Regis Corp Q2 FY2026 Earnings Call

Good morning, and thank you for joining the Regis Second Quarter 2026 Earnings Conference Call. I am your host, Kersten Zupfer, Executive Vice President and Chief Financial Officer. I am joined today by our Interim Chief Executive Officer, Jim Lain. This conference is being recorded. I would like to remind everyone that the language on forward-looking statements included in our earnings release and 8-K filing also applies to our comments made on the call today. These documents can be found on our website, www.regiscorp.com/investor-relations. We will be taking questions at the end of the call. Please use the Q&A feature to submit any questions. With that, I will now turn the call over to Jim Lain.

Good morning, everyone, and thank you for joining us for Regis Corporation's Second Quarter Fiscal 2026 Earnings Call. Our focus remains on building a more durable, modern, and disciplined Regis, positioned to sustain consistent cash generation, improve financial performance, and create long-term value for all stakeholders. Q2 represents continued progress on that journey. We are operating with greater precision and honing in on the execution levers that are most impactful despite facing traffic challenges. For the second quarter, adjusted EBITDA was $8 million, which is an increase of $900,000 year-over-year, fueled by continued discipline in general and administrative expenses and contributions from our company-owned salon portfolio. Year-to-date adjusted EBITDA stands at $16 million, an increase of $1.2 million compared to the previous year. Consolidated same-store sales for the quarter saw a modest decline of 0.10%. Importantly, Supercuts recorded same-store sales growth of 2% year-to-date, while consolidated same-store sales increased by 0.4%. We generated $1.5 million of unrestricted cash from operations in Q2 and $3.9 million year-to-date, reflecting improved operational discipline and cash management. However, traffic remains our most significant challenge and the primary drag on top-line performance. While pricing actions have supported same-store sales, especially year-to-date, achieving sustainable traffic improvements remains the central goal of our strategy. Our strategy has not changed since Q1, but we are executing it with greater focus and rigor. Over the past two quarters, we have concentrated on the specific enablers of effective execution, such as tighter organizational alignment, clear leadership ownership, disciplined capital deployment, and a sharper focus on adoption and compliance throughout the system. We are making good progress in modernizing and transforming our flagship brand, Supercuts. Highlights include improvements in loyalty participation, digital engagement, and execution of brand standards. In December, we launched pilots to evaluate enhancements aimed at improving customer digital interaction. With loyalty membership on the rise, we are refining our CRM strategy to enhance customer retention. Although Supercuts experienced same-store sales growth of 2% in the quarter, traffic does not yet fully capture the work in progress. Our priorities for the upcoming quarters are clear: reducing friction, increasing franchisee adoption and compliance, and demonstrating measurable improvement through targeted pilots that we can scale confidently. Our company-owned salon group remains a key strategic asset. For Q2, these salons achieved sales growth of 4.3%. We introduced a new stylist pay plan aimed at fostering a productivity-driven operating model. As with any significant change, early insights from implementation highlighted areas for improvement, and the timing of pricing actions exerted some near-term pressure on margins. During Q2, we quickly acted to implement targeted measures, including adjusting service pricing and deploying a labor optimization tool. While still early, we are starting to see better alignment with our margin expectations. The trajectory of performance is improving, and this group of salons is increasingly becoming a center of excellence, testing, learning, and refining operating practices that can inform the broader franchise system. We are taking specific steps to strengthen performance across our brand portfolio and drive long-term value. While SmartStyle faces more pronounced performance challenges than our other brands, we are taking a disciplined, proactive approach focused on stabilization and improvement. Our overall objective is not to make every brand identical, but to ensure they function on a common operational and digital backbone, allowing each brand to maintain its unique customer proposition while benefiting from shared capabilities that reduce complexity and cost. Our multi-brand portfolio is a valuable asset for Regis, allowing us to reach diverse geographies and consumer segments effectively while fostering greater discipline and efficiency beneath the surface. Technology is a crucial enabler of our strategy, and we are making steady progress on key initiatives. In the short term, we are focused on effectively leveraging and integrating our POS platform to drive traffic and enhance the overall guest experience, including targeted enhancements to guest-facing digital capabilities, particularly in booking and loyalty connectivity. Simultaneously, we are creating a long-term modernization roadmap aimed at supporting scale, personalization, and a unified guest identity across our brands. Loyalty and CRM systems show promise in driving repeat visits and increasing engagement. Although gains are incremental at this stage, these platforms are foundational capabilities that will unlock greater frequency and utilization over time. We are also adopting a disciplined, forward-looking approach to AI. An AI task force has been formed with a defined mandate that ensures the responsible and effective use of AI across the organization. Our focus is practical, using AI to enhance process efficiency, improve data analysis, and support better decision-making across our brand portfolio. We are making necessary changes to position Regis for its next phase, simplifying the organization, clarifying leadership roles, and reallocating resources to the highest-impact priorities. This is not change for change's sake; instead, it’s about ensuring Regis is structurally equipped to execute with greater speed, clarity, and accountability. As we approach the second half of fiscal 2026, our priorities are clear: stabilizing traffic through increased adoption of our initiatives, maintaining disciplined cost and cash management, strengthening the operational and digital foundation across our brands, and establishing credibility through execution rather than mere ambitions. Although we have work ahead, we are optimistic about our progress in profitability, cash generation, and organizational focus, which bolsters our confidence in the path forward. I want to thank our franchisees, stylists, and team members for their resilience and commitment. Together, we are shaping a Regis that is more focused, disciplined, and modern. Now, I will turn the call over to Kersten to provide a detailed overview of the financial results.

