Item 1. Financial Statements
REGIS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited)
(Dollars in thousands, except share data)
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December 31,
2017
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June 30,
2017
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ASSETS
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Current assets:
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|
|
|
|
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Cash and cash equivalents
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$
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163,300
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|
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$
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171,044
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Receivables, net
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31,895
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|
|
19,683
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Inventories
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87,347
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|
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98,392
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Other current assets
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|
47,814
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|
|
48,114
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Current assets held for sale (Note 1)
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|
—
|
|
|
32,914
|
|
Total current assets
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330,356
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370,147
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|
|
|
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Property and equipment, net
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109,448
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123,281
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Goodwill
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417,709
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416,987
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Other intangibles, net
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11,416
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|
11,965
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Other assets
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52,958
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61,756
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Noncurrent assets held for sale (Note 1)
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—
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|
|
27,352
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|
Total assets
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$
|
921,887
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$
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1,011,488
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LIABILITIES AND SHAREHOLDERS’ EQUITY
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Current liabilities:
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Accounts payable
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$
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52,738
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|
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$
|
54,501
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Accrued expenses
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107,198
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110,435
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Current liabilities related to assets held for sale (Note 1)
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—
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13,126
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Total current liabilities
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159,936
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178,062
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Long-term debt, net
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121,096
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120,599
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Other noncurrent liabilities
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112,284
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197,374
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Noncurrent liabilities related to assets held for sale (Note 1)
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—
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7,232
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Total liabilities
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393,316
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503,267
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Commitments and contingencies (Note 6)
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Shareholders’ equity:
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Common stock, $0.05 par value; issued and outstanding 46,688,423 and 46,400,367 common shares at December 31, 2017 and June 30, 2017, respectively
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2,335
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2,320
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Additional paid-in capital
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216,301
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214,109
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Accumulated other comprehensive income
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11,789
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3,336
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Retained earnings
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298,146
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288,456
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Total shareholders’ equity
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528,571
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508,221
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Total liabilities and shareholders’ equity
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$
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921,887
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$
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1,011,488
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The accompanying notes are an integral part of the unaudited Condensed Consolidated Financial Statements.
REGIS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
For The Three and
Six Months Ended December 31, 2017
and
2016
(Dollars and shares in thousands, except per share data amounts)
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Three Months Ended
December 31,
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Six Months Ended
December 31,
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2017
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2016
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2017
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2016
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Revenues:
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Service
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$
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223,214
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$
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235,609
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$
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458,773
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$
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478,700
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Product
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71,816
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68,229
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132,756
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131,945
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Royalties and fees
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13,485
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11,411
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26,859
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23,435
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308,515
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315,249
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618,388
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634,080
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Operating expenses:
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Cost of service
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134,850
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151,193
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274,686
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301,990
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Cost of product
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39,864
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34,584
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70,026
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65,399
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Site operating expenses
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32,119
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32,638
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65,422
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65,283
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General and administrative
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48,592
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36,695
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83,758
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72,611
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Rent
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65,473
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45,091
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107,889
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91,324
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Depreciation and amortization
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24,951
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12,646
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37,206
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24,755
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Total operating expenses
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345,849
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312,847
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638,987
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621,362
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Operating (loss) income
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(37,334
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)
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2,402
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(20,599
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)
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12,718
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Other (expense) income:
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Interest expense
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(2,169
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)
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(2,153
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)
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(4,307
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)
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(4,316
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)
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Interest income and other, net
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2,362
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1,452
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3,389
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1,779
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(Loss) income from continuing operations before income taxes
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(37,141
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)
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1,701
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(21,517
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)
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10,181
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Income tax benefit (expense)
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76,462
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(719
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)
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71,630
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(3,459
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)
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Income from continuing operations
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39,321
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|
982
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50,113
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6,722
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Loss from discontinued operations, net of taxes (Note 1)
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(6,601
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)
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(3,201
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)
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(40,368
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)
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(5,660
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)
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Net income (loss)
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$
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32,720
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$
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(2,219
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)
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$
|
9,745
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$
|
1,062
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Net income (loss) per share:
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Basic:
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Income from continuing operations
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$
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0.84
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$
|
0.02
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$
|
1.07
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|
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$
|
0.15
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Loss from discontinued operations
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(0.14
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)
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|
(0.07
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)
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(0.86
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)
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|
(0.12
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)
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Net income (loss) per share, basic (1)
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$
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0.70
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$
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(0.05
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)
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$
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0.21
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$
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0.02
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Diluted:
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Income from continuing operations
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$
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0.83
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$
|
0.02
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$
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1.07
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|
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$
|
0.14
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Loss from discontinued operations
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|
(0.14
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)
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(0.07
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)
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(0.86
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)
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|
(0.12
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)
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Net income (loss) per share, diluted (1)
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$
|
0.69
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|
$
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(0.05
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)
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$
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0.21
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$
|
0.02
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Weighted average common and common equivalent shares outstanding:
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Basic
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46,821
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|
|
46,327
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46,719
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|
46,277
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Diluted
|
|
47,314
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|
46,774
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|
47,053
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|
46,751
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_______________________________________________________________________________
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(1)
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Total is a recalculation; line items calculated individually may not sum to total due to rounding.
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The accompanying notes are an integral part of the unaudited Condensed Consolidated Financial Statements.
REGIS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
For The Three and
Six Months Ended December 31, 2017
and
2016
(Dollars in thousands)
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|
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Three Months Ended December 31,
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Six Months Ended December 31,
|
|
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2017
|
|
2016
|
|
2017
|
|
2016
|
Net income (loss)
|
|
$
|
32,720
|
|
|
$
|
(2,219
|
)
|
|
$
|
9,745
|
|
|
$
|
1,062
|
|
Foreign currency translation adjustments
|
|
(381
|
)
|
|
(2,322
|
)
|
|
2,301
|
|
|
(4,838
|
)
|
Reclassification adjustments for losses included in net income (loss) (Note 1)
|
|
6,152
|
|
|
—
|
|
|
6,152
|
|
|
—
|
|
Comprehensive income (loss)
|
|
$
|
38,491
|
|
|
$
|
(4,541
|
)
|
|
$
|
18,198
|
|
|
$
|
(3,776
|
)
|
The accompanying notes are an integral part of the unaudited Condensed Consolidated Financial Statements.
REGIS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
For The
Six Months Ended December 31, 2017
and
2016
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended December 31,
|
|
|
2017
|
|
2016
|
Cash flows from operating activities:
|
|
|
|
|
|
|
Net income
|
|
$
|
9,745
|
|
|
$
|
1,062
|
|
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
|
|
|
|
|
|
Non-cash impairment related to discontinued operations
|
|
25,095
|
|
|
—
|
|
Depreciation and amortization
|
|
20,492
|
|
|
20,369
|
|
Depreciation related to discontinued operations
|
|
3,038
|
|
|
7,220
|
|
Deferred income taxes
|
|
(77,055
|
)
|
|
3,297
|
|
Gain on life insurance
|
|
(7,986
|
)
|
|
—
|
|
Gain from sale of salon assets to franchisees, net(1)
|
|
(18
|
)
|
|
(121
|
)
|
Salon asset impairments
|
|
16,714
|
|
|
4,386
|
|
Accumulated other comprehensive income reclassification adjustments (Note 1)
|
|
6,152
|
|
|
—
|
|
Stock-based compensation
|
|
4,618
|
|
|
4,400
|
|
Amortization of debt discount and financing costs
|
|
703
|
|
|
703
|
|
Other non-cash items affecting earnings
|
|
(104
|
)
|
|
64
|
|
Changes in operating assets and liabilities, excluding the effects of asset sales
|
|
(13,647
|
)
|
|
(13,775
|
)
|
Net cash (used in) provided by operating activities
|
|
(12,253
|
)
|
|
27,605
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Capital expenditures
|
|
(13,773
|
)
|
|
(15,510
|
)
|
Capital expenditures related to discontinued operations
|
|
(1,171
|
)
|
|
(2,893
|
)
|
Proceeds from sale of assets to franchisees(1)
|
|
2,696
|
|
|
335
|
|
Change in restricted cash
|
|
(542
|
)
|
|
738
|
|
Proceeds from company-owned life insurance policies
|
|
18,108
|
|
|
—
|
|
Net cash provided by (used in) investing activities
|
|
5,318
|
|
|
(17,330
|
)
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
Taxes paid for shares withheld
|
|
(2,039
|
)
|
|
(1,113
|
)
|
Cash settlement of equity awards
|
|
(375
|
)
|
|
—
|
|
Net cash used in financing activities
|
|
(2,414
|
)
|
|
(1,113
|
)
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
253
|
|
|
(866
|
)
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
(9,096
|
)
|
|
8,296
|
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
Beginning of period
|
|
171,044
|
|
|
147,346
|
|
Cash and cash equivalents included in current assets held for sale
|
|
1,352
|
|
|
—
|
|
Beginning of period, total cash and cash equivalents
|
|
172,396
|
|
|
147,346
|
|
End of period
|
|
$
|
163,300
|
|
|
$
|
155,642
|
|
_____________________________
(1) Excludes transaction with The Beautiful Group.
The accompanying notes are an integral part of the unaudited Condensed Consolidated Financial Statements.
REGIS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
1.
|
BASIS OF PRESENTATION OF UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
|
The unaudited interim Condensed Consolidated Financial Statements of Regis Corporation (the Company) as of
December 31, 2017
and for the three and
six
months ended
December 31, 2017
and
2016
, reflect, in the opinion of management, all adjustments necessary to fairly state the consolidated financial position of the Company as of
December 31, 2017
and its consolidated results of operations, comprehensive income (loss) and cash flows for the interim periods. Adjustments consist only of normal recurring items, except for any discussed in the notes below. The results of operations and cash flows for any interim period are not necessarily indicative of results of operations and cash flows for the full year.
The Condensed Consolidated Balance Sheet data for
June 30, 2017
was derived from audited Consolidated Financial Statements, but includes unaudited adjustments for assets and liabilities held for sale and does not include all disclosures required by accounting principles generally accepted in the United States of America (GAAP). The unaudited interim Condensed Consolidated Financial Statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended
June 30, 2017
and other documents filed or furnished with the Securities and Exchange Commission (SEC) during the current fiscal year.
Discontinued Operations:
In October 2017, the Company sold substantially all of
its mall-based salon business in
North America,
representing
858
salons, and substantially all of its International segment, representing approximately
250
salons in the UK, to The Bea
utiful Group, an affiliate of Regent, a private equity firm based in Los Angeles, California, who will operate these locations as franchise locations. As part of the sale of the mall-based business, The Beautiful Group
agreed to pay for the value of certain inventory and assumed specific liabilities, including lease liabilities. For the International segment, the Company entered into a share purchase agreement with The Beautiful Group for minimal consideration.
