Zacks_Analysts' Blog : Regis Upgraded to Neutral - Analyst Blog

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 first quarter 2011 earnings, which were in line with the Zacks Consensus Estimate. Results reflect the benefits of cost-containment measures and improved customer traffic. Additionally, the company has a proven track record of growth through both acquisitions, as well as new salon construction.

Moreover, we expect Regis to substantially benefit, given an improvement in economic conditions and consumer spending. During the third quarter, management highlighted that it is currently experiencing positive same-store sales for the month of October, thus indicating improved customer traffic.

In fiscal 2011, Regis will focus on its top-line growth and expects same-store sales to improve, with positive comps anticipated in the second half of the year as the company is taking initiatives to attract new customers and retain the existing ones through a new point of sale (POS) system, coupled with the installation of Internet in all its salons.

In order to drive traffic, the company is improving customer communication and service initiatives, reaccelerating marketing for its Promenade brand from 2.5% to 4.5% and expanding its Pro-Cuts concept. The company is also seeing positive results from price increases over the last 4 years, as demand appears to be price inelastic.

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

However, slower traffic due to economic concerns remains a drag on same-store sales, resulting in nine 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 a lingering risk from changes in fashion trends. These continuous changes in trends are risky for a company that generates revenues from haircutting and styling services. The company competes with Ulta Salon, Cosmetics & Fragrance, Inc. (ULTA), Cabela’s Inc (CAB) and Cost Plus Inc. (CPWM).