(RGS) Regis Corporation Upgrades Shares to Neutral

We are upgrading our rating on Regis Corporation (RGS), the largest hair salon chain in the world, from Underperform to Neutral.

The rating upgrade is based on a host of initiatives taken by the company to drive traffic and enhance same-store sales growth. To attract new customers and retain existing ones, Regis has installed a point of sale (POS) system as well as Internet connections in all salons. The company has already equipped more than 2000 salons with this facility and plans to equip another 1,000 salons in each subsequent quarter.

The full system-wide roll out is expected to be completed by June 2012, and it will enable RGS to store customer data that will enable the company to interact with its customers directly, thereby developing loyalty programs. Regis is also improving its Net Promoter Score (or NTS) program, which focuses on customer satisfaction.

Moreover, to attract customers Regis is re-accelerating marketing for its Promenade brand from 2.5% to 4.5% and expanding its Pro-Cuts concept. The company is also witnessing positive results from price increases over the last 4 years, as demand appears to be price inelastic.

During the second quarter of 2011, Regis also engaged Black, a design company, to remodel store fronts at 70–80 salons as a test. If the test is successful, Regis would expand Black’s service to 1,500–2,000 salons in 2012 to remodel store-fronts. The company has also engaged PeopleAnswers (employment consultants) to improve employee turnover and ultimately customer service.

The company is initially rolling out the program at 3,000 salons and expects it to be accretive in the near term. During the third quarter, management intends to spend $5–$10 million over the next twelve months to reinvigorate the Regis brand and drive traffic.

The emphasis of increased spending will be on marketing in the mall arena along with the usage of direct mail. Other initiatives include increased spending on national media for SuperCuts advertising, offering new services in certain salons, introducing new product lines and initiatives to launch new franchised salons.

Regis has also increased its investment ownership interest in Provalliance, Europe’s largest salon operator, to 46% from 30%. The company has made an investment of $56 million to increase its ownership stake.

Management expects the transaction to add approximately 6 cents to EPS annually upon completion. Provalliance has 2,500 company-owned and franchise salons in 33 countries, with annual revenues of over $275 million and system-wide sales exceeding $1 billion. We remain positive regarding the investment as it will not only increase the company’s income, but will also help Regis to expand in both domestic and international markets.

Additionally, we believe Regis’ commitment to restructuring and cost-cutting initiatives, economies of scale; incremental salon closures and enhancement of shareholders’ value will likely boost the company’s earnings going forward.

However, slower traffic due to economic concerns remains a drag on same-store sales and has resulted in eleven straight quarters of negative same-store sales.

Regis does not face demand risk stemming from technological innovations or foreign competition, but it is exposed to the lingering risk of changes in fashion trends, which will likely impact revenues from hair cutting and styling services The company competes with Ulta Salon, Cosmetics & Fragrance, Inc. (ULTA), Cabela’s Inc (CAB) and Sally Beauty Holdings Inc. (SBH).

CABELAS INC (CAB): Free Stock Analysis Report

REGIS CORP/MN (RGS): Free Stock Analysis Report

SALLY BEAUTY CO (SBH): Free Stock Analysis Report

ULTA SALON COSM (ULTA): Free Stock Analysis Report

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