UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

x        ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended June 30, 2005

OR

o        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from           to         

Commission file number 0-11230

Regis Corporation

(Exact name of registrant as specified in its charter)

 

(952) 947-7777

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Securities registered pursuant to section 12(g) of the Act:

Common Stock, Par Value $.05 per share

(Title of class)

1

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x   No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes x  No o

The aggregate market value of the voting common stock held by non-affiliates computed by reference to the price at which common stock was last sold as of the last business day of the Registrant’s most recently completed second fiscal quarter, December 31, 2004, was approximately $1,972,000,000. The Registrant has no non-voting common stock.

The number of outstanding shares of the Registrant’s common stock, par value $.05 per share, as of August 31, 2005 was 45,104,427.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Proxy Statement dated September 24, 2005 are incorporated by reference into Parts I, II and III.

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PART I

Item 1.         Business

Regis Corporation, the Registrant, together with its subsidiaries, is referred to herein as the “Company.”

(a) General Development of Business

In 1922, Paul and Florence Kunin opened Kunin Beauty Salon, which quickly expanded into a chain of value-priced salons located in department stores. Their son, Myron, bought the chain in 1958 and changed its name to Regis. Regis Corporation is listed on the NYSE under the ticker symbol “RGS.” Discussions of the general development of the business take place throughout this Annual Report on Form 10-K. During fiscal year 2005, there were no significant changes to the Company’s corporate structure or material changes in the Company’s method of conducting business. However, in December 2004, the Company purchased Hair Club for Men and Women, in part, to expand the Company’s product and service offerings. The Company continues to acquire hair and retail product salons and beauty schools.

(b) Financial Information about Segments

Segment data for the years ended June 30, 2005, 2004 and 2003 are included in Note 11 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K.

(c) Narrative Description of Business

The following topical areas are discussed below in order to aid in understanding the Company and its operations:

Topic				Page(s)
Background				4
Industry Overview				4
Salon Business Strategy				4-8
Salon Concepts				8-14
Salon Franchising Program				14-16
Salon Markets and Marketing				16
Salon Education and Training Programs				16-17
Salon Staff Recruiting and Retention				17
Salon Design				17
Salon Management Information Systems				17-18
Salon Competition				18
Beauty School Business Strategy				18-20
Hair Restoration Business Strategy				20-21
Corporate Trademarks				21
Corporate Employees				21
Executive Officers				22-23
Corporate Community Involvement				23
Governmental Regulations				23

 

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Background:

Based in Minneapolis, Minnesota, the Company’s primary business is owning, operating and franchising hair and retail product salons. In the last three years, the Company began acquiring and operating a limited number of beauty schools in North America and internationally. Additionally, in December 2004, the Company acquired Hair Club for Men and Women, a leading provider of hair restoration services. The Company’s worldwide operations include 10,879 company-owned and franchise salons, 90 hair restoration centers and 24 beauty schools at June 30, 2005. Each of the Company’s salon concepts offer similar salon products and services, concentrate on the mass-market consumer marketplace and generally display similar economic characteristics. The Company’s recently acquired beauty school locations offer similar education services to students. Services are marketed to potential students pursuing post-secondary education alternatives. The Company’s hair restoration centers offer three hair restoration solutions; hair systems, hair transplants and hair therapy, which are targeted at the mass-market consumer.

The Company is organized to manage its operations based on significant lines of business—salons, beauty schools and hair restoration centers. Salon operations are managed based on geographical location—North America and International. The Company’s North American salon operations include 6,551 corporate salons and 2,310 franchise salons. The Company’s international operations include 426 corporate salons and 1,592 franchise salons operating throughout Europe, primarily in the United Kingdom, France, Italy and Spain. The Company’s worldwide salon locations operate under concepts such as Supercuts, Jean Louis David, Vidal Sassoon, Regis Salons, MasterCuts, Trade Secret, SmartStyle and Cost Cutters. During fiscal year 2005, the number of customer visits at the Company’s corporate salons approximated 100 million. The Company had approximately 55,000 corporate employees worldwide during fiscal year 2005.

Industry Overview:

Management estimates that annual revenues of the hair care industry are $53 billion in the United States and $150 billion worldwide. The hair salon, hair restoration and beauty school industries are each highly fragmented with the vast majority of locations independently owned and operated. However, the influence of chains, both franchise and company-owned, has increased substantially in all three industries. Management believes that chains will continue to have a significant influence on these markets and will continue to increase their presence. Management also believes that the demand for salon services, professional products and hair restoration services will continue to increase as the overall population continues to focus on personal health and beauty, as well as convenience.

