Regis changed its business model — now what?

Regis Corp. is now looking forward after a yearslong process of converting to a fully franchised business model and managing through the setbacks caused by COVID-19 and executive turnover.

However, the Minneapolis-based company is still struggling as it learns how to be a smaller company that manages franchisees instead of salons.

"Running your own salons and being a franchisor is incredibly different," said Kersten Zupfer, who has been with Regis for 16 years and is currently chief financial officer. "When you're running your own salons, you can make decisions and you can execute on them. When you're a franchisor, you're providing tools and resources to franchisees and influencing them."

By number of stores, Regis remains the largest hair salon company in the country. However, the number of salons — under brand names including Supercuts and Roosters — fell from 9,700 a decade ago to 4,863 today.

In its most recent fiscal year, which ended June 30, systemwide revenue was up 4.4% to $1.23 billion, but Regis recorded a loss of $7.4 million. The loss was smaller than the year before and the company reported positive operating income for the first time in six years.

Still, the company's debt load is high and its stock is trading at under $1, putting it out of compliance with New York Stock Exchange rules.

The debt came with the shutdown of salons during the pandemic and then lingering restrictions. Regis withdrew its entire $295 million revolving line of credit during the pandemic in order to fund its operating losses.

"It's unfortunate, had COVID never happened, we wouldn't be dealing with the leverage that we're dealing with today," Zupfer said.

The company has downsized from three buildings in Edina to one on the outskirts of Minneapolis, and it has restructured some of its debt.

Zupfer said Regis is constantly looking at ways to reduce the company's debt. It has until mid-December to figure out how to regain compliance with NYSE rules.

All as it looks ahead in how to refine its business as a franchisor, said Matt Doctor, Regis' chief executive.

"What's not done is our journey as franchisor," Doctor said. "Communication, trust, support, business reviews, optimizing the business tools, resources, that's not done."

Doctor said the number of salons probably hasn't reached its optimal level yet, either. More underperforming salons may close, including a number of corporate-owned salons that remain.

Franchisees closed 600 salons in the last fiscal year, and 37 corporate-owned stores closed. Doctor said more salons cuts are likely to come in the next few years.

"I can't shy away from what the reality is when trying to strengthen the system," he said. "Is there a way to get more out of a smaller base? I really do think there is."

Across town, Bloomington-based Great Clips has demonstrated how well an all-franchise salon model can work. The company was founded in 1982 and essentially has been all-franchise from the start.

Today, Great Clips has 4,425 salons, all franchise-owned, in 50 states and four Canadian provinces. All of the salons are under the Great Clips banner, making them the single largest brand name in the hair salon industry.

The shift to a franchise model for Regis was complicated by turnover at the top of the company.

The decision was made in August 2019 under CEO Hugh Sawyer. In 2020, Regis replaced Sawyer with Felipe Athayde, who was only there a little more than a year.

Doctor, who joined Regis in 2021 as chief strategy officer, became interim CEO in 2022 and later in the year was given the job permanently. He came from the franchise world; he ran Tim Horton's largest franchisee before selling out in 2020.

Regis, which has 18 brands, has concentrated on its five main ones: Supercuts, SmartStyle, First Choice, Cost Cutters and Roosters.

The shift in strategy took buy-in from its franchisees, said Mike Sarafa, co-founder and chief executive of Alline Salon Group, the largest franchisee in the Regis system with more than 350 salons primarily in Michigan, Ohio and Pennsylvania.

"They were trying to go asset light and become a publicly traded franchisor," Sarafa said. "It wasn't without its bumps."

Alline, which formed in 2018, and Regis developed a good relationship, Sarafa said, and ended up making three deals over 18 months. Alline bought 400 salons under a dozen brand names. Some were shut down, with others converted to Cost Cutters or Supercuts brands.

"It was really, really hectic," Sarafa said.

It didn't help that much of the conversion was during the pandemic. Salons had to close for stretches, and when they did reopen it was often with a number of restrictions and masking requirements, and certain services were canceled.

Stylists left the industry, so when restrictions were lifted, salons faced staffing shortages that affected the days and hours they could be open. Fewer stylists and fewer hours open means less revenue in the salon business.

But things are getting better, Sarafa said. Some salons are still not open for a full schedule, but staffing numbers are finally increasing and the whole situation is drastically better, he said.

Regis now is looking ahead at growth strategies. Executives believe they can export the franchised salon experience to countries where salons are entrenched but the franchise concept is not. For example, the company signed a master franchise agreement with a group in India called Ravishing Style, which plans to open as many as 100 Supercuts franchises across India within the next five years.

India is "a market full of long-term growth potential [and] is primed to experience the first large-scale, U.S.-based salon brand in the country," Doctor said in a recent news release.

Doctor likened the company's shift to being in the early innings of a baseball game. The company, he said, will need to continue its shift in mindset and corporate development into a fully franchised model.

"That's the journey that we're on when it comes to that piece of the equation," Doctor said.