Shareholder Asks Regis to Cut Costs, Sell Some Assets

Starboard Value LP, which owns about a 4.4 percent stake in Regis, asked Regis to dramatically cut operating expenses, sell its non-core businesses, and return focus to its core salon business in North America; Regis said it is "always open to ideas that can create shareholder value."

One of Regis Corporation's largest shareholders on Tuesday announced that it had written a letter to the company outlining a request for some significant changes-news that sent the Edina-based salon operator's stock price up about 6.7 percent to close at $14.68.

Starboard Value LP, which owns about 4.4 percent of Regis' outstanding common stock, asked Regis to dramatically cut operating expenses, sell its non-core businesses, and return focus to its core salon business in North America.

The shareholder said that Regis is plagued by “a bloated cost structure and a lack of operational focus.”

Starboard sent a letter dated August 16 to Regis Chairman and CEO Paul Finkelstein, President Randy Pearce, and the company's board of directors. It stated that Regis is “deeply undervalued and that opportunities exist to greatly improve both operating and stock price performance based on actions within the control of management and the board of directors.”

The letter encourages Regis to focus on its North American salon business due to its high return on equity and ability to weather recessions. Starboard also pointed out that Regis' stock trades “far below its specialty retail peers.” In fact, over the last one-, three-, and five-year periods, Regis' stock price has dropped about 19 percent, 55 percent, and 60 percent, respectively, Starboard said.

As part of its cost-cutting request, Starboard pointed out that overhead costs have risen more than 70 percent since 2004, while revenue climbed only 20 percent.

The “non-core assets” that Starboard suggested that Regis sell include the Hair Club chain and 400 international salons, as well as two minority owned assets, Provalliance and Empire Education Group. Starboard wrote in its letter that it believes Hair Club in particular “would be attractive to a number of potential acquirers.”

In addition to outlining its suggested changes to Regis' operations, Starboard also nominated three candidates for the company's board: James Fogarty, a private investor; Jeffrey Smith, a managing member of Starboard; and David Williams, executive vice president and chief financial officer of Cincinnati-based Chemed.

Regis issued a statement on Tuesday, acknowledging that it had received Starboard's letter. The company said that it has not yet scheduled its 2011 annual shareholder meeting and, regarding Starboard's board nominations, it will “review the matter in due course.”

“Regis is always open to ideas that can create shareholder value and has been in private discussions with Starboard,” the company wrote in its statement. “We will continue to engage constructively with Starboard and all of our shareholders. Our board and management team remain firmly committed to creating value for all shareholders through the successful execution of the company's strategy.”

Regis operates more than 12,700 salons, cosmetology education centers, and hair restoration centers worldwide-including franchised locations. Those locations operate under numerous brands, including-in addition to its namesake salons-Supercuts, MasterCuts, Cost Cutters, and Hair Club for Men and Women.

Last fall, the company said that it was exploring strategic alternatives, but in December, the company said it would continue with its existing business plan and remain an independent public company.

Its net income for the fiscal year that ended in June 2010 totaled $42.7 million, or 71 cents per share, a vast improvement from the net loss of $124.5 million that the company reported in its previous fiscal year. Revenue, meanwhile, fell about 3 percent to $2.36 billion during the period.

For the fiscal year that ended in June 2011, Regis reported revenue of $2.33 billion. The company will announce earnings results for the period next week.