Salon Business Strategy:

The Company’s goal is to provide high quality, affordable hair care services and products to a wide range of mass-market customers that enable the Company to expand in a controlled manner. The key elements of the Company’s strategy to achieve these goals are taking advantage of (1) growth opportunities, (2) economies of scale and (3) maintaining centralized control over salon operations in order to ensure (i) consistent, quality services and (ii) a superior selection of high quality, professional products. Each of these elements is discussed below.

Salon Growth Opportunities.   The Company’s salon expansion strategy focuses on organic (new salon construction and same-store sales growth of existing salons) and salon acquisition growth.

Organic Growth.   The Company executes its organic growth strategy through a combination of new construction of company-owned and franchise salons, as well as same-store sales increases. The square footage requirements related to opening new salons allow the Company great flexibility in securing real estate for new salons.

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The Company’s long-term outlook for organic expansion remains strong. The Company has at least one salon in all major cities in the U.S. and has penetrated every viable U.S. market with at least one concept. However, because the Company has a variety of concepts, it can place several of its salons within any given market. The Company plans to continue expansion not only in North America, but also in the United Kingdom and throughout continental Europe. Opportunities in Asian markets are also being explored.

A key component to successful North American and international organic growth relates to site selection, as discussed in the following paragraphs.

Salon Site Selection.   The Company’s salons are located in high-traffic locations, such as; regional shopping malls, strip centers, lifestyle centers, Wal-Mart Supercenters, high-street locations and department stores. The Company’s financial strength, successful salon operations and international recognition causes the Company to be an attractive tenant to landlords. In evaluating specific locations for both company-owned and franchise stores, the Company seeks conveniently located, visible locations which allow customers adequate parking and quick and easy store access. Various other factors are considered in evaluating sites, including trade area demographics, availability and cost of space, the strength of the major retailers within the area, location of competitors, proximity of other company-owned and franchise salons, traffic count, signage and other leasehold factors in a given center or area.

Because the Company’s different salon concepts target slightly different mass-market customer groups, more than one of the Company’s salon concepts may be located in the same real estate development. As a result, there are numerous leasing opportunities for all of its salon concepts.

While same-store sales growth plays an important part in the Company’s organic growth strategy, it is not critical to achieving the Company’s long-term revenue growth objectives. New salon construction and salon acquisitions (described below) are expected to generate low, double-digit revenue growth. Generating annual same-store sales increases in excess of two percent is, however, necessary to achieve the Company’s long-term earnings growth objective of low-to-mid teen earnings per share growth. The Company anticipates low single-digit same-store sales growth on an annual basis.

Pricing is a factor in same-store sales growth. The Company actively monitors the prices charged by its competitors in each market and makes every effort to maintain prices which remain competitive with prices of other salons offering similar services. Historically, the Company has not depended on price increases to drive same-store sales growth. However, in an effort to stimulate same-store sales growth, the Company increased prices at approximately 2,500 salons during calendar 2005, primarily during the first six months.

Salon Acquisition Growth.   In addition to organic growth, another key component of the Company’s growth strategy is the acquisition of salons. With an estimated two percent world-wide market share, management believes opportunities to acquire additional salons remain.

Over the past nearly twelve years, the Company has completed 339 acquisitions, adding 7,165 locations. Through acquisition, the Company has expanded in both North America and internationally. When contemplating an acquisition, the Company evaluates the existing salon or salon group with respect to the same characteristics as discussed above in conjunction with site selection for constructed salons (conveniently located, visible, with strong retailers in the area, etc.). The Company generally acquires mature strip center locations, which are systematically integrated within the salon concept that it most clearly emulates.

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In addition to adding new salon locations each year, the Company has an ongoing program of remodeling its existing salons, ranging from redecoration to substantial reconstruction. This program is implemented as management determines that a particular location will benefit from remodeling, or as required by lease renewals. A total of 205 and 169 salons were remodeled in fiscal year 2005 and 2004, respectively.

Recent Salon Additions.   During fiscal year 2003, the Company added nearly 1,000 salons, net of closures and relocations. The Company constructed or franchised 672 new salons (397 company-owned and 275 franchise) and acquired 753 salons (555 company-owned and 198 franchise). The 555 acquired company-owned salons included 97 franchise salon buybacks. The Company’s most significant fiscal year 2003 salon acquisitions included 328 North American BoRics salons, 25 Vidal Sassoon salons, and 286 salons (including 196 franchise salons) from Opal Concepts.

