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Regis continues growth

By Jim McCartney

Regis Corp. is in the unusual position of being the largest chain in the hair salon industry, but still having a lot of room for growth.

The Edina, Minn.-based hair salon chain, with more than 5,000 stores worldwide in regional malls, strip centers and Wal-Mart stores, has been buying small firms at a rapid rate to keep its sales growing at 14% annually and earnings rising from 15% to 20% annually. In the last six years, Regis completed 146 acquisitions, adding 3,322 salons representing revenues of $494 million and systemwide sales of $912 million.

Regis CEO Paul Finkelstein said his company's position as the "industry consolidator" is essentially unrivaled. Regis has plans to add 600 to 700 stores this year, with half coming from purchases of existing salons and half from building new stores. About three-quarters of the new stores will be company-owned, and the rest will be franchises, he said.

Finkelstein sums up his company's growth strategy in simple terms: "Regis is a real estate-driven company.''

Regis has plenty of room to grow: After all, given that there are about 350,000 beauty salons and barbershops in the United States, Regis has just 1.4% of the stores. Its $1.2 billion in sales for the year ended in June account for about 3% of the $40 billion U.S. hair care market.

Regis operates under a variety of banners, including Regis Hairstylists, Supercuts, Mastercuts, Trade Secret and SmartStyle at Wal-Mart as well as its international salons.

Strip center salons, primarily Supercuts and Cost Cutters, produce the highest profit margins, faster growth than mall-based salons and have the largest growth opportunities.

"Our regional mall growth is limited by the fact that they're just not building many of them these days,'' Finkelstein said.

That's why strip salons have been a key focus of growth. The first major move outside the regional mall was to acquire 154 Wal-Mart salons from Stevens Financial in May 1996.

Then came Supercuts, which Regis bought in 1997. The chain has "incredible name recognition'' in places like Los Angeles, Miami and Dallas.

"It has almost unlimited growth because Supercuts is exclusively in strip malls, where there are a lot of potential acquisitions and new developments,'' he said.

That said, Regis officials are still committed to their mall format and plan to double the firm's mall business over the next decade. Regis Hairstylists, which caters to the moderate-to-upscale customer in many of the largest U.S. regional malls, is the company's most mature business.

Aside from Supercuts, Regis' fastest-growing salon brand is its SmartStyle in Wal-Mart Supercenter stores.

That growth took off last year when Regis bought The Barbers, the second-largest publicly held hair care chain, with 979 salons and 1998 sales of $26 million. The $58.7 million deal merged the two largest publicly traded companies in the hair salon industry.

The merger made Regis the sole (although not exclusive) provider of Wal-Mart salon services, and it now has about 600 Wal-Mart salons. At the time of the deal, Minneapolis-based The Barbers had 190 Wal-Mart salons and was adding 40 a year, while Regis had 320 Wal-Mart salons and was adding about 80 per year, Finkelstein said. Finkelstein said he anticipates Regis will have at least 1,000 Wal-Mart salons within two years. "It's been very rewarding to us and to Wal-Mart,'' he said.

Regis and The Barbers had been competitors ever since they were organized in the Twin Cities more than three decades ago. While Regis was oriented to malls and female customers, The Barbers started out in strip centers and was geared to serving men. Also, while Regis has tended to build corporate-owned stores, The Barbers has remained largely a franchisor operating under the names City Looks, Cost Cutters and We Care Hair.

Although most of its stores are company-owned, Regis does have franchisees, and it added to those ranks with its purchase of The Barbers.

"Some of The Barbers' franchisees were in their 60s and 70s, and had no exit strategy, so we picked them up,'' Finkelstein said.

In fact, Regis is buying up its own franchisees as a steady source of low-risk growth over the next few years. That's the way Regis picks up many of its stores — salon owners who are near retirement or, for whatever reason, want to sell.

One arena in which Regis does not compete much is that of department store salons. That's despite the fact that Finkelstein began his career with Glemby's, his family's department store hair salon business. He later went to work for Seligman & Lutz, a rival of his family's firm, then joined Regis in 1988 when it bought Seligman & Lutz. Two years later, Regis and MEI Corp. bought out Glemby's for $50 million. It was a heavily leveraged deal that ended up going sour with a flurry of litigation between the two partners.

In the aftermath of the MEI deal, Regis essentially exited the department store salon business in the United States.

"The department store business is not what it used to be, and dealing with department store management is something we'd rather not do for a long, long period of time — like forever," he said.

In the days of investors betting heavily on high-growth-potential stocks like Internet companies, Regis has been somewhat ignored by Wall Street, said Tom Emmel, a securities analyst with John G. Kinnard & Co. in Minneapolis.

"They're not high tech, they're not high growth and there's no catalyst out there for them,'' Emmel said.

On the other hand, Regis has a steady revenue stream, a dominant market position, tremendous growth opportunities and a strong management team, and that's why he strongly recommends investors buy the stock. For the six months ended Dec. 31, Regis posted sales of $552 million, up 16% from the same period the previous year; add in sales at franchises, and systemwide sales are $810 million for the six-month period.

What's more, Regis is essentially recession-proof, given that people's hair grows no matter how the economy is doing, Finkelstein said.