Regis’s Cost Cuts Create Value by HFAC

The Harvard Financial Analysts Club is a student run club dedicated to providing the Harvard student body with sound financial education programs and real-world investment experience. 

In this post HFAC examines hair care salon Regis Corporation. The original article is on their Seeking Alpha page and there is a link on the bottom. Here are two paragraphs from their posts that I’ve elected to share:  

Harvard Financial Analysts Club (HFAC)
By Connor Haley

Regis Corporation (RGS) owns, operates and franchises low-end hair care salons and hair restoration centers around the world, including well-known brands such as Supercuts, MasterCuts and Magicuts, with a market capitalization of roughly $1 billion. Their core business is resilient in even the most difficult of business climates (hair needs cutting no matter how the economy is doing), which has allowed the company to produce decent results despite poor management. A recent power play by activist investing firm Starboard Value, however, has the potential to unlock the value in this stable, low risk business by cutting excessive costs, making Regis an attractive investment opportunity for value investors.

To begin, the stock is cheap at current valuations even before potential catalysts are considered. It trades at an enterprise value of less than 6 times EBITDA, all while yielding 1.5%, and produces substantial free cash flow yields, averaging over 15% of the current market cap over the past five years. The free cash flows are primarily a result of the cash flow friendly industry model, with low capital requirements and few shifts that require large capital expenditures. A likely reason for these attractive valuation levels is the company’s poor management history, with billions of capital expenditures yielding paltry returns for shareholders (ROE for the ttm is negative and ROA is a miniscule 3.68%), a suspicious history of related party transactions and egregious management salaries despite chronic underperformance.

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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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