10-K 1 rgs-20160630x10k.htm 10-K Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
 
 
ý
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2016
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 1-12725
Regis Corporation
(Exact name of registrant as specified in its charter)
Minnesota
State or other jurisdiction of
incorporation or organization
 
41-0749934
(I.R.S. Employer
Identification No.)
7201 Metro Boulevard, Edina, Minnesota
(Address of principal executive offices)
 
55439
(Zip Code)
(952) 947-7777
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, par value $0.05 per share
 
New York Stock Exchange
Preferred Share Purchase Rights
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý    No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No ý
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 ý    No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) 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. ý 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý
 
Accelerated filer o
 
Non-accelerated filer o
 (Do not check if a
smaller reporting company)
 
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act). Yes o    No ý

The aggregate market value of the voting common equity held by non-affiliates computed by reference to the price at which common equity was last sold as of the last business day of the registrant's most recently completed second fiscal quarter, December 31, 2015, was approximately $509,674,694. The registrant has no non-voting common equity.
As of August 16, 2016, the registrant had 46,154,722 shares of Common Stock, par value $0.05 per share, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the annual fiscal 2016 meeting of shareholders (the "2016 Proxy Statement") (to be filed pursuant to Regulation 14A within 120 days after the registrant's fiscal year-end of June 30, 2016) are incorporated by reference into Part III.
 



CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This annual report, as well as information included in, or incorporated by reference from, future filings by the Company with the Securities and Exchange Commission and information contained in written material, press releases and oral statements issued by or on behalf of the Company contains or may contain "forward-looking statements" within the meaning of the federal securities laws, including statements concerning anticipated future events and expectations that are not historical facts. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements in this document reflect management's best judgment at the time they are made, but all such statements are subject to numerous risks and uncertainties, which could cause actual results to differ materially from those expressed in or implied by the statements herein. Such forward-looking statements are often identified herein by use of words including, but not limited to, "may," "believe," "project," "forecast," "expect," "estimate," "anticipate," and "plan." In addition, the following factors could affect the Company's actual results and cause such results to differ materially from those expressed in forward-looking statements. These factors include the continued ability of the Company to execute on our strategy and build on the foundational initiatives that we have implemented; the success of our stylists and our ability to attract, train and retain talented stylists; changes in regulatory and statutory laws; our ability to manage cyber threats and protect the security of sensitive information about our guests, employees, vendors or Company information; changes in tax exposure; the effect of changes to healthcare laws; reliance on management information systems; financial performance of Empire Education Group; reliance on external vendors; consumer shopping trends and changes in manufacturer distribution channels; financial performance of our franchisees; competition within the personal hair care industry; changes in interest rates and foreign currency exchange rates; failure to standardize operating processes across brands; the ability of the Company to maintain satisfactory relationships with certain companies and suppliers; the continued ability of the Company to implement cost reduction initiatives; compliance with debt covenants; changes in economic conditions; changes in consumer tastes and fashion trends; or other factors not listed above. Additional information concerning potential factors that could affect future financial results is set forth under Item 1A of this Form 10-K. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. However, your attention is directed to any further disclosures made in our subsequent annual and periodic reports filed or furnished with the SEC on Forms 10-Q and 8-K and Proxy Statements on Schedule 14A.



2


REGIS CORPORATION
FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 2016
INDEX

 
 
 
Page(s)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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PART I

Item 1.    Business
General:
Regis Corporation owns, franchises and operates beauty salons. The Company is listed on the NYSE under the ticker symbol "RGS." Unless the context otherwise provides, when we refer to the "Company," "we," "our," or "us," we are referring to Regis Corporation, the Registrant, together with its subsidiaries.
As of June 30, 2016, the Company owned, franchised or held ownership interests in 9,483 locations worldwide. The Company's locations consist of 9,288 company-owned and franchised salons and 195 locations in which we maintain a non-controlling ownership interest of less than 100%. Each of the Company's salon concepts generally offer similar salon products and services and serve the mass marketplace.
Service revenues comprise approximately 79% of total company-owned revenues. The major services supplied by the Company's salons are haircutting and styling (including shampooing and conditioning), hair coloring and other services. The percentage of company-owned service revenues in each fiscal year 2016, 2015, and 2014 attributable to haircutting and styling, hair coloring and other services were 72%, 19% and 9%, respectively.
The Company reports its operations in three operating segments: North American Value, North American Premium and International. The Company's North American Value salon operations are comprised of 5,784 company-owned salons and 2,496 franchised salons operating in the United States, Canada, and Puerto Rico. The Company's North American Premium salon operations are comprised of 680 company-owned salons operating in the United States, Canada, and Puerto Rico. The Company's International operations are comprised of 328 company-owned salons in the United Kingdom. The Company's salons operate primarily under the trade names of SmartStyle, Supercuts, MasterCuts, Regis Salons, and Cost Cutters, and they generally serve two categories within the industry, value and premium. SmartStyle, Supercuts, MasterCuts, Cost Cutters, and other regional trade names are generally within the value category, offering high quality, convenience, and affordably priced hair care and beauty services and retail products. Regis Salons, among other trade names, are in the premium category, offering upscale hair care and beauty services and retail products. The Company's North American Value business is located mainly in strip center locations and Walmart Supercenters and the North American Premium business is primarily in mall-based locations. During fiscal years 2016 and 2015, the number of guest visits at the Company's company-owned salons approximated 72 and 76 million, respectively.
Financial information about our segments and geographic areas for fiscal years 2016, 2015, and 2014 are included in Note 14 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K.
Industry Overview:
The hair salon market is highly fragmented, with the vast majority of locations independently owned and operated. However, the influence of salon chains, both franchised and company-owned, continues to grow within this market. Management believes salon chains will continue to have significant influence on this market and will continue to increase their presence.
In every area in which the Company has a salon, there are competitors offering similar hair care services and products at similar prices. The Company faces competition from smaller chains of salons such as Great Clips, Fantastic Sams, and Sport Clips, independently owned salons, department store salons located within malls, booth rentals and blow dry bars.
At the individual salon level, barriers to entry are low; however, barriers exist for chains to expand nationally due to the need to establish systems and infrastructure, to recruit experienced field and salon management and stylists, and to lease quality sites. The principal factors of competition in the hair care category are quality, consistency and convenience. The Company continually strives to improve its performance in each of these areas and to create additional points of differentiation versus the competition.
Mission and Strategies:
The Company's long-term mission is to create guests for life. To successfully achieve our mission and build a winning organization, we must be the place where stylists can have successful and satisfying careers, which will drive great guest experiences and in turn, guests for life. Our key strategies and priorities are well aligned, focusing on people, processes and metrics to drive execution and performance. Our key strategies follow:
1.
Earn the Hearts and Minds of Our Team

4


2.
Develop High Performing Leaders
3.
Attain Operational Excellence through Simplicity
4.
Achieve Each Salon's Potential
5.
Deliver Exceptional Guest Experiences
Our stylists' ability to serve our guests in a professional, courteous, and friendly manner is the most critical element of our service model in cultivating strong guest relationships. Great stylists, coupled with high quality service, convenience, affordability, an inviting salon appearance and atmosphere, and comprehensive retail assortments create guests for life. We are committed to providing an outstanding guest experience that drives guest loyalty and repeat business. To that end, we are investing in a number of areas focused on delivering that promise and helping our stylists have successful careers, including investments in organization, training and technology.
Stylists
Creating an organization where stylists can have successful and satisfying careers leads to improved execution, and in turn, great guest experiences.
Field Leadership. Our field leadership is organized to enable localized mentoring and decision making, improve geographic proximity and increase local market efficiency. Development of our field leaders is a high priority because stylists depend on their salons and field leaders for coaching, mentoring and motivation. Our training curriculum serves as the foundation for ongoing leadership development. Role clarity and talent assessments help us identify ways to develop and upgrade field leadership. Execution disciplines are used to drive accountability, execution and business performance. Incentives are designed to align field interests with those of the Company's shareholders by rewarding behaviors focused on profitable revenue growth. This organization structure also provides a clear career path for our people who desire to ascend within the Company.
Technical Education. Our technical education program is becoming a key point of difference in attracting and retaining stylists. Stylists place a tremendous amount of importance in ongoing development of their craft. They deliver a superior experience for our guests when they are well trained technically and experientially. We employ technical trainers who provide new hire training for stylists joining the Company from beauty schools and training for all stylists in current beauty care and styling trends. We supplement internal training with targeted vendor training and external trainers who bring specialized expertise to our stylists. We utilize training materials to help all levels of field employees navigate the running of a salon and essential elements of guest service training within the context of brand positions.
 Recruiting.     Ensuring we keep our salons fully staffed with great stylists is critical to our success. To that end, we continue to enhance our recruiting efforts across all levels within our organization. We cultivate a pipeline of field leaders through succession planning and recruitment venues from within and outside the salon industry. We also leverage beauty school relationships and participate in job fairs and industry events.
Technology.    Our point-of-sale (POS) systems and salon workstations throughout North America enable communication with salons and stylists, delivery of online and digital training to stylists, real-time salon level analytics on guest retention, wait times, stylist productivity, and salon performance. We also use technology to provide asset protection dashboards and analytics to help prioritize efforts against our most compelling opportunities to reduce loss in our salons.
Guests
Great stylists, coupled with high quality service, convenience, affordability, an inviting salon appearance and atmosphere, and comprehensive retail assortments, create guests for life.
Convenience.    Our different salon concepts enable our guests to select different service scheduling options based upon their preference. In the value category, the ability to serve walk-in appointments and minimize guest wait times is an essential element in delivering upon convenience. We continue to focus on staffing and retention, optimizing schedules and leveraging our POS systems to help us balance stylist hours with guest traffic and manage guest wait times. In the premium category, our salons generally schedule appointments in advance of service. Our salons are located in high-traffic strip centers, Walmart Supercenters and shopping malls, with guest parking and easy access, and are generally open seven days per week, offering guests a variety of convenient ways to fulfill their beauty needs.
Affordability.    The Company strives to offer an exceptional value for its services. In the value category, our guests expect outstanding service at affordable prices. These expectations are met with average service transactions ranging from $17 to $22. In the premium category, our guests expect upscale, full service beauty services at reasonable prices. Average service

5


transactions approximate $47 in this category. Pricing decisions are considered on a salon level basis and established based on local conditions.
Salon Appearance and Atmosphere.    The Company's salons range from 500 to 5,000 square feet, with the typical salon approximating 1,200 square feet. Our salon repairs and maintenance program is designed to ensure we invest annually in salon cleanliness and safety, as well as in maintaining the normal operation of our salons. Our annual capital expenditures include funds to refresh the appeal and comfort of our salons.
Retail Assortments.    The Company's salons sell nationally recognized hair care and beauty products, as well as a complete assortment of own-brand products. Retail products offered by the Company are intended to be sold only through professional salons, and complement its salon services business. The Company's stylists are compensated and regularly trained to sell hair care and beauty products to their guests. Additionally, guests are encouraged to purchase products after stylists demonstrate their efficacy by using them in the styling of our guests' hair. The top selling brands within the Company's retail assortment include Paul Mitchell, Biolage, Regis designLINE, Redken, Nioxin, Sexy Hair Concepts, It's a 10, Kenra, Tigi, and Moroccanoil.
Technology.    Our POS systems have the ability to collect guest and transactional data and enable the Company to invest in guest relationship management, gaining insights into guest behavior, communicating with guests and incenting return visits. Leveraging this technology allows us to monitor guest retention and to survey our guests for feedback on improving the guest experience, and allows guests to use mobile apps to schedule appointments, view wait times and interact in other ways with salons.
Marketing.    We are focused on driving local traffic at the most efficient cost. This includes leveraging media, guest relationship management programs, digital channels, and local tactical efforts (e.g., couponing), among other programs.  Traffic driving efforts are targeted vs. a one-size-fits all approach. Annual marketing plans are based on seasonality, consumer mindset, competitive positioning and return on investment. We continually reallocate marketing investments into vehicles with known, strong returns.  
Salon Support
Our corporate headquarters is referred to as Salon Support. This acknowledges that creating guests for life mandates a service-oriented, stylist and guest-focused mentality in supporting our field organization to grow our business profitably.
Organization.    Salon Support and our associated priorities are aligned to our field structure to enhance the effectiveness and efficiency of the service provided to our field organization. During fiscal year 2014, we created a human resources organization to help transform the Company into the place where stylists can have successful and satisfying careers and enhanced our asset protection capabilities by building a strong asset protection team and establishing standard operating procedures to support field and salon leaders.
Simplification.   Our ongoing simplification efforts focus on improving the way we plan and execute across our many brands. Standardizing processes and procedures around scheduling, inventory management, day-to-day salon execution and reporting makes it easier to lead and execute in a multi-unit organization. Our organization also remains focused on identifying and driving cost saving and profit enhancing initiatives.
Salon Concepts:
The Company's salon concepts focus on providing high quality hair care services and professional products, primarily to the mass market. A description of the Company's salon concepts are listed below:
SmartStyle.    SmartStyle salons offer a full range of custom styling, cutting, and hair coloring, as well as professional hair care products and are located exclusively in Walmart Supercenters. SmartStyle has a walk-in guest base with value pricing. Service revenues represent approximately 69% of total company-owned SmartStyle revenues. Additionally, the Company has 125 franchised Cost Cutters salons located in Walmart Supercenters.
Supercuts.    Supercuts salons provide consistent, high quality hair care services and professional products to its guests at convenient times and locations at value prices. This concept appeals to men, women, and children. Service revenues represent approximately 90% of total company-owned Supercuts revenues. Additionally, the Company has 1,579 franchised Supercuts locations.
MasterCuts.    MasterCuts salons are a full service, mall based salon group which focuses on the walk-in consumer who demands moderately priced hair care services. MasterCuts salons emphasize quality hair care services, affordable prices, and time saving services for the entire family. These salons offer a full range of custom styling, cutting and hair coloring services, as well as professional hair care products. Service revenues comprise approximately 83% of the concept's total revenues.

