REGIS CORPORATION Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is designed to provide a reader of our consolidated 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. This MD&A should be read in conjunction with the MD&A included in ourJune 30, 2021 Annual Report on Form 10-K and other documents filed or furnished with theSEC during the current fiscal year. MANAGEMENT'S OVERVIEWRegis Corporation (RGS) franchises technology-enabled hairstyling and hair care salons throughoutthe United States ,Canada ,Puerto Rico and theUnited Kingdom . As ofDecember 31, 2021 , the Company franchised, owned or held ownership interests in 5,779 worldwide locations. Our locations consisted of 5,703 system-wide North American and international salons, and in 76 locations we maintained a non-controlling ownership interest less than 100 percent. Each of the Company's salon concepts generally offer similar salon products and services and serve the mass market. As ofDecember 31, 2021 , the Company had 853 employees worldwide. COVID-19 Impact During the period endedDecember 31, 2021 , the COVID-19 pandemic had an adverse impact on operations. The COVID-19 pandemic continues to impact salon guest visits and franchisee staffing, resulting in a significant reduction in revenue and profitability. In response to COVID-19, theU.S. employee retention payroll tax credit,Canada Emergency Wage Subsidy (CEWS) andCanada Emergency Rent Subsidy (CERS) were introduced for eligible employers. In fiscal year 2021, the Company recorded a$1.5 million benefit related to theU.S. employee retention payroll tax credit. In fiscal years 2022 and 2021, the Company received$1.4 and$1.6 million , respectively, in CEWS and$1.2 and$0.0 million , respectively, in CERS that partially cover expenses incurred inCanada during those years. Overall, COVID-19 has, and may continue to have, a negative effect on revenue and profitability. The ultimate impact of the COVID-19 pandemic in both the short and long term is not currently estimable due to the uncertainty surrounding the duration of the pandemic, the availability and acceptance of preventative vaccines, the emergence and impact of new COVID-19 variants, and changing government restrictions. Additional impacts to the business may arise that we are not aware of currently. Merchandising Strategy As part of the Company's transformation to focus on managing and nurturing brands, and in line with its capital-light business, a new merchandise strategy to outsource product distribution was adopted in the third quarter of fiscal year 2021. The Company is shifting its product business from a wholesale model to a third-party distribution model. Management expects the change will positively impact franchisees by providing them access to industry-leading pricing, loyalty programs, promotional benefits, educational assets, and ongoing support. The Company will receive a fee from the third-party distributors which is included in fees on the interim unaudited Condensed Consolidated Statement of Operations. The change is expected to result in product sales to franchisees providing significantly less revenue by the end of fiscal year 2022. CRITICAL ACCOUNTING POLICIES The interim unaudited Condensed Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted inthe United States of America . In preparing the interim unaudited Condensed 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 interim unaudited Condensed 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 interim unaudited Condensed Consolidated Financial Statements. Our significant accounting policies can be found in Note 1 to the Consolidated Financial Statements contained in Part II, Item 8 of theJune 30, 2021 Annual Report on Form 10-K, as well as Notes 1 and 2 to the unaudited Condensed Consolidated Financial Statements contained within this Quarterly Report on Form 10-Q. We believe the accounting policies related to the valuation of goodwill, the valuation and estimated useful lives of long-lived assets, estimates used in relation to tax liabilities and deferred taxes are most critical to aid in fully understanding and evaluating our reported financial condition and results of operations. Discussion of each of these policies is contained under "Critical Accounting Policies" in Part II, Item 7 of ourJune 30, 2021 Annual Report on Form 10-K. Our policies related to revenue recognition guidance can be found in Note 2 to the unaudited Condensed Consolidated Financial Statements. 23 -------------------------------------------------------------------------------- RESULTS OF OPERATIONS System-wide results As an asset-light franchise platform, our results are impacted by our system-wide sales, which include sales by all points of distribution, whether owned by our franchisees or the Company. While we do not record sales by franchisees as revenue, and such sales are not included in our unaudited Condensed Consolidated Financial Statements, we believe that this operating measure is important in obtaining an understanding of our financial performance. We believe system-wide sales information aids in understanding how we derive royalty revenue and in evaluating performance. System-wide same-store sales (1) by concept are detailed in the table below: Three Months Ended December 31, Six Months Ended December 31, 2021 2020 2021 2020 SmartStyle 13.2 % (32.2) % 15.1 % (33.0) % Supercuts 30.8 (32.9) 30.6 (33.2) Portfolio Brands 16.6 (30.0) 17.6 (30.1) Consolidated system-wide same-store sales 22.1 % (32.0) % 22.6 % (32.3) % _______________________________________________________________________________ (1)Fiscal year 2022 system-wide same-store sales are calculated as the total change in sales for system-wide franchise and company-owned locations that were open on a specific day of the week during the current period and the corresponding prior period. Fiscal year 2021 system-wide same-store sales are calculated as the total change in sales for system-wide franchise and company-owned locations for more than one year that were open on a specific day of the week during the current period and the corresponding prior period. Quarterly and year-to-date system-wide same-store sales are the sum of the system-wide same-store sales computed on a daily basis. Franchise salons that do not report daily sales are excluded from same-store sales. System-wide same-store sales are calculated in local currencies to remove foreign currency fluctuations from the calculation. 24
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Condensed Consolidated Results of Operations (Unaudited) The following table sets forth, for the periods indicated, certain information derived from our unaudited Condensed Consolidated Statement of Operations. The percentages are computed as a percent of total consolidated revenues, except as otherwise indicated, and the increase (decrease) is measured in basis points.
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