Edina-based Regis Corp. (RGS: 15.74 +0.38 +2.47%), the former owner of Trade Secret, is all set to buy it back for approximately $45 million, including $13 million in assumed liabilities. Ontario-based operator of the Trade Secret salon chain, Premier Salons Beauty Inc., has recently filed for bankruptcy protection.A slowdown in consumer spending, an anemic balance sheet, soaring store leases and huge inventory levels are the reasons for Trade Secret’s insolvency. Massive renovation and restructuring efforts including the elimination of unprofitable outlets should turn the salon chain into profitability.
The Past of Trade Secret
Trade Secret had been too unprofitable a business for Regis, who had sold it off to Premier Salons Beauty Inc. in February 2009 as part of its cost cutting strategy. Regardless of the huge capital investments, the unit had produced operating losses, spawning the divestment decision.
Though it had not received any proceeds from the sale, Regis received an income tax benefit of $56 million spread evenly over fiscal 2009 and 2010 as a result of the transaction. However, fiscal 2010, benefit is yet to be accounted. The sale was primarily a stock transaction. However, the divesture boosted Regis’ financial ratios and profitability.
Regis plans to buy back Trade Secret represents horizontal merger and appropriate cultural fit. Regis’ current buyback consideration is about $45 million while the company has already taken advantage of $56 million tax-benefit related to divesture. Therefore, Regis is expected to book profit from the buy back deal.
Based in Markham, Ontario, Trade Secret operates salons under the Trade Secret, Beauty Express, BeautyFirst and PureBeauty brands. Trade Secret functions through 600 salons across the United States and Canada.
The Future of Regis
To enhance the brand and drive traffic, Regis currently has a modest growth plan of building 160 new salon locations by fiscal 2010.
In the long run, Regis’ management expects the mix of organic and acquisition growth to be more or les homogeneous. The company looks forward to build and/or acquire 700 to 1,000 salons each year once the economy stabilizes.Regis owns, franchises or has stakes in more than 12,700 salons, hair restoration centers and cosmetology education services. Its more popular brands include Supercuts, Cost Hutters, Cool Cuts 4 Kids and Hair Club for Men and Women.
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