Gary Wyetzner

[Gary Wyetzner @WyetznerGary]

$RGS
When I speak with people, it is interesting that they all know about the "no tax on tips" provision in the latest tax bill. This is clearly a bonus to stylists and to an industry that has struggled with stylist shortages in the past. However, there is another component of the bill that most people don't seem to know about, the 45B FICA Tax Tip Credit. This is a credit that the restaurant industry has had for years. With the signing of this new tax bill, the beauty industry can now take advantage of this credit. My understanding of the credit is that for every dollar of FICA tax paid on tips, the owner of the salon gets a dollar for dollar credit against their federal income taxes. So, if the owner is paying taxes, this is a nice boost to the bottom line. It's great for franchisees, who finally get a break after getting decimated by COVID and the resulting stylist shortages and inflationary pressures. At the margin, it could keep a few less salons from closing, encourage more CapEx, or even be the last reason for opening a new salon. It is also a further positive for Regis as the company owns all of the Alline salons. The benefit is not immediate as the company is not expecting a federal income tax liability due to their significant NOL's. However, over time, it represents potentially millions of dollars of deferred tax assets that can be used to reduce future tax liabilities over the next 20 years. If the company ever spins off any of the Alline locations, it is a boost to the purchaser's bottom line that can be monetized by the company. The credit is currently only valid for a few years; however, if the restaurant industry is any guide, this credit could be around for a long time. It's disappointing that the credit can't be used immediately by the company, but I can't help but think that one of the things that people miss when they discuss valuation multiples on top of Alline's potential EBITDA or the company's total EBITDA is that the company should not be paying taxes for a very long time. This is in addition to the very low CapEx requirements of a franchisor. I am not a tax expert, so do your own research on this matter.

[Gary Wyetzner @WyetznerGary]

Nice article by Bill Charters from 2 days ago discussing $RGS (Regis Corporation):

https://t.co/7xvcmnwJZD

[Gary Wyetzner @WyetznerGary]

I thought I would give some quick thoughts on the $RGS (Regis Corporation) quarterly earnings from last week. Although, adjusted EBITDA was up a lot from last year, it is the implications for the next four quarters and beyond that is the most interesting part of the release.

1) The contribution to company-owned salon adjusted EBITDA was 800K this past quarter. But, let's look at the Alline transaction. The guidance was for 5.8 million in annual adjusted EBITDA. To this we add 1.5 million of expected synergies. Finally, we add back the franchise fees that are no longer getting paid, which is approximately 5.5 percent of 80+ million (or around 4.4 million) and we get a total annual adjusted EBITDA of around 11.7 million dollars. This represents an average quarterly contribution to company-owned salon adjusted EBITDA of almost 3 million dollars, where due to seasonality, the 3rd fiscal quarter will be less and the 2nd fiscal quarter will be more.

So, why did we see only 800K this past quarter. There were actually three significant components to the underperformance that I can see. According to the numbers given, it sounds like Alline same store sales growth was around negative 5 percent for the quarter due to severe weather. It's important to realize that the Alline portfolio is located in the following three cold-weather states: Michigan, Ohio, and Pennsylvania. Even without the 5 percent decline in same store sales, the adjusted EBITDA would have been less than the average quarter due to the high seasonality of these locations relative to the average Regis salon. Seasonality is the second component. The third component relates to the fact that this was the Alline integration quarter for Regis. They made a number of changes and unfortunately costs came first. Their labor rate seemed to be very high, but they made the appropriate changes to prices and pay plans at the end of the quarter.

For the current quarter, I estimate franchise adjusted EBITDA to be over 6 million and company adjusted EBITDA to be close to 3 million dollars, even taking into account that not all of the synergies have been realized. That equates to a total adjusted EBITDA of 9 million dollars. I expect a similar sizable bump in adjusted EBITDA in each of the next four quarters. This potentially represents significant free cash flow. If we look out a year from now, I believe the company will be able to refinance its debt after the make whole provision is over on significantly better terms and I restate my belief that the company could be closing in on a 25 million dollars free cash flow run rate in approximately 12 months. And yet RGS's market cap is only around 50 million dollars.