As of September 30, 2017, the Company classified the results of its mall-based business and its International segment as discontinued operations for all periods presented in the Condensed Consolidated Statement of Operations. Included within discontinued operations are the impairment charge, results of operations and professional fees associated with the transaction, for the three and
six
months ended
December 31, 2017
. The operations of the mall-based business and International segment, which were previously recorded in the North American Value, North American Premium and International
reporting segments, have been eliminated from ongoing operations of the Company.
In connection with the sale of the mall-based business and the International segment as part of our held for sale assessment at September 30, 2017, the Company performed an impairment assessment of the asset groups. The Company recognized net impairment charges within discontinued operations during the three and
six
months ended
December 31, 2017
, based on the difference between the expected sale prices and the carrying value of the asset groups.
The following summarizes the results of our discontinued operations for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended December 31,
|
|
For the Six Months Ended December 31,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
(Dollars in thousands)
|
Revenues
|
|
$
|
7,773
|
|
|
$
|
108,793
|
|
|
$
|
101,140
|
|
|
$
|
221,005
|
|
Loss from discontinued operations, before income taxes
|
|
(10,073
|
)
|
|
(3,201
|
)
|
|
(43,840
|
)
|
|
(5,660
|
)
|
Income tax benefit on discontinued operations
|
|
3,472
|
|
|
—
|
|
|
3,472
|
|
|
—
|
|
Loss from discontinued operations, net of income taxes
|
|
(6,601
|
)
|
|
(3,201
|
)
|
|
(40,368
|
)
|
|
(5,660
|
)
|
For the three months ended
December 31, 2017
, included within the
$6.6 million
loss from discontinued operations are
$4.8 million
of asset impairment charges,
$1.1
million of loss from operations and
$4.2 million
of professional fees associated with the transaction, partly offset by a
$3.5 million
income tax benefit generated due to federal tax legislation enacted during the three months ended
December 31, 2017
. For the
six
months ended
December 31, 2017
, included within the $
40.4 million
loss from discontinued operations are
$29.1 million
of asset impairment charges,
$6.2 million
of cumulative foreign currency translation adjustment associated with the Company's liquidation of substantially all foreign entities with British pound denominated entities,
$2.8 million
of loss from operations and
$5.8 million
of professional fees associated with the transaction, partly offset by a
$3.5 million
income tax benefit generated due to federal tax legislation enacted during the three months ended
December 31, 2017
.
Income taxes have been allocated to continuing and discontinued operations based on the methodology required by interim reporting and accounting for income taxes guidance. See Note 5 to the unaudited Condensed Consolidated Financial Statements for further discussion regarding Staff Accounting Bulletin ("SAB") 118.
Within salon asset impairments presented in the Consolidated Statement of Cash Flows for the six months ended December 31, 2016,
$1.7 million
of salon asset impairments were related to discontinued operations. Other than the salon asset impairments and the other items presented in the Consolidated Statement of Cash Flows, there were no other significant non-cash operating activities or any significant non-cash investing activities related to discontinued operations for the
six
months ended
December 31, 2017
and 2016.
SmartStyle
®
Salon Restructuring:
In December 2017 the Company committed to close
597
non-performing Company owned SmartStyle salons in January 2018.
A summary of costs associated with the SmartStyle salon restructuring for the three and
six
months ended
December 31, 2017
is as follows:
|
|
|
|
|
|
|
|
Dollars in thousands
|
Inventory reserves
|
|
$
|
585
|
|
Long-lived fixed asset impairment
|
|
5,418
|
|
Asset retirement obligation
|
|
7,462
|
|
Lease termination and other related closure costs
|
|
27,290
|
|
Deferred rent
|
|
(3,291
|
)
|
Total
|
|
$
|
37,464
|
|
As the operational restructuring plan was announced publicly on January 8, 2018, the Company expects to incur an additional
$1.0 million
in related severance expense in the third quarter of fiscal 2018.
Stock-Based Employee Compensation:
During the three and
six
months ended
December 31, 2017
, the Company granted various equity awards including restricted stock units (RSUs) and performance-based restricted stock units (PSUs).
A summary of equity awards granted is as follows:
|
|
|
|
|
|
|
|
|
|
For the Periods Ended December 31, 2017
|
|
|
Three Months
|
|
Six Months
|
Restricted stock units
|
|
38,811
|
|
|
297,969
|
|
Performance-based restricted stock units
|
|
153,612
|
|
|
153,612
|
|
Total compensation cost for stock-based payment arrangements totaled
$2.6
and
$2.5 million
for the three months ended
December 31, 2017
and
2016
, respectively, and
$4.6
and
$4.4 million
for the six months ended
December 31, 2017
and
2016
, respectively, recorded within general and administrative expense on the unaudited Condensed Consolidated Statement of Operations. Total compensation cost for stock-based payment arrangements for the three and six months ended
December 31,
2017
includes
$1.0
and
$1.2 million
, respectively, related to the termination of former executive officers. In connection with the terminations of former executive officers, the Company settled certain PSUs for cash of
$0.4 million
during the three and six months ended
December 31, 2017
, respectively.
Long-Lived Asset Impairment Assessments, Excluding Goodwill:
The Company assesses impairment of long-lived assets at the individual salon level, as this is the lowest level for which identifiable cash flows are largely independent of other groups of assets and liabilities, when events or changes in circumstances indicate the carrying value of the assets or the asset grouping may not be recoverable. Factors considered in deciding when to perform an impairment review include significant under-performance of an individual salon in relation to expectations, significant economic or geographic trends, and significant changes or planned changes in our use of the assets. Impairment is evaluated based on the sum of undiscounted estimated future cash flows expected to result from use of the long-lived assets. If the undiscounted estimated cash flows are less than the carrying value of the assets, the Company calculates an impairment charge based on the estimated fair value of the assets. The fair value of the long-lived assets is estimated using a discounted cash flow model based on the best information available, including salon level revenues and expenses. Long-lived asset impairment charges of
$14.4
and
$2.5 million
for the three months ended
December 31, 2017
and
2016
, respectively, and
$16.7
and
$4.4 million
for the six months ended
December 31, 2017
and
2016
, respectively, have been recorded within depreciation and amortization in the Consolidated Statement of Operations.
A
ccounting Standards Recently Issued But Not Yet Adopted by the Company:
Leases
In February 2016, the FASB issued updated guidance requiring organizations that lease assets to recognize the rights and obligations created by those leases on the consolidated balance sheet. The new standard is effective for the Company in the first quarter of fiscal year 2020, with early adoption permitted. The Company is currently evaluating the effect the new standard will have on the Company's consolidated financial statements but expects this adoption will result in a material increase in the assets and liabilities on the Company's consolidated balance sheet.
Revenue from Contracts with Customers
In May 2014, the FASB issued updated guidance for revenue recognition. The updated accounting guidance provides a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the exchange for goods or services to a customer at an amount that reflects the consideration it expects to receive for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. The guidance is effective for the Company in the first quarter of fiscal year 2019, with early adoption permitted at the beginning of fiscal year 2018. The standard allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or modified retrospective adoption, meaning the standard is applied only to the most current period presented in the financial statements. The Company expects to adopt this guidance in fiscal year 2019 using the modified retrospective method of adoption.
The Company does not believe the standard will impact its recognition of point-of-sale revenue in company-owned salons, or royalties. The Company believes the standard will impact the recognition of initial franchise fees revenue and gift card breakage, although the impacts are not expected to be material to the Company’s consolidated financial statements. The Company licenses intellectual property and trademarks to franchisees through franchise agreements. As part of these agreements, the Company receives an initial franchise fee payment which is currently recognized as revenue when the salon opens. Upon adoption of the new standard initial franchise fees will generally be recognized as revenue over the life of the contract. The Company sells gift cards to customers and records the sale as a liability. The liability is released to revenue once the card is redeemed. Historically a portion of these gift card sales have never been redeemed by the customer (“breakage”). Currently the Company recognizes breakage when redemption is considered remote. Upon adoption of the new standard, expected breakage is anticipated to be recognized as customers redeem the gift cards rather than only when redemption is considered remote.
The Company is continuing its assessment, including the impact on internal controls, which may identify additional impacts this standard will have on its consolidated financial statements and related disclosures. The new standard is not expected to have any impact on the timing or classification of the Company’s cash flows as reported in the Consolidated Statement of Cash Flows.
Intra-Entity Transfers Other Than Inventory
In October 2016, the FASB issued guidance on the accounting for income tax effects of intercompany transfers of assets other than inventory. The guidance requires entities to recognize the income tax impact of an intra-entity transfer of an asset other than inventory when the transfer occurs, rather than when the assets have been sold to an outside party. The guidance is effective for the Company in the first quarter of fiscal year 2019, with early adoption permitted. The Company does not expect the adoption of this standard to have a material impact on the Company's consolidated financial statements.
Restricted Cash
In November 2016, the FASB issued updated cash flow guidance requiring restricted cash and restricted cash equivalents to be included in the cash and cash equivalent balances in the statement of cash flows. Transfers between cash and cash equivalents and restricted cash will no longer be presented in the statement of cash flows and a reconciliation between the balance sheet and statement of cash flows must be disclosed. The guidance is effective for the Company beginning in the first quarter of fiscal year 2019, with early adoption permitted. The Company is currently evaluating the impact this guidance will have on the Company's consolidated statement of cash flows.
Statement of Cash Flows
In August 2016, the FASB issued updated cash flow guidance clarifying cash flow classification and presentation for certain items. The guidance is effective for the Company beginning in the first quarter of fiscal year 2019, with early adoption permitted. The Company does not expect the adoption of this standard to have a material impact on the Company's consolidated statement of cash flows.
2.
INVESTMENT IN AFFILIATES:
Empire Education Group, Inc. (EEG)
As of
December 31, 2017
, the Company had a
54.6%
ownership interest in EEG and
no
remaining investment value as the Company fully impaired its investment in EEG as of December 31, 2015. The Company has not recorded any equity income or losses related to its investment in EEG subsequent to the impairment. The Company will record equity income related to the Company's investment in EEG once EEG's cumulative income exceeds its cumulative losses, measured from the date of impairment.
While the Company could be responsible for certain liabilities associated with this venture, the Company does not currently expect them to have a material impact on the Company's financial position.