Thanks, Jim. As a reminder, the company's acquisition of approximately 300 salons from Alline closed on December 19, 2024. Consequently, our results for the fiscal second quarter ending December 31, 2025, include a full period of contribution from those salons, while the prior year quarter included less than 2 weeks of contribution, which affects year-over-year comparability. As Jim discussed, our fiscal 2026 second quarter results reflect ongoing progress in executing our transformation strategy. While this work will take time, our fiscal second quarter results demonstrate continued strengthening of Regis' financial performance, supported by improving brand level performance and advancement of the initiatives that will drive long-term profitable and sustainable growth. For the second quarter, we delivered a 13% increase in GAAP operating income, $8 million in consolidated adjusted EBITDA, and generated positive cash from operations for the fifth consecutive quarter. Total second quarter revenue was $57.1 million, an increase of 22.3% or $10.4 million compared to the prior year. This increase was primarily driven by increased revenue from company-owned salons resulting from the acquisition of Alline in December of 2024. This increase was partially offset by lower royalties and fees and non-margin franchise rental income. As of December 31, 2025, we had a net decrease of 374 franchise locations compared to December 31, 2024. Of the 374 franchise locations that closed since last December, 96 were in the 6 months ended December 31, 2025. We believe closures in the second half of fiscal year 2026 will be in the same range as the first half of fiscal 2026. The closures year-over-year primarily involved underperforming stores with much lower trailing 12-month sales than our top-performing units. The gap between those stores and our highest performers was approximately $350,000, highlighting both the strong potential in our system and the opportunity to further enhance profitability and cash flow as we continue executing our transformation strategy. We reported GAAP operating income of $6.2 million, an increase of $0.7 million compared to $5.5 million in the year-ago quarter. This increase was primarily driven by operating income contribution from the company-owned segment, which includes the salons from the Alline acquisition and continued cost management discipline, which was partially offset by one-time professional fee expenses associated with the Alline acquisition in the prior year and salon closures. Income from continuing operations was around $456,000 compared to $206,000 in the year-ago quarter. The year-over-year improvement was primarily driven by an increase in company-owned salon contribution and reductions in G&A expenses, which was partially offset by lower contribution from higher-margin royalty revenues. The increase in both operating income and income from continuing operation reflects positive same-store sales performance at Supercuts and our company-owned salons as well as disciplined cost management. Turning to our adjusted results. As a reminder, our adjusted results exclude stock-based compensation expense. We believe this provides a clearer view of our underlying business performance. A reconciliation of our GAAP to non-GAAP results is included in our press release. For the second quarter, our consolidated adjusted EBITDA was $8 million, an increase of 11.9% compared to $7.1 million in the prior year quarter. The improvement was primarily driven by the EBITDA contribution from the acquired company-owned salons and lower G&A expenses, which was partially offset by lower franchise royalties and non-cash fee recognition. Our adjusted G&A was $9.8 million in the second quarter of fiscal year 2026, up from $9.6 million in the year-ago quarter. The slight increase resulted from G&A associated with our additional company-owned salons, partially offset by lower corporate G&A expenses resulting from our continued focus on disciplined cost management. Adjusted EBITDA for our franchise segment was $6.2 million in the quarter, a $173,000 decrease compared to $6.4 million in the prior year quarter. This decrease was primarily due to lower royalties and non-cash fees in the current period, which were partially offset by lower G&A expenses. Franchise adjusted EBITDA as a percentage of franchise revenue was 16.5%, up from 14.8% in the year-ago quarter. Adjusted EBITDA for our company-owned salon segment improved by $1.1 million year-over-year to $1.8 