During fiscal year 2004, net of closures and relocations, the Company added over 500 salons through new construction and acquisitions. The Company constructed or franchised 720 new salons (452 company-owned and 268 franchise). Additionally, the Company acquired 405 company-owned salons, including 206 franchise buybacks. The Company’s most significant fiscal year 2004 acquisition was 153 Holiday Hair Salons (primarily in Pennsylvania).

During fiscal year 2005, net of closures and relocations, the Company added over 700 salons through new construction and acquisitions. The Company constructed or franchised 810 new salons (525 company-owned and 285 franchise). Additionally, the Company acquired 451 salons (444 company-owned and 7 franchise salons). The 444 acquired company-owned salons included 139 franchise salon buybacks. The Company’s largest fiscal year 2005 salon acquisitions included 129 TGF Salons and 67 HeadStart salons.

Salon Closures.   The Company evaluates its salon performance on a regular basis. Upon evaluation, the Company may close a salon for operational performance or real estate issues. In either case, the closures generally occur at the end of a lease term and typically do not require significant lease buyouts. In addition, during the Company’s acquisition evaluation process, the Company may identify acquired salons that do not meet operational or real estate requirements. At the time of acquisition, generally limited value is allocated to these salons, which are usually closed within the first year.

During fiscal year 2005, 315 salons were closed; including 147 company-owned salons and 168 franchise salons. During fiscal year 2004, 338 salons were closed; including 148 company-owned salons and 190 franchise salons. During fiscal year 2003, 360 salons were closed; including 127 company-owned salons and 233 franchise salons. The number of franchise salons closed during fiscal year 2004 and 2003 were primarily the result of transition related closures associated with the Company’s acquisition of two franchise concepts in Europe.

Economies of Scale.   Management believes that due to its size and number of locations, the Company has certain advantages which are not available to single location salons or small chains. The Company has developed a comprehensive point of sale system to accumulate and monitor service and product sales trends, as well as assist in payroll and cash management. Economies of scale are realized through the support system offered by the home office. Additionally, due to its size, the Company has numerous financing and capital expenditure alternatives, as well as the benefits of buying retail products, supplies and salon fixtures directly from manufacturers. Furthermore, the Company can offer employee benefit programs, training and career path opportunities that are often superior to its smaller competitors.

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Control Over Salon Operations.   The Company manages its expansive salon base through a combination of area and regional supervisors, corporate salon directors and chief operating officers. Each area supervisor is responsible for the management of approximately ten salons. Regional supervisors oversee the performance of five area supervisors or approximately 50 salons. Salon directors manage approximately 200 salons while chief operating officers are responsible for the oversight of an entire salon concept. This operational hierarchy is key to the Company’s ability to expand successfully. In addition, the Company has an extensive training program, including the production of training DVDs for use in the salons, to ensure its stylists are knowledgeable in the latest haircutting and fashion trends and provide consistent quality hair care services. Finally, the Company tracks salon activity for all of its company-owned salons through the utilization of daily sales detail delivered from the salons’ point of sale system. This information is used to reconcile cash on a daily basis and is also reported to the Company’s Chief Executive Officer, who is also the Chief Operating Decision Maker.

Consistent, Quality Service.   The Company is committed to meeting its customers’ hair care needs by providing competitively priced services and products with professional and knowledgeable stylists. The Company’s operations and marketing emphasize high quality services to create customer loyalty, to encourage referrals and to distinguish the Company’s salons from its competitors. To promote quality and consistency of services provided throughout the Company’s salons, the Company employs full and part-time artistic directors whose duties are to train salon stylists in current styling trends. The major services supplied by the Company’s salons are haircutting and styling, hair coloring and waving, shampooing, conditioning and waxing. During fiscal year 2005, 2004 and 2003, the percentage of company-owned service revenues attributable to each of these services was as follows:

		2005				2004				2003
Haircutting and styling (including shampooing & conditioning)			72	%			73	%			74	%
Hair coloring			18				17				15
Hair waving			5				5				5
Waxing			2				2				2
Other			3				3				4
			100	%			100	%			100	%

 

High Quality, Professional Products.   The Company’s salons merchandise nationally-recognized hair care and beauty products as well as a complete line of private label products sold under the Regis, MasterCuts and Cost Cutters labels. The retail products offered by the Company are sold through professional salons. The top selling brands include Matrix, Paul Mitchell, Tigi, Redken, Sebastian, Nioxin, OPI and the Company’s various private label brands.