The table below presents the summarized Statement of Operations information for EEG:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended December 31,
|
|
For the Six Months Ended December 31,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
(Unaudited)
|
|
(Dollars in thousands)
|
Gross revenues
|
|
$
|
32,962
|
|
|
$
|
31,019
|
|
|
$
|
65,599
|
|
|
$
|
61,055
|
|
Gross profit
|
|
9,720
|
|
|
9,168
|
|
|
19,398
|
|
|
17,278
|
|
Operating income (loss)
|
|
1,053
|
|
|
488
|
|
|
861
|
|
|
(219
|
)
|
Net income (loss)
|
|
1,034
|
|
|
357
|
|
|
690
|
|
|
(472
|
)
|
The Company’s basic earnings per share is calculated as net income (loss) divided by weighted average common shares outstanding, excluding unvested outstanding restricted stock awards, RSUs and PSUs. The Company’s diluted earnings per share is calculated as net income divided by weighted average common shares and common share equivalents outstanding, which includes shares issued under the Company’s stock-based compensation plans. Stock-based awards with exercise prices greater than the average market price of the Company’s common stock are excluded from the computation of diluted earnings per share.
For the three months ended
December 31, 2017
and
2016
,
492,889
and
446,877
, respectively, and for the six months ended
December 31, 2017
and
2016
,
334,062
and
474,616
, respectively, common stock equivalents of dilutive common stock were included in the diluted earnings per share calculations due to the net income from continuing operations.
The computation of weighted average shares outstanding, assuming dilution, excluded
2,373,110
and
2,361,971
of stock-based awards during the three months ended
December 31, 2017
and
2016
, respectively, and
1,199,042
and
2,411,047
of stock-based award during the six months ended
December 31, 2017
and
2016
, respectively, as they were not dilutive under the treasury stock method.
Additional Paid-In Capital:
The
$2.2 million
increase in additional paid-in capital during the
six
months ended
December 31, 2017
was primarily due to
$4.6 million
of stock-based compensation, partly offset by other stock-based compensation activity of
$2.4 million
, primarily shares forfeited for withholdings on vestings.
A summary of income tax benefit (expense) and corresponding effective tax rates is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended December 31,
|
|
For the Six Months
Ended December 31,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
(Dollars in thousands)
|
Income tax benefit (expense)
|
|
$
|
76,462
|
|
|
$
|
(719
|
)
|
|
$
|
71,630
|
|
|
$
|
(3,459
|
)
|
Effective tax rate
|
|
205.9
|
%
|
|
42.3
|
%
|
|
332.9
|
%
|
|
34.0
|
%
|
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code including, but not limited to, (1) reducing the U.S. federal corporate tax rate from
35 percent
to
21 percent
; (2) changing rules related to net operating losses ("NOL") carryforwards and carrybacks; (3) eliminating the corporate alternative minimum tax (“AMT”) and changing how existing AMT credits can be realized; (4) requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries; (5) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (6) allowing full expensing of qualified property; (7) creating a new base erosion anti-abuse minimum tax (“BEAT”) and provisions designed to tax global intangible low-taxed income (“GILTI”); (8) adding rules that limit the deductibility of interest expense; and (9) adding new provisions that further restrict the deductibility of certain executive compensation.
Due to our fiscal year end, different provisions of the Tax Act will become applicable at varying dates. Nonetheless, the Company is required to recognize the effects of the rate change and enacted legislation on its deferred tax assets and liabilities in the period of enactment.
The SEC staff issued Staff Accounting Bulletin ("SAB") 118, which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under Accounting Standards Codification (ASC) 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
In connection with our initial analysis of the impact of the Tax Act, we have recorded a provisional estimated net tax benefit of
$68.9 million
in continuing operations for the periods ended December 31, 2017. The net tax benefit is primarily attributable to the impact of the corporate rate reduction on our deferred tax assets and liabilities along with a partial release of the U.S. valuation allowance (“VA”). The VA release is solely attributable to tax reform and the law change that allows for the indefinite carryforward of NOLs arising in tax years ending after December 31, 2017. Prior law limited the carryforward period to 20 years. As a result of the change, the Company is able to release its VA on deferred tax assets that it expects to reverse in future periods. The Company continues to maintain a VA on the historical balance of its finite lived federal NOLs, tax credits and various state tax attributes. We are still analyzing certain aspects of the Tax Act and refining our calculations, which could
potentially affect the measurement of our deferred tax balances and ultimately cause us to revise our provisional estimate in future periods in accordance with SAB 118. In addition, changes in interpretations, assumptions, and guidance regarding the new tax legislation, as well as the potential for technical corrections to the Tax Act, could have a material impact to the Company’s effective tax rate in future periods.
The recorded tax provision and effective tax rates for the three and
six
months ended
December 31, 2017
and three and
six
months ended December 31,
2016
were different than what would normally be expected primarily due to the impact of the Tax Act and the deferred tax VA. Additionally, the majority of the tax provision in periods ended prior to December 31, 2017 related to non-cash tax expense for tax benefits on certain indefinite-lived assets the Company could not recognize for reporting purposes. Due to the Tax Act and the resulting partial release of the Company’s VA, the Company recorded
$7.6 million
of tax benefit in continuing operations during the three months ended
December 31, 2017
, exclusive of the
$68.9 million
benefit mentioned above. Furthermore, the non-cash tax expense is not expected to be material in future periods.
The Company’s U.S. federal income tax returns for the fiscal years 2010 through 2013 have been examined by the Internal Revenue Service (IRS) and were moved to the IRS Appeals Division. The Company believes its income tax positions and deductions will be sustained and will continue to vigorously defend such positions. All earlier tax years are closed to examination. With limited exceptions, the Company is no longer subject to state and international income tax examinations by tax authorities for years before 2012.
|
|
6.
|
COMMITMENTS AND CONTINGENCIES:
|
The Company is a defendant in various lawsuits and claims arising out of the normal course of business. Like certain other large retail employers, the Company has been faced with allegations of purported class-wide consumer and wage and hour violations. Litigation is inherently unpredictable and the outcome of these matters cannot presently be determined. Although the actions are being vigorously defended, the Company could in the future incur judgments or enter into settlements of claims that could have a material adverse effect on its results of operations in any particular period.
See Note 5 to the unaudited Condensed Consolidated Financial Statements for discussion regarding certain issues that have resulted from the IRS' examination of fiscal 2010 through 2013 federal income tax returns. Final resolution of these issues is not expected to have a material impact on the Company's financial position.
7. GOODWILL AND OTHER INTANGIBLES:
During the first quarter of fiscal year 2018, the Company experienced a triggering event due to the redefining of its operating segments as a result of the sale of the mall-based business and the International segment. See Note 10 to the unaudited Condensed Consolidated Financial Statements. The Company utilized the Step 0 goodwill impairment assessment during the first quarter. As part of this assessment, the Company evaluated qualitative factors to determine whether it was more likely than not that the fair value of the reporting units was less than its carrying value. The Company determined it was "more-likely-than-not" that the carrying values of the reporting units were less than the fair values. The Company now reports its operations in
two
reportable segments: Company-owned salons and Franchise salons. The Company considered whether any goodwill associated with the MasterCuts salons should be allocated as part of the sale of the mall-based business and considered for impairment. The Company determined
no
goodwill should be allocated to the mall-based business because the salons sold were projected to produce operating losses in the future and had minimal fair value. All goodwill associated with the North American Premium and International segments was previously impaired. Pursuant to the change in operating segments, the Company compared the fair value of the remaining salons in the Company-owned reporting unit to its carrying value and concluded the fair value exceeded its carrying value by a substantial margin, resulting in
no
goodwill impairment.
The table below contains details related to the Company's goodwill:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-owned
|
|
Franchise
|
|
Consolidated
|
|
|
(Dollars in thousands)
|
Goodwill, net at June 30, 2017
|
|
$
|
188,888
|
|
|
$
|
228,099
|
|
|
$
|
416,987
|
|
Translation rate adjustments
|
|
573
|
|
|
690
|
|
|
1,263
|
|
Derecognition related to sale of salon assets to franchisees (1)
|
|
(541
|
)
|
|
—
|
|
|
(541
|
)
|
Goodwill, net at December 31, 2017
|
|
$
|
188,920
|
|
|
$
|
228,789
|
|
|
$
|
417,709
|
|
_______________________________________________________________________________
|
|
(1)
|
Goodwill is derecognized for salons sold to franchisees with positive cash flows. The amount of goodwill derecognized is determined by a fraction (the numerator of which is the EBITDA of the salon being sold and the denominator of which is the EBITDA of the Company-owned reporting unit) that is applied to the total goodwill balance of the Company-owned reporting unit.
|
The table below presents other intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
June 30, 2017
|
|
|
Cost (1)
|
|
Accumulated
Amortization (1)
|
|
Net
|
|
Cost (1)
|
|
Accumulated
Amortization (1)
|
|
Net
|
|
|
(Dollars in thousands)
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brand assets and trade names
|
|
$
|
8,356
|
|
|
$
|
(4,229
|
)
|
|
$
|
4,127
|
|
|
$
|
8,187
|
|
|
$
|
(4,013
|
)
|
|
$
|
4,174
|
|
Franchise agreements
|
|
10,026
|
|
|
(7,744
|
)
|
|
2,282
|
|
|
9,832
|
|
|
(7,433
|
)
|
|
2,399
|
|
Lease intangibles
|
|
14,036
|
|
|
(9,449
|
)
|
|
4,587
|
|
|
14,007
|
|
|
(9,077
|
)
|
|
4,930
|
|
Other
|
|
2,030
|
|
|
(1,610
|
)
|
|
420
|
|
|
1,994
|
|
|
(1,532
|
)
|
|
462
|
|
|
|
$
|
34,448
|
|
|
$
|
(23,032
|
)
|
|
$
|
11,416
|
|
|
$
|
34,020
|
|
|
$
|
(22,055
|
)
|
|
$
|
11,965
|
|
_____________________________
|
|
(1)
|
The change in the gross carrying value and accumulated amortization of other intangible assets is impacted by foreign currency.
|
|
|
8.
|
FINANCING ARRANGEMENTS:
|
The Company’s long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity Dates
|
|
Interest Rate
|
|
December 31,
2017
|
|
June 30,
2017
|
|
|
(fiscal year)
|
|
|
|
(Dollars in thousands)
|
Senior Term Notes, net
|
|
2020
|
|
5.50%
|
|
$
|
121,096
|
|
|
$
|
120,599
|
|
Revolving credit facility
|
|
2018
|
|
—
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
$
|
121,096
|
|
|
$
|
120,599
|
|
Senior Term Notes
In December 2015, the Company exchanged its
$120.0 million
5.75%
senior notes due December 2017 for
$123.0 million
5.5%
senior notes due December 2019 (Senior Term Notes). The Senior Term Notes were issued at a
$3.0 million
discount which is being amortized to interest expense over the term of the notes. Interest on the Senior Term Notes is payable semi-annually in arrears on June 1 and December 1 of each year. The Senior Term Notes are unsecured and not guaranteed by any of the Company’s subsidiaries or any third parties.