2) As I stated before, I believe same store sales are beginning to turn around. If you exclude the underperformance due to how Easter impacted the business calendar last quarter, and the corresponding over performance this quarter, same store sales have been flat. I expect them to turn positive due to the Smartstyle remodels, remaining closings of underperforming stores, and as more of the company's initiatives take hold including their back-to-basics program, improved communications with customers, continued adoption of their loyalty program, continued improvements in company ratings on google, continued improvements in training ... I believe this will be the last calendar year of large salon closings. It is important to remember that the salons that have closed, especially the smaller Smartstyle salons, have low revenues that don't contribute much to royalty income.

3) The company should be generating a lot of cash over the foreseeable future. It could have interesting high-return acquisition opportunities or can pay down its high interest rate debt. Capital allocation becomes a little tricky if you assume that its interest rate will come down a lot in a year. In any event, every day now is a step forward with the cash generation versus last year where every day was a step back.

4) I continue to believe there are a couple of large areas of potential growth for the company that I have discussed before. As an example, I believe Regis is uniquely positioned to take advantage of the advances in AR/AI.

5) Finally, I continue to believe that given the price of the stock, it would be great to see some insider buying.

This is not a recommendation to buy the stock. There are lots of execution risks that can result in significant losses and you should do your own analysis.

[Gary Wyetzner @WyetznerGary]

I have been told by a number of investors about the $RGS (Regis Corporation) comments on X, so I decided to read them and give my take.

First, there is this false notion that RGS gave up the franchise fees when they bought Alline. All numbers presented by the company were computed after paying franchise fees. Instead of making 5.8 million in EBITDA after paying say 4 million in franchise fees, the new Alline will be making 9.8 million of EBITDA and won't be paying franchisee fees. It's just a recategorization of the fees. Of course, the company needs to execute well on the Alline transaction to achieve these results.

Second, I agree that a large chunk of fee revenue is non-cash. I get a slightly smaller number than what was posted here. But, it is important to realize there are non-cash items that work the other way. As part of SGA, the company amortizes millions of dollars of broker fees that they have already paid. So, this compensates for a chunk of the non-cash fee revenues. The non cash portion of EBITDA still represents a few million dollars, but it is considerably less than what was presented. Below EBITDA, the company also amortizes the large costs associated with the last financing which they have already paid, further compensating for the non-cash fee revenue at the bottom line.

No matter how you measure it, the stock is trading for a very low EBITDA multiple. The main point to remember is that the EBITDA earned by many companies is eaten up by capex and taxes, significantly reducing free cash flow. Regis has very little capex and won't be paying taxes for a very long time. That is why I have written about free cash flow, which is the only thing that matters to me.

If you consider that the company should be able to refinance their debt in a little over a year after the make whole provision ends and lower its SOFR plus 9 percent by a significant amount, the company should be closing in on a 25 million dollar free cash flow run rate. Compare that to a 39 million dollar market cap for the company.

And this is a company that has been hit by everything including COVID and major inflation, which severely impacts visitation frequency. Regis also tends to do fairly well in a recession as people tend to drop down to value salons to save money. Compare this to all the hot tech companies that have benefitted from huge monetary and fiscal stimulus over the last few years. It will be interesting to see how they do as this stimulus unwinds.

I still expect there to be closings the rest of the calendar year, especially in the quarter that just ended and the one we are currently in. I do think there is a chance that we start seeing a same store sales reversal in the quarter we are currently in as the pressure from closing Smartstyles subsides and the company starts to see the benefits of remodeling salons. There is also many paths to free cash flow growth: the Alline acquisition if they execute well, future acquisitions, paying down/refinancing debt, and two categories that I think long term could be huge drivers. One is refining the Holiday Hair women-focused salon concept they just bought and getting franchisees to expand as I believe there is a large opening for this sector of the market. Remember, COVID obliterated the in-mall Regis salons. The second is future AR/AI salon capabilities. I have seen nothing in the market that exploits the potential of this and Regis is best suited to take advantage of it. I also believe the company still has cost levers to compensate for near-term pressures. One other thing to realize is that as underperforming salons are closed, Regis is left with a much stronger and higher average volume base of salons.

Finally, I agree that the management team should buy shares with their own money when the window opens up.

This is not a recommendation to buy the stock. There are lots of execution risks that can result in significant losses and you should do your own analysis. I personally have been consistently buying RGS the past few weeks including Friday as I can't find anything better for my own risk/reward parameters.