PREMIUM SEARCH Search by job title, geography and build a list of executive contacts
Standard & Poor's Focus Stock of the Week is Regis Corp. (RGIS
), a leading owner, operator, and franchiser of hair care and retail product salons. The company's shares carry S&P's highest investment ranking of 5 STARS, or strong buy. We at S&P believe that in an uncertain market environment, Regis has excellent growth prospects. And right now, its shares trade at a relatively low multiple to earnings.
With over 118 million customers worldwide, Regis is a global leader in the highly fragmented personal hair care industry. The company's domestic operations include more than 4,200 owned and 2,100 franchised salons operating under the brand names of Regis Salons, MasterCuts, Trade Secret, SmartStyle, Supercuts, Cost Cutters, Hair Masters, Style America, First Choice Haircutters, Magicuts, and others. International operations include 370 owned and 560 franchised salons, mainly in the U.K. and France. The company believes it has a 4% share of the domestic hair care market and a 2.2% share of the global market.
The company's brands represent a diversified portfolio within the hair care industry, from full-service hair and beauty salons targeting upscale customers (Regis Salons) to value-priced salons targeting men, women, and children (Cost Cutters, MasterCuts). Salons are located in malls (Regis, MasterCuts, and Trade Secret), strip centers (Supercuts, Cost Cutters), and a growing number of Wal-Mart locations (SmartStyle).
Regis sells nationally recognized hair care products such as Matrix, Paul Mitchell, and Redken, and a complete line of products sold under its own label. Salon branded products generate higher gross margins than haircutting and other salon services. Sales of products have been increasing as a percentage of total revenues, from 28% in fiscal year 2000 (June) to more than 30% during the six months ended December 31, 2001, thereby improving overall gross margins.
EXPANDING OPPORTUNITY. The company is currently pursuing an aggressive expansion strategy. From 1995 until the end of fiscal year 2001, Regis added 5,147 net units from new salon construction, mergers and acquisitions, and franchise agreements. In addition to continuing acquisitions, it is currently on pace to meet its goals of adding 410 new company-owned salons and completing 150 major remodeling and conversion projects in fiscal 2002.
Despite the recent economic turbulence, the company's operating performance has been impressive. Total revenues for the six months ended Dec. 31, 2001, grew 11.6%, year to year, to $708.2 million, fueled by the expansion strategy. Comparable store sales increased 3.1%, even though a difficult economic environment has limited mall traffic. Aided by a more favorable sales mix and a change in goodwill accounting, which added about $0.10 a share, earnings per share jumped 27% to $0.74 per diluted share for the six month period.
Shares of Regis have soared more than 80% in the past year, which we believe reflects the company's expansion strategy and sound operating performance that has fueled top-line and bottom-line growth. We believe that there is an abundance of opportunities for both internal and external growth, and that, consistent with the company's view, it can continue to grow earnings at a percentage rate in the low teens over the next few years.
Given the fragmentation in the hair care industry, we believe that Regis will have little trouble finding appropriate acquisition candidates at reasonable prices. Currently, approximately 90% of the company's acquisitions are the result of salon owners contacting Regis. Furthermore, we see little risk of large-scale shop closings that have recently dogged retail chains like Kmart and CVS. Regis does not face the same risks of over-expansion or competition, given its relatively low market share and a lack of a predatory industry competitor. The hair care market also provides Regis with a steady stream of customers, and is less susceptible to heavy losses in an economic downturn.
LOTS OF UPSIDE. We expect the company to maintain, or slightly improve, operating margins in the future. The company should benefit as a larger sales base is leveraged against fixed corporate costs. Regis is also able to improve revenues at acquired salons through improved training, marketing of products, and information technology. Furthermore, comparable store sales should improve above current levels as demand for hair care products and services continues to grow and the economy rebounds from recent lows, improving traffic in mall, strip center, and Wal-Mart locations.
Finally, we are also impressed by the company's powerful cash flow. Capital expenditures currently outweigh depreciation expenses, although this is a result of new store expansions. More than half of the company's budgeted capital expenditures in fiscal 2002 relate to its expansion plan. Expenditures needed to maintain existing revenue streams, including maintenance and remodeling for salons, and other corporate needs are exceeded by depreciation costs related to currently owned properties.
With improving comparable-store sales and reduced distribution costs, we at S&P see fiscal 2002 earnings per share for Regis rising to $1.57, excluding a $0.04 non-recurring gain and $0.20 benefit from goodwill accounting, versus $1.26 in fiscal 2001. Driven by expansion and improving operating margins, we project earnings will rise to $1.79 in fiscal 2003. We also believe that Regis can continue to meet its targeted annual earnings growth rates in the low teens for several years.
Given the company's excellent growth prospects, steady operating history, and an improving economy, we feel that Regis shares are undervalued at just over 14 times our fiscal 2003 estimate. The shares trade at a discount to the broader market, as the S&P 500 currently trades at more than 20 times 2002 earnings.
Our discounted cash flow analysis backs up this conclusion. Based on our assumption that Regis will experience rapidly improving cash flow over the next few years from revenue increases of between 12% and 14% and a flattening of capital expenditures, followed by declining growth rates until reaching a growth rate of 3.5% after 10 years, we believe that the shares trade at a significant discount to their fair range value of $34 to $37, which implies 33% upside potential.
Milton is an equity analyst for Standard & Poor's
Any advice, analysis, or recommendations contained in articles labeled "Insight from Standard & Poor's" reflect the views of Standard & Poor's, which operates separately from and independently of BusinessWeek Online. It is possible that BWOL may from time to time publish information that is not consistent with advice, analysis, or recommendations that are published by Standard & Poor's. Standard & Poor's and BusinessWeek Online are each units of The McGraw-Hill Companies, Inc.
Get BusinessWeek directly on your desktop with our RSS feeds.
Add BusinessWeek news to your Web site with our headline feed.
Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video.
To subscribe online to BusinessWeek magazine, please click here.
Copyright 2002 , by The McGraw-Hill Companies Inc. All rights reserved.
Printer-Friendly Version