The following table contains details related to the Company's Senior Term Notes:
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
June 30, 2017
|
|
|
(Dollars in thousands)
|
Principal amount on the Senior Term Notes
|
|
$
|
123,000
|
|
|
$
|
123,000
|
|
Unamortized debt discount
|
|
(1,439
|
)
|
|
(1,815
|
)
|
Unamortized debt issuance costs
|
|
(465
|
)
|
|
(586
|
)
|
Senior Term Notes, net
|
|
$
|
121,096
|
|
|
$
|
120,599
|
|
Revolving Credit Facility
The Company has a
$200 million
five
-year unsecured revolving credit facility that expires in June 2018. The revolving credit facility has interest rates tied to LIBOR credit spread. As of
December 31, 2017
and
June 30, 2017
, the Company had
no
outstanding borrowings under this credit facility. The Company had outstanding standby letters of credit under the facility of
$1.5 million
at
December 31, 2017
and
June 30, 2017
, primarily related to the Company's self-insurance program, therefore, unused available credit under the facility at
December 31, 2017
and
June 30, 2017
was
$198.5 million
.
The Company was in compliance with all covenants and requirements of its financing arrangements as of and during the three months ended
December 31, 2017
.
|
|
9.
|
FAIR VALUE MEASUREMENTS:
|
Fair value measurements are categorized into one of three levels based on the lowest level of significant input used: Level 1 (unadjusted quoted prices in active markets); Level 2 (observable market inputs available at the measurement date, other than quoted prices included in Level 1); and Level 3 (unobservable inputs that cannot be corroborated by observable market data).
Assets and Liabilities Measured at Fair Value on a Recurring Basis
As of
December 31, 2017
and
June 30, 2017
, the estimated fair value of the Company’s cash, cash equivalents, restricted cash, receivables and accounts payable approximated their carrying values. As of
December 31, 2017
, the estimated fair value of the Company's debt was
$125.4 million
and the carrying value was
$123.0 million
, excluding the
$1.4 million
unamortized debt discount and
$0.5 million
unamortized debt issuance costs. As of
June 30, 2017
, the estimated fair value of the Company's debt was
$125.9 million
and the carrying value was
$123.0 million
, excluding the
$1.8 million
unamortized debt discount and
$0.6 million
unamortized debt issuance costs. The estimated fair value of the Company's debt is based on Level 2 inputs.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
We measure certain assets, including the Company’s equity method investments, tangible fixed and other assets and goodwill, at fair value on a nonrecurring basis when they are deemed to be other than temporarily impaired. The fair values of these assets are determined based on valuation techniques using the best information available, and may include quoted market prices, market comparables, and discounted cash flow projections.
The following impairments were based on fair values using Level 3 inputs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended December 31,
|
|
For the Six Months Ended December 31,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
(Dollars in thousands)
|
|
|
|
|
Long-lived assets (1)
|
|
$
|
(14,434
|
)
|
|
$
|
(2,477
|
)
|
|
$
|
(16,714
|
)
|
|
$
|
(4,386
|
)
|
_____________________________
|
|
(1)
|
See Note 1 to the unaudited Condensed Consolidated Financial Statements.
|
10.
SEGMENT INFORMATION:
Segment information is prepared on the same basis the chief operating decision maker reviews financial information for operational decision-making purposes. During the first quarter of fiscal year 2018, the Company redefined its operating segments to reflect how the chief operating decision maker now evaluates the business as a result of the Company's Board of Directors' approval of the mall-based business and International segment sale. See Note 1 to the unaudited Condensed
Consolidated Financial Statements. The Company now reports its operations in
two
operating segments: Company-owned salons and Franchise salons. The Company's operating segments are its reportable operating segments. Prior to this change, the Company had
four
operating segments: North American Value, North American Premium, North American Franchise, and International. The Company did not operate under the realigned operating segment structure prior to the first quarter of fiscal year 2018.
The Company’s reportable operating segments consisted of the following salons:
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
June 30, 2017
|
COMPANY-OWNED SALONS:
|
|
|
|
|
|
|
|
|
|
SmartStyle/Cost Cutters in Walmart Stores (1)
|
|
2,497
|
|
|
2,652
|
|
Supercuts
|
|
954
|
|
|
980
|
|
Signature Style
|
|
1,414
|
|
|
1,468
|
|
Mall locations (Regis and MasterCuts)
|
|
—
|
|
|
898
|
|
Total North American Salons
|
|
4,865
|
|
|
5,998
|
|
Total International Salons (2)
|
|
—
|
|
|
275
|
|
Total Company-owned Salons
|
|
4,865
|
|
|
6,273
|
|
as a percent of total Company-owned and Franchise salons
|
|
55.3
|
%
|
|
70.3
|
%
|
|
|
|
|
|
FRANCHISE SALONS:
|
|
|
|
|
|
|
|
|
|
SmartStyle in Walmart Stores
|
|
210
|
|
|
62
|
|
Cost Cutters in Walmart Stores
|
|
116
|
|
|
114
|
|
Supercuts
|
|
1,730
|
|
|
1,687
|
|
Signature Style
|
|
754
|
|
|
770
|
|
Total non-mall franchise locations
|
|
2,810
|
|
|
2,633
|
|
Mall franchise locations (Regis and MasterCuts)
|
|
849
|
|
|
—
|
|
Total North American Salons
|
|
3,659
|
|
|
2,633
|
|
Total International Salons (2)
|
|
270
|
|
|
13
|
|
Total Franchise Salons
|
|
3,929
|
|
|
2,646
|
|
as a percent of total Company-owned and Franchise salons
|
|
44.7
|
%
|
|
29.7
|
%
|
|
|
|
|
|
OWNERSHIP INTEREST LOCATIONS:
|
|
|
|
|
|
|
|
|
|
Equity ownership interest locations
|
|
89
|
|
|
89
|
|
|
|
|
|
|
Grand Total, System-wide
|
|
8,883
|
|
|
9,008
|
|
____________________________________
|
|
(1)
|
In January 2018, the Company closed
597
non-performing Company owned SmartStyle salons.
|
|
|
(2)
|
Canadian and Puerto Rican salons are included in the North American salon totals.
|
As of December 31, 2017, the Company-owned operating segment is comprised primarily of SmartStyle
®
, Supercuts
®
, Cost Cutters
®
, and other regional trade names and the Franchise operating segment is comprised primarily of Supercuts, Regis
®
, MasterCuts
®
, SmartStyle
®
, Cost Cutters
®
, First Choice Haircutters
®
, Roosters
®
and Magicuts
®
concepts. The Corporate segment represents home office and other unallocated costs.
Concurrent with the change in reportable segments, the Company recast its prior period financial information to reflect comparable financial information for the new segment structure. Historical financial information shown in the following table and elsewhere in this filing reflects this change. Financial information concerning the Company's reportable operating segments is shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended December 31, 2017
|
|
|
Company-owned
|
|
Franchise
|
|
Corporate
|
|
Consolidated
|
|
|
(Dollars in thousands)
|
Revenues:
|
|
|
|
|
|
|
|
|
Service
|
|
$
|
223,214
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
223,214
|
|
Product
|
|
56,748
|
|
|
15,068
|
|
|
—
|
|
|
71,816
|
|
Royalties and fees
|
|
—
|
|
|
13,485
|
|
|
—
|
|
|
13,485
|
|
|
|
279,962
|
|
|
28,553
|
|
|
—
|
|
|
308,515
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Cost of service
|
|
134,850
|
|
|
—
|
|
|
—
|
|
|
134,850
|
|
Cost of product
|
|
28,044
|
|
|
11,820
|
|
|
—
|
|
|
39,864
|
|
Site operating expenses
|
|
32,119
|
|
|
—
|
|
|
—
|
|
|
32,119
|
|
General and administrative
|
|
17,947
|
|
|
6,869
|
|
|
23,776
|
|
|
48,592
|
|
Rent
|
|
65,159
|
|
|
70
|
|
|
244
|
|
|
65,473
|
|
Depreciation and amortization
|
|
22,054
|
|
|
91
|
|
|
2,806
|
|
|
24,951
|
|
Total operating expenses
|
|
300,173
|
|
|
18,850
|
|
|
26,826
|
|
|
345,849
|
|
Operating (loss) income
|
|
(20,211
|
)
|
|
9,703
|
|
|
(26,826
|
)
|
|
(37,334
|
)
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
Interest expense
|
|
—
|
|
|
—
|
|
|
(2,169
|
)
|
|
(2,169
|
)
|
Interest income and other, net
|
|
—
|
|
|
—
|
|
|
2,362
|
|
|
2,362
|
|
(Loss) income from continuing operations before income taxes
|
|
$
|
(20,211
|
)
|
|
$
|
9,703
|
|
|
$
|
(26,633
|
)
|
|
$
|
(37,141
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended December 31, 2016
|
|
|
Company-owned
|
|
Franchise
|
|
Corporate
|
|
Consolidated
|
|
|
(Dollars in thousands)
|
Revenues:
|
|
|
|
|
|
|
|
|
Service
|
|
$
|
235,609
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
235,609
|
|
Product
|
|
60,636
|
|
|
7,593
|
|
|
—
|
|
|
68,229
|
|
Royalties and fees
|
|
—
|
|
|
11,411
|
|
|
—
|
|
|
11,411
|
|
|
|
296,245
|
|
|
19,004
|
|
|
—
|
|
|
315,249
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Cost of service
|
|
151,193
|
|
|
—
|
|
|
—
|
|
|
151,193
|
|
Cost of product
|
|
28,783
|
|
|
5,801
|
|
|
—
|
|
|
34,584
|
|
Site operating expenses