6


Other Value.    Other Value salons are made up of acquired regional company-owned salon groups operating under the primary concepts of Hair Masters, Cool Cuts for Kids, Style America, First Choice Haircutters, Famous Hair, Cost Cutters, BoRics, Magicuts, Holiday Hair, Head Start, Fiesta Salons, and TGF, as well as other concept names. Most concepts offer a full range of custom hairstyling, cutting and coloring services, as well as hair care products. Hair Masters offers moderately-priced services, while the other concepts primarily cater to time-pressed, value-oriented families. Service revenues represent approximately 89% of total company-owned Other Value salons revenues. Additionally, the Company has 792 franchised locations of Other Value salons.
Regis Salons.    Regis Salons are primarily mall based, full service salons providing complete hair care and beauty services aimed at moderate to upscale, fashion conscious consumers. At Regis Salons both appointments and walk-in guests are common. These salons offer a full range of custom styling, cutting and hair coloring services, as well as professional hair care products. Service revenues represent approximately 82% of the concept's total revenues. Regis Salons compete in their existing markets primarily by providing high quality services. Included within the Regis Salon concept are various other trade names, including Carlton Hair, Sassoon, Hair by Stewarts, Hair Excitement, and Renee Beauty.
International Salons.    International salons are comprised of company-owned salons operating in the United Kingdom primarily under the Supercuts, Regis, and Sassoon concepts. These salons offer similar levels of service as our North American salons. Sassoon is one of the world's most recognized names in hair fashion and appeals to women and men looking for a prestigious full service hair salon. Salons are usually located in prominent high-traffic locations and offer a full range of custom hairstyling, cutting and coloring services, as well as professional hair care products. Service revenues comprise approximately 76% of total company-owned international locations.
The tables on the following pages set forth the number of system wide locations (company-owned and franchised) and activity within the various salon concepts.
System-wide location counts
 
 
June 30,
 
 
2016
 
2015
 
2014
Company-owned salons:
 
 
 
 
 
 
SmartStyle/Cost Cutters in Walmart stores
 
2,683

 
2,639

 
2,574

Supercuts
 
1,053

 
1,092

 
1,176

MasterCuts
 
430

 
466

 
505

Other Value
 
1,604

 
1,711

 
1,846

Regis
 
694

 
761

 
816

Total North American salons(1)
 
6,464


6,669


6,917

Total International salons(2)
 
328

 
356

 
360

Total, Company-owned salons
 
6,792


7,025


7,277

Franchised salons:
 
 
 
 
 
 
SmartStyle/Cost Cutters in Walmart stores
 
125

 
127

 
126

Supercuts
 
1,579

 
1,393

 
1,213

Other Value
 
792

 
804

 
840

Total North American salons
 
2,496


2,324


2,179

Total International salons(2)
 

 

 

Total, Franchised salons
 
2,496


2,324


2,179

Ownership interest locations:
 
 
 
 
 
 
Equity ownership interest locations
 
195

 
207

 
218

Grand Total, System-wide
 
9,483


9,556


9,674



7


Constructed Locations (net relocations)
 
 
Fiscal Years
 
 
2016
 
2015
 
2014
Company-owned salons:
 
 
 
 
 
 
SmartStyle/Cost Cutters in Walmart stores
 
51

 
68

 
85

Supercuts
 
5

 
7

 
13

MasterCuts
 

 

 
1

Other Value
 
1

 
1

 
4

Regis
 

 

 
1

Total North American salons(1)
 
57


76


104

Total International salons(2)
 
9

 
15

 
23

Total, Company-owned salons
 
66


91


127

Franchised salons:
 
 
 
 
 
 
SmartStyle/Cost Cutters in Walmart stores
 

 
1

 
3

Supercuts
 
146

 
126

 
94

Other Value
 
24

 
13

 
37

Total North American salons(1)
 
170


140


134

Total International salons(2)
 

 

 

Total, Franchised salons
 
170


140


134

Closed Locations
 
 
Fiscal Years
 
 
2016
 
2015
 
2014
Company-owned salons:
 
 

 
 

 
 

SmartStyle/Cost Cutters in Walmart stores
 
(7
)
 
(3
)
 
(1
)
Supercuts
 
(17
)
 
(36
)
 
(44
)
MasterCuts
 
(36
)
 
(39
)
 
(27
)
Other Value
 
(77
)
 
(114
)
 
(126
)
Regis
 
(67
)
 
(55
)
 
(47
)
Total North American salons(1)
 
(204
)

(247
)

(245
)
Total International salons(2)
 
(37
)
 
(19
)
 
(14
)
Total, Company-owned salons
 
(241
)

(266
)

(259
)
Franchised salons:
 
 
 
 
 
 
SmartStyle/Cost Cutters in Walmart Stores
 
(2
)
 

 

Supercuts
 
(22
)
 
(22
)
 
(19
)
Other Value
 
(32
)
 
(50
)
 
(44
)
Total North American salons(1)
 
(56
)

(72
)

(63
)
Total International salons(2)
 

 

 

Total, Franchised salons
 
(56
)

(72
)

(63
)

8


Conversions (including net franchisee transactions)(3)
 
 
Fiscal Years
 
 
2016
 
2015
 
2014
Company-owned salons:
 
 
 
 
 
 
SmartStyle/Cost Cutters in Walmart stores
 

 

 

Supercuts
 
(27
)
 
(55
)
 
(3
)
MasterCuts
 

 

 
(1
)
Other Value
 
(31
)
 
(22
)
 
(22
)
Regis
 

 

 

Total North American salons(1)
 
(58
)

(77
)

(26
)
Total International salons(2)
 

 

 

Total, Company-owned salons
 
(58
)

(77
)

(26
)
Franchised salons:
 
 
 
 
 
 
SmartStyle/Cost Cutters in Walmart Stores
 

 

 

Supercuts
 
62

 
76

 
22

Other Value
 
(4
)
 
1

 
4

Total North American salons(1)
 
58


77


26

Total International salons(2)
 

 

 

Total, Franchised salons
 
58


77


26

_______________________________________________________________________________

(1)
The North American Value operating segment is comprised primarily of the SmartStyle, Supercuts, MasterCuts and Other Value salon brands. The North American Premium operating segment is comprised primarily of the Regis salon brands.

(2)
Canadian and Puerto Rican salons are included in the North American salon totals.

(3)
During fiscal years 2016, 2015, and 2014, the Company acquired one, zero, and two salon locations, respectively, from franchisees. During fiscal years 2016, 2015, and 2014, the Company sold 59, 77, and 28 salon locations, respectively, to franchisees.
Salon Franchising Program:
General.    We have various franchising programs supporting our 2,496 franchised salons as of June 30, 2016, consisting mainly of Supercuts, Cost Cutters, First Choice Haircutters, and Magicuts. These salons have been included in the discussions regarding salon counts and concepts.
We provide our franchisees with a comprehensive system of business training, stylist education, site approval and lease negotiation, construction management services, professional marketing, promotion, and advertising programs, and other forms of support designed to help franchisees build successful businesses.
Standards of Operations.    The Company does not control the day-to-day operations of its franchisees, including employment, benefits and wage determination, establishing prices to charge for products and services, business hours, personnel management, and capital expenditure decisions. However, the franchise agreements afford certain rights to the Company, such as the right to approve locations, suppliers and the sale of a franchise. Additionally, franchisees are required to conform to the Company's established operational policies and procedures relating to quality of service, training, salon design and decor, and trademark usage. The Company's field personnel make periodic visits to franchised salons to ensure they are operating in conformity with the standards for each franchising program. All of the rights afforded to the Company with regard to franchised operations allow the Company to protect its brands, but do not allow the Company to control the franchise operations or make decisions that have a significant impact on the success of the franchised salons. The Company’s franchise agreements do not give the Company any right, ability or potential to determine or otherwise influence any terms and/or conditions of employment of franchisees’ employees (except for those, if any, that are specifically related to quality of service, training, salon design, decor, and trademark usage), including, but not limited to, franchisees’ employees’ wages and benefits,

9


hours of work, scheduling, leave programs, seniority rights, promotional or transfer opportunities, layoff/recall arrangements, grievance and dispute resolution procedures, uniforms, and/or discipline and discharge.
Franchise Terms.    Pursuant to a franchise agreement with the Company, each franchisee pays an initial fee for each store and ongoing royalties to the Company. In addition, for most franchise concepts, the Company collects advertising funds from franchisees and administers the funds on behalf of the concepts. Franchisees are responsible for the costs of leasehold improvements, furniture, fixtures, equipment, supplies, inventory, payroll costs and certain other items, including initial working capital. The majority of franchise agreements provide the Company a right of first refusal if the store is to be sold and the franchisee must obtain the Company's approval in all instances where there is a sale of a franchise location.
Additional information regarding each of the major franchised brands is listed below:
Supercuts
Supercuts franchise agreements have a perpetual term, subject to termination of the underlying lease agreement or termination of the franchise agreement by either the Company or the franchisee. All new franchisees enter into development agreements, which give them the right to enter into a defined number of franchise agreements. These franchise agreements are site specific. The development agreement provides limited territorial protection for the stores developed under those franchise agreements. Older franchisees have grandfathered expansion rights which allow them to develop stores outside of development agreements and provide them with greater territorial protections in their markets. The Company has a comprehensive impact policy that resolves potential conflicts among Supercuts franchisees and/or the Company's Supercuts locations regarding proposed store sites.
Cost Cutters, First Choice Haircutters, and Magicuts
The majority of existing Cost Cutters franchise agreements have a 15 year term with a 15 year option to renew (at the option of the franchisee), while the majority of First Choice Haircutters franchise agreements have a ten year term with a five year option to renew. The majority of Magicuts franchise agreements have a term equal to the greater of five years or the current initial term of the lease agreement with an option to renew for two additional five year periods. The current franchise agreement is site specific. Franchisees may enter into development agreements with the Company which provide limited territorial protection.
Franchisee Training.    The Company provides new franchisees with training, focusing on the various aspects of salon management, including operations, personnel management, marketing fundamentals, and financial controls. Existing franchisees receive training, counseling and information from the Company on a continuous basis. The Company provides salon managers and stylists with extensive technical training for Supercuts franchises.
Salon Markets and Marketing:
Company-Owned Salons
The Company utilizes various marketing vehicles for its salons, including traditional advertising, guest relationship management, digital channels and promotional/pricing based programs. A predetermined allocation of revenue is used for such programs. Most marketing vehicles including radio, print, online, digital and television advertising are developed and supervised at the Company's Salon Support headquarters; however, the majority of advertising is created for our local markets. The Company reviews its brand strategy with the intent to create more clear communication platforms, identities and differentiation points for our brands to drive consumer preference.
Franchised Salons
Most franchise concepts maintain separate advertising funds that provide comprehensive marketing and sales support for each system. The Supercuts advertising fund is the Company's largest advertising fund and is administered by a council consisting of primarily franchisee representatives. The council has overall control of the advertising fund's expenditures and operates in accordance with terms of the franchise operating and other agreements. All stores, company-owned and franchised, contribute to the advertising funds, the majority of which are allocated to the contributing market for media placement and local marketing activities. The remainder is allocated for the creation of national advertising and system-wide activities.
Affiliated Ownership Interests:
The Company maintains ownership interests in beauty schools and salons. The primary ownership interest is a 54.6% interest in Empire Education Group, Inc. (EEG), which is accounted for as an equity method investment. See Note 1 to the Consolidated Financial Statements. EEG operates accredited cosmetology schools. Contributing the Company's beauty schools in fiscal 2008 to EEG leveraged EEG's management expertise, while enabling the Company to maintain a vested

10


interest in the beauty school industry. Additionally, we utilize our EEG relationship to recruit stylists straight from beauty school.
In addition, the Company has a 27.1% ownership interest in MY Style, which is accounted for as a cost method investment. MY Style operates salons in Japan.
Corporate Trademarks:
The Company holds numerous trademarks, both in the United States and in many foreign countries. The most recognized trademarks are "SmartStyle," "Supercuts," "MasterCuts," "Regis Salons," "Cost Cutters," "Hair Masters," "First Choice Haircutters," and "Magicuts."
"Sassoon" is a registered trademark of Procter & Gamble. The Company has a license agreement to use the Sassoon name for existing salons and academies and new salon development.
Corporate Employees:
During fiscal year 2016, the Company had approximately 45,000 full and part-time employees worldwide, of which approximately 39,000 employees were located in the United States. None of the Company's employees are subject to a collective bargaining agreement and the Company believes its employee relations are amicable.