million for the quarter, primarily as a result of the increased number of company-owned salons acquired in December of 2024. Turning to cash flows. For the 6 months ended December 31, 2025, we generated $3.9 million in cash from operations, which is an improvement of $3.1 million compared to the $787,000 in the prior year period. The increase in cash generation was driven by impacts from the Alline acquisition. As a reminder, when evaluating our reported cash flows, we believe it's important to understand that cash flows are derived from 2 sources: unrestricted cash from operations, which is available for general corporate use and restricted cash related to our ad fund, which is sourced from the contributions made by our salons, both franchise and company-owned. Ad fund cash is designated specifically for marketing purposes and is not available for corporate use. For the first 6 months of fiscal year 2026, our total reported cash from operations of $3.9 million includes $200,000 of cash used for the ad funds, which is restricted, and $4.2 million in cash generated from our core operations, which is unrestricted. The business continues to generate positive cash from operations, providing a strong foundation for growth and financial flexibility. For fiscal year 2026, we continue to anticipate a meaningful increase in unrestricted cash generated from our core operations compared to fiscal year 2025. This expected improvement is supported by continued operational strength, a full year of acquired company-owned salon results, and the absence of one-time expenses we experienced last fiscal year. Additionally, working capital improvements are expected to further enhance cash generation from our core business. Ad fund cash, which is designated specifically for marketing purposes and not available for corporate use, built up over fiscal year 2025 as we moderated spending to focus on executing our business transformation strategy. Our marketing plans for fiscal year 2026 anticipate deploying a portion of this accumulated ad fund cash to support initiatives aimed at driving growth. In allocating capital, our priorities remain the same: reinvesting in the business to support growth, maintaining disciplined debt management and evaluating potential strategic opportunities. Turning to our balance sheet. In terms of liquidity, as of December 31, 2025, we had $27.4 million of available liquidity, including capacity under our revolving credit agreement and $18.4 million in unrestricted cash and cash equivalents. As of the end of the second fiscal quarter, we had outstanding debt of $126 million, excluding deferred financing costs and the value of warrants plus accrued paid-in-kind interest. As a reminder, in accordance with GAAP, our balance sheet contains approximately $208 million of operating lease liabilities related to our franchise salon leases. These leases have a weighted average remaining term of less than 5 years and the associated obligations are serviced by our franchisees. Provided the franchisees continue to meet their lease payments as they historically have, we believe these amounts should not be considered part of our debt position when evaluating our financial leverage. We expect these liabilities will continue to decrease over time as the leases mature and as we further reduce our use of franchise leases. And lastly, we continue to receive questions from shareholders regarding the potential to refinance our existing debt. While our current interest rate is higher than recent market levels, the economics of refinancing also depend on other terms of the agreement, including prepayment penalties and fees. Taken together, these factors may make refinancing after the 2-year anniversary of the agreement in June of 2026, economically viable and in the best interest of our shareholders. In the meantime, I want to assure investors that reducing our debt service remains a top priority. We are speaking with potential partners to explore refinancing options as we near the 2-year anniversary of the agreement in June of 2026, and we will keep shareholders informed as things progress. In summary, our fiscal year 2026 second quarter results reflect meaningful progress in strengthening Regis' financial profile. Our adjusted EBITDA and positive operating cash flows demonstrate the benefits of operating leverage and the contributions from the Alline acquisition, while our balance sheet and liquidity position provide flexibility to support our strategic initiatives.