|
|
32,638
|
|
|
—
|
|
|
—
|
|
|
32,638
|
|
General and administrative
|
|
11,889
|
|
|
4,968
|
|
|
19,838
|
|
|
36,695
|
|
Rent
|
|
44,881
|
|
|
41
|
|
|
169
|
|
|
45,091
|
|
Depreciation and amortization
|
|
10,203
|
|
|
89
|
|
|
2,354
|
|
|
12,646
|
|
Total operating expenses
|
|
279,587
|
|
|
10,899
|
|
|
22,361
|
|
|
312,847
|
|
Operating income (loss)
|
|
16,658
|
|
|
8,105
|
|
|
(22,361
|
)
|
|
2,402
|
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
Interest expense
|
|
—
|
|
|
—
|
|
|
(2,153
|
)
|
|
(2,153
|
)
|
Interest income and other, net
|
|
—
|
|
|
—
|
|
|
1,452
|
|
|
1,452
|
|
Income (loss) from continuing operations before income taxes
|
|
$
|
16,658
|
|
|
$
|
8,105
|
|
|
$
|
(23,062
|
)
|
|
$
|
1,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended December 31, 2017
|
|
|
Company-owned
|
|
Franchise
|
|
Corporate
|
|
Consolidated
|
|
|
(Dollars in thousands)
|
Revenues:
|
|
|
|
|
|
|
|
|
Service
|
|
$
|
458,773
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
458,773
|
|
Product
|
|
109,966
|
|
|
22,790
|
|
|
—
|
|
|
132,756
|
|
Royalties and fees
|
|
—
|
|
|
26,859
|
|
|
—
|
|
|
26,859
|
|
|
|
568,739
|
|
|
49,649
|
|
|
—
|
|
|
618,388
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Cost of service
|
|
274,686
|
|
|
—
|
|
|
—
|
|
|
274,686
|
|
Cost of product
|
|
52,491
|
|
|
17,535
|
|
|
—
|
|
|
70,026
|
|
Site operating expenses
|
|
65,422
|
|
|
—
|
|
|
—
|
|
|
65,422
|
|
General and administrative
|
|
33,771
|
|
|
12,415
|
|
|
37,572
|
|
|
83,758
|
|
Rent
|
|
107,282
|
|
|
117
|
|
|
490
|
|
|
107,889
|
|
Depreciation and amortization
|
|
31,948
|
|
|
183
|
|
|
5,075
|
|
|
37,206
|
|
Total operating expenses
|
|
565,600
|
|
|
30,250
|
|
|
43,137
|
|
|
638,987
|
|
Operating income (loss)
|
|
3,139
|
|
|
19,399
|
|
|
(43,137
|
)
|
|
(20,599
|
)
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
Interest expense
|
|
—
|
|
|
—
|
|
|
(4,307
|
)
|
|
(4,307
|
)
|
Interest income and other, net
|
|
—
|
|
|
—
|
|
|
3,389
|
|
|
3,389
|
|
Income (loss) from continuing operations before income taxes
|
|
$
|
3,139
|
|
|
$
|
19,399
|
|
|
$
|
(44,055
|
)
|
|
$
|
(21,517
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended December 31, 2016
|
|
|
Company-owned
|
|
Franchise
|
|
Corporate
|
|
Consolidated
|
|
|
(Dollars in thousands)
|
Revenues:
|
|
|
|
|
|
|
|
|
Service
|
|
$
|
478,700
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
478,700
|
|
Product
|
|
116,949
|
|
|
14,996
|
|
|
—
|
|
|
131,945
|
|
Royalties and fees
|
|
—
|
|
|
23,435
|
|
|
—
|
|
|
23,435
|
|
|
|
595,649
|
|
|
38,431
|
|
|
—
|
|
|
634,080
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Cost of service
|
|
301,990
|
|
|
—
|
|
|
—
|
|
|
301,990
|
|
Cost of product
|
|
54,130
|
|
|
11,269
|
|
|
—
|
|
|
65,399
|
|
Site operating expenses
|
|
65,283
|
|
|
—
|
|
|
—
|
|
|
65,283
|
|
General and administrative
|
|
23,431
|
|
|
10,365
|
|
|
38,815
|
|
|
72,611
|
|
Rent
|
|
90,893
|
|
|
83
|
|
|
348
|
|
|
91,324
|
|
Depreciation and amortization
|
|
19,798
|
|
|
179
|
|
|
4,778
|
|
|
24,755
|
|
Total operating expenses
|
|
555,525
|
|
|
21,896
|
|
|
43,941
|
|
|
621,362
|
|
Operating income (loss)
|
|
40,124
|
|
|
16,535
|
|
|
(43,941
|
)
|
|
12,718
|
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
Interest expense
|
|
—
|
|
|
—
|
|
|
(4,316
|
)
|
|
(4,316
|
)
|
Interest income and other, net
|
|
—
|
|
|
—
|
|
|
1,779
|
|
|
1,779
|
|
Income (loss) from continuing operations before income taxes
|
|
$
|
40,124
|
|
|
$
|
16,535
|
|
|
$
|
(46,478
|
)
|
|
$
|
10,181
|
|
Condensed Consolidated Results of Operations (Unaudited)
The following table sets forth, for the periods indicated, certain information derived from our unaudited Condensed Consolidated Statement of Operations. The percentages are computed as a percent of total consolidated revenues, except as otherwise indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Periods Ended December 31,
|
|
Three Months
|
|
Six Months
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
($ in millions)
|
|
% of Total
Revenues (1)
|
|
Basis Point
(Decrease)
Increase
|
|
($ in millions)
|
|
% of Total
Revenues (1)
|
|
Basis Point
(Decrease)
Increase
|
Service revenues
|
$
|
223.2
|
|
|
$
|
235.6
|
|
|
72.3
|
%
|
|
74.7
|
%
|
|
(240
|
)
|
|
(160
|
)
|
|
$
|
458.8
|
|
|
$
|
478.7
|
|
|
74.2
|
%
|
|
75.5
|
%
|
|
(130
|
)
|
|
30
|
|
Product revenues
|
71.8
|
|
|
68.2
|
|
|
23.3
|
|
|
21.7
|
|
|
160
|
|
|
170
|
|
|
132.8
|
|
|
131.9
|
|
|
21.5
|
|
|
20.8
|
|
|
70
|
|
|
(30
|
)
|
Franchise royalties and fees
|
13.5
|
|
|
11.4
|
|
|
4.4
|
|
|
3.6
|
|
|
80
|
|
|
(10
|
)
|
|
26.9
|
|
|
23.4
|
|
|
4.3
|
|
|
3.7
|
|
|
60
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (2)
|
134.9
|
|
|
151.2
|
|
|
60.4
|
|
|
64.2
|
|
|
(380
|
)
|
|
110
|
|
|
274.7
|
|
|
302.0
|
|
|
59.9
|
|
|
63.1
|
|
|
(320
|
)
|
|
60
|
|
Cost of product (2)
|
39.9
|
|
|
34.6
|
|
|
55.5
|
|
|
50.7
|
|
|
480
|
|
|
40
|
|
|
70.0
|
|
|
65.4
|
|
|
52.7
|
|
|
49.6
|
|
|
310
|
|
|
40
|
|
Site operating expenses
|
32.1
|
|
|
32.6
|
|
|
10.4
|
|
|
10.4
|
|
|
—
|
|
|
(50
|
)
|
|
65.4
|
|
|
65.3
|
|
|
10.6
|
|
|
10.3
|
|
|
30
|
|
|
(60
|
)
|
General and administrative
|
48.6
|
|
|
36.7
|
|
|
15.8
|
|
|
11.6
|
|
|
420
|
|
|
(150
|
)
|
|
83.8
|
|
|
72.6
|
|
|
13.5
|
|
|
11.5
|
|
|
200
|
|
|
(110
|
)
|
Rent
|
65.5
|
|
|
45.1
|
|
|
21.2
|
|
|
14.3
|
|
|
690
|
|
|
10
|
|
|
107.9
|
|
|
91.3
|
|
|
17.4
|
|
|
14.4
|
|
|
300
|
|
|
10
|
|
Depreciation and amortization
|
25.0
|
|
|
12.6
|
|
|
8.1
|
|
|
4.0
|
|
|
410
|
|
|
(10
|
)
|
|
37.2
|
|
|
24.8
|
|
|
6.0
|
|
|
3.9
|
|
|
210
|
|
|
(30
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
(37.3
|
)
|
|
2.4
|
|
|
(12.1
|
)
|
|
0.8
|
|
|
(1,290
|
)
|
|
100
|
|
|
(20.6
|
)
|
|
12.7
|
|
|
(3.3
|
)
|
|
2.0
|
|
|
(530
|
)
|
|
150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
2.2
|
|
|
2.2
|
|
|
0.7
|
|
|
0.7
|
|
|
—
|
|
|
—
|
|
|
4.3
|
|
|
4.3
|
|
|
0.7
|
|
|
0.7
|
|
|
—
|
|
|
—
|
|
Interest income and other, net
|
2.4
|
|
|
1.5
|
|
|
0.8
|
|
|
0.5
|
|
|
30
|
|
|
20
|
|
|
3.4
|
|
|
1.8
|
|
|
0.5
|
|
|
0.3
|
|
|
20
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit (expense) (3)
|
76.5
|
|
|
(0.7
|
)
|
|
205.9
|
|
|
42.3
|
|
|
N/A
|
|
|
N/A
|
|
|
71.6
|
|
|
(3.5
|
)
|
|
332.9
|
|
|
34.0
|
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of taxes
|
(6.6
|
)
|
|
(3.2
|
)
|
|
(2.1
|
)
|
|
(1.0
|
)
|
|
(110
|
)
|
|
(160
|
)
|
|
(40.4
|
)
|
|
(5.7
|
)
|
|
(6.5
|
)
|
|
(0.9
|
)
|
|
(560
|
)
|
|
(60
|
)
|
_____________________________
|
|
(1)
|
Cost of service is computed as a percent of service revenues. Cost of product is computed as a percent of product revenues.
|
|
|
(2)
|
Excludes depreciation and amortization expense.
|
|
|
(3)
|
Computed as a percent of (loss) income from continuing operations before income taxes. The income taxes basis point change is noted as not applicable (N/A) as the discussion within MD&A is related to the effective income tax rate.
|
Consolidated Revenues
Consolidated revenues primarily include revenues of company-owned salons, product and equipment sales to franchisees, and franchise royalties and fees. The following tables summarize revenues and same-store sales by concept as well as the reasons for the percentage change:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended December 31,
|
|
For the Six Months
Ended December 31,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
(Dollars in thousands)
|
Company-owned salons:
|
|
|
|
|
|
|
|
|
|
|
SmartStyle
|
|
$
|
122,497
|
|
|
$
|
130,992
|
|
|
$
|
248,699
|
|
|
$
|
259,942
|
|
Supercuts
|
|
71,034
|
|
|
72,273
|
|
|
142,466
|
|
|
145,914
|
|
Signature Style
|
|
86,431
|
|
|
92,980
|
|
|
177,574
|
|
|
189,793
|
|
Total Company-owned salons
|
|
279,962
|
|
|
296,245
|
|
|
568,739
|
|
|
595,649
|
|
Franchise salons:
|
|
|
|
|
|
|
|
|
Product
|
|
15,068
|
|
|
7,593
|
|
|
22,790
|
|
|
14,996
|
|
Royalties and fees
|
|
13,485
|
|
|
11,411
|
|
|
26,859
|
|
|
23,435
|
|
Total Franchise salons
|
|
28,553
|
|
|
19,004
|
|
|
49,649
|
|
|
38,431
|
|
Consolidated revenues
|
|
$
|
308,515
|
|
|
$
|
315,249
|
|
|
$
|
618,388
|
|
|
$
|
634,080
|
|
Percent change from prior year
|
|
(2.1
|
)%
|
|
(2.2
|
)%
|
|
(2.5
|
)%
|
|
(1.7
|
)%
|
Salon same-store sales decrease (1)
|
|
(0.7
|
)%
|
|
(2.5
|
)%
|
|
(0.2
|
)%
|
|
(1.1
|
)%
|
_____________________________
|
|
(1)
|
Same-store sales are calculated on a daily basis as the total change in sales for company-owned locations that were open on a specific day of the week during the current period and the corresponding prior period. Quarterly and year-to-date same-store sales are the sum of the same-store sales computed on a daily basis. Locations relocated within a one-mile radius are included in same-store sales as they are considered to have been open in the prior period. Same-store sales are calculated in local currencies to remove foreign currency fluctuations from the calculation.
