Starboard, 3; Regis exec Pearce, 1 new seat on board

  • Article by: THOMAS LEE , Star Tribune
  • Updated: October 27, 2011 - 9:09 PM

President and future CEO Randy Pearce wants to move the hair salon operator beyond its bruising proxy battle with Starboard Value.

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Regis Salon at the Nicollet Mall and 6th St. in Minneapolis

Photo: David Brewster, Star Tribune

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When all is said and done, Regis Corp. President Randy Pearce's day turned out pretty well Thursday.

Dissident investor Starboard Value LP won three seats on the Edina-based company's seven-member board of directors, partly because of its blistering criticism of senior executives like Pearce. Nevertheless, the longtime Regis veteran will still succeed Paul Finkelstein as CEO next year.

But Pearce -- who later Thursday afternoon was given a new, eighth seat after the board voted to expand -- knows he can't take anything for granted.

"I realize every person has to perform," Pearce told the Star Tribune. "I'm not pleased with our financial performance. I agree with our shareholders that we need to turn around our financial performance."

Starboard executives said Pearce's path to the CEO's office, which the company had announced earlier this year, was never really in doubt. But you wouldn't have known that, given Starboard's bare-knuckled campaign to replace three Regis directors with its own candidates: Starboard CEO Jeffrey Smith; former Charming Shoppes CEO James Fogarty, and David Williams, who previously served as executive vice president of Chemed.

Starboard said the company, under Finkelstein and Pearce, was bloated with costs and lacked operational focus. The firm also accused Regis of bad corporate governance. For example, Starboard argued Regis should have conducted a broader search for a new CEO. While Starboard said Pearce was a qualified candidate, the firm suggested Pearce was too much of an insider to bring real change to the company.

But that's water under the bridge, said Peter Feld, Starboard's portfolio manager and head of research. What Starboard really wanted, besides its three board seats, was to infuse Regis with a sense of urgency, he said.

"People's eyes are now open," Feld said. "That's the most important thing to come out" of the proxy battle.

The Edina-based operator of hair salons said Thursday that first-quarter profits fell to $8.3 million or 15 cents per share, down from $18.3 million or 32 cents per share for the same time a year ago. Sales at stores open for at least a year, a key growth measure for retailers, dropped 3.1 percent.

Regis is already feeling the influence of Starboard, a New York-based activist hedge fund that owns 5.2 percent of the company. Regis is exploring the sale of Hair Club for Men and Women and will cut $40 million to $50 million in costs over the next two years.

Starboard and Pearce said they've not yet discussed whether Regis should dump other non-core assets, including 400 salons it operates in the United Kingdom and the minority stakes it holds in Provalliance, a chain of 2,760 salons in Europe, and Empire Education Group, a chain of 102 U.S. cosmetology schools.

"The core of what we do is [run North American] salons," Pearce said. "We know that."

At Regis' annual shareholder meeting, Pearce pledged to seek out more savings, but in a "thoughtful way" that doesn't hurt the salon experience. He also said the company will trim its hodgepodge of store brands, including Regis Salons, Supercuts, MasterCuts and Cost Cutters.

"This creates inefficiencies in the minds of consumers," Pearce told investors. "They don't differentiate between the brands."

Pearce said Starboard and Regis never really differed on strategy, just how many seats Starboard should hold.

"We had very constructive meetings with Starboard," Pearce said. "There was a lot of common ground. There were not significant differences of opinions on what needed to be done."

Thomas Lee • 612-673-4113

REGIS CORP.

(RGS) Owns, operates and franchises hair salons in mall and strip-center locations.

1st quarter FY2012, 9/30

2012 2011 % chg. Revenue $568.7 $578.2 -1.6 Income 8.3 18.3 -54.5 Earn/share 0.15 0.30 -50

Figures in millions except for earnings per share.

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