Well, that's great news on the proactive refinancing efforts. I know it's almost 5 months away, but it's good that you're looking at that now. My question is actually on the Alline stores. And what is your initiative to improve performance there? Is it pricing? If you could just elaborate on that, that would be great.

Yes. Bill, this is Jim. Thanks for the question. Thanks for joining today. Yes, this has been one that I've been particularly involved with for the last many months. There's really 3 components to what we're doing. First off is a refinement of the pay plan itself. I'm no stranger to pay plans in our business, and this particular pay plan needed a bit of tweaking to put it in kind of simplistic terms. And we've made some, what I think to be pretty solid meaningful adjustments without any kind of a massive impact at all to the stylist. Second component is pricing. I think we were a bit slow early this past year in terms of taking price, and we've caught that up. We took further price adjustments in early December. And then the important part about pricing when you take price with a pay plan is that you adjust the associated tiers, the commensurate tiers so that it's all kind of going up equally together; that ensures that you maintain the appropriate margins in terms of the pay plan itself versus labor. And then lastly, what I will call labor optimization. You heard me talk in my narrative about the early steps we're taking with AI, and we've done some good work here. This is probably one of the first notable steps we've taken where we've leveraged machine learning to help us, as an example, dumping in data in terms of sales by hour, so call it dayparts so that we better understand where we're overstaffed on stylists or understaffed on stylists. And one of the first things that really popped for us was where we were overstaffed. And so moving those stylists accordingly with the business is really the kind of the ultimate output of this labor optimization tool. It's early. I like what I see so far with it, but I think it's going to take the rest of the quarter that we're in to get a better understanding of where that might need to be tweaked. So listen, overall, I'm encouraged by what I'm seeing so far, and we're going to continue to stay very, very close to it.

Great. One other thing about the stores, I think last fiscal year there were about 200 closures. So far this year, there have been around 100 closures, and you indicated there might be another 100. If you compare this to the Alline stores transitioning from franchise to company-owned, that represents roughly a 50% reduction from the previous fiscal year. Is that correct?

Yes, that's correct. Are you referring to a reduction to half the number of closures we had last year?

That's said properly, Bill.

We did get one more question in the Q&A feature, and I'll just read it and respond. Can you share any preliminary high-level feedback you're getting from potential replacement lenders on what rates you might get as a much more stable system with better leverage ratios? I'd love to be able to answer that at this point. But unfortunately, I can't really share anything more on rates or discussions we've been having, but know that we are having initial conversations with potential advisers. And as we can share more information, we definitely will.

Yes. Another question has come in. Can you walk through major new insights or initiatives from awareness to consideration to store visit to retention to address foot traffic goals? And if I'm following the question correctly, yes, there are several components there. One is top of funnel, middle funnel, bottom funnel paid media, driving customer acquisition and then getting the customer in our door and then maintaining the stickiness of that customer. And that's where the CRM and the loyalty come into play. But data such as online booking, we look at very, very closely, 90-day customer retention, transactions with a valid email. Those are all of the things that I consider to be important lead measures. And again, the primary drivers, the resources, the tools we're using and leaning into is paid media, and we continue to improve and tighten our execution there as well as loyalty, the kind of offers that we have and down the road, what I would call gamification in that particular arena. And then, of course, the whole idea of 90-day customer retention and what we're doing to maintain that stickiness.

We did get a couple more questions that came in through the Q&A. I'll combine these 2 questions from the same individual. Are you planning to add cost-cutter locations? And why is loyalty adoption lagging in SmartStyle and cost cutters?

Firstly, there isn't a comprehensive initiative to increase cost-cutter locations, but some are opening up currently. A franchisee has taken over an old hair cutting business and is converting it to a cost-cutter location. This strategy allows us to have both brands operating in the same market, which is advantageous since expanding Supercuts there doesn’t make sense. Instead, we can introduce the cost-cutter brand effectively. I find this progress encouraging. Regarding loyalty adoption, it is slower because we initiated it later in our other brands. However, we're starting to see growth, and in some instances, it's outpacing the initial launch growth we observed at Supercuts. As I mentioned earlier, part of our strategy is to leverage the successful elements from Supercuts and apply them across our other brands. Concerning the CEO search, the Board is still reviewing options for the next CEO while I continue to manage the organization and collaborate closely with the Board to advance our goals. More updates will follow.

That wraps up our Q&A session. That wraps up our second quarter fiscal year 2026 earnings call. Thank you for your interest and continued support of Regis. Have a great day. Thank you.