Regis Corp (NYSE:RGS)

RGS is a leader in the highly-fragmented haircare industry whose primary business is owning and franchising hair salons. I would like to set the table with some investment advice from Warren Buffett: “We see change as the enemy of investments…so we look for the absence of change. We don’t like to lose money. Capitalism is pretty brutal. We look for mundane products that everyone needs.” There are few things more mundane than having your haircut 6-12x per year. The company sells a service that has experienced few, if any technological changes and cannot be outsourced. Regis enjoys some pricing power. I see the current negative trends (-SSS) as transitory rather than permanent. The Company is in the early innings of a turnaround, which is being spearheaded by a new leadership team and board. I see EBITDA margins “reverting” to more normalized levels (today: <5%, 10-year average: 10.2%) as management executes against its business turnaround plan. It should be noted that the Company’s franchisees comp positively and generate roughly $50,000 more per salon than a company-owned store (there is a lot of leverage to improved sales trends). RGS has a healthy balance sheet (net cash) and good long-term return characteristics (excellent FCF). Recently, there was significant insider buying. If the company is successful in improving its margins, then the equity is worth > $25 per share from ~$14.50 today. The primary risk is in the timing of the turnaround. After several years of disappointing results, RGS has become an orphan stock, unloved and under-followed by Wall Street pros.

this pick is a combo MF Special Ops pick and Starboard Value. The thesis was basically divesting non-core operations coupled with a stock buyback program or a special divi and driving greater profitability through better focus on core operations - once the non-core stuff was disposed of.

While some divestitures occurred, mgmt's been reluctant to initiate a buyback program or pay out a special divi. Previously, mgmt indicated that it didn't want to return cash to shareholders until it completed renogotiating its credit facility. That was months ago when lots of companies were able to successfully able to renegotiate their credit facilities at generally favorable terms. RGS wasn't able to do so and to my knowledge still hasn't. Meanwhile it sits on cash.

I closed out my position a month or 2 ago as I grew tired watching mgmt not be able to 1) improve its core business or 2) execute on its credit facility renegotiation and bump up the share price through buybacks or a divi.

I'll continue to keep this open in CAPs in the event Starboard can drive some meaningful change and get me in the green.