XNYS:RGS Regis Corporation Annual Report 10-K Filing - 6/30/2012

Use these links to rapidly review the document
TABLE OF CONTENTS
Item 1. Business
TABLE OF CONTENTS1

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

Commission file number 1-12725

Regis Corporation
(Exact name of registrant as specified in its charter)

(952) 947-7777
(registrant's telephone number, including area code)

         Securities registered pursuant to Section 12(b) of the Act:

         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.

         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, 2011, was approximately $902,940,461. The registrant has no non-voting common equity.

         As of August 13, 2012, the registrant had 57,407,876 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 meeting of shareholders to be held on October 25, 2012 (the "2012 Proxy Statement") (to be filed pursuant to Regulation 14A within 120 days after the registrant's fiscal year-end of June 30, 2012) are incorporated by reference into Part III.

   

---

Table of Contents

REGIS CORPORATION
FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 2012
INDEX

2

---

Table of Contents

PART I

Item 1.    Business

        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.

General Development of Business

        In 1922, Paul and Florence Kunin opened Kunin Beauty Salon, which quickly expanded into a chain of value priced salons located in department stores. In 1958, the chain was purchased by their son and renamed Regis Corporation. On August 1, 2007, the Company contributed its 51 wholly-owned accredited cosmetology schools to Empire Education Group, Inc (EEG). On January 31, 2008, the Company merged its continental European franchise salon operations with the operations of the Franck Provost Salon Group in the newly formed entity, Provalliance. The Company acquired an additional equity interest in Provalliance in March 2011. On February 20, 2008, the Company acquired the capital stock of Cameron Capital I, Inc. (CCI), a wholly-owned subsidiary of Cameron Capital Investments, Inc. CCI owned and operated PureBeauty and BeautyFirst salons. On February 16, 2009, the Company sold its Trade Secret salon concept (Trade Secret), which included CCI.

        During the fiscal year ended June 30, 2012, the Company began reviewing alternatives for non-core assets to focus on our core salon business. In April 2012, the Company entered into a Share Purchase Agreement (Agreement) to sell the Company's 46.7 percent equity interest in Provalliance to the Provost Family for a purchase price of €80 million. The transaction is expected to close no later than September 30, 2012 and is subject to the Provost Family securing financing for the purchase price. On July 13, 2012, the Company entered into a definitive agreement to sell its Hair Club for Men and Women business (Hair Club) for $163.5 million, a provider of hair restoration services. The transaction is expected to close during the first half of fiscal year 2013.

        Regis Corporation is listed on the NYSE under the ticker symbol "RGS." Discussions of the general development of the business take place throughout this Annual Report on Form 10-K.

Financial Information about Segments

        Segment data for the years ended June 30, 2012, 2011 and 2010 are included in Note 15 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K.

3

---

Table of Contents

Narrative Description of Business

        The following topical areas are discussed below in order to aid in understanding the Company and its operations:

Background:

        Based in Minneapolis, Minnesota, the Company's primary business is owning, operating and franchising hair and retail product salons. In addition to the primary hair and retail product salons, during fiscal years 2012 and 2011 the Company owned Hair Club. As of June 30, 2012, the Company owned, franchised or held ownership interests in approximately 12,600 worldwide locations. The Company's locations consisted of 9,738 company-owned and franchise salons, 98 hair restoration centers, and 2,811 locations in which the Company maintains a non-controlling ownership interest of less than 100 percent. Each of the Company's salon concepts offer similar salon products and services and serve the mass market consumer marketplace. The Company's hair restoration centers offer three hair restoration solutions; hair systems, hair transplants and hair therapy, which are targeted at the mass market consumer.

