After a shake-up in its board, Regis will adopt a more conservative approach to its cash.
Regis Corp.’s new board of directors has a new and unmistakable message to investors: prudence before payout.
The world’s largest chain of salons, based in Edina, said this week that it will no longer pay shareholders a dividend. Instead, Regis will use its cash to manage its balance sheet and, if business improves, repurchase shares and improve its salons.
CEO Dan Hanrahan told the Star Tribune on Thursday that its decision to end the dividend does not mean the company lacks cash. As of Sept. 30, Regis’ cash balance totaled $204 million, with another $120 million raised from newly issued corporate debt. Moving forward, Hanrahan suggested the company would adopt a more conservative approach to its capital that focuses more on long-term returns than short-term payouts.
“We took a long and hard look at the best use of our capital,” Hanrahan said. “Our No. 1 objective is to drive shareholder value. [Ending the dividend and managing debt] puts us in a position of a strong balance sheet that will help drive shareholder value.”
Regis’ actions, though, suggest that the company’s turnaround effort might take longer that shareholders expected. For instance, Hanrahan stressed that Regis only “prefers” to reinvest its money into salons and “intends” to buy back shares at an unspecified later date.
“We think we can still drive growth, which will generate better returns to shareholders over the long term,” he said. But Regis will only spend the cash “once we stabilize the business,” the company said in a statement.
In many ways, Regis’ new philosophy reflects changes to its board of directors. In September, the company said Jeffrey Smith, the CEO of the activist hedge fund Starboard Value, would not run for re-election and stepped down from the board.
“Jeff provided a lot of value to the board,” Hanrahan said. “He effected a lot of change. But we have a different board than three years ago.”
Fund cuts holdings
Starboard has also significantly reduced its stake in Regis. The firm now owns about 900,000 shares, down from 3 million in late 2011.
In October 2011, Smith successfully led an effort to oust longtime chairman and CEO Paul Finkelstein and his allies from the board. Smith, who campaigned on the promise to quickly turn around the struggling company, joined the board along with two other directors he hand-picked.
Since then, the company has made some progress: It managed to arrest the decline of sales at stores open for at least a year and sell off noncore businesses like Hair Club for Men and Women. Since Starboard’s ascension to the board, Regis’ stock has increased 12.4 percent to Thursday’s close of $15.66. At one point in the fall of 2012, the stock broke $20 a share.
Turnaround has stalled
But Regis’ turnaround has stalled recently. During the last three months of its fiscal 2013, Regis said same-store sales and same-store service sales each fell 3.1 percent. At the time, Hanrahan blamed some of the sales declines on the disruption caused by installing the new point-of-sale system. Some salons were able to adapt better than others, he said, suggesting that the ultimate factor was effective leadership.
“We saw salons where people got through it very well and we didn’t see our salons lose revenue,” Hanrahan told the newspaper in August, “but we did see salons where they just really struggled with any kind of change. I think more than anything else, it pointed out … how much we need to improve in our ability to deal with change in the field.”
Regis’ decision to end its dividend might annoy some shareholders. But over the long term, the move gives Hanrahan more time and money to steer Regis back to health.
“I am confident that our strategic changes and our new capital allocation philosophy position Regis to execute its turnaround plan, provide options with respect to capital deployment, and ensure that we maximize value to our shareholders during our turnaround,” Hanrahan said in a statement.