Opportunity??? A Salon Service With a Large Price Drop And Insider Buying

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

It is interesting to see a particular stock experience a significant decline within a day because of short-term solvable issues because it creates buying opportunities for investors. It is even more interesting to know that after the decline, insiders of that stock begin to accumulate shares in the market. That is a case with Regis Corporation (NYSE: RGS), an owner and franchisor of hair and retail product salons. When Regis declared a disappointing 2013 first quarter results, the stock declined from $19.11 to $16, a loss of nearly 16.3% within a day.

In one year time frame, Regis stock has been fluctuating, but in a very short price range. The 52-week change is -3.45% whereas S&P500’s 52 week change is 12.14%. That is why Regis is considered less volatility than the average market, with a beta of 0.71. 

<img src="/media/images/user_14219/screen-shot-2012-11-04-at-51551-pm_large.png" />

After the significant daily drop, Regis’ 10% owner, Birch Run Capital has purchased nearly 2 million shares from October 31 to November 2 at a price range of $16.36 - $16.97. Should investors follow its insider into Regis? We should dig deeper to determine further.

In the first quarter 2013, it reported a 5% decline in revenue, from $531.35 million in 2012 to $505.36 million. The main revenue contributor was service segment, of $393.42 million, or 77.8% of total revenue. Its GAAP net income was $28.5 million, or $0.45 EPS, three times higher than last year EPS of $0.15. However, higher net income was mainly due to the non-operational after tax benefit of $24.2 million, from the gain of cumulative foreign currency translation associated with the ownership sale of Provalliance. Excluding that, its adjusted EPS was $0.08, well below analysts’ estimate of $0.25 and its Q1 2012 EPS of $0.22. Operationally, Regis saw its same-store sales decline by 3.1%. This decline was the 17th continuous negative same-store sales growth. 

For balance sheet strength, as of September 2012, Regis’ stockholders' equity was nearly $900 million; its cash was $222.5 million whereas total liabilities were $670.7 million. The total interest-bearing debt was around $280 million. Regis seems to have a good balance sheet, but what worried me was high goodwill and intangible items, of $487 million. So its tangible book value was only $7.14 per share

Currently, Regis is trading at $16.51 per share; its market capitalization is nearly $950 million. At the current price, the market is valuing Regis at 1.1x P/B and 6.1x P/CF, its earnings valuation is not valid because it has generated losses over the past twelve months.

Regis’ competitors include Ulta Salon (NASDAQ: ULTA), Sport Clips and Ratner Companies. Sport Clips and Ratner are private companies so I can only compare Regis with Ulta. 

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p><strong>RGS</strong></p> </td> <td> <p><strong>ULTA</strong></p> </td> </tr> <tr> <td> <p><strong>Net margin (%)</strong></p> </td> <td> <p>-5</p> </td> <td> <p>7.3</p> </td> </tr> <tr> <td> <p><strong>ROIC (%)</strong></p> </td> <td> <p>-11.9</p> </td> <td> <p>25.6</p> </td> </tr> <tr> <td> <p><strong>D/E</strong></p> </td> <td> <p>0.3</p> </td> <td> <p>0</p> </td> </tr> <tr> <td> <p><strong>P/E</strong></p> </td> <td> <p>N/A</p> </td> <td> <p>41.3</p> </td> </tr> <tr> <td> <p><strong>P/CF</strong></p> </td> <td> <p>6.1</p> </td> <td> <p>30.1</p> </td> </tr> <tr> <td> <p><strong>Dividend yield (%)</strong></p> </td> <td> <p>1.5</p> </td> <td> <p>N/A</p> </td> </tr> </tbody> </table>

Regis has been generating losses over the past twelve months, so it has negative net margin and return on invested capital. Ulta has a better operating picture, with a 7.3% net margin and a high return on capital of 25.6%. However, it only pays a $1 dividend in March this year after 5 years of no dividends, and it receives extremely high valuations, of 41.3x P/E and 30.1x P/CF. Regis’ investors must be so jealous of Ulta’s shareholders.


<img src="/media/images/user_14219/screen-shot-2012-11-04-at-62447-pm_large.png" />

In the past 5 years, while Regis delivered its shareholders a loss of more than 48%, Ulta made its investors wealthier by nearly 194%. Including dividends, Regis was down 45.4% and Ulta was up nearly 197%. 

My Foolish Take

Ulta is clearly a better company than Regis in terms of operating figures and historical performance. However, the valuation is quite rich with 41.3x earnings and 30.1x cash flow. So I would restrain from initiating a position in this stock. For Regis, although its 10% owner kept buying, I would not consider it as a buy for me now because of poor operating figures and weak Q1 2013 results.  

hoangquocanh has no positions in the stocks mentioned above. The Motley Fool owns shares of Regis and Ulta Salon, Cosmetics & Fragrance. Motley Fool newsletter services recommend Regis and Ulta Salon, Cosmetics & Fragrance. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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