Executive Officers:
Information relating to the Executive Officers of the Company follows:
Name
 
Age
 
Position
Daniel Hanrahan
 
59

 
President and Chief Executive Officer
Steven Spiegel
 
54

 
Executive Vice President and Chief Financial Officer
Eric Bakken
 
49

 
Executive Vice President, Chief Administrative Officer, Corporate Secretary and General Counsel
Jim Lain
 
52

 
Executive Vice President and Chief Operating Officer
Andrew Dulka
 
42

 
Senior Vice President and Chief Information Officer
Annette Miller
 
54

 
Senior Vice President and Chief Merchandising Officer
Heather Passe
 
45

 
Senior Vice President and Chief Marketing Officer
Carmen Thiede
 
49

 
Senior Vice President and Chief Human Resources Officer
Daniel Hanrahan has served as President and Chief Executive Officer since August 2012. He most recently served as President of Celebrity Cruises, a subsidiary of Royal Caribbean Cruises Ltd., from February 2005 to July 2012, and as its President and Chief Executive Officer since September 2007. Mr. Hanrahan has served on the Board of Directors of Cedar Fair, L.P., an amusement-resort operator, since 2012 and is a member of its Audit and Compensation Committees.
Steven Spiegel has served as Executive Vice President and Chief Financial Officer since December 2012. Before joining Regis Corporation, he served as Vice President of Finance at Unilever (formerly Alberto Culver) from May 2005 to May 2012.
Eric Bakken has served as Executive Vice President, Chief Administrative Officer, Corporate Secretary and General Counsel since April 2013. He served as Executive Vice President, General Counsel and Business Development and Interim Corporate Chief Operating Officer from 2012 to April 2013, and performed the function of interim principal executive officer between July 2012 and August 2012. Mr. Bakken joined the Company in 1994 as a lawyer and became General Counsel in 2004.
Jim Lain has served as Executive Vice President and Chief Operating Officer since November 2013. Before joining Regis Corporation, he served as Vice President at Gap, Inc. from August 2006 to November 2013.
Andrew Dulka has served as Senior Vice President and Chief Information Officer since May 2015. He served as Vice President, Retail Systems and Enterprise Architecture from July 2012 to April 2015. Before joining Regis Corporation, he served as Vice President, Infrastructure and Application Maintenance at Allianz Life from December 2009 to July 2012.
Annette Miller has served as Senior Vice President and Chief Merchandising Officer since December 2014. Before joining Regis Corporation, she served as Senior Vice President of Merchandising, Grocery at Target from 2010 to 2014.

11


Heather Passe has served as Senior Vice President and Chief Marketing Officer since July 2012. Before joining Regis Corporation, she served as Vice President Marketing, Customer Relationship Marketing (CRM) and E-Commerce at Carlson from February 2009 to July 2012.
Carmen Thiede has served as Senior Vice President and Chief Human Resources Officer since October 2013. Before joining Regis Corporation, she served as Senior Vice President of Human Resources at Ameriprise Financial from October 2006 to October 2013.
Governmental Regulations:
The Company is subject to various federal, state, local and provincial laws affecting its business as well as a variety of regulatory provisions relating to the conduct of its beauty related business, including health and safety.
In the United States, the Company's franchise operations are subject to the Federal Trade Commission's Trade Regulation Rule on Franchising (the FTC Rule) and by state laws and administrative regulations that regulate various aspects of franchise operations and sales. The Company's franchises are offered to franchisees by means of an offering circular/disclosure document containing specified disclosures in accordance with the FTC Rule and the laws and regulations of certain states. The Company has registered its offering of franchises with the regulatory authorities of those states in which it offers franchises and in which such registration is required. State laws that regulate the franchisor-franchisee relationship presently exist in a substantial number of states and, in certain cases, apply substantive standards to this relationship. Such laws may, for example, require that the franchisor deal with the franchisee in good faith, may prohibit interference with the right of free association among franchisees and may limit termination of franchisees without payment of reasonable compensation. The Company believes that the current trend is for government regulation of franchising to increase over time. However, such laws have not had, and the Company does not expect such laws to have, a significant effect on the Company's operations.
In Canada, the Company's franchise operations are subject to franchise laws and regulations in the provinces of Ontario, Alberta, Manitoba, New Brunswick and Prince Edward Island. The offering of franchises in Canada occurs by way of a disclosure document, which contains certain disclosures required by the applicable provincial laws. The provincial franchise laws and regulations primarily focus on disclosure requirements, although each requires certain relationship requirements such as a duty of fair dealing and the right of franchisees to associate and organize with other franchisees.
The Company believes it is operating in substantial compliance with applicable laws and regulations governing all of its operations.
The Company maintains an ownership interest in EEG. Beauty schools derive a significant portion of their revenue from student financial assistance originating from the U.S. Department of Education's Title IV Higher Education Act of 1965. For the students to receive financial assistance at the school, the beauty schools must maintain eligibility requirements established by the U.S. Department of Education.
Financial Information about Foreign and North American Operations
Financial information about foreign and North American markets is incorporated herein by reference to Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 and segment information in Note 14 to the Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.
Available Information
The Company is subject to the informational requirements of the Securities and Exchange Act of 1934 (Exchange Act). The Company therefore files periodic reports, proxy statements and other information with the Securities and Exchange Commission (SEC). Such reports may be obtained by visiting the Public Reference Room of the SEC at 100 F Street NE, Washington, DC 20549, or by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an internet site (http://www.sec.gov) that contains reports, proxy and information statements and other information.
Financial and other information can be accessed in the Investor Information section of the Company's website at www.regiscorp.com. The Company makes available, free of charge, copies of its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the SEC.


12


Item 1A.    Risk Factors
An inability to continue to execute on our strategy and build on foundational initiatives we've implemented could adversely impact our same-store sales and operating results.
Our success depends, in part, on our ability to improve sales, as well as both cost of service and product and operating margins. Same-store sales are affected by average ticket and same-store guest visits. A variety of factors affect same-store guest visits, including the guest experience, staffing and retention of stylists and salon leaders, fashion trends, competition, current economic conditions, product assortment, marketing programs and weather conditions. These factors may cause our same-store sales to differ materially from prior periods and from our expectations.
Since fiscal year 2013, we have gone through significant change as we executed upon a number of foundational initiatives to support and focus on our business strategies to return the Company to sustainable long-term growth and profitability.
These foundational changes were disruptive to our business. In fiscal 2014 and 2015, same-store sales declined 4.8% and 0.3%, respectively, compared to the prior year. While fiscal 2016 same-store sales growth of 0.2% represents improved trends, there can be no assurance we will be able to successfully execute on our business strategy in fiscal 2017 and beyond to achieve long-term growth, profitability and a broader scale turn. We will also need to continue to refine our strategy as market dynamics continue to evolve. If our efforts are not effective, our same-store sales, margins and return on invested capital may be adversely affected.
In addition, the unexpected loss of any of our executive leadership team members could adversely affect the momentum we have achieved in executing on our business strategies and could adversely affect our business.
Our business is based on the success of our stylists. It is important for us to attract, train and retain talented stylists and salon leaders.
Guest loyalty is highly dependent upon the stylists who serve our guests. In order to profitably grow our business, it is important for us to attract, train and retain talented stylists and salon leaders and to adequately staff our salons. Because the salon industry is highly-fragmented and comprised of many independent operators, the market for stylists is highly competitive. In addition, increases in minimum wage requirements may impact the number of stylists considering careers outside the beauty industry. In some markets we have experienced a shortage of qualified stylists. Offering competitive wages, benefits, education and training programs are important elements to attracting and retaining great stylists. In addition, due to challenges facing the for-profit education industry, cosmetology schools, including our joint venture EEG, have experienced declines in enrollment, revenues and profitability in recent years. If the cosmetology school industry sustains further declines in enrollment or some schools close entirely, or if stylists leave the beauty industry, we expect that we would have increased difficulty staffing our salons in some markets. If we are not successful in attracting, training and retaining stylists or in staffing our salons, our same-store sales could decline and our results of operations could be adversely affected.
Changes in regulatory and statutory laws, such as increases in the minimum wage and changes that make collective bargaining easier, recent changes to overtime requirements, and the costs of compliance and non-compliance with such laws, may result in increased costs to our business.
With 9,483 locations and approximately 45,000 employees worldwide, our financial results can be adversely impacted by regulatory or statutory changes in laws. Due to the number of people we employ, laws that increase minimum wage rates, employment taxes, overtime requirements or costs to provide employee benefits may result in additional costs to our Company.
A number of states and cities in which we do business have recently increased or are considering increasing the minimum wage, with increases generally phased over several years depending upon the size of the employer. The Department of Labor has approved changes, effective December 1, 2016, to the classification of employees deemed to be exempt from the overtime requirements of the Fair Labor Standards Act, which are designed to increase the number of employees eligible to receive overtime pay. Increases in minimum wages and overtime pay increase our costs, and our ability to offset these increases through price increases is limited. In fact, increases in minimum wages increased our costs throughout fiscal 2014, 2015 and 2016. In addition, changes in labor laws could increase the likelihood of some or all of our employees being subjected to greater organized labor influence. If a significant portion of our employees were to become unionized, it could have an adverse effect on our business and financial results.
Increases in minimum wages, overtime requirements and unionization could also have an adverse effect on the performance of our franchisees, especially if our franchisees are treated as a "joint employer" with us by the National Labor Relations Board (NLRB) or as a large employer under minimum wage statutes because of their affiliation with us. With respect to the NLRB, it is anticipated that its current standard for joint employer relationships may become more lenient and, as such,

13


we may face an increased risk of being alleged to be a joint employer with our franchisees. In addition, we must comply with state employment laws, including the California Labor Code, which has stringent requirements and penalties for non-compliance.
In addition to employment laws, we are also subject to a wide range of federal, state, provincial and local laws and regulations, including those affecting public companies, product manufacture and sale, and governing the franchisor-franchisee relationship, in the jurisdictions in which we operate. Compliance with new, complex and changing laws may cause our expenses to increase. In addition, any non-compliance with laws or regulations could result in penalties, fines, product recalls and enforcement actions or otherwise restrict our ability to market certain products or attract or retain employees, which could adversely affect our business, financial condition and results of operations.
If we fail to manage cyber threats and protect the security of sensitive information about our guests, employees, vendors or company, we could be subject to business disruption, negative publicity, costly government enforcement actions or private litigation and our reputation could suffer.
The nature of our business involves processing, transmission and storage of personal information about our guests as well as employees, vendors and our Company. Cyber-attacks designed to gain access to sensitive information by breaching mission critical systems of large organizations and their third party vendors are constantly evolving, and high profile electronic security breaches leading to unauthorized release of sensitive guest information have occurred at a number of large U.S. companies in recent years. Our efforts, and those of our third party vendors, to protect sensitive guest and employee information may not be successful in preventing a breach in our systems, or detecting and responding to a breach on a timely basis. As a result of a security incident or breach in our systems, our systems could be interrupted or damaged, or sensitive information could be accessed by third parties. If that happened, our guests could lose confidence in our ability to protect their personal information, which could cause them to stop visiting our salons altogether. Such events could lead to lost future sales and adversely affect our results of operations. In addition, as the regulatory environment relating to retailers and other companies' obligations to protect sensitive data becomes stricter, a material failure on our part to comply with applicable regulations could subject us to fines or other regulatory sanctions and potentially to lawsuits. These laws are changing rapidly and vary among jurisdictions. Furthermore, while our franchisees are independently responsible for data security at franchised locations, a breach of guest or vendor data at a franchised location could also negatively affect public perception of our brands. More broadly, our incident response preparedness and disaster recovery planning efforts may be inadequate or ill-suited for a security incident and we could suffer disruption of operations or adverse effects to our operating results.
We could be subject to changes in tax rates, the adoption of new U.S. or international tax legislation or exposure to additional tax liabilities.
We are subject to income taxes in the U.S. and other foreign jurisdictions. Significant judgment is required in determining our tax provision for income taxes. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. We are subject to the examination of our income tax returns, payroll taxes and other tax matters by the Internal Revenue Service and other tax authorities and governmental bodies. The Company regularly assesses the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of its provision for income taxes and payroll tax accruals. There can be no assurances as to the outcome of these examinations. Although we believe our tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially different from our historical tax provisions and employment taxes.  The results of an audit or litigation could have a material effect on our consolidated financial statements in the period or periods for which that determination is made.
Our effective income tax rate in the future could be adversely affected by a number of factors, including changes in the mix of earnings in countries with different statutory tax rates, changes in tax laws, the outcome of income tax audits, and any repatriation of non-U.S. earnings for which we have not previously provided for U.S. taxes.
Changes to healthcare laws in the U.S. may increase the number of employees who participate in our healthcare plans, which may significantly increase our healthcare costs and negatively impact our operating results.
We offer comprehensive healthcare coverage to eligible employees in the United States. Historically, a majority of our eligible employees do not participate in our healthcare plans. Due to changes to healthcare laws in the United States pursuant to the Affordable Care Act (ACA), it is possible that enrollment in the Company’s healthcare plans may increase as employees continue to assess their healthcare alternatives (and as individual penalties for failing to have insurance increase) and if provisions regarding automatic enrollment of new eligible employees become effective in the future. Furthermore, potential fees and or penalties may be assessed as a result of individuals either not being offered healthcare coverage within a limited timeframe or if coverage offered does not meet minimum care and affordability standards. An increase in the number of