|
Decreases in consolidated revenues were driven by the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended December 31,
|
|
For the Six Months
Ended December 31,
|
Factor
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Same-store sales
|
|
(0.7
|
)%
|
|
(2.5
|
)%
|
|
(0.2
|
)%
|
|
(1.1
|
)%
|
Closed salons
|
|
(4.8
|
)
|
|
(1.5
|
)
|
|
(4.2
|
)
|
|
(1.7
|
)
|
New stores and conversions
|
|
0.6
|
|
|
0.5
|
|
|
0.6
|
|
|
0.5
|
|
Franchise
|
|
2.5
|
|
|
(0.1
|
)
|
|
1.5
|
|
|
—
|
|
Foreign currency
|
|
0.4
|
|
|
—
|
|
|
0.3
|
|
|
—
|
|
Other
|
|
(0.1
|
)
|
|
1.4
|
|
|
(0.5
|
)
|
|
0.6
|
|
|
|
(2.1
|
)%
|
|
(2.2
|
)%
|
|
(2.5
|
)%
|
|
(1.7
|
)%
|
Same-store sales by concept are detailed in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended December 31,
|
|
For the Six Months
Ended December 31,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
SmartStyle
|
|
(1.5
|
)%
|
|
(2.3
|
)%
|
|
(0.5
|
)%
|
|
(1.1
|
)%
|
Supercuts
|
|
1.4
|
|
|
(1.1
|
)
|
|
1.6
|
|
|
—
|
|
Signature Style
|
|
(1.3
|
)
|
|
(3.7
|
)
|
|
(1.1
|
)
|
|
(1.9
|
)
|
Consolidated same-store sales
|
|
(0.7
|
)%
|
|
(2.5
|
)%
|
|
(0.2
|
)%
|
|
(1.1
|
)%
|
The same-store sales decrease of
0.7%
and
0.2%
during the three and
six
months ended
December 31, 2017
, respectively, were due to decreases of
3.2%
and
3.2%
, respectively, in same-store guest visits, partly offset by increases of
2.5%
and
3.0%
, respectively, in average ticket price. The Company constructed (net of relocations) and closed
8
and
182
company-owned salons, respectively, during the twelve months ended
December 31, 2017
and sold (net of buybacks)
266
company-owned salons to franchisees during the same period (2018 Net Salon Count Changes). Revenue related to franchised locations increased
$9.5
and
$11.2 million
during the three and
six
months ended
December 31, 2017
, respectively, primarily as a result of product sold to The Beautiful Group and increased number of franchised locations during the twelve months ended
December 31, 2017
. Also impacting revenues for the three and
six
months ended
December 31, 2017
, were favorable foreign currency and a cumulative adjustment related to discontinuing a piloted loyalty program, partly offset by unfavorable calendar shifts.
The same-store sales decrease of 2.5% and 1.1% during the three and six months ended December 31, 2016, respectively, were due to decreases of 6.0% and 5.4%, respectively, in same-store guest visits, partly offset by increases of 3.5% and 4.3%, respectively, in average ticket price. The Company constructed (net of relocations) and closed
56
and
128
company-owned salons, respectively, during the twelve months ended December 31, 2016 and sold (net of buybacks)
23
company-owned salons to franchisees during the same period (2017 Net Salon Count Changes). Also impacting revenues was favorable calendar shifts.
Consolidated revenues are primarily comprised of service and product revenues, as well as franchise royalties and fees. Fluctuations in these three major revenue categories, operating expenses and other income and expense were as follows:
Service Revenues
Decreases of
$12.4
and
$19.9 million
in service revenues during the three and
six
months ended
December 31, 2017
, respectively, were primarily due to the 2018 Net Salon Count Changes. Same-store service sales (decrease) increase of
(0.7)%
and
0.1%
during the three and
six
months ended
December 31, 2017
, respectively, were primarily the result of
2.7%
and
3.4%
increases in average ticket price, respectively, and decreases of
3.4%
and
3.3%
, respectively, in same-store guest visits. Also impacting service revenues during the three and
six
months ended
December 31, 2017
, were favorable foreign currency and a cumulative adjustment related to discontinuing a piloted loyalty program, partly offset by unfavorable calendar shifts. The
six
months ended
December 31, 2017
were also negatively impacted by hurricanes in the southern United States.
Decreases of $3.7 and $6.7 million in service revenues during the three and six months ended December 31, 2016, respectively, were primarily due to the 2017 Net Salon Count Changes, same-store service sales decreases of 1.9% and 0.7%, respectively, partly offset by favorable calendar shifts. Decreases in same-store service sales were primarily the result of 5.6% and 5.1% decreases in same-store guest visits, respectively, partly offset by 3.7% and 4.4% increases in average ticket price, respectively, during the three and six months ended December 31, 2016.
Product Revenues
The
$3.6
and
$0.8 million
increases in product revenues during the three and
six
months ended
December 31, 2017
were primarily due to product sold to The Beautiful Group, partly offset by the 2018 Net Salon Count Changes and same-store product sales decreases of
0.8%
and
1.2%
, respectively. For the three and
six
months ended
December 31, 2017
, the decrease in same-store product sales was primarily the result of a decrease in same-store transactions of
4.2%
and
4.6%
, respectively, partly offset by an increase in average ticket price of
3.4%
and
3.4%
, respectively. The
six
months ended
December 31, 2017
were also negatively impacted by hurricanes in the southern United States.
Decreases of $3.3 and $4.0 million in product revenues during the three and
six
months ended December 31, 2016, respectively, were primarily due to the 2017 Net Salon Count Changes, same-store product sales decreases of 4.7% and 2.6%, respectively, partly offset by favorable calendar shifts. The decrease in same-store product sales was primarily the result of decreases in same-store transactions of 5.0% and 3.8%, respectively, partly offset by increases in average ticket price of 0.3% and 1.2% during the three and
six
months ended December 31, 2016, respectively.
Royalties and Fees
Total franchised locations open at
December 31, 2017
were
3,929
as compared to 2,549 at
December 31, 2016
. The increase of
$2.1
and
$3.4 million
in royalties and fees for the three and
six
months ended
December 31, 2017
, respectively, was primarily due to higher franchise fees due to an increase in the number of new salons opened in fiscal 2018 compared to the prior year and higher royalties due to the increased number of franchised locations.
Total franchised locations open at December 31, 2016 were 2,549 compared to 2.427 at December 31, 2015. Decreases of $0.3 and $0.2 million in royalties and fees for the three and six months ended December 31, 2016, respectively, compared to the prior year period were primarily due to a lower level of initial franchise fees due to the timing of new salon openings and higher franchise termination fees in the prior year, partly offset by the increased number of franchised locations and same-store sales increases and franchised locations. In the prior year, franchise growth and the associated fees with new franchise openings was skewed to the first half of the year whereas the Company expected new openings to be weighted more towards the back half of the year.
Cost of Service
The
380
and
320
basis point decreases in cost of service as a percent of service revenues during the three and
six
months ended
December 31, 2017
, respectively, were primarily due to the change in expense categorization as a result of the field reorganization that took place during the first quarter of fiscal year 2018. After considering this change in expense categorization, cost of service as a percent of service revenues decreased 70 and 60 basis points for the three and
six
months ended
December 31, 2017
, respectively, as a result of improved stylist productivity and cost savings associated with salon tools, partly offset by state minimum wage increases and higher health insurance costs. The
six
months ended
December 31, 2017
, were also negatively impacted by hurricanes in the southern United States.
The 110 and 60 basis point increases in cost of service as a percent of service revenues during the three and six months ended December 31, 2016, respectively, were primarily the result of state minimum wage increases, stylist productivity and a rebate in the prior year, partly offset by lower bonuses.
Cost of Product
The
480
and
310
basis point increases in cost of product as a percent of product revenues during the three and
six
months ended
December 31, 2017
, respectively, were primarily due to franchise product sold to The Beautiful Group, shift into lower margin product revenue to franchises and inventory reserves related to the SmartStyle restructure.
The 40 basis point increases in cost of product as a percent of product revenues during the three and six months ended December 31, 2016 were primarily due to a mix shift into lower margin product sales to franchisees. The increase during the six months ended December 31, 2016 was also due to inventory write-offs associated with salon closures and obsolescence.
Site Operating Expenses
Site operating expenses (decreased) increased
$(0.5)
and
$0.1 million
during the three and
six
months ended
December 31, 2017
, respectively. After considering the change in expense categorization as a result of the field reorganization that took place during the first quarter of fiscal year 2018, site operating expenses increased $1.2 and $2.9 million during the three and
six
months ended
December 31, 2017
, respectively, primarily as a result of the SmartStyle marketing campaign and less favorable actuarial adjustments related to workers' compensation accruals, partly offset by a net reduction in salon counts.
Site operating expenses decreased by $2.4 and $5.1 million during the three and six months ended December 31, 2016, respectively. The decreases were primarily due to cost savings associated with workers' compensation and salon telecom costs and reduced stylist incentives, partly offset by an increase in repairs and service expense.
General and Administrative
General and administrative (G&A) increased
$11.9
and
$11.1 million
during the three and
six
months ended
December 31, 2017
, respectively. After considering the change in expense categorization as a result of the field reorganization that took place during the first quarter of fiscal year 2018, G&A increased (decreased) $3.0 and ($4.0) million during the three and
six
months ended
December 31, 2017
, respectively. The remaining G&A increase during the three months ended
December 31, 2017
was primarily as a result of severance payments related to terminations of former executives, year over year increase in incentive compensation accruals and professional fees. After considering the change in expense categorization as a result of the field reorganization, the G&A decrease during the
six
months ended
December 31, 2017
, was primarily a result of a gain associated with life insurance proceeds in connection with the passing of a former executive officer, partially offset by severance payments related to terminations of former executives, year over year increase in incentive compensation accruals and professional fees.