The Company has launched a product diversion website for the entire industry to use as a measurement tool to track diversion. Diversion involves the selling of salon-exclusive hair care products to discount retailers. Diversion is harmful to the consumer because diverted product is often old, tainted or damaged. It is also harmful to the salon owners and stylists because their credibility is questioned, as well as to manufacturers and distributors because their actions are scrutinized.

The Company has the most comprehensive assortment of retail products in the industry, with an estimated share of the North American retail beauty product market of up to 15 percent. Although the Company constantly strives to carry an optimal level of inventory in relation to consumer demand, it is more economical for the Company to have a higher amount of inventory on hand than to run the risk of being under-stocked should demand prove higher than expected. The extended shelf life and lack of seasonality related to the beauty products allows the cost of carrying inventory to be relatively low and lessens the importance of inventory turnover ratios. The Company’s primary goal is to maximize revenues rather than inventory turns.

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The retail portion of the Company’s business complements its salon services business. The Company’s stylists and beauty consultants are compensated and regularly trained to sell hair care and beauty products to their customers. Additionally, customers are enticed to purchase products after a stylist demonstrates its effect by using it in the styling of the customer’s hair.

Salon Concepts:

The Company’s salon concepts focus on providing high quality hair care services and professional products, primarily to the middle consumer market. Most of the Company’s salon concepts are located in regional malls, strip centers, life style centers, Wal-Mart Supercenters, high-street locations and department stores.

The Company’s North American salon operations consist of 8,861 salons (2,310 franchise), operating under five concepts, each offering attractive and affordable hair care products and services in the United States, Canada and Puerto Rico. The Company’s International salon operations consist of 2,018 hair care salons, including 1,592 franchise salons, located throughout Europe, primarily in the United Kingdom, France, Italy and Spain. Under each concept below, the number of new salons expected to be opened within the upcoming fiscal year is discussed. In addition to these openings, the Company typically acquires several hundred salons each year. The number of acquired salons, and the concept under which the acquisitions will fall, vary based on the acquisition opportunities which develop throughout the year.

Salon Development

The table on the following pages set forth the number of system-wide salons (company-owned and franchise) opened at the beginning and end of each of the last five years, as well as the number of salons opened, closed, relocated, converted and acquired during each of these periods.

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SALON LOCATION SUMMARY

NORTH AMERICAN SALONS:				2005		2004		2003		2002		2001
REGIS SALONS
Open at beginning of period				1,085		1,095		1,016		981			912
Salons constructed				39		33		53		61			43
Acquired				13		4		72		17			65
Less relocations				14		10		12		17			17
Salon openings				38		27		113		61			91
Conversions				(1	)	(2	)	(2	)	(1	)		(1	)
Salons closed				(29	)	(35	)	(32	)	(25	)		(21	)
Total, Regis Salons				1,093		1,085		1,095		1,016			981
MASTERCUTS
Open at beginning of period				604		590		551		523			502
Salons constructed				47		34		47		42			33
Acquired				2		3		—		1			2
Less relocations				13		9		6		2			10
Salon openings				36		28		41		41			25
Conversions				1		1		2		1			1
Salons closed				(5	)	(15	)	(4	)	(14	)		(5	)
Total, Mastercuts				636		604		590		551			523

 

		2005				2004				2003				2002				2001
TRADE SECRET
Company-owned salons:
Open at beginning of period			549				517				490				478				460
Salons constructed			56				26				34				34				39
Acquired			23				12				10				1				3
Franchise buybacks			—				2				—				—				—
Less relocations			17				5				4				11				7
Salon openings			62				35				40				24				35
Conversions			—				1				—				(1	)			(2	)
Salons closed			(14	)			(4	)			(13	)			(11	)			(15	)
Total company-owned salons			597				549				517				490				478
Franchise salons:
Open at beginning of period			24				25				26				25				26
Salons constructed			—				1				—				1				—
Salon openings			—				1				—				1				—
Franchise buybacks			—				(2	)			—				—				—
Salons closed			—				—				(1	)			—				(1	)
Total franchise salons			24				24				25				26				25
Total, Trade Secret			621				573				542				516				503

 