14


employees who elect to participate in our healthcare plans, new ACA requirements or if the Company fails to comply with one or more provisions of ACA may significantly increase our healthcare-related costs and negatively impact our operating results.
We rely heavily on our management information systems. If our systems fail to perform adequately or if we experience an interruption in their operation, our results of operations may be affected.
The efficient operation of our business is dependent on our management information systems. We rely heavily on our management information systems to collect daily sales information and guest demographics, generate payroll information, monitor salon performance, manage salon staffing and payroll costs, inventory control and other functions. Certain of our management information systems are developed and maintained by external vendors, including our POS system. In addition, certain of our systems are outdated or of limited functionality. The failure of our management information systems to perform as we anticipate, or to meet the continuously evolving needs of our business, could disrupt our business and may adversely affect our operating results.
If our joint venture with Empire Education Group is unsuccessful, our financial results may be affected.
We have a joint venture arrangement with Empire Education Group (EEG), an operator of accredited cosmetology schools. Due to significantly lower financial projections resulting from continued declines in EEG’s enrollment, revenue and profitability we recorded a $13.0 million non-cash impairment charge in the quarter ended December 31, 2015, resulting in a full-impairment of our investment. If EEG is unsuccessful in executing its business plan, or if economic, regulatory and other factors, including declines in enrollment, revenue and profitability continue for the for-profit secondary education market, our financial results may be affected by certain potential liabilities related to this joint venture.
We rely on external vendors for products and services critical to our operations.
Our dependence on vendors exposes us to operational, reputational, financial, and compliance risk. Our vendors are also responsible for the security of certain Company data. In the event that one of our key vendors becomes unable to continue to provide products and services, or their systems fail, are compromised or the quality of their systems deteriorate, we may suffer operational difficulties and financial loss.
Consumer shopping trends and changes in manufacturer choice of distribution channels may negatively affect both service and product revenues.
Our North American Value business is located mainly in strip center locations and Walmart Supercenters and the North American Premium business is primarily in mall-based locations. Our salons are partly dependent on the volume of traffic around these locations in order to generate both service and product revenues. We've experienced a proliferation of alternative channels of distribution, like blow dry bars, booth rental facilities, discount brick-and-mortar and online professional products retailers, and manufacturers selling direct to consumers online. Also, product manufacturers may decide to utilize these other distribution channels to a larger extent than in the past and they generally have the right to terminate relationships with us without much advance notice. In some shopping malls, we have experienced declines in traffic due to changes in consumer preferences favoring locations other than malls. These trends could reduce the volume of traffic around our salons, and in turn, our revenues may be adversely affected.
Our continued success depends in part on the success of our franchisees, who operate independently.
As of June 30, 2016, approximately 26% of our salons are franchised locations. We derive revenues associated with our franchised locations from royalties, service fees and product sales to franchised locations. Our financial results are therefore dependent in part upon the operational and financial success of our franchisees. As we increase our focus on our franchise business, our dependence on our franchisees grows.
We have limited control over how our franchisees’ businesses are run. Though we have established operational standards and guidelines, they own, operate and oversee the daily operations of their salon locations. If franchisees do not successfully operate their salons in compliance with our standards, our brand reputation and image could be harmed and our financial results could be affected.
In addition, our franchisees are subject to the same general economic risks as our Company, and their results are influenced by competition, market trends, and disruptions in their markets due to severe weather and other external events. They may also be limited in their ability to open new locations by an inability to secure adequate financing, especially since many of them are small businesses with much more limited access to financing than our Company, or by the limited supply of favorable real estate for new salon locations. A deterioration in the financial results of our franchisees, or a failure of our franchisees to renew their franchise agreements, could adversely affect our operating results through decreased royalty payments, fees and product revenues.

15


If we are not able to successfully compete in our business markets, our financial results may be affected.
Competition on a market by market basis remains challenging as many smaller chain competitors are franchise systems with local operating strength in certain markets and the hair salon industry as a whole is fragmented and highly competitive for customers, stylists and prime locations. Therefore, our ability to attract guests, raise prices and secure suitable locations in certain markets can be adversely impacted by this competition. Our strategies for competing are complicated by the fact that we have multiple brands in multiple segments, which compete on different factors.
Furthermore, our reputation is critical to our ability to compete and succeed. Our reputation may be damaged by negative publicity on social media or other channels regarding the quality of services we provide. It may also be damaged by factors that are mostly or entirely out of our control, including actions by our franchisees. If we are not able to successfully compete, our ability to grow same-store sales and increase our revenue and earnings may be impaired.
Changes to interest rates and foreign currency exchange rates may impact our results from operations.
Changes in interest rates and foreign currency exchange rates will have an impact on our expected results from operations. Historically, we have managed the risk related to fluctuations in these rates through the use of fixed rate debt instruments and other financial instruments. In particular, the United Kingdom’s vote in June 2016 to leave the European Union, commonly known as “Brexit,” has increased the volatility of currency exchange rates. If the British pound weakens, it may adversely affect our results of operations.
Failure to simplify and standardize our operating processes across our brands could have a negative impact on our financial results.
Standardization of operating processes across our brands, marketing and products will enable us to simplify our operating model and decrease our costs. Failure to do so could adversely impact our ability to grow revenue and realize further efficiencies within our results of operations.
Changes in our key relationships may adversely affect our operating results.
We maintain key relationships with certain companies, including Walmart. In particular, we have 2,808 SmartStyle/Cost Cutters salons within Walmart locations, including 51 salons opened during fiscal year 2016 (net of relocations). The continued operation and growth of this business is dependent on our relationship with Walmart. In addition, our company-owned locations are concentrated with leases with certain major regional and national landlords. Termination, modification or mismanagement, of any of these relationships could significantly reduce our revenues and have a material and adverse impact on our business, our operating results and our ability to grow.
Failure to control costs may adversely affect our operating results.
We must continue to control our expense structure. Failure to manage our cost of product, labor and benefit rates, advertising and marketing expenses, operating lease costs, other store expenses or indirect spending could delay or prevent us from achieving increased profitability or otherwise adversely affect our operating results.
If we fail to comply with any of the covenants in our financing arrangements, we may not be able to access our existing revolving credit facility, and we may face an accelerated obligation to repay our indebtedness.
We have several financing arrangements that contain financial and other covenants. If we fail to comply with any of the covenants, it may cause a default under one or more of our financing arrangements, which could limit our ability to obtain additional financing under our existing credit facility, require us to pay higher levels of interest or accelerate our obligations to repay our indebtedness.
Changes in the general economic environment may impact our business and results of operations.
Changes to the U.S., Canadian and United Kingdom economies have an impact on our business. General economic factors that are beyond our control, such as recession, inflation, deflation, tax rates and policy, energy costs, unemployment trends, extreme weather patterns, other casualty events and other matters that influence consumer confidence and spending, may impact our business. In particular, visitation patterns to our salons can be adversely impacted by increases in unemployment rates and decreases in discretionary income levels.
Brexit may have economic repercussions, including recession, which could adversely impact our operating results.

16


Changes in fashion trends may impact our revenue.
Changes in consumer tastes, hair product innovation, and fashion trends can have an impact on our financial performance. Our inability to anticipate, gauge and react to changing consumer tastes in a timely manner could adversely impact our revenue.

Item 1B.    Unresolved Staff Comments
None.
Item 2.    Properties
The Company's corporate offices are headquartered in a 170,000 square foot, three building complex in Edina, Minnesota that is owned by the Company.
The Company also operates offices in Edina, Minnesota; Toronto, Canada; and Coventry and London, England. These offices are occupied under long-term leases.
The Company owns distribution centers located in Chattanooga, Tennessee and Salt Lake City, Utah. The Chattanooga facility currently utilizes 230,000 square feet while the Salt Lake City facility utilizes 210,000 square feet. The Salt Lake City facility can be expanded to 290,000 square feet to accommodate future growth.
The Company operates all of its salon locations under leases or license agreements. Substantially all of its North American locations in regional malls are operating under leases with an original term of at least ten years. Salons operating within strip centers and Walmart Supercenters have leases with original terms of at least five years, generally with the ability to renew, at the Company's option, for one or more additional five year periods. Salons operating within department stores in Canada and Europe operate under license agreements, while freestanding or shopping center locations in those countries have real property leases comparable to the Company's North American locations.
The Company also leases the premises in which approximately 84% of our franchisees operate and has entered into corresponding sublease arrangements with the franchisees. These leases have a five year initial term and one or more five year renewal options. All lease costs are passed through to the franchisees. Remaining franchisees who do not enter into sublease arrangements with the Company negotiate and enter into leases on their own behalf.
None of the Company's salon leases are individually material to the operations of the Company and the Company expects that it will be able to renew its leases on satisfactory terms as they expire or identify and secure other suitable locations. See Note 8 to the Consolidated Financial Statements.
Item 3.    Legal Proceedings
The Company is a defendant in various lawsuits and claims arising out of the normal course of business. Like certain other large retail employers, the Company has been faced with allegations of purported class-wide consumer and wage and hour violations. Litigation is inherently unpredictable and the outcome of these matters cannot presently be determined. Although the actions are being vigorously defended, the Company could in the future incur judgments or enter into settlements of claims that could have a material adverse effect on its results of operations in any particular period.

Item 4.    Mine Safety Disclosures
Not applicable.

PART II

Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Repurchase of Equity Securities
Regis common stock is listed and traded on the New York Stock Exchange under the symbol "RGS."
The accompanying table sets forth the high and low closing bid quotations for each quarter during fiscal years 2016 and 2015 as reported by the New York Stock Exchange (under the symbol "RGS"). The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions.
As of August 10, 2016, Regis shares were owned by approximately 14,000 shareholders based on the number of record holders and an estimate of individual participants in security position listings. The closing stock price was $12.92 per share on August 10, 2016.

17


 
 
Fiscal Years
 
 
2016
 
2015
Fiscal Quarter
 
High
 
Low
 
High
 
Low
1st Quarter
 
$
16.10

 
$
10.60

 
$
17.51

 
$
13.50

2nd Quarter
 
18.13

 
11.81

 
17.76

 
14.58

3rd Quarter
 
16.55

 
13.04

 
17.41

 
14.70

4th Quarter
 
16.02

 
10.96

 
17.91

 
15.76

The Company paid dividends of $0.06 per share per quarter during the first and second quarters of fiscal year 2014. In accordance with its capital allocation policy, the Company no longer pays dividends.
The following graph compares the cumulative total shareholder return on the Company's stock for the last five years with the cumulative total return of the Standard and Poor's 500 Stock Index and the cumulative total return of a peer group index (the Peer Group) constructed by the Company. In addition, the Company has included the Standard and Poor's 400 Midcap Index and the Dow Jones Consumer Services Index in this analysis because the Company believes these two indices provide a comparative correlation to the cumulative total return of an investment in shares of Regis Corporation.
The Peer Group consists of the following companies: Advance Auto Parts, Inc., Boyd Gaming Corp., Brinker International, Inc., Outerwall, Inc. (formerly Coinstar, Inc.), Cracker Barrel Old Country Store, DineEquity, Inc., Fossil Group, Inc., Fred's, Inc., H&R Block, Inc., Jack in the Box, Inc., Panera Bread Co., Penn National Gaming, Inc., Revlon, Inc., Sally Beauty Holdings, Inc., Service Corporation International, The Cheesecake Factory, Inc. and Ulta Salon, Cosmetics & Fragrance Inc. The Peer Group is a self-constructed peer group of companies that have comparable annual revenues, the guest service element is a critical component to the business and a target of moderate guests in terms of income and style, excluding apparel companies. The Peer Group is the same group of companies the Company utilized as its peer group for executive compensation purposes in fiscal years 2016, 2015 and 2014. Information regarding executive compensation will be set forth in the 2016 Proxy statement.
The comparison assumes the initial investment of $100 in the Company's Common Stock, the S&P 500 Index, the Peer Group, the S&P 400 Midcap Index and the Dow Jones Consumer Services Index on June 30, 2011 and that dividends, if any, were reinvested.

18


Comparison of 5 Year Cumulative Total Return
Assumes Initial Investment of $100
June 2016

 
 
June 30,
 
 
2011
 
2012
 
2013
 
2014
 
2015
 
2016
Regis
 
$
100.00

 
$
118.95

 
$
110.22

 
$
95.25

 
$
106.62

 
$
84.23

S & P 500
 
100.00

 
105.45

 
127.17

 
158.46

 
170.22

 
177.02

S & P 400 Midcap
 
100.00

 
97.67

 
122.27

 
153.12

 
162.92

 
165.09

Dow Jones Consumer Service Index
 
100.00

 
113.30

 
145.52

 
177.89

 
208.91

 
212.73

Peer Group
 
100.00

 
109.28

 
143.21

 
159.01

 
191.76

 
194.95

In May 2000, the Company's Board of Directors (Board) approved a stock repurchase program with no stated expiration date. Since that time and through June 30, 2016, the Board has authorized $450.0 million to be expended for the repurchase of the Company's stock under this program. All repurchased shares become authorized but unissued shares of the Company. The timing and amounts of any repurchases depends on many factors, including the market price of the common stock and overall market conditions. As of June 30, 2016, 18.4 million shares have been cumulatively repurchased for $390.0 million, and $60.0 million remained outstanding under the approved stock repurchase program.