The decreases of $5.5 and $8.8 million during the three and
six
months ended December 31, 2016, respectively, in G&A were primarily driven by certain costs in the prior year quarter, timing, and cost savings, partly offset by planned strategic investments in Technical Education. The decrease during the six months ended December 31, 2106 was also driven by one-time compensation benefits.
Rent
Rent expense increased
$20.4
and
$16.6 million
during the three and
six
months ended
December 31, 2017
primarily due to lease termination and other related closure costs associated with the SmartStyle operational restructuring and rent inflation, partly offset by a deferred rent adjustment related to the SmartStyle restructuring and a net reduction in salon counts.
Rent expense decreased $0.8 and $1.0 million during the three and
six
months ended December 31, 2016, respectively, due to salon closures, partly offset by lease termination fees and rent inflation.
Depreciation and Amortization
Depreciation and amortization (D&A) increased
$12.3
and
$12.5 million
during the three and
six
months ended
December 31, 2017
, respectively, primarily due to costs associated with returning SmartStyle locations to their pre-occupancy condition in connection with the SmartStyle restructuring and higher fixed asset impairment charges, partly offset by lower depreciation on a reduced salon base.
The decreases of $0.6 and $2.5 million in D&A during the three and
six
months ended December 31, 2016, respectively, were primarily due to lower depreciation on a reduced salon base and reduced fixed asset impairment charges in the
six
months ended December 31, 2016.
Interest Expense
Interest expense was flat for the three and
six
months ended
December 31, 2017
compared to the prior year period.
Interest expense decreased
$0.2
and
$0.4
million for the three and
six
months ended December 31, 2016, respectively, primarily due to the senior term note modification and the amendment to the revolving credit facility in fiscal year 2016.
Interest Income and Other, net
The
$0.9
and
$1.6 million
increase in interest income and other, net during the three and
six
months ended
December 31, 2017
, respectively, was primarily due to income received for transition services related to The Beautiful Group transaction, partly offset by a prior year insurance recovery benefit. The
six
months ended
December 31, 2017
also benefited from increased gift card breakage and a net gain on salon assets sold to franchisees.
The $0.6 and $0.1 million increases in interest income and other, net during the three and
six
months ended December 31, 2016, respectively, were primarily due to an insurance recovery and gift card breakage. For the
six
months ended December 31, 2016, these increases were partially offset due to prior year gains on salon assets sold.
Income Taxes
During the three and
six
months ended
December 31, 2017
, the Company recognized tax benefit of
$76.5
and
$71.6 million
, respectively, with corresponding effective tax rates of
205.9%
and
332.9%
.
During the three and
six
months ended December 31, 2016, the Company recognized tax expense of
$0.7
and
$3.5 million
, respectively, with corresponding effective tax rates of
42.3%
and
34.0%
.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). In connection with our initial analysis of the impact of the Tax Act, we have recorded a provisional estimated net tax benefit of $68.9 million in continuing operations for the periods ended December 31, 2017. The net tax benefit is primarily attributable to the impact of the corporate rate reduction on our deferred tax assets and liabilities along with a partial release of the U.S. valuation allowance (“VA”). The VA release is solely attributable to tax reform and the law change that allows for the indefinite carryforward of NOLs arising in tax years ending after December 31, 2017. Prior law limited the carryforward period to 20 years. As a result of the change, the Company is able to release its VA on deferred tax assets that it expects to reverse in future periods. The Company continues to maintain a VA on the historical balance of its finite lived federal
NOLs, tax credits and various state tax attributes. We are still analyzing certain aspects of the Tax Act and refining our calculations, which could potentially affect the measurement of our deferred tax balances and ultimately cause us to revise our provisional estimate in future periods in accordance with SAB 118. In addition, changes in interpretations, assumptions, and guidance regarding the new tax legislation, as well as the potential for technical corrections to the Tax Act, could have a material impact to the Company’s effective tax rate in future periods.
The recorded tax provision and effective tax rates for the three and
six
months ended
December 31, 2017
and three and
six
months ended December 31,
2016
were different than what would normally be expected primarily due to the impact of the Tax Act and the deferred tax VA. Additionally, the majority of the tax provision in periods ended prior to December 31, 2017 related to non-cash tax expense for tax benefits on certain indefinite-lived assets the Company could not recognize for reporting purposes. Due to the Tax Act and the resulting partial release of the Company’s VA, the Company recorded
$7.6 million
of tax benefit in continuing operations during the three months ended
December 31, 2017
, exclusive of the
$68.9 million
benefit mentioned above. Furthermore, the non-cash tax expense is not expected to be material in future periods.
Additionally, the Company is currently paying taxes in Canada and certain states in which it has profitable entities.
See Note 5 to the unaudited Condensed Consolidated Financial Statements.
Loss from Discontinued Operations
Loss associated with the discontinued operations of the mall-based business and International segment during the three months ended
December 31, 2017
and 2016, were
$6.6
and
$3.2 million
, respectively, and during the
six
months ended
December 31, 2017
and 2016,
$40.4
and
$5.7 million
, respectively. The increase in the loss during the three months ended
December 31, 2017
is primarily due to asset impairment charges based on the sales price and the carrying value of the International segment and professional fees related to the successful completion of the transaction. The increase in the loss during the
six
months ended
December 31, 2017
was primarily due to asset impairment charges, the loss from operations, the recognition of net loss of amounts previously classified within accumulated other comprehensive income and professional fees associated with the transaction. The recognition of the net loss of amounts previously classified within accumulated other comprehensive income into earnings was the result of the Company's liquidation of substantially all foreign entities with British pound denominated entities. See Note 1 to the unaudited Condensed Consolidated Financial Statements.
Results of Operations by Segment
Based on our internal management structure, we now report two segments: Company-owned salons and Franchise salons. See Note 10 to the Consolidated Financial Statements. Significant results of operations are discussed below with respect to each of these segments.
Company-owned Salons
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For the Three Months Ended December 31,
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For the Six Months Ended December 31,
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2017
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2016
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2017
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2016
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2017
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2016
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2017
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2016
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(Dollars in millions)
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(Decrease) Increase
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(Dollars in millions)
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(Decrease) Increase
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Total revenue
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$
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280.0
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$
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296.2
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$
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(16.2
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)
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$
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(6.3
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)
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$
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568.7
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$
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595.6
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$
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(26.9
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)
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$
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(9.9
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)
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Same-store sales
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(0.7
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)%
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(2.5
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)%
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180 bps
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(630 bps)
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(0.2
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)%
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(1.1
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)%
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90 bps
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(400 bps)
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Operating (loss) income
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$
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(20.2
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)
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$
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16.7
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$
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(36.9
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)
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$
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(0.9
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)
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$
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3.1
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$
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40.1
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$
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(37.0
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)
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$
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2.3
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Company-owned Salon Revenues
Decreases in Company-owned salon revenues were driven by the following:
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For the Three Months
Ended December 31,
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For the Six Months
Ended December 31,
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Factor
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2017
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2016
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2017
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2016
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Same-store sales
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(0.7
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)%
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(2.5
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)%
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(0.2
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)%
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(1.1
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)%
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Closed salons
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(5.1
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)
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(1.6
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)
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(4.4
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)
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(1.8
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)
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New stores and conversions
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0.2
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0.5
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0.3
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0.5
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Foreign currency
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0.3
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—
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0.3
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—
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Other
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(0.2
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)
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1.5
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(0.5
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)
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0.8
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(5.5
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)%
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(2.1
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)%
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(4.5
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)%
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(1.6
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)%
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Company-owned salon revenues decreased
$16.2
and
$26.9 million
during the three and
six
months ended
December 31, 2017
, respectively, primarily due to the closure of
182
salons and the sale of
266
company-owned salons (net of buybacks) to franchisees during the twelve months ended
December 31, 2017
and same-store sale decreases of
0.7%
and
0.2%
during the three and
six
months ended
December 31, 2017
, respectively. The same-store sales decreases were due to decreases of
3.2%
and
3.2%
in same-store guest visits, partly offset by increases of
2.5%
and
3.0%
in average ticket price during the three and
six
months ended
December 31, 2017
, respectively. Partly offsetting the decrease was revenue growth from construction (net of relocations) of
8
salons during the twelve months ended
December 31, 2017
.
Company-owned salon revenues decreased
$6.3
and
$9.9 million
during the three and
six
months ended
December 31, 2016
, respectively, primarily due to the closure of
128
salons and the sale of
23
company-owned salons (net of buybacks) to franchisees during the twelve months ended
December 31, 2016
and same-store sales decreases of 2.5% and $1.1%,
respectively, partly offset by revenue growth from construction (net of relocations) of
56
salons during the twelve months ended
December 31, 2016
. The same-store sales decreases were due to 6.0% and 5.4% decreases in same-store guest visits,
partly offset by 3.5% and 4.3% increases in average ticket price.
Company-owned Salon Operating (Loss) Income
During the three and
six
months ended
December 31, 2017
, Company-owned salon operations generated operating (loss) income of
$(20.2)
and
$3.1 million
, a decrease of
$36.9
and
$37.0 million
compared to the prior comparable period, primarily due to SmartStyle restructuring charges consisting of lease termination and other related closure costs and costs associated with returning the salons to pre-occupancy condition and non-cash fixed asset impairment costs. Also contributing to the decrease were state minimum wage increases, costs associated with the SmartStyle marketing campaign and higher health insurance costs, partly offset by improved stylist productivity, the closure of underperforming salons and prior year inventory expense related to salon tools. The
six
months ended
December 31, 2017
were also negatively impacted by the hurricanes in the southern United States.
Company-owned salon operating income decreased
$0.9 million
during the three months ended December 31, 2016 primarily due to the same-store sales decreases, state minimum wage increases and decreased stylist productivity, partly offset by cost savings associated with salon telecom and utilities costs and lower bonuses. Company-owned salon operating income increased
$2.3 million
during the
six
months ended December 31, 2016 primarily due to reduced fixed asset impairment charges and cost savings associated with salon telecom and utilities costs, partly offset by same-store sales decreases, minimum wage increases, and decreased stylist productivity.
