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Paul Finkelstein

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Investor tells Regis: Get leaner

  • Article by: THOMAS LEE
  • Star Tribune
  • August 17, 2011 - 12:07 AM

A New York hedge fund wants Regis Corp. to take a $100 million haircut.

In a letter sent Tuesday to the Edina-based owner of hair salons, Starboard Value LP urged Regis to boost shareholder value by cutting $100 million in costs. Specifically, the fund wants Regis to pare its workforce, reorganize its North American business units, and sell off its international operations and its Hair Club for Men and Women restoration centers.

Starboard blames the company's weak stock price on a "bloated cost structure and lack of operational focus."

In the letter to Regis CEO Paul Finkelstein, Starboard said: "We strongly believe that Regis should dramatically reduce operating expenses, exit its non-core businesses, and focus on its core North American salon business."

Regis owns, franchises or holds interest in 12,700 salons, hair restoration centers and beauty schools, mostly in the United States, Canada and the United Kingdom. Its brands include Regis Salons, Supercuts, MasterCuts and Cost Cutters.

Since November 2010, Regis shares have fallen nearly 40 percent, though the stock rallied nearly 7 percent Tuesday to close at $14.68, up 92 cents. Regis was the biggest one-day gainer among the Star Tribune 100 stocks.

A year ago, Regis hired an investment banker to identify strategic options, including a possible sale. But in December, the company said it abandoned efforts to find a buyer.

In a statement Tuesday, Regis said it would study Starboard's proposals.

"Regis is always open to ideas that can create shareholder value and has been in private discussions with Starboard," the statement said. "We will continue to engage constructively with Starboard and all of our shareholders."

Regis' sales, general and administrative expenses now total $310 million, or about 13.4 percent of revenue, Starboard's letter pointed out. Since 2004, overhead costs have jumped 70 percent while revenue increased only 20 percent, according to Starboard's analysis.

"We struggle to understand the need for such a large amount of overhead cost," the letter said. "This imbalance of expense growth versus revenue growth has directly resulted in significant declines in profitability and operating margin."

Here's what Starboard wants Regis to do:

• Reorganize its North American salon businesses by geography instead of brands, which would eliminate overlap between managers who oversee brands in different regions/states.

• Reduce the workforce, which includes 1,250 employees at Regis headquarters and distribution center.

• Reduce non-cash compensation, professional fees, and other expenses.

• Sell off Hair Club, which Starboard called "an attractive asset to a number of potential acquires." In addition, Regis should divest the 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 cosmetology schools in the United States.

Starboard, the ninth-largest investor in Regis, nominated three directors to the Regis board of directors who would stand for election at the company's yet-to-be scheduled annual meeting this fall.

Starboard's nominees include Starboard CEO Jeffrey Smith; former Charming Shoppes CEO James Fogarty, and David Williams, who previously served as executive vice president of Chemed, a provider of hospice care, repair, and maintenance services.

Executives behind Starboard have successfully pressed for change at another Minnesota company in the past year. Starboard spun off from Ramius LLC, a subsidiary of Cowen Group Inc., earlier this year. Ramius, led by Smith, successfully pressured SurModics Inc., a biopharmaceutical firm based in Eden Prairie, into accepting two of the three directors it nominated to the board.

Thomas Lee • 612-673-4113

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