19


The Company repurchased the following common stock through its share repurchase program:
 
 
Fiscal Years
 
 
2016
 
2015
 
2014
Repurchased Shares
 
7,647,819

 
3,054,387

 

Average Price (per share)
 

$13.19

 

$15.64

 
$

Price range (per share)
 
$10.94 - $15.95

 
$13.72 - $17.32

 
$

Total
 
$101.0 million

 
$47.9 million

 
$


The following table shows the stock repurchase activity by the Company or any "affiliated purchaser" of the Company, as defined in Rule 10b-18(a)(3) under the Exchange Act, by month for the quarter ended June 30, 2016:
Period
 
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Approximate Dollar Value of Shares that May Yet Be Purchased under the Plans or Programs (in thousands)
4/1/16 - 4/30/16
 

 
$

 
18,103,403

 
$
64,037

5/1/16 - 5/31/16
 
292,767

 
13.65

 
18,396,170

 
60,041

6/1/16 - 6/30/16
 

 

 
18,396,170

 
60,041

Total
 
292,767

 
$
13.65

 
18,396,170

 
$
60,041


Item 6.    Selected Financial Data
The following table sets forth selected financial data derived from the Company's Consolidated Financial Statements in Part II, Item 8. The table should be read in conjunction with Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", and Item 8, "Financial Statements and Supplementary Data", of this Report on Form 10-K.
 
 
Fiscal Years
 
 
2016
 
2015
 
2014
 
2013(b)
 
2012(b)
 
 
(Dollars in thousands, except per share data)
Revenues
 
$
1,790,869

 
$
1,837,287

 
$
1,892,437

 
$
2,018,713

 
$
2,122,227

Operating income (loss)(a)
 
17,614

 
3,531

 
(34,958
)
 
13,359

 
(2,226
)
(Loss) income from continuing operations(a)
 
(11,316
)
 
(33,212
)
 
(139,874
)
 
5,478

 
(51,950
)
(Loss) income from continuing operations per diluted share
 
(0.23
)
 
(0.60
)
 
(2.48
)
 
0.10

 
(0.91
)
Dividends declared, per share
 

 

 
0.12

 
0.24

 
0.24

 
 
June 30,
 
 
2016
 
2015
 
2014
 
2013(b)
 
2012(b)
 
 
(Dollars in thousands)
Total assets, including discontinued operations
 
$
1,036,761

 
$
1,162,015

 
$
1,415,949

 
$
1,391,399

 
$
1,572,725

Long-term debt and capital lease obligations, including current portion
 
120,435

 
120,002

 
293,503

 
174,770

 
287,674

_______________________________________________________________________________
(a)
The following significant items affected each of the years presented:

During fiscal year 2016, the Company recorded a $13.0 million other than temporary non-cash impairment charge to fully impair its investment in EEG and $10.5 million of fixed asset impairment charges.


20


During fiscal year 2015, the Company recorded its share of a non-cash deferred tax asset valuation allowance recorded by EEG of $6.9 million, other than temporary impairment charges of its investment in EEG of $4.7 million, $14.6 million of fixed asset impairment charges and established a $2.1 million valuation allowance against its Canadian deferred tax assets.

During fiscal year 2014, the Company recorded a goodwill impairment charge of $34.9 million associated with Company's Regis salon concept, fixed asset impairment charges of $18.3 million, $15.9 million, net of tax for the Company's share of goodwill and fixed asset impairment charges recorded by EEG and established an $86.6 million valuation allowance against the U.S. and U.K. deferred tax assets.

During fiscal year 2013, the Company recorded $7.4 million in restructuring charges and a $12.6 million inventory write-down. In addition, the Company recognized a net $33.8 million foreign currency translation gain in connection with the sale of Provalliance, recorded net other than temporary impairment charges of $17.9 million associated with the Company's investment in EEG and incurred a $10.6 million make-whole payment in connection with the prepayment of $89.3 million of senior term notes in June 2013.

During fiscal year 2012, the Company recorded a goodwill impairment charge of $67.7 million associated with the Company's Regis salon concept, incremental amortization expense of $16.2 million associated with an adjustment to the useful life of the Company's previously internally developed POS system, $14.4 million for senior management and other restructuring charges, $8.9 million for the Company's share of intangible and fixed asset impairments recorded by EEG and $36.6 million of other than temporary impairment charges associated with the Company's investments in affiliated companies.
    
(b)
In fiscal year 2013 the Hair Restoration Centers operations were accounted for as discontinued operations. Fiscal year 2012 is presented to reflect the Hair Restoration Centers as discontinued operations.

Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations
Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is designed to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results.
BUSINESS DESCRIPTION
Regis Corporation owns, franchises and operates beauty salons. As of June 30, 2016, the Company owned, franchised or held ownership interests in 9,483 locations worldwide. The Company's locations consist of 9,288 company-owned and franchised salons and 195 locations in which we maintain a non-controlling ownership interest of less than 100%. Each of the Company's salon concepts generally offer similar salon products and services and serve the mass market. See discussion within Part I, Item 1.
RESULTS OF OPERATIONS
Explanations are primarily for North American Value, unless otherwise noted. Discontinued operations are discussed at the end of this section.

21


Consolidated Results of Operations
The following table sets forth, for the periods indicated, certain information derived from our Consolidated Statement of Operations. The percentages are computed as a percent of total revenues, except as otherwise indicated.
 
 
Fiscal Years
 
 
2016
 
2015
 
2014
 
2016
 
2015
 
2014
 
2016
 
2015
 
2014
 
 
(Dollars in millions)
 
% of Total Revenues
 
Basis Point
Increase (Decrease)
Service revenues
 
$
1,383.7

 
$
1,429.4

 
$
1,480.1

 
77.3
%
 
77.8
 %
 
78.2
 %
 
(50
)
 
(40
)
 
70

Product revenues
 
359.7

 
363.2

 
371.5

 
20.1

 
19.8

 
19.6

 
30

 
20

 
(100
)
Franchise royalties and fees
 
47.5

 
44.6

 
40.9

 
2.7

 
2.4

 
2.2

 
30

 
20

 
30

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of service(1)
 
868.2

 
882.7

 
907.3

 
62.7

 
61.8

 
61.3

 
90

 
50

 
180

Cost of product(2)
 
179.3

 
180.6

 
186.9

 
49.9

 
49.7

 
50.3

 
20

 
(60
)
 
(480
)
Site operating expenses
 
183.0

 
192.4

 
203.5

 
10.2

 
10.5

 
10.8

 
(30
)
 
(30
)
 
80

General and administrative
 
178.0

 
186.1

 
172.8

 
9.9

 
10.1

 
9.1

 
(20
)
 
100

 
(210
)
Rent
 
297.3

 
309.1

 
322.3

 
16.6

 
16.8

 
17.0

 
(20
)
 
(20
)
 
90

Depreciation and amortization
 
67.5

 
82.9

 
99.7

 
3.8

 
4.5

 
5.3

 
(70
)
 
(80
)
 
80

Goodwill impairment
 

 

 
34.9

 

 

 
1.8

 

 
(180
)
 
180

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
9.3

 
10.2

 
22.3

 
0.5

 
0.6

 
1.2

 
(10
)
 
(60
)
 
(60
)
Interest income and other, net
 
4.2

 
1.7

 
2.0

 
0.2

 
0.1

 
0.1

 
10

 

 
(170
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income taxes(3)
 
(9.0
)
 
(14.6
)
 
(73.0
)
 
72.3

 
(293.4
)
 
(131.9
)
 
N/A

 
N/A

 
N/A

Equity in loss of affiliated companies, net of income taxes
 
14.8

 
13.6

 
11.6

 
0.8

 
0.7

 
0.6

 
10

 
10

 
(20
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Loss) income from discontinued operations, net of income taxes
 

 
(0.6
)
 
1.4

 

 

 
0.1

 

 
(10
)
 
(110
)
____________________________________________________________________________
(1)
Computed as a percent of service revenues and excludes depreciation and amortization expense.
(2)
Computed as a percent of product revenues and excludes depreciation and amortization expense.
(3)
Computed as a percent of income (loss) from continuing operations before income taxes and equity in loss of affiliated companies. The income taxes basis point change is noted as not applicable (N/A) as the discussion below is related to the effective income tax rate.

22


Consolidated Revenues
Consolidated revenues primarily include revenues of company-owned salons, product and equipment sales to franchisees and franchise royalties and fees. The following tables summarize revenues and same-store sales by concept, as well as the reasons for the percentage change:
 
 
Fiscal Years
 
 
2016
 
2015
 
2014
 
 
(Dollars in thousands)
North American Value salons:
 
 
 
 
 
 
SmartStyle
 
$
522,700

 
$
500,562

 
$
487,722

Supercuts
 
345,094

 
343,299

 
343,372

MasterCuts
 
106,791

 
117,246

 
127,758

Other Value
 
420,754

 
442,312

 
471,231

Total North American Value salons
 
1,395,339

 
1,403,419

 
1,430,083

North American Premium salons
 
283,438

 
309,600

 
333,858

International salons
 
112,092

 
124,268

 
128,496

Consolidated revenues
 
$
1,790,869

 
$
1,837,287

 
$
1,892,437

Percent change from prior year
 
(2.5
)%
 
(2.9
)%
 
(6.3
)%
Salon same-store sales increase (decrease)(1)
 
0.2
 %
 
(0.3
)%
 
(4.8
)%
_______________________________________________________________________________
(1)
Same-store sales are calculated on a daily basis as the total change in sales for company-owned locations which were open on a specific day of the week during the current period and the corresponding prior period. Quarterly and fiscal year same-store sales are the sum of the same-store sales computed on a daily basis. Locations relocated within a one mile radius are included in same-store sales as they are considered to have been open in the prior period. International same-store sales are calculated in local currencies to remove foreign currency fluctuations from the calculation.
Decreases in consolidated revenues were driven by the following:
 

Fiscal Years
Factor

2016

2015

2014
Same-store sales

0.2
 %

(0.3
)%

(4.8
)%
Closed salons

(2.7
)

(2.7
)

(2.6
)
New stores and conversions

0.5


0.6


0.8

Foreign currency
 
(1.2
)
 
(0.8
)
 
(0.2
)
Other

0.7


0.3


0.5



(2.5
)%

(2.9
)%

(6.3
)%
Same-store sales by concept by fiscal year are detailed in the table below:
 
 
Fiscal Years
 
 
2016
 
2015
 
2014
SmartStyle
 
3.4
 %
 
1.6
 %
 
(5.4
)%
Supercuts
 
2.0
 %
 
1.3
 %
 
0.5
 %
MasterCuts
 
(4.4
)%
 
(4.0
)%
 
(9.4
)%
Other Value
 
(0.2
)%
 
(0.7
)%
 
(5.4
)%
Total North American Value salons
 
1.3
 %
 
0.3
 %
 
(4.5
)%
North American Premium salons
 
(3.8
)%
 
(3.0
)%
 
(6.7
)%
International salons
 
(2.3
)%
 
0.6
 %
 
(1.5
)%
Consolidated same-store sales
 
0.2
 %
 
(0.3
)%
 
(4.8
)%

23


The same-store sales increase of 0.2% during fiscal year 2016 was due to a 3.1% increase in average ticket, partly offset by a 2.9% decrease in guest visits. We closed 297 salons (including 56 franchised salons), constructed (net of relocations) 66 company-owned salons and acquired one company-owned salon via franchise buyback during fiscal year 2016 (2016 Net Salon Count Changes).
The same-store sales decrease of 0.3% during fiscal year 2015 was due to a 1.9% decrease in guest visits, partly offset by a 1.6% increase in average ticket. We closed 338 salons (including 72 franchised salons), constructed (net of relocations) 91 company-owned salons and did not acquire any company-owned locations during fiscal year 2015 (2015 Net Salon Count Changes).
The same-store sales decrease of 4.8% during fiscal year 2014 was due to a 6.1% decrease in guest visits, partly offset by a 1.3% increase in average ticket. We closed 322 salons (including 63 franchised salons), constructed (net of relocations) 127 company-owned salons and acquired two company-owned salons via franchise buybacks during fiscal year 2014 (2014 Net Salon Count Changes).
Consolidated revenues are primarily comprised of service and product revenues, as well as franchise royalties and fees. Fluctuations in these three major revenue categories, operating expenses and other income and expense were as follows:
Service Revenues
The $45.7 million decrease in service revenues during fiscal year 2016 was primarily due to the 2016 Net Salon Count Changes and foreign currency fluctuations. Same-store service sales were flat, primarily a result of a 2.7% increase in average ticket, offset by a 2.7% decrease in same-store guest visits.
The $50.7 million decrease in service revenues during fiscal year 2015 was primarily due to the 0.4% decrease in same-store service sales, the 2015 Net Salon Count Changes and foreign currency fluctuations. The decrease in same-store service sales was primarily a result of a 1.2% decrease in same-store guest visits, partly offset by a 0.8% increase in average ticket.
The $83.8 million decrease in service revenues during fiscal year 2014 was primarily due to the 3.4% decrease in same-store service sales and the 2014 Net Salon Count Changes. The decrease in same-store service sales was primarily a result of a 4.9% decrease in same-store guest visits, partly offset by a 1.5% increase in average ticket.
Product Revenues
The $3.6 million decrease in product revenues during fiscal year 2016 was primarily due to the 2016 Net Salon Count Changes and foreign currency fluctuations, partly offset by the increase in same-store product sales of 1.3%. The increase in same-store product sales was primarily a result of a 2.0% increase in same-store guest visits, partly offset by a 0.7% decrease in average ticket.
The $8.2 million decrease in product revenues during fiscal year 2015 was primarily due to the 2015 Net Salon Count Changes. Same-store product sales were flat primarily a result of a 1.7% increase in same-store guest visits, offset by a 1.7% decrease in average ticket.
The $44.3 million decrease in product revenues during fiscal year 2014 was primarily due to the 10.3% decrease in same-store product sales and the 2014 Net Salon Count Changes. The decrease in same-store product sales was primarily a result of a 14.7% decrease in same-store guest visits, partly offset by a 4.4% increase in average ticket.
Royalties and Fees
The $2.9, $3.8, and $1.8 million increases in royalties and fees during fiscal years 2016, 2015 and 2014, respectively, were due to increases in franchised locations of 172, 145 and 97, respectively, and same-store sales increases at franchised locations.
Cost of Service
The 90 basis point increase in cost of service as a percent of service revenues during fiscal year 2016 was primarily due to minimum wage increases, unfavorable stylist productivity, higher health insurance costs and mix shifts to more costly color services, partly offset by mix improvement from closing underperforming salons.
The 50 basis point increase in cost of service as a percent of service revenues during fiscal year 2015 was primarily due to state minimum wage increases, higher field incentives as the Company anniversaries an incentive-lite year and the lapping of a prior year rebate, partly offset by improved stylist productivity and a decrease in healthcare costs.

