Tuesday, Credit Suisse downgraded Regis Corp. (RGS) shares to Neutral from Outperform and lowered its price target to $16 from $19.
Analyst Lejuez noted that the core hair salon business model is a strong free cash flow generator. However, despite lapping the slowdown in visitation patterns that began in December 2008, the analyst has not yet seen the signs of a pick-up in visitation that he anticipated, and that RGS management had built into its fiscal 2010 guidance. With less visibility into the timing of a turnaround, the analyst believes stock upside is limited.
The analyst said that on January 8, RGS reported fiscal second quartetr comps of down 3.7% driven by customer visits (traffic) down 8% and average ticket up 4%. Aside from the Supercuts chain posting a +1.3% comp, domestic results were disappointing, particularly in the value-priced SmartStyle division where comps were down 2.2%, despite its location in Wal-Mart stores, where traffic and comps have held up better than most malls and strip malls throughout the weak economic environment.
The next potential catalyst for the stock will be RGS's fiscal second quarter of 2010 earnings report on January 27, 2010, when the analyst would hear how margins held up and whether the company was able to find additional expense savings to offset the softer than expected top-line results this quarter.
There is no change to the analyst's second quarter estimate of $0.26, as he expects the quarter to come in light of consensus of $0.28. The analyst remains concerned that price increases, which have helped offset traffic decreases, and increases in gross margin cannot continue indefinitely and that the remaining SG&A cuts are limited.
Currently, RGS is down $0.30 or 1.85% and trading at $15.91.
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