Starboard Value Delivers Letter to Regis Corporation
Believes Company is Deeply Undervalued and that Opportunities Exist to Greatly Improve Operating and Stock Price Performance
Urges Regis to Dramatically Reduce Operating Expenses and Exit Non-Core Businesses
Has Nominated Three Highly Qualified Candidates for Election to the Board
NEW YORK, Aug. 16, 2011 /PRNewswire/ -- Starboard Value LP (together with its affiliates, "Starboard"), one of the largest shareholders of Regis Corporation ("Regis" or the "Company") (NYSE: RGS), today announced that it delivered a letter to the Company's Chairman and Chief Executive Officer, Paul Finkelstein, the Company's President, Randy Pearce, and the Board of Directors.
In the letter, Starboard states that Regis trades at a steep discount to the value of the sum of its parts and far below its specialty retail peers as a result of deteriorating operating results, driven in part by a bloated cost structure and a lack of operational focus. Starboard stressed that Regis should dramatically reduce operating expenses, exit its non-core businesses, and focus on its core North American salon business. In order to facilitate the implementation of these outlined options, Starboard submitted a letter to the Company on July 29, 2011, nominating three candidates with strong, relevant backgrounds for election to the Board of Directors at the Company's 2011 Annual Meeting. Starboard looks forward to discussing its nominees' backgrounds in more detail with the Company and is hopeful a mutually agreeable outcome can be reached that will serve the best interest of all shareholders.
The full text of the letter follows:
August 16, 2011
Paul Finkelstein, Chairman and Chief Executive Officer
Randy Pearce, President
7201 Metro Boulevard
Minneapolis, MN 55439
CC: Board of Directors
Dear Paul and Randy,
Starboard Value LP, together with its affiliates, currently owns 2,035,000 shares of common stock of Regis Corporation ("Regis" or the "Company") and also beneficially owns an additional 542,538 shares of common stock underlying the Company's 5% convertible senior notes due 2014. Collectively, we beneficially own approximately 4.4% of the outstanding common stock of Regis, making us one of the Company's largest shareholders. We appreciate you taking the time to meet with us at our offices on August 8th. After meeting with you and conducting extensive due diligence, we believe that Regis is deeply undervalued and that opportunities exist to greatly improve both operating and stock price performance based on actions within the control of management and the Board of Directors (the "Board"). The purpose of this letter is to outline our concerns and propose a set of strategic, operational, and corporate governance changes that we strongly believe are in the best interest of all shareholders.
We have evaluated the Company's different businesses, competitive positioning, and historical and projected operating statistics. Based on our research, we have concluded that the Company's core North American salon business is a strong and valuable business due to its ability to generate significant free cash flow and a high return on equity. Furthermore, the salon business is relatively recession-resistant, has little risk of technological change, and enjoys a greater degree of stability than most specialty retailers because it provides services that are generally considered to be non-discretionary. Despite these favorable business characteristics, we believe Regis trades at a steep discount to the sum of its parts and only 4.6x the consensus estimate for 2012 EBITDA(1), far below its specialty retail peers.
Over almost any period of time, Regis' stock price has materially underperformed the market. As shown in the table below, over the last one-, three-, and five-year periods, the Company's stock price has declined approximately -19%, -55%, and -60%, respectively. This negative performance has occurred despite modest increases in the broader equity markets and strong performance by its specialty retail peers.
Share Price Performance (1)
Russell 2000 Index
Specialty Retail Peer Group (1)
Underperformance vs. Russell
Underperformance vs. Peer Group
1. Total Return as of August 15, 2011. In Regis' 2010 Proxy, their peer group is defined as: AAP, AZO, CBRL, DIN, EAT, FL, GME, HRB, JACK, PETM, PZZA, RSH, SBUX, SCI.
We believe this weak stock price performance is due to deteriorating operating results, driven in part by a bloated cost structure and a lack of operational focus. To address these issues, we strongly believe that Regis should dramatically reduce operating expenses, exit its non-core businesses, and focus on its core North American salon business.
Reduce Operating Expenses
Despite having gross margins that are among the highest of its specialty retail peer group, Regis' operating margins are among the lowest in the group. The Company's inability to adjust its cost structure to a lower revenue base has resulted in four years of declines in operating income. Over the past 12 months, general and administrative expenses amounted to $310 million. This represents 13.4% of revenue, and appears to indicate that Regis has a higher portion of its cost structure dedicated to corporate overhead than virtually any other U.S. retailer of a similar size.
Specialty Retail Operating Metrics
Gross Margins (1)
Operating Margins (1)
Advance Auto Parts Inc.
H&R Block, Inc.
Service Corp. International
Foot Locker, Inc.
Advance Auto Parts Inc.
H&R Block, Inc.
Brinker International Inc.
Cracker Barrel, Inc.
Papa John's International Inc.
Papa John's International Inc.
Cracker Barrel, Inc.
Service Corp. International
Foot Locker, Inc.
Brinker International Inc.
Jack in the Box Inc.
Jack in the Box Inc.
1. Gross margins and operating margins are for the last twelve months. Companies listed are consistent with the peer group outlined in Regis' 2010 Proxy filing.