24


The 180 basis point increase in cost of service as a percent of service revenues during fiscal year 2014 was primarily due to the change in expense categorization as a result of the field reorganization that took place during the fourth quarter of fiscal year 2013. The change in expense categorization accounted for 140 basis points of the increase for fiscal year 2014. The remaining increase of 40 basis points for fiscal year 2014 was primarily the result of negative leverage from stylist hours caused by a decline in same-store service sales, increased stylists wages and an increase in healthcare costs, partly offset by cost reductions due to the field reorganization and lower levels of bonuses and the lapping of a full commission coupon event that was not repeated.
Cost of Product
The 20 basis point increase in cost of product as a percent of product revenues during fiscal year 2016 was primarily from increased promotions, partly offset by the closure of salons with higher product costs as a percent of product revenues.
The 60 basis point decrease in cost of product as a percent of product revenues during fiscal year 2015 was primarily the result of improved salon-level inventory management and compliance, closure of salons with higher product costs as a percent of product revenues and lapping of an inventory write-down in the prior year. These were partly offset by increased promotional activity and lapping of vendor rebates in the prior year.
The 480 basis point decrease in cost of product as a percent of product revenues during fiscal year 2014 was primarily the result of lapping a $12.6 million non-cash impairment charge recorded in the prior year. Prior year clearance sales in connection with standardizing plan-o-grams and reducing retail product assortments and reduced sales commissions in fiscal year 2014 further contributed to the decrease in cost of product as a percent of product revenues.
Site Operating Expenses
Site operating expenses decreased $9.5 million during fiscal year 2016 primarily due to store closures, mainly within our North American Value and Premium segments, cost savings associated with salon telecom costs, reduced marketing expenses, lower self-insurance costs and foreign currency, partly offset by the lapping of a sales and use tax refund in the prior year.
Site operating expenses decreased $11.0 million during fiscal year 2015 primarily due to store closures, mainly within our North American Value and Premium segments, lower self-insurance reserves, reduced marketing expenses, a sales and use tax refund and cost savings.
Site operating expenses increased $1.3 million during fiscal year 2014. After considering the prior year change in expense categorization as a result of the field reorganization that took place during the fourth quarter of fiscal year 2013, site operating expense decreased $7.3 million during fiscal year 2014, primarily from increased salon connectivity costs to support the Company’s POS system and salon workstations and increased marketing costs. These were partly offset by cost savings initiatives to lower utilities, janitorial and repairs and maintenance expenses, lower travel expense due to the field reorganization and reduced incentive compensation from lower same-store sales, lower self-insurance reserves and reduced freight.
General and Administrative
General and administrative expense (G&A) declined $8.0 million during fiscal year 2016. This decrease was primarily driven by reduced incentive compensation, cost savings, a gain on life insurance proceeds and foreign currency, partly offset by planned strategic investments in Technical Education, higher legal fees and financing arrangement modification fees.
G&A increased $13.3 million during fiscal year 2015. This increase was primarily driven by higher incentive compensation levels as the Company anniversaries an incentive-lite year, planned strategic investments in Asset Protection and Human Resource initiatives and the lapping of a favorable deferred compensation adjustment within our Unallocated corporate segment. These items were partly offset by cost savings and reduced legal and professional fees.
G&A declined $53.9 million during fiscal year 2014. This improvement was primarily due to the change in expense categorization as a result of the field reorganization. The change in expense categorization accounted for $29.6 million of the decrease for fiscal year 2014. The remaining decrease of $24.3 million during fiscal year 2014 was primarily due to reduced levels of incentive compensation in our North American Value and Unallocated Corporate segments, cost savings from various initiatives and the field reorganization, reduced health insurance costs and a favorable deferred compensation adjustment within our Unallocated Corporate segment, partly offset by legal and professional fees.
Rent
Rent expense decreased by $11.9 million during fiscal year 2016 primarily due to salon closures, primarily within our North American Value and Premium segments and foreign currency fluctuations, partly offset by rent inflation.

25


Rent expense decreased by $13.1 million during fiscal year 2015 primarily due to salon closures, primarily within our North American Value and Premium segments and foreign currency fluctuations, partly offset by rent inflation.
Rent expense decreased by $2.9 million during fiscal year 2014 primarily due to salon closures, primarily within our North American Value and Premium segments, partly offset by rent inflation.
Depreciation and Amortization
Depreciation and amortization expense (D&A) decreased $15.4 million during fiscal year 2016, primarily driven by lower depreciation expense on a reduced salon base and reduced fixed asset impairment charges.
D&A decreased $16.9 million during fiscal year 2015, primarily driven by lower depreciation expense on a reduced salon base and reduced fixed asset impairment charges.
D&A increased $8.0 million during fiscal year 2014, primarily due to increased fixed asset impairment charges recorded in our North American Premium and Value segments, partly offset by declines in depreciation expense on a reduced salon base.
Goodwill Impairment
The Company did not record a goodwill impairment charge in fiscal year 2016 and 2015.
The Company recorded a goodwill impairment charge of $34.9 million related to the Regis salon concept during fiscal year 2014. The Company redefined its operating segments during the second quarter of fiscal year 2014. In addition, overall performance trends were down. For these reasons, the Company was required to perform this goodwill assessment in the second quarter of fiscal year 2014. As a result of this non-cash charge, the Company has no further goodwill on its balance sheet associated with the Regis salon concept (North American Premium). The Company remains focused on improving the performance of this business as it stabilizes and turns around the business. See Notes 1 and 4 to the Consolidated Financial Statements.
Interest Expense
Interest expense decreased by $0.9 million during fiscal year 2016 primarily due to the lapping of prior year interest for the $172.5 million convertible senior notes settled in July 2014.
Interest expense decreased by $12.1 million during fiscal year 2015 primarily due to the settlement of the $172.5 million convertible senior notes in July 2014, partly offset by interest on the $120.0 million Senior Term Notes issued in November 2013.
Interest expense decreased by $14.7 million during fiscal year 2014 primarily due to a $10.6 million make-whole payment associated with the prepayment of private placement debt in June 2013 and decreased average outstanding debt and related interest rates compared to the prior year.
Interest Income and Other, net
Interest income and other, net increased $2.5 million during fiscal year 2016 primarily due to lapping a prior year foreign currency loss and an insurance recovery.
Interest income and other, net was flat during fiscal year 2015 compared to the prior year period.
Interest income and other, net decreased $33.4 million during fiscal year 2014. This decrease was primarily due to the recognition of a $33.8 million foreign currency translation gain in connection with the sale of Provalliance during fiscal year 2013.
Income Taxes
During fiscal year 2016, the Company recognized income tax expense of $9.0 million on $12.5 million of income from continuing operations before income taxes and equity in loss of affiliated companies, for an effective tax rate of 72.3%. The recorded tax expense and effective tax rate for fiscal year 2016 are different than would normally be expected primarily due to the impact of the valuation allowance against the majority of our deferred tax assets. Approximately $7.9 million of the tax expense relates to non-cash tax expense for tax benefits on certain indefinite-lived assets that the Company cannot recognize for reporting purposes. This non-cash tax expense will continue as long as we have a valuation allowance in place.
During fiscal year 2015, the Company recognized income tax expense of $14.6 million on $5.0 million of loss from continuing operations before income taxes and equity in loss of affiliated companies, for an effective tax rate of (293.4)%. The recorded tax expense and effective tax rate for fiscal year 2015 are different than would be expected primarily due to the

26


establishment of a $2.1 million valuation allowance against the majority of the Canadian deferred tax assets and $8.9 million non-cash tax expense relating to tax benefits on certain indefinite-lived assets that the Company cannot recognize for reporting purposes.
During fiscal year 2014, the Company recognized income tax expense of $73.0 million on $55.3 million of loss from continuing operations before income taxes and equity in loss of affiliated companies, for an effective tax rate of (131.9)%. The recorded tax expense and effective tax rate for fiscal year 2014 are different than would be expected as a result of the $86.6 million non-cash valuation allowance established against the Company's U.S. and U.K. deferred tax assets and the tax effect of the $34.9 million goodwill impairment charge, which was partly non-deductible for tax purposes.
Additionally, the Company is currently paying taxes in Canada and certain states in which it has profitable entities.
Equity in Loss of Affiliated Companies, Net of Income Taxes
The loss in affiliated companies, net of income taxes, of $14.8 million for fiscal year 2016 was due to the Company recording a $13.0 million other than temporary non-cash impairment charge and EEG's net loss of $1.8 million. See Note 5 to the Consolidated Financial Statements.
The loss in affiliated companies, net of income taxes, of $13.6 million for fiscal year 2015 was primarily due to the Company recording its portion of EEG's non-cash deferred tax asset valuation allowance ($6.9 million) and EEG's net loss ($2.0 million), plus other than temporary non-cash impairment charges ($4.7 million). See Note 5 to the Consolidated Financial Statements.
The loss in affiliated companies, net of income taxes for fiscal year 2014, was primarily due to the Company recording its portion of EEG's goodwill impairment charge ($12.6 million, net of income taxes) and fixed asset impairment charges ($3.3 million, net of income taxes), partly offset by the recovery of $3.1 million on previously impaired investments in Yamano Holding Corporation. See Note 5 to the Consolidated Financial Statements.
(Loss) Income from Discontinued Operations, Net of Income Taxes
During fiscal year 2015 and 2014, the Company recognized $0.6 million of tax expense and $1.4 million of tax benefit associated with the Trade Secret salon concept. See Note 2 to the Consolidated Financial Statements.
Recent Accounting Pronouncements
Recent accounting pronouncements are discussed in Note 1 to the Consolidated Financial Statements.

LIQUIDITY AND CAPITAL RESOURCES
Sources of Liquidity
Funds generated by operating activities, available cash and cash equivalents, and our borrowing agreements are our most significant sources of liquidity.
As of June 30, 2016, cash and cash equivalents were $147.3 million, with $136.9, $5.6 and $4.8 million in the U.S., Canada and Europe, respectively.
The Company's borrowing agreements include $123.0 million 5.5% senior notes due December 2019 (Senior Term Notes) and a $200.0 million five-year unsecured revolving credit facility that expires in June 2018. See additional discussion under Financing Arrangements.
Uses of Cash
The Company has a capital allocation policy that focuses on three key principles. These principles focus on preserving a strong balance sheet and enhancing operating flexibility, preventing unnecessary dilution so the benefits of future value accrue to shareholders and deploying capital to the highest and best use by optimizing the tradeoff between risk and after-tax returns.
During fiscal year 2016, the Company repurchased approximately 7.6 million shares of common stock for $101.0 million at an average share price of $13.19, excluding transaction costs.

