Barchart’s Top 100 Stocks to Buy are companies whose shares are on a roll. They are often momentum stocks with excellent businesses justifying their pricey valuations to investors.
The Bottom 100 Stocks, on the other hand, are businesses whose share prices have gotten hammered in recent weeks and often over the past year.
As I combed through both lists for today’s commentary, I wondered what happened to Regis Corp. (RGS). Once upon a time, it traded over $450 (post reverse split) in October 2019.
In its 2018 fiscal year (June year-end), it made money, generating $60 million in operating profits from $1.24 billion in revenue. Today, it has revenue of $209 million in the trailing 12 months ended March 31 and a slight $7 million loss from operations.
I must admit that it’s been years since I’ve looked at Regis’s finances. Its brands include Supercuts and First Choice Haircutters, two fairly recognizable banners.
What the heck happened? I’ll consider its plight.
In the meantime, as you can see below, it finished yesterday’s trading ranked 74th in Barchart’s Bottom 100 Stocks to Buy, with a weighted alpha of -77.51 and a 52-week change of just 0.05%.
This suggests that the 36% haircut (pun intended) that has taken over the past month could continue. If you’re an aggressive investor, here’s why you might consider a speculative bet.
The Back Story
There are several different reasons why the business has cratered in recent years. An asset-heavy business model led to considerable debt, while Covid shut off the revenue tap long enough to cause significant damage to its overall business. I’ll focus on the former rather than the latter.
In October 2019, Regis announced that it was fully transitioning to a franchise model with few if any, corporate-owned locations. It's been transitioning for the better part of the past decade. In 2013, it had 9,700 salons, most of which it owned. Today, it has half that, most of which are owned by franchisees.
“Given the success to date of the Company's effort to profitably sell and convert company-owned salons into its franchise portfolio, the Company has reached the decision to fully franchise its remaining company-owned portfolio of salons,” the company’s Q4 2019 press release stated.
At the time, Regis estimated that it would take 18 to 24 months to complete the transition to a fully-franchised portfolio. As of June 30, 2019, it owned 3,108 locations, or about 44% of its 7,145 total. As of June 30, it owned just 20 salons out of 4,557 (0.4%).
Transition Complete
As I wrote above, it only owns 20 salons, so most of its revenue comes from franchise royalties, franchise fees, franchise rental income, advertising fund contributions, and the revenue from the company-owned salons.
In Q3 2024, its revenues were $49.2 million, 12% lower than a year ago. For the first nine months of fiscal 2024, its revenues were $153.6 million, 14% lower than a year earlier. While its system-wide revenues were down 4% in the first nine months of the fiscal year, its system-wide same-store sales rose 1.4% on top of 5.0% growth in 2023.
Further down the income statement, Regis’ operating profit for the nine months ended March 31 was $16.3 million, 213% higher than a year earlier. So, the business is operating reasonably efficiently, with lower overhead, boosting its operating profit margin.
Alas, it still loses money on a GAAP basis. It lost $2.3 million in the third quarter, up from a $1.6 million loss in Q3 2023. While its operating income nearly quadrupled in the first nine months of the fiscal year, its $18.5 million in interest expenses pushed it to a loss.
“[T]he Board continues to review strategic alternatives to assess the Company's capital structure, and we remain dedicated to maximizing value for all of our stakeholders,” stated CEO Matthew Doctor in its Q3 2024 press release.
As of March 31, its total debt, including its leases, was $502.5 million, or more than 10 times its market cap and about 92% of its total assets. The leases aren’t the issue, as rent from its franchisees for subleases covers that expense. The trouble is that it has $180 million in long-term debt due in 2026 at 9.6% interest.
In June, Regis refinanced its existing credit facility with a new secured credit facility due in June 2029, pushing out its debt by three years, reducing its outstanding debt by $80 million to $105 million, and cutting its annual interest expense by $7 million.
The Bottom Line
Regis isn’t likely to go out of business in the near term.
If you back out the right-of-use assets on its balance sheet for the leases ($361 million), the $180 million in debt is about 73% of the remaining $247 million in assets. It’s manageable, if not ideal, although with an Altman Z-Score of 0.09, it is distressed and could face bankruptcy proceedings in the next 24 months should its debt situation not get remedied, or its operations become less profitable.
In November 2023, the company did a 20-for-1 stock split to avoid being delisted from Nasdaq. Thus, it is effectively a penny stock.
I wish there were options available for Regis, but there aren’t. While I wouldn’t recommend buying RGS for a retirement account, its Supercuts and Portfolio Brands (including First Choice Haircutters) segments continue to grow same-store sales, and they should do so for the foreseeable future.
It seems a short-term fix to the balance sheet has been found. With its EBITDA moving in the right direction, it should deliver a third consecutive year of growing EBITDA when it reports Q4 2024 results tomorrow.
That makes it an attractive speculative bet despite being on Barchart’s Bottom 100 Stocks to Buy.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