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		2005		2004		2003		2002		2001
SMARTSTYLE/COST CUTTERS IN WAL-MART
Company-owned salons:
Open at beginning of period		1,263		1,033		861		722		547
Salons constructed		194		174		168		125		152
Acquired		—		—		2		—		27
Franchise buybacks		45		61		12		17		11
Less relocations		1		—		5		1		4
Salon openings		238		235		177		141		186
Conversions		—		—		—		—		(9	)
Salons closed		(4	)	(5	)	(5	)	(2	)	(2	)
Total company-owned salons		1,497		1,263		1,033		861		722
Franchise salons:
Open at beginning of period		201		230		210		194		148
Salons constructed		29		33		33		37		39
Acquired		—		—		—		—		13
Less relocations		—		—		—		—		1
Salon openings		29		33		33		37		51
Conversions		—		—		—		—		9
Franchise buybacks		(45	)	(61	)	(12	)	(17	)	(11	)
Salons closed		(1	)	(1	)	(1	)	(4	)	(3	)
Total franchise salons		184		201		230		210		194
Total, SmartStyle/Cost Cutters in Wal-Mart		1,681		1,464		1,263		1,071		916
STRIP CENTERS
Company-owned salons:
Open at beginning of period		2,310		1,928		1,476		1,383		982
Salons constructed		167		166		85		69		114
Acquired		248		162		361		40		230
Franchise buybacks		94		133		85		36		111
Less relocations		21		8		3		2		8
Salon openings		488		453		528		143		447
Conversions		(3	)	(8	)	(13	)	(4	)	(13	)
Salons closed		(67	)	(63	)	(63	)	(46	)	(33	)
Total company-owned salons		2,728		2,310		1,928		1,476		1,383
Franchise salons:
Open at beginning of period		2,105		2,172		1,988		2,011		1,740
Salons constructed		154		146		147		150		131
Acquired(2)		7		—		198		—		292
Less relocations		13		10		10		12		10
Salon openings		148		136		335		138		413
Conversions		6		8		13		5		18
Franchise buybacks		(94	)	(133	)	(85	)	(36	)	(111	)
Salons closed		(63	)	(78	)	(79	)	(130	)	(49	)
Total franchise salons		2,102		2,105		2,172		1,988		2,011
Total, Strip Centers		4,830		4,415		4,100		3,464		3,394

 

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		2005		2004		2003		2002		2001
INTERNATIONAL SALONS(1)
Company-owned salons:
Open at beginning of period		416		395		382		364			352
Salons constructed		22		19		10		18			35
Acquired		19		18		13		16			3
Franchise buybacks		—		10		—		—			—
Salon openings		41		47		23		34			38
Conversions		(3	)	—		—		—			(3	)
Salons closed		(28	)	(26	)	(10	)	(16	)		(23	)
Total company-owned salons		426		416		395		382			364
Franchise salons:
Open at beginning of period		1,594		1,627		1,684		—			—
Salons constructed		102		88		95		69			—
Acquired(2)		—		—		—		1,664			—
Salon openings		102		88		95		1,733			—
Franchise buybacks		—		(10	)	—		—			—
Salons closed		(104	)	(111	)	(152	)	(49	)		—
Total franchise salons		1,592		1,594		1,627		1,684			—
Total international salons		2,018		2,010		2,022		2,066			364

 

		2005		2004		2003		2002		2001
TOTAL SYSTEM-WIDE SALONS
Company-owned salons:
Open at beginning of period		6,227		5,558		4,776		4,451		3,755
Salons constructed		525		452		397		349		416
Acquired		305		199		458		75		330
Franchise buybacks		139		206		97		53		122
Less relocations		66		32		30		33		46
Salon openings		903		825		922		444		822
Conversions		(6	)	(8	)	(13	)	(5	)	(27	)
Salons closed		(147	)	(148	)	(127	)	(114	)	(99	)
Total company-owned salons		6,977		6,227		5,558		4,776		4,451
Franchise salons:
Open at beginning of period		3,924		4,054		3,908		2,230		1,914
Salons constructed		285		268		275		257		170
Acquired(2)		7		—		198		1,664		305
Less relocations		13		10		10		12		11
Salon openings		279		258		463		1,909		464
Conversions		6		8		13		5		27
Franchise buybacks		(139	)	(206	)	(97	)	(53	)	(122	)
Salons closed		(168	)	(190	)	(233	)	(183	)	(53