Expect big layoffs at Regis

Shortly after Regis' annual meeting ended last week, I sought out Starboard Value CEO Jeffrey Smith, who along with two other Starboard-recruited candidates, was just elected to Regis' board of directors.

Being a secretive hedge fund guy, Smith didn't want to speak on the record, except to say this: "Today is a great day for Regis shareholders."

Great day for shareholders? Maybe. Great day for employees? Not so much.

For Starboard's ascension to the board can only mean one sure fired thing: layoffs. And lots of them, especially the 1,250 souls at the company's corporate headquarters in Edina and distribution center.

When Starboard first bought a stake in Regis this summer, the New York-based activist investors said the country's largest operator of hair salons was bloated with costs and lacked operational focus. To boost shareholder value, Regis should cut at least $100 million in costs, Starboard said.

The hedge fund chose its target well. Though Regis enjoys dominant market share and strong cash flow, the company's operating income and operating profit margins have been shrinking because costs have been going up while sales at stores open for at least a year have been going down. Generally not a good combination.

In fiscal 2011, general and administrative expenses jumped to $310 million from $292 million the previous year, a whopping 13.4 percent of overall revenue. Of that $310 million, 45 percent, or $139 million, went to corporate overhead.

Regis has already committed to trimming $40 million to $50 million over the next two years. But president/incoming CEO Randy Pearce told investors at the company's annual meeting Regis will need to find more savings.

For one thing, Regis will pare down its hodge podge of store brands, which includes MasterCuts, Regis and Supercuts. Starboard also wants to eliminate geographic overlap within Regis' field sales organizations, which are currently structured around brands. (The company's North American salon business makes up 39 percent, or $120 million, of general and administrative expenses.)

Regis is also exploring the sale of its Hair Club for Men and Women business and possibly its international salons. That would theoretically save approximately $49.6 million in overhead.

Pearce told shareholders he wants to find savings in a "thoughtful" manner without affecting hair stylists. In a subsequent interview with the Star Tribune, Pearce said the company will "do things smarter" such as trimming travel, adopting technology, and sign national contracts with suppliers.(On the last point, one wonders why they haven't done that in the first place).

When asked about corporate layoffs, Pearce was somewhat evasive.

Uh...that's not exactly reassuring if you're a Regis employee. Seems like Pearce has definitely ruled out pulling out of Minnesota but other than that, all options appear to be on the table.

You could argue that if Regis has a sales/cost imbalance, then the logical thing to do would be just to boost sales. But Regis has been struggling to do just that, especially in this economy, so any growth plan will likely take a year or more before we start to see results.

And you better be sure that Starboard is not likely to wait that long before it pulls the layoff trigger. When the firm won a disputed proxy contest at Eden Prairie-based Surmodics last year, the company soon said it would slash its workforce by nine percent.