27


Cash Flows
Cash Flows from Operating Activities
Fiscal year 2016 cash provided by operating activities of $55.0 million decreased by $38.9 million compared to the previous fiscal year largely due to higher inventory levels, enhanced incentive payouts in the current year relating to the prior fiscal year and lower income tax refunds.
Fiscal year 2015 cash provided by operating activities of $94.0 million decreased by $22.8 million compared to the previous fiscal year, primarily as a result of a $12.0 million decrease in working capital primarily due to lapping fiscal year 2014 income tax refunds and lower earnings.
Fiscal year 2014 cash provided by operating activities of $116.8 million increased by $47.0 million compared to the previous fiscal year primarily as a result of increased cash provided by working capital partly offset by the operating loss. The $77.2 million working capital improvement over the previous year was primarily the result of cash received in fiscal year 2014 for income tax refunds and the collection of weekend credit card receivables outstanding at the end of the previous fiscal year. Fiscal year 2013 working capital included cash used for increased deferred compensation payments and build of the outstanding income tax receivable collected in fiscal year 2014. 
Cash Flows from Investing Activities
Cash used in investing activities during fiscal year 2016 of $17.4 million was less than the $35.6 million used in fiscal year 2015. In fiscal year 2016, we used $31.1 million for capital expenditures, partly offset by a reduction in restricted cash of $9.0 million, cash proceeds from company-owned life insurance policies of $2.9 million and cash proceeds from sale of salon assets of $1.7 million.
Cash used in investing activities during fiscal year 2015 of $35.6 million was less than the $44.4 million used in fiscal year 2014. In fiscal year 2015, we used $38.3 million for capital expenditures, partly offset by cash proceeds from sale of salon assets of $3.0 million.
Cash used in investing activities during fiscal year 2014 of $44.4 million was less than the $165.1 million cash provided in fiscal year 2013. In fiscal year 2014, we used $49.4 million for capital expenditures and received $3.1 million from the recovery of the Company's previously impaired investment in Yamano and the receipt of $2.0 million for the final working capital adjustment on the sale of Hair Club.
Cash Flows from Financing Activities
During fiscal years 2016, 2015 and 2014, cash (used in) provided by financing activities were for net (repayments) borrowings of long-term debt of $0.0, $(173.8) and $111.0 million, respectively. During fiscal years 2016 and 2015, the Company repurchased $101.0 and $47.9 million of common stock, respectively. During fiscal year 2014, the Company paid $6.8 million for dividends.
Financing Arrangements
Financing activities are discussed in Note 7 to the Consolidated Financial Statements. Derivative activities are discussed in Part II, Item 7A, "Quantitative and Qualitative Disclosures about Market Risk."

28


The Company's financing arrangements consist of the following:
 
 
 
 
Interest rate %
 
 
 
 
 
 
 
 
Fiscal Years
 
June 30,
 
 
Maturity Dates
 
2016
 
2015
 
2016
 
2015
 
 
(fiscal year)
 
 
 
 
 
(Dollars in thousands)
Senior term notes - 5.75%
 
2018
 
 
5.75
 
$

 
$
120,000

Senior term notes - 5.50%
 
2020
 
5.50
 
 
120,435

 

Revolving credit facility
 
2018
 
 
 

 

Equipment and leasehold notes payable
 
2015 - 2016
 
4.90 - 8.75
 
4.90 - 8.75
 

 
2

 
 
 
 
 
 
 
 
120,435

 
120,002

Less current portion (included in accrued expenses)
 
 
 
 
 
 
 

 
(2
)
Long-term portion
 
 
 
 
 
 
 
$
120,435

 
$
120,000

In December 2015, the Company exchanged its $120.0 million 5.75% senior notes due December 2017 for $123.0 million 5.5% senior notes due December 2019. The Senior Term Notes were issued at a $3.0 million discount which will be amortized to interest expense over the term of the notes. The Company accounted for this non-cash exchange as a debt modification, as it was with the same lenders and the changes in terms were not considered substantial. Interest on the Senior Term Notes is payable semi-annually in arrears on June 1 and December 1 of each year. The Senior Term Notes are unsecured and not guaranteed by any of the Company's subsidiaries or any third parties.
In January 2016, the Company amended its revolving credit facility primarily reducing the borrowing capacity from $400.0 to $200.0 million. The credit facility expires in June 2018 and includes, among other things, a maximum leverage ratio covenant, a minimum fixed charge coverage ratio covenant and certain restrictions on liens, liquidity and other indebtedness. The Company may request an increase in revolving credit commitments under the facility of up to $200.0 million under certain circumstances. Events of default under the Credit Agreement include a change of control of the Company.
Our debt to capitalization ratio, calculated as total debt as a percentage of total debt and shareholders' equity at fiscal year-end, was as follows:
As of June 30,
 
Debt to
Capitalization
 
Basis Point
Increase
(Decrease)(1)
2016
 
18.8
%
 
270

2015
 
16.1

 
(1,300
)
2014
 
29.1

 
1,210

_______________________________________________________________________________

(1)
Represents the basis point change in debt to capitalization as compared to prior fiscal year-end (June 30).
The basis point increase in the debt to capitalization ratio as of June 30, 2016 compared to June 30, 2015 was primarily due to the repurchase of 7.6 million shares of common stock for $101.0 million.
The basis point improvement in the debt to capitalization ratio as of June 30, 2015 compared to June 30, 2014 was primarily due to the $173.8 million repayment of long-term debt, which included $172.5 million in settlement of the convertible notes. This was partly offset by the repurchase of 3.1 million shares of common stock for $47.9 million.
The basis point increase in the debt to capitalization ratio as of June 30, 2014 compared to June 30, 2013 was primarily due to the issuance of the $120.0 million Senior Term Notes, the $34.9 million non-cash goodwill impairment charge for the Regis salon concept, the $86.6 million non-cash valuation allowance established against the United States and United Kingdom deferred tax assets and the $12.6 million (net of tax) charge recorded by the Company for its share of the non-cash goodwill impairment charge recorded by EEG.

29


Contractual Obligations and Commercial Commitments
The following table reflects a summary of obligations and commitments outstanding by payment date as of June 30, 2016:
 
 
 
 
Payments due by period
Contractual Obligations
 
Total
 
Within
1 year
 
1 - 3 years
 
3 - 5 years
 
More than
5 years
 
 
 
 
(Dollars in thousands)
On-balance sheet:
 
 
 
 
 
 
 
 
 
 
Debt obligations
 
$
120,435

 
$

 
$

 
$
120,435

 
$

Other long-term liabilities
 
14,127

 
2,458

 
3,182

 
1,593

 
6,894

Total on-balance sheet
 
134,562

 
2,458

 
3,182

 
122,028

 
6,894

Off-balance sheet(a):
 
 
 
 
 
 
 
 
 
 
Operating lease obligations
 
930,324

 
290,621

 
406,511

 
184,413

 
48,779

Interest on long-term debt
 
23,133

 
6,765

 
13,530

 
2,838

 

Total off-balance sheet
 
953,457

 
297,386

 
420,041

 
187,251

 
48,779

Total
 
$
1,088,019

 
$
299,844

 
$
423,223

 
$
309,279

 
$
55,673

_______________________________________________________________________________
(a)
In accordance with accounting principles generally accepted in the United States of America, these obligations are not reflected in the Consolidated Balance Sheet.
On-Balance Sheet Obligations
Our long-term obligations are composed primarily of our Senior Term Notes. There were no outstanding borrowings under our revolving credit facility at June 30, 2016.
Other long-term liabilities of $14.1 million include $10.8 million related to a Nonqualified Deferred Salary Plan and a salary deferral program of $3.3 million related to established contractual payment obligations under retirement and severance agreements for a small number of employees.
This table excludes short-term liabilities disclosed on our balance sheet as the amounts recorded for these items will be paid in the next year. We have no unconditional purchase obligations. Also excluded from the contractual obligations table are payment estimates associated with employee health and workers' compensation claims for which we are self-insured. The majority of our recorded liability for self-insured employee health and workers' compensation losses represents estimated reserves for incurred claims that have yet to be filed or settled.
The Company has unfunded deferred compensation contracts covering certain management and executive personnel. Because we cannot predict the timing or amount of future payments related to these contracts, such amounts were not included in the table above. See Note 10 to the Consolidated Financial Statements.
As of June 30, 2016, we have liabilities for uncertain tax positions. We are not able to reasonably estimate the amount by which the liabilities will increase or decrease over time; however, at this time, we do not expect a significant payment related to these obligations within the next fiscal year. See Note 9 to the Consolidated Financial Statements.
Off-Balance Sheet Arrangements
Operating leases primarily represent long-term obligations for the rental of salons, including leases for company-owned locations, as well as salon franchisee lease payments of approximately $232.4 million, which are reimbursed to the Company by franchisees. Regarding franchisee subleases, we generally retain the right to the related salon assets, net of any outstanding obligations, in the event of a default by a franchise owner. Management has not experienced and does not expect any material loss to result from these arrangements.
Interest payments on long-term debt and capital lease obligations are estimated based on each debt obligation's agreed upon rate as of June 30, 2016 and scheduled contractual repayments.
We are a party to a variety of contractual agreements under which we may be obligated to indemnify the other party for certain matters, which indemnities may be secured by operation of law or otherwise, in the ordinary course of business. These contracts primarily relate to our commercial contracts, operating leases and other real estate contracts, financial agreements,

30


agreements to provide services and agreements to indemnify officers, directors and employees in the performance of their work. While our aggregate indemnification obligation could result in a material liability, we are not aware of any current matter that we expect to result in a material liability.
We do not have other unconditional purchase obligations or significant other commercial commitments such as commitments under lines of credit and standby repurchase obligations or other commercial commitments.
We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet financial arrangements or other contractually narrow or limited purposes at June 30, 2016. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.
Dividends
We paid dividends of $0.12 per share during fiscal year 2014. In December 2013, the Board of Directors elected to discontinue declaring regular quarterly dividends.
Share Repurchase Program
In May 2000, the Company's Board of Directors (Board) approved a stock repurchase program with no stated expiration date. Since that time and through June 30, 2016, the Board has authorized $450.0 million to be expended for the repurchase of the Company's stock under this program. All repurchased shares become authorized but unissued shares of the Company. The timing and amounts of any repurchases depends on many factors, including the market price of the common stock and overall market conditions. As of June 30, 2016, 18.4 million shares have been cumulatively repurchased for $390.0 million, and $60.0 million remained outstanding under the approved stock repurchase program.
CRITICAL ACCOUNTING POLICIES
The Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States of America. In preparing the Consolidated Financial Statements, we are required to make various judgments, estimates and assumptions that could have a significant impact on the results reported in the Consolidated Financial Statements. We base these estimates on historical experience and other assumptions believed to be reasonable under the circumstances. Estimates are considered to be critical if they meet both of the following criteria: (1) the estimate requires assumptions about material matters that are uncertain at the time the accounting estimates are made, and (2) other materially different estimates could have been reasonably made or material changes in the estimates are reasonably likely to occur from period to period. Changes in these estimates could have a material effect on our Consolidated Financial Statements.
Our significant accounting policies can be found in Note 1 to the Consolidated Financial Statements. We believe the following accounting policies are most critical to aid in fully understanding and evaluating our reported financial condition and results of operations.
Investments In Affiliates
The Company has equity investments in securities of certain privately held entities. The Company accounts for these investments under the equity or cost method of accounting. Investments accounted for under the equity method are recorded at the amount of the Company's investment and adjusted each period for the Company's share of the investee's income or loss. Investments are reviewed for changes in circumstance or the occurrence of events that suggest the Company's investment may not be recoverable.

31


The table below summarizes losses recorded by the Company related to its investments:
 
 
Fiscal Year
 
 
2016
 
2015
 
2014
 
 
(Dollars in thousands)
Equity losses (1)
 
$
(1,829
)
 
$
(8,975
)
 
$
(11,623
)
Other than temporary impairment
 
(12,954
)
 
(4,654
)
 

Total losses
 
$
(14,783
)
 
$
(13,629
)
 
$
(11,623
)
_____________________________
(1)
For fiscal year 2015, includes $6.9 million of expense for a non-cash deferred tax valuation allowance related to EEG. For fiscal year 2014, includes $21.2 million of pretax non-cash impairment charges related to EEG for goodwill and fixed and intangible asset impairments.
Goodwill
As of June 30, 2016 and 2015, the North American Value reporting unit had $417.4 and $419.0 million of goodwill, respectively and the North American Premium and International reporting units had no goodwill. See Note 4 to the Consolidated Financial Statements. The Company tests goodwill impairment on an annual basis, during the Company’s fourth fiscal quarter, and between annual tests if an event occurs, or circumstances changes, that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
Goodwill impairment test is performed at the reporting unit level, which are the same as the Company’s operating segments. The goodwill test involves a two-step process. The first step is a comparison of the reporting unit’s fair value to its carrying value, including goodwill. If the reporting unit’s fair value exceeds its carrying value, no further procedures are required. However, if the reporting unit’s fair value is less than the carrying value, an impairment of goodwill may exist, requiring a second step to measure the amount of impairment loss. If the implied fair value of goodwill is less than the recorded goodwill, an impairment charge is recorded for the difference.
In applying the goodwill impairment test, the Company may assess qualitative factors to determine whether it is more likely than not that the fair value of the reporting units is less than its carrying value (“Step 0”). Qualitative factors may include, but are not limited to, economic, market and industry condition, cost factors, and overall financial performance of the reporting unit. If after assessing these qualitative factors, the Company determines it is “more-likely-than-not” that the carrying value is less than the fair value, then performing the two-step impairment test is unnecessary.
The carrying value of each reporting unit is based on the assets and liabilities associated with the operations of the reporting unit, including allocation of shared or corporate balances among reporting units. Allocations are generally based on the number of salons in each reporting unit as a percent of total company-owned salons.
For the two-step impairment test, the Company calculates estimated fair values of the reporting units based on discounted future cash flows utilizing estimates in annual revenue, service and product margins, fixed expense rates, allocated corporate overhead, and long-term growth rates for determining terminal value. Where available and as appropriate, comparative market multiples are used in conjunction with the results of the discounted cash flows. The Company periodically engages third-party valuation consultants to assist in evaluating the Company's estimated fair value calculations.
Following is a description of the goodwill impairment analyses for each of the fiscal years:
Fiscal Years 2016 and 2015
During the Company’s annual impairment test, the Company assessed qualitative factors to determine whether it is more likely than not that the fair value of the reporting units is less than its carrying value (“Step 0”). The Company determined it is “more-likely-than-not” that the carrying value is less than the fair value. Accordingly, the Company did not perform a two-step quantitative analysis.
Fiscal Year 2014
During the second quarter of fiscal year 2014, the Company redefined its operating segments and goodwill was reallocated to the new reporting units at June 30, 2014. Additionally, the Regis and Promenade reporting units reported lower than projected same-store sales that were unfavorable compared to the Company’s projections used in the fiscal year 2013 annual goodwill impairment test.
Accordingly, during the second quarter of fiscal year 2014, the Company performed interim goodwill impairment tests on its former Regis and Promenade reporting units. The impairment tests resulted in a $34.9 million non-cash goodwill