Franchise Salons
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For the Three Months Ended December 31,
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For the Six Months Ended December 31,
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2017
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2016
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|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(Dollars in millions)
|
|
Increase (Decrease)
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|
(Dollars in millions)
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|
Increase (Decrease)
|
Revenue
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Product
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$
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15.1
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|
|
$
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7.6
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|
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$
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7.5
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$
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(0.7
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)
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$
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22.8
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|
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$
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15.0
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$
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7.8
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$
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(0.8
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)
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Royalties and fees
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13.5
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|
11.4
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|
2.1
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|
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(0.2
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)
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26.9
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23.4
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3.4
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(0.2
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)
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Total franchise salons revenue (1)
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$
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28.6
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$
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19.0
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$
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9.5
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|
$
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(0.9
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)
|
|
$
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49.6
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|
$
|
38.4
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|
|
$
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11.2
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$
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(1.0
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)
|
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Operating income
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$
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9.7
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$
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8.1
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$
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1.6
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$
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(0.1
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)
|
|
$
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19.4
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$
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16.5
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|
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$
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2.9
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$
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0.4
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|
_______________________________________________________________________________
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(1)
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Total is a recalculation; line items calculated individually may not sum to total due to rounding.
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Franchise Salon Revenues
Franchise salon revenues increased
$9.5 million
and
$11.2 million
during the three and
six
months ended
December 31, 2017
, respectively, due to increases of
$7.5
and
$7.8 million
, respectively, in franchise product sales primarily due to product sold to The Beautiful Group and
$2.1
and
$3.4 million
, respectively, in increased royalties and fees, primarily as a result of increased franchised locations. The increase in royalties and fees was also due to an increase in the number of new salons opened in the first
six
months compared to the prior year. During the twelve months ended
December 31, 2017
, franchisees constructed (net of relocations) and closed 108 and 127 franchise-owned salons, respectively, and purchased (net of Company buybacks)
266
salons from the Company and 1,134 salons previously included in the Company's previous mall-based business and International segment during the same period.
Franchise salon revenues decreased
$0.9
and
$1.0 million
during the three and
six
months ended
December 31, 2016
, respectively, due to
$0.7
and
$0.8 million
decreases in franchise product sales, respectively and
$0.2 million
decreases in royalties and fees. The decreases in royalties and fees were primarily due to lower franchise fees and a higher level of franchise termination fees in the prior year, partly offset by the increased number of franchised locations and same-store sales increases at franchised locations. During the twelve months ended December 31, 2016, franchisees constructed (net of relocations) and closed 165 and 70 franchise-owned salons, respectively, and purchased (net of Company buybacks) 27 salons from the Company during the same period.
Franchise Salon Operating Income
Franchise salon operating income increased
$1.6
and
$2.9 million
during the three and
six
months ended
December 31, 2017
, respectively, primarily due to the increased number of new franchised locations. Franchise salon operating income decreased
$0.1 million
during the three months ended December 31, 2016 primarily due to lower franchise product sales and franchise fees, partly offset by timing of annual franchise convention. Franchise salon operating income increased
$0.4 million
during the
six
months ended December 31, 2016 primarily due to the prior year including bad debt expense and one-time compensation benefits during the period, partly offset by lower franchise product sales and franchise fees.
Corporate
Corporate Operating Loss
Corporate operating loss
increased
$4.5 million
during the three months ended
December 31, 2017
primarily driven by a year over year increase in incentive compensation accruals, severance associated with terminations of former executives and professional fees, partly offset by savings realized from Company initiatives. Corporate operating loss
decreased
$0.8
during the
six
months ended
December 31, 2017
primarily driven by a gain associated with life insurance proceeds in connection with the passing of a former executive officer and savings realized from Company initiatives, partly offset by year over year increase in incentive compensation accruals, severance associated with terminations of former executives and professional fees.
Corporate operating loss decreased $4.1 and $6.5 million during the three and
six
months ended
December 31, 2016
primarily due to the prior certain costs in the prior year quarter, timing, and cost savings, partly offset by planned strategic investments in Technical Education, partly offset by one-time compensation benefits.
LIQUIDITY AND CAPITAL RESOURCES
Sources of Liquidity
Funds generated by operating activities, available cash and cash equivalents, and our borrowing agreements are our most significant sources of liquidity.
As of
December 31, 2017
, cash and cash equivalents were
$163.3
million, with
$146.6
,
$16.6
and
$0.1 million
within the United States, Canada, and Europe, respectively.
The Company's borrowing agreements include $123.0 million 5.5% senior notes due December 2019 (Senior Term Notes) and a $200.0 million five-year unsecured revolving credit facility that expires in June 2018, of which
$198.5 million
was unused as of
December 31, 2017
. See Note 8 to the unaudited Condensed Consolidated Financial Statements.
Uses of Cash
The Company closely manages its liquidity and capital resources. The Company's liquidity requirements depend on key variables, including the level of investment needed to support its business strategies, the performance of the business, capital expenditures, credit facilities and borrowing arrangements and working capital management. Capital expenditures are a component of the Company's cash flow and capital management strategy which can be adjusted in response to economic and other changes to the Company's business environment. The Company has a disciplined approach to capital allocation, which focuses on investing in key priorities to support the Company's multi-year strategic plan as discussed within Part I, Item 1 of our Annual Report on Form 10-K for the fiscal year ended June 30, 2017.
Cash Flows
Cash Flows from Operating Activities
During the
six
months ended
December 31, 2017
, cash
used in
operating activities of
$12.3 million
, a decrease of
$39.9
million compared to the prior comparable period, was primarily due to the payment of lease termination and other related closure costs associated with the Company's SmartStyle restructuring.
During the
six
months ended
December 31, 2016
, cash provided by operating activities of
$27.6 million
increased $15.0 million compared to the prior comparable period, primarily due to higher inventory purchases in the prior year.
Cash Flows from Investing Activities
During the
six
months ended
December 31, 2017
, cash
provided by
investing activities of
$5.3
million was primarily from proceeds from company-owned life insurance policies of
$18.1 million
and cash proceeds from sale of salon assets of
$2.7 million
, partly offset by capital expenditures of
$14.9 million
and a change in restricted cash of
$0.5 million
.
During the
six
months ended
December 31, 2016
, cash used in investing activities of
$17.3 million
was primarily for capital expenditures of
$18.4 million
, partly offset by a change in restricted cash of
$0.7 million
and cash proceeds from the sale of salon assets of
$0.3 million
.
Cash Flows from Financing Activities
During the
six
months ended
December 31, 2017
, cash
used in
financing activities of
$2.4 million
was for employee taxes paid for shares withheld of
$2.0 million
and settlement of equity awards of
$0.4 million
.
During the six months ended
December 31, 2016
, cash used in financing activities of
$1.1 million
was for employee taxes paid for shares withheld.
Financing Arrangements
See Note 8 of the Notes to the unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for the quarter ended
December 31, 2017
and Note 7 of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended
June 30, 2017
, for additional information regarding our financing arrangements.
Debt to Capitalization Ratio
Our debt to capitalization ratio, calculated as the principal amount of debt as a percentage of the principal amount of debt and shareholders’ equity at fiscal quarter end, were as follows:
|
|
|
|
|
|
|
|
As of
|
|
Debt to
Capitalization
|
|
Basis Point
(Decrease) Increase (1)
|
December 31, 2017
|
|
18.9
|
%
|
|
(60
|
)
|
June 30, 2017
|
|
19.5
|
%
|
|
40
|
|
_____________________________
(1)
Represents the basis point change in debt to capitalization as compared to the prior fiscal year end (
June 30, 2017
).
The
60
basis point
decrease
in the debt to capitalization ratio as of
December 31, 2017
as compared to
June 30, 2017
was primarily due to increases to shareholders equity resulting from the impact of changes in federal tax legislation during the
six
months ended
December 31, 2017
, partially offset by the non-cash impairment charge associated with the franchising the Company's previously owned mall-based and International segment and costs associated with the Company's restructuring of its SmartStyle portfolio.
The
40
basis point increase in the debt to capitalization ratio as of June 30, 2017 compared to June 30, 2016 was primarily due to net reductions to shareholders' equity resulting from net losses and foreign currency translation adjustments.
Share Repurchase Program
In May 2000, the Company’s Board of Directors (Board) approved a stock repurchase program with no stated expiration date. Since that time and through
December 31, 2017
, the Board has authorized $450.0 million to be expended for the repurchase of the Company's stock under this program. All repurchased shares become authorized but unissued shares of the Company. The timing and amounts of any repurchases depend on many factors, including the market price of the common stock and overall market conditions. At
December 31, 2017
, 18.4 million shares have been cumulatively repurchased for $390.0 million, and $60.0 million remained outstanding under the approved stock repurchase program. No shares were repurchased in the three months ended
December 31, 2017
.
SAFE HARBOR PROVISIONS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Quarterly Report on Form 10-Q, as well as information included in, or incorporated by reference from, future filings by the Company with the Securities and Exchange Commission and information contained in written material, press releases and oral statements issued by or on behalf of the Company contains or may contain “forward-looking statements” within the meaning of the federal securities laws, including statements concerning anticipated future events and expectations that are not historical facts. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements in this document reflect management’s best judgment at the time they are made, but all such statements are subject to numerous risks and uncertainties, which could cause actual results to differ materially from those expressed in or implied by the statements herein. Such forward-looking statements are often identified herein by use of words including, but not limited to, “may,” “believe,” “project,” “forecast,” “expect,” “estimate,” “anticipate,” and “plan.” In addition, the following factors could affect the Company’s actual results and cause such results to differ materially from those expressed in forward-looking statements. These factors include the continued ability of the Company to implement its strategy, priorities and initiatives; our ability to attract, train and retain talented stylists; financial performance of our franchisees; acceleration of sale of certain salons to franchisees; the ability of the Company to maintain a satisfactory relationship with Walmart; the success of The Beautiful Group, our largest franchisee; marketing efforts to drive traffic; changes in regulatory and statutory laws including increases in minimum wages; our ability to manage cyber threats and protect the security of sensitive information about our guests, employees, vendors or Company information; reliance on information technology systems; reliance on external vendors; competition within the personal hair care industry; changes in tax exposure; changes in healthcare; changes in interest rates and foreign currency exchange rates; failure to standardize operating processes across brands; consumer shopping trends and changes in manufacturer distribution channels; financial performance of Empire Education Group; the continued ability of the Company to implement cost reduction initiatives; compliance with debt covenants; changes in economic conditions; changes in consumer tastes and fashion trends; exposure to uninsured or unidentified risks; ability to attract and retain key management personnel; reliance on our management team and other key personnel or other factors not listed above. Additional information concerning potential factors that could affect future financial results is set forth in the Company’s Annual Report on Form 10-K for the year ended
June 30, 2017
. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. However, your attention is directed to any further disclosures made in our subsequent annual and periodic reports filed or furnished with the SEC on Forms 10-K, 10-Q and 8-K and Proxy Statements on Schedule 14A.