 million in annual franchise revenue compared to SG&A’s $40-$45 million run rate. EBITDA of $30-35 million and 5:1 leverage may allow for more favorable refinancing terms compared to the current 7:1 ratio. With significant NOLs and an asset-light business model, interest payments will be the only headwind to significant free cash flow conversion.

To support this assumption, consider the company’s recent results.

Based on 4,500 stores, 2024 sales are expected to average approximately $270,000 per location, or 5.4% of annual royalties, or $14,600 per store. Adding $2.1,000 per store in franchise fees gives you $16,700 per location, or $75 million per year.

In such a scenario, convertible preference makes a lot of sense, as recently done in a memo from J. Jill (JILL), Superior. (SUP) and comScore (SCOR). $150 million worth of paper due in 5 years, which could be converted using PIK options to about 1.5 to 2 times the current share price, allowing more time to right-size the store count and grow on a better footing. . Again, this will work best if your assets are not severely undermined by fears of dilution.

To this end, the company announced in November 2023: Exploring strategic alternatives Retained Jefferies as financial advisor. The company is cautious about starting this process now, as its current debt is due more than a year and a half from now. August 2025. fun, Jefferies was hired in 2022. To help with final debt maturity. The company seems to have enough time and good advisors to find a solution.

evaluation

A recent ValueInvestorsClub pitch claimed $4.6 to $18.2 per share, which gets even better when you remember that this was before the 20:1 reverse split. The last two pieces on Seeking Alpha argued: $40-50and After splitting $100, each remains essentially the same investment case. If the company can survive without significant dilution, a stable store base with steady cash flow would attract a higher multiple than what Regis currently enjoys.

danger

Regis is highly leveraged and experiencing a significant decline in store count. There is no guarantee that you will be able to right the ship before going into bankruptcy.

There are competitive threats to the traditional salon model that I cannot fully explain. The pandemic has led to more people cutting their hair at home and purchasing hair products online. Unless this trend is reversed, salons could permanently earn less than they did in pre-COVID times.

With the presence of multiple actors, there is a risk that companies will spend time and money fighting for control instead of fixing their business. This may further impair their ability to survive.

Rolling out a new CRM across the rest of your stores can help standardize your business and increase sales, but it can backfire if it’s not done right. The hope is that the standard operating model will allow Regis to begin accelerating sales.

conclusion

I think Regis is at an interesting inflection point, and I expect the conclusion of its efforts to address its debt maturity issues will give the market a clear signal to own the stock. Investors can then trace back to management’s efforts to stabilize the business and steer Regis into a profitable future. Otherwise, investors are likely to lose part or all of their investment. Investing in Regis comes with many risks and many potential rewards.

Editor’s note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.