We struggle to understand the need for such a large amount of overhead cost. These costs have grown over 70% since 2004, while revenue has only increased 20% over the same period. This imbalance of expense growth versus revenue growth has directly resulted in significant declines in profitability and operating margin.
There are four categories of expense included in the $310 million of overhead costs; costs directly allocated to the North American Salon business (39% of overhead costs), costs directly allocated to the International Salon business (4% of overhead costs), costs directly allocated to Hair Club for Men and Women ("Hair Club") (12% of overhead costs), and unallocated corporate overhead (45% of overhead costs). We believe that the greatest opportunity for cost savings exists within the North American Salon business and unallocated corporate overhead. We would advocate a restructuring of the North America salon business field organization. The field organization is currently structured by brand concept instead of by region, which creates a great deal of redundancy across the different regions in which Regis operates. In each geographic region, the Company employs separate area managers and regional managers for each of its five brand concepts, rather than employing a single layer of middle management for each region. Although we recognize that each of these brand concepts is unique, we believe that integrating the field organization into a lean operation structured by geography instead of concept will result in significant cost savings. A unified field organization will also be better equipped to share best practices and drive profitability enhancements throughout the network.
We believe the second area of focus for cost reductions is unallocated corporate overhead which amounted to approximately $139 million in the last twelve months. This expense includes 750 employees at Regis' home office in Minneapolis, 500 employees at its distribution center, and expenses such as non-cash compensation, professional fees, and other expenses.
Revenue and Expense Growth for Regis Corp.
Fiscal Year Ended June
2011 vs. 2004
General & Administrative Expenses (2)
1. Last twelve months ended March 31, 2011 (most recent 10-Q filing).
2. General & Administrative Expense was classified as 'Corporate and Franchise Support Costs' in 2004 10-K.
As demonstrated in the table above, from 2004 to the last twelve months, operating expenses at Regis grew by $128 million. This growth in expense without commensurate growth in revenues has led to substantial de-leveraging in the business model as demonstrated by the reduction in operating margin from 9.4% in 2004 to 4.5% in the last twelve months. Based on the areas of focus outlined above, we believe Regis should be able to achieve cost savings of approximately $100 million annually by restructuring and re-focusing the business into a lean operation.
Explore Strategic Alternatives for Non-Core Assets
Regis owns several non-core assets which we believe are obscuring the value of the core North American Salon business. These non-core assets include two wholly-owned business units, Hair Club and 400 International salons, as well as two minority owned assets, Provalliance and Empire Education Group. Hair Club is a chain of 96 hair restoration centers which generate high EBITDA margins and positive growth. However, this business has no synergies with Regis' core salon operations. We believe that Hair Club would be attractive to a number of potential acquirers, who would be better able to realize the value of this asset. Regis also owns 400 salons in the U.K. that are managed separately from its North American salons. We believe the International salon business is far less profitable than the North American business because Regis lacks the scale and expertise to properly manage international locations. Regis also has minority interests in Provalliance, a chain of 2,760 salons in Europe that is majority owned by Frank Provost, as well as Empire Education Group, a chain of 102 accredited cosmetology schools in the U.S. These minority-owned businesses are not reflected in Regis' EBITDA and, as such, we believe that investors are potentially ignoring the significant value of these non-core assets.
Based on the changes we have outlined above, we believe consolidated EBITDA could be approximately $330 million after taking into account the proposed $100 million of cost savings. This metric includes Hair Club, but excludes the value of the Company's minority investments in Provalliance and Empire Education Group. As shown in the table below, this implies that Regis currently trades at a pro forma EBITDA multiple of only 3.2x Enterprise Value / EBITDA. This represents a steep discount to the specialty retail peer group which currently trades at an average Enterprise Value / EBITDA multiple(2) of 6.9x. Further, this analysis does not take into account what we believe should be a premium valuation for Hair Club as well as the value of Regis' minority investments.
Enterprise Value for Regis Corp.
Share Price (8/15/2011)
Pro Forma EBITDA (1)
EV / PF EBITDA Multiple
1. Based on Starboard Value internal estimates assuming $100 million reduction in general and administrative expenses.
We strongly believe that Regis is significantly undervalued and that opportunities exist to greatly improve valuation based on actions within the control of management and the Board. We recognize that these changes are not easy and will require tremendous focus and attention by management and the Board.
We believe that the Board could be improved with independent directors who have strong, relevant backgrounds and the operational expertise necessary to explore the options that we have outlined. To that end, and in accordance with the Company's Bylaws, we submitted a letter to the Company on July 29th, providing notice of our nomination of one Starboard representative and two independent candidates for election to the Board at the Company's 2011 Annual Meeting. We have included detailed biographies for each of these nominees below and believe they will be able to assist the Company in determining the right path going forward to appropriately address the long-term underperformance of Regis' profitability and stock price.
We look forward to discussing our nominees' backgrounds in more detail and are open-minded about ways to work together to reach a mutually agreeable outcome that will serve the best interest of all shareholders.
Jeffrey C. Smith
Starboard Value LP
(1) Based on Consensus EBITDA of $230 million and Regis' share price as of 8/15/2011.