32


impairment charge on the former Regis reporting unit and no impairment on the former Promenade reporting unit, as its estimated fair value exceeded its carrying value by approximately 12.0%.
As of June 30, 2016, the Company's estimated fair value, as determined by the sum of our reporting units' fair value, reconciled within a reasonable range of our market capitalization, which included an assumed control premium of 25.0%.
Long-Lived Assets, Excluding Goodwill
The Company assesses the impairment of long-lived assets at the individual salon level, as this is the lowest level for which identifiable cash flows are largely independent of other groups of assets and liabilities, when events or changes in circumstances indicate the carrying value of the assets or the asset grouping may not be recoverable. Factors considered in deciding when to perform an impairment review include significant under-performance of an individual salon in relation to expectations, significant economic or geographic trends, and significant changes or planned changes in our use of the assets. Impairment is evaluated based on the sum of undiscounted estimated future cash flows expected to result from use of the long-lived assets that do not recover the carrying values. If the undiscounted estimated cash flows are less than the carrying value of the assets, the Company calculates an impairment charge based on the assets' estimated fair value. The fair value of the long-lived assets is estimated using a discounted cash flow model based on the best information available, including market data and salon level revenues and expenses. Long-lived asset impairment charges are recorded within depreciation and amortization in the Consolidated Statement of Operations.
Judgments made by management related to the expected useful lives of long-lived assets and the ability to realize undiscounted cash flows in excess of the carrying amounts of such assets are affected by factors such as the ongoing maintenance and improvement of the assets, changes in economic conditions and changes in operating performance. As the ongoing expected cash flows and carrying amounts of long-lived assets are assessed, these factors could cause the Company to realize material impairment charges.
A summary of long-lived asset impairment charges follows:
 
 
Fiscal Years
 
 
2016
 
2015
 
2014
 
 
(Dollars in thousands)
North American Value
 
$
8,393

 
$
9,612

 
$
11,714

North American Premium
 
1,924

 
4,804

 
5,014

International
 
161

 
188

 
1,599

Total
 
$
10,478

 
$
14,604

 
$
18,327

Income Taxes
Deferred income tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the Consolidated Financial Statements or income tax returns. Deferred income tax assets and liabilities are determined based on the differences between the financial statement and tax basis of assets and liabilities using currently enacted tax rates in effect for the years in which the differences are expected to reverse. A valuation allowance is established for any portion of deferred tax assets that are not considered more likely than not to be realized. The Company evaluates all evidence, including recent financial performance, the existence of cumulative year losses and our forecast of future taxable income, to assess the need for a valuation allowance against our deferred tax assets. While the determination of whether or not to record a valuation allowance is not fully governed by a specific objective test, accounting guidance places significant weight on recent financial performance.
During fiscal year 2015 and 2014, respectively, the Company established a $2.1 million valuation allowance on its Canadian deferred tax assets and an $86.6 million valuation allowance on its U.S. and U.K. deferred tax assets.
The Company assesses the realizability of its deferred tax assets on a quarterly basis and will reverse the valuation allowance and record a tax benefit when the Company generates sufficient sustainable pretax earnings to make the realizability of the deferred tax assets more likely than not.

The Company reserves for unrecognized tax benefits, interest and penalties related to anticipated tax audit issues in the U.S. and other tax jurisdictions based on an estimate of whether additional taxes will be due. If payment of these amounts ultimately proves to be unnecessary, the reversal of these liabilities would result in tax benefits being recognized in the period in which it is determined that the liabilities are no longer necessary. If the estimate of unrecognized tax benefits, interest and penalties proves to be less than the ultimate assessment, additional expenses would result. Inherent in the measurement of

33


deferred balances are certain judgments and interpretations of tax laws and published guidance with respect to the Company's operations. Income tax expense is primarily the current tax payable for the period and the change during the period in certain deferred tax assets and liabilities.
Contingencies
The Company is a defendant in various lawsuits and claims arising out of the normal course of business. Like certain other large retail employers, the Company has been faced with allegations of purported class-wide consumer and wage and hour violations. Litigation is inherently unpredictable and the outcome of these matters cannot presently be determined. Although the actions are being vigorously defended, the Company could in the future incur judgments or enter into settlements of claims that could have a material adverse effect on its results of operations in any particular period.
See Note 9 to the Consolidated Financial Statements for discussion regarding certain issues that have resulted from the IRS' audit of fiscal year 2010 through 2013. Final resolution of these issues is not expected to have a material impact on the Company’s financial position.

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk
The primary market risk exposure of the Company relates to changes in interest rates in connection with its debt, specifically the revolving credit facility which bears interest at variable rates based on LIBOR plus an applicable borrowing margin. Additionally, the Company is exposed to foreign currency translation risk related changes in the Canadian dollar and British Pound. The Company has established policies and procedures that govern the management of these exposures through the use of derivative financial instrument contracts. By policy, the Company does not enter into such contracts for the purpose of speculation. The following details the Company's policies and use of financial instruments.
Interest Rate Risk:
The Company has established an interest rate management policy that attempts to minimize its overall cost of debt, while taking into consideration earnings implications associated with volatility in short-term interest rates. On occasion, the Company uses interest rate swaps to further mitigate the risk associated with changing interest rates and to maintain its desired balances of fixed and floating rate debt. In addition, access to variable rate debt is available through the Company's revolving credit facility. The Company reviews its policy and interest rate risk management quarterly and makes adjustments in accordance with market conditions and the Company's short and long-term borrowing needs. As of June 30, 2016, the Company did not have any outstanding variable rate debt as there were no amounts outstanding on the revolving credit facility. The Company had outstanding fixed rate debt balances of $120.4 and $120.0 million at June 30, 2016 and 2015, respectively.
Foreign Currency Exchange Risk:
Over 85% of the Company's revenue, expense and capital purchasing activities are transacted in United States dollars. However, because a portion of the Company's operations consists of activities outside of the United States, the Company has transactions in other currencies, primarily the Canadian dollar and British pound. In preparing the Consolidated Financial Statements, the Company is required to translate the financial statements of its foreign subsidiaries from the currency in which they keep their accounting records, generally the local currency, into United States dollars. Different exchange rates from period to period impact the amounts of reported income and the amount of foreign currency translation recorded in accumulated other comprehensive income (AOCI). As part of its risk management strategy, the Company frequently evaluates its foreign currency exchange risk by monitoring market data and external factors that may influence exchange rate fluctuations. As a result, the Company may engage in transactions involving various derivative instruments to hedge assets, liabilities and purchases denominated in foreign currencies. As of June 30, 2016 and 2015, the Company did not have any derivative instruments to manage its foreign currency risk.
During fiscal years 2016, 2015 and 2014, the foreign currency gain (loss) included in net loss was $0.3, $(1.3) and $0.1 million, respectively.

34


Item 8.    Financial Statements and Supplementary Data

35


Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Regis Corporation
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of comprehensive loss, of shareholders' equity and of cash flows present fairly, in all material respects, the financial position of Regis Corporation and its subsidiaries at June 30, 2016 and June 30, 2015, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2016 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PRICEWATERHOUSECOOPERS LLP

Minneapolis, Minnesota
August 23, 2016

36


REGIS CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in thousands, except per share data)
 
 
June 30,
 
 
2016
 
2015
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
147,346

 
$
212,279

Receivables, net
 
24,691

 
24,631

Inventories
 
134,212

 
128,610

Other current assets
 
51,765

 
62,762

Total current assets
 
358,014

 
428,282

Property and equipment, net
 
183,321

 
218,157

Goodwill
 
417,393

 
418,953

Other intangibles, net
 
15,185

 
17,069

Investment in affiliates
 
520

 
15,321

Other assets
 
62,328

 
64,233

Total assets
 
$
1,036,761

 
$
1,162,015

LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
59,884

 
$
63,302

Accrued expenses
 
135,431

 
153,364

Total current liabilities
 
195,315

 
216,666

Long-term debt
 
120,435

 
120,000

Other noncurrent liabilities
 
201,610

 
197,905

Total liabilities
 
517,360

 
534,571

Commitments and contingencies (Note 8)
 

 

Shareholders' equity:
 
 
 
 
Common stock, $0.05 par value; issued and outstanding, 46,154,410 and 53,664,366 common shares at June 30, 2016 and 2015, respectively
 
2,308

 
2,683

Additional paid-in capital
 
207,475

 
298,396

Accumulated other comprehensive income
 
5,068

 
9,506

Retained earnings
 
304,550

 
316,859

Total shareholders' equity
 
519,401

 
627,444

Total liabilities and shareholders' equity
 
$
1,036,761

 
$
1,162,015

The accompanying notes are an integral part of the Consolidated Financial Statements.

37


REGIS CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in thousands, except per share data)
 
 
Fiscal Years
 
 
2016
 
2015
 
2014
Revenues:
 
 
 
 
 
 
Service
 
$
1,383,663

 
$
1,429,408

 
$
1,480,103

Product
 
359,683

 
363,236

 
371,454

Royalties and fees
 
47,523

 
44,643

 
40,880

 
 
1,790,869

 
1,837,287

 
1,892,437

Operating expenses:
 
 
 
 
 
 
Cost of service
 
868,188

 
882,717

 
907,294

Cost of product
 
179,341

 
180,558

 
186,924

Site operating expenses
 
182,952

 
192,442

 
203,450

General and administrative
 
178,033

 
186,051

 
172,793

Rent
 
297,271

 
309,125

 
322,262

Depreciation and amortization
 
67,470

 
82,863

 
99,733

Goodwill impairment
 

 

 
34,939

Total operating expenses
 
1,773,255

 
1,833,756

 
1,927,395

Operating income (loss)
 
17,614

 
3,531

 
(34,958
)
Other (expense) income:
 
 
 
 
 
 
Interest expense
 
(9,317
)
 
(10,206
)
 
(22,290
)
Interest income and other, net
 
4,219

 
1,697

 
1,952

Income (loss) from continuing operations before income taxes and equity in loss of affiliated companies           
 
12,516

 
(4,978
)
 
(55,296
)
Income taxes
 
(9,049
)
 
(14,605
)
 
(72,955
)
Equity in loss of affiliated companies, net of income taxes
 
(14,783
)
 
(13,629
)
 
(11,623
)
Loss from continuing operations
 
(11,316
)
 
(33,212
)
 
(139,874
)
(Loss) income from discontinued operations, net of income taxes (Note 2)
 

 
(630
)
 
1,353

Net loss
 
$
(11,316
)
 
$
(33,842
)
 
$
(138,521
)
Net loss per share:
 
 
 
 
 
 
Basic and diluted:
 
 
 
 
 
 
Loss from continuing operations
 
$
(0.23
)
 
$
(0.60
)
 
$
(2.48
)
(Loss) income from discontinued operations
 

 
(0.01
)
 
0.02

Net loss per share, basic and diluted (1)
 
$
(0.23
)
 
$
(0.62
)
 
$
(2.45
)
Weighted average common and common equivalent shares outstanding:
 
 
 
 
 
 
Basic and diluted
 
48,542

 
54,992

 
56,482

Cash dividends declared per common share
 
$

 
$

 
$
0.12

_______________________________________________________________________________
(1)
Total is a recalculation; line items calculated individually may not sum to total due to rounding.

The accompanying notes are an integral part of the Consolidated Financial Statements.

38


REGIS CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS
(Dollars in thousands)
 
 
Fiscal Years
 
 
2016
 
2015
 
2014
Net loss
 
$
(11,316
)
 
$
(33,842
)
 
$
(138,521
)
Other comprehensive (loss) income:
 
 
 
 
 
 
Foreign currency translation adjustments during the period
 
(4,276
)
 
(13,515
)
 
1,930

Recognition of deferred compensation
 
(162
)
 
370

 
165

Other comprehensive (loss) income
 
(4,438
)
 
(13,145
)
 
2,095

Comprehensive loss
 
$
(15,754
)
 
$
(46,987
)
 
$
(136,426
)

The accompanying notes are an integral part of the Consolidated Financial Statements.

39


REGIS CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Dollars in thousands, except share data)
 
 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Income
 
Retained
Earnings
 
Total
 
 
Shares
 
Amount
 
 
 
 
Balance, June 30, 2013
 
56,630,926

 
$
2,832

 
$
334,266

 
$
20,556

 
$
495,765

 
$
853,419

Net loss
 
 

 
 

 
 

 
 

 
(138,521
)
 
(138,521
)
Foreign currency translation adjustments
 
 

 
 

 
 

 
1,930

 
 

 
1,930

Proceeds from exercise of SARs & stock options
 
11