(2) Represents the mean Enterprise Value / EBITDA multiple for specialty retail peer group defined in Regis' 2010 Proxy filing.
James P. Fogarty, age 41, is a private investor. From April 2009 until November 2010, Mr. Fogarty was President, Chief Executive Officer and Director of Charming Shoppes, Inc., a multi-brand, specialty apparel retailer. Prior to that, Mr. Fogarty was a Managing Director of Alvarez & Marsal ("A&M"), an independent global professional services firm, from August 1994 until April 2009. He was also a member of A&M's Executive Committee for North America Restructuring. During his tenure at A&M, Mr. Fogarty most recently served as President and Chief Operating Officer of Lehman Brothers Holdings (subsequent to its Chapter 11 bankruptcy filing) from September 2008 until April 2009. From September 2005 through February 2008, Mr. Fogarty was President and Chief Executive Officer of American Italian Pasta Company, the largest producer of dry pasta in North America. He served as the Chief Financial Officer of Levi Strauss & Co., a brand-name apparel marketer, from 2003 until 2005. From December 2001 through September 2003, he served as Senior Vice President and Chief Financial Officer and for a period as a Director of The Warnaco Group, a then $1,500,000,000 global apparel maker, which emerged from bankruptcy in early 2003 after completing a successful turnaround during his tenure. Starboard believes that Mr. Fogarty's deep experience, including as a President, CEO, COO, CFO, and director of public and private companies, will enable him to assist in the effective oversight of the Company.
Jeffrey C. Smith, age 39, is a Managing Member, Chief Executive Officer and Chief Investment Officer of Starboard Value. Prior to founding Starboard Value, Mr. Smith was a Partner Managing Director of Ramius LLC, a subsidiary of Cowen Group, Inc. ("Cowen"), and the Chief Investment Officer of Ramius Value and Opportunity Master Fund Ltd. (renamed the Starboard Value and Opportunity Fund) Mr. Smith was also a member of Cowen's Operating Committee and Cowen's Investment Committee. Prior to joining Ramius LLC in January 1998, he served as Vice President of Strategic Development for The Fresh Juice Company, Inc. ("The Fresh Juice Company"). While at The Fresh Juice Company, Mr. Smith helped orchestrate three acquisitions quadrupling sales and doubling market value. He later initiated and completed the sale of The Fresh Juice Company to The Saratoga Beverage Group, Inc. Mr. Smith was the Chairman of the Board of Phoenix Technologies Ltd., a provider of core systems software products, services and embedded technologies, from November 2009 until the sale of the company to Marlin Equity Partners and certain of its affiliates in November 2010. He also served as a director of Actel Corporation, a provider of power management solutions, from March 2009 until its sale to Microsemi Corporation in October 2010. Mr. Smith is a former member of the Board of Directors of Sl Corporation, Kensey Nash Corp., The Fresh Juice Company, Inc., and Jotter Technologies, Inc., an internet infomediary company. Mr. Smith served as a member of the Management Committee for Register.com, which provides internet domain name registration services. He began his career in the Mergers and Acquisitions department at Societe Generale. Mr. Smith is a General Securities Registered Representative. As a Chief Investment Officer of Starboard Value, he has significant experience evaluating companies from a financial, operational, and strategic perspective to identify inefficiencies and the resulting opportunities for value creation. Mr. Smith has particular expertise in assessing companies' balance sheets and capital structures to determine the best means of raising capital for growth or recapitalizing stressed situations. Mr. Smith's extensive experience in a variety of industries together with his management experience in a variety of roles enable Mr. Smith to provide Regis with valuable financial and executive insights and make him well qualified to sit on Regis' Board.
David P. Williams, age 50, has been the Executive Vice President of Chemed, a provider, through its subsidiaries, of hospice care, and repair and maintenance services, since May 2007, and its Chief Financial Officer since February 2004. From 1998 until 2004, Mr. Williams was the Senior Vice President and Chief Financial Officer of the Roto-Rooter Group, a leading provider of commercial and residential plumbing and drain cleaning services and the largest subsidiary of Chemed. Previously, from 1995 until 1998, Mr. Williams was the Chief Financial Officer of Chemed's Omnia Group subsidiary, a manufacturer of disposable healthcare products, and from 1990 until 1995, was Senior Vice President and Chief Financial Officer of Omnicare's Veratex Group, a national distributor of disposable medical, dental and pharmaceutical products. Prior to joining Chemed, Mr. Williams was with Price Waterhouse in their Comprehensive Professional Services Group, from 1983 until 1990. Mr. Williams holds a B.A. degree in accounting from Michigan State University and an M.B.A. from Michigan State University's Executive Management Program. Mr. Williams was on the executive committee and the board of trustees of one of the largest Ronald McDonald house operations in the United States from 2006 until 2010 and previously served on the board of trustees of Kids Helping Kids, an intensive 24/7 drug rehabilitation program. Mr. Williams' depth of experience in various senior executive roles of public and private companies and his accounting and financial expertise will enable him to assist in the effective oversight of Regis.
SOURCE Starboard Value LP
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