        The Company is organized to manage its operations based on significant lines of business—salons and hair restoration centers. Salon operations are managed based on geographical location—North America and International. The Company's North American salon operations are comprised of 7,324 company-owned salons and 2,016 franchise salons operating in the United States, Canada and Puerto Rico. The Company's International operations are comprised of 398 company-owned salons in the United Kingdom. The Company's worldwide salon locations operate primarily under the trade names of Regis Salons, MasterCuts, SmartStyle, Supercuts, Cost Cutters, and Sassoon. The Company's hair restoration centers are located in the United States and Canada. During fiscal years 2012 and 2011, the number of guest visits at the Company's company-owned salons approximated 90 and 91 million, respectively. The Company had approximately 52,000 corporate employees worldwide during fiscal year 2012.

        On August 1, 2007, the Company contributed 51 of its wholly-owned accredited cosmetology schools to EEG in exchange for a 49.0 percent equity interest in EEG. EEG is the largest beauty school operator in North America with 105 accredited cosmetology schools with revenues of approximately $180 million annually and is overseen by the Empire Beauty School management team.

4

---

Table of Contents

        In January 2008, the Company's effective ownership interest increased to 55.1 percent related to the buyout of EEG's minority interest shareholder. The Company accounts for the investment in EEG under the equity method of accounting as Empire Beauty School retains majority voting interest and has full responsibility for managing EEG. The Company recorded a $19.4 million other than temporary impairment charge in its fourth quarter ended June 30, 2012 on its investment in EEG. Refer to Note 6 to the Consolidated Financial Statements for additional information.

        On January 31, 2008, the Company merged its continental European franchise salon operations with the operations of the Franck Provost Salon Group in exchange for a 30.0 percent equity interest in the newly formed entity, Provalliance. The merger agreement contains a right (Equity Put) to require the Company to purchase additional ownership interest in Provalliance between specified dates in 2010 to 2018. The merger with the operations of the Franck Provost Salon Group, which are also located in continental Europe, created Europe's largest salon operator with approximately 2,600 company-owned and franchise salons as of June 30, 2012.

        The Company contributed to Provalliance the shares of each of its European operating subsidiaries, other than the Company's operating subsidiaries in the United Kingdom and Germany. The contributed subsidiaries operate retail hair salons in France, Spain, Switzerland and several other European countries primarily under the Jean Louis David™ and Saint Algue™ brands.

        On February 16, 2009, the Company sold its Trade Secret concept. The Company concluded, after a comprehensive review of its strategic and financial options, to divest Trade Secret. The sale of Trade Secret included 655 company-owned salons and 57 franchise salons, all of which had historically been reported within the Company's North America reportable segment.

        In March of 2011, the Company elected to honor and settle a portion of the Equity Put and acquired approximately 17 percent additional equity interest in Provalliance for $57.3 million (approximately € 40.4 million), bringing the Company's total equity interest to 46.7 percent.

        On April 9, 2012, the Company entered into the Agreement to sell the Company's 46.7 percent equity interest in Provalliance to the Franck Provost family (Provost Family) for a purchase price of €80 million. The transaction is expected to close no later than September 30, 2012 and is subject to the Provost Family securing financing for the purchase price. The purchase price was negotiated independently of the Equity Put and the Equity Put will automatically terminate upon completion of the Agreement. If the completion of the Agreement does not occur by September 30, 2012, the Provost Family will not be entitled to exercise their Equity Put rights until September 30, 2014. During fiscal year 2012, the Company recorded a $37.4 million other than temporary impairment charge on its investment in Provalliance and $20.2 million reduction in the fair value of the Equity Put in conjunction with the Agreement, resulting in a net impairment charge of $17.2 million recorded within the equity in (loss) income of affiliated companies in the Consolidated Statement of Operations.

        During the fiscal year ended June 30, 2012, the Company began reviewing alternatives for non-core assets to focus on our core salon business. On July 13, 2012, the Company entered into a definitive agreement to sell Hair Club for $163.5 million, a provider of hair restoration services. The transaction is expected to close during the first half of fiscal year 2013.

Industry Overview:

        Management estimates that annual revenues of the hair care industry are approximately $50 to $60 billion in the United States and approximately $160 billion worldwide. The Company estimates that it holds approximately two percent of the worldwide market. The hair salon and hair restoration markets are each highly fragmented, with the vast majority of locations independently owned and operated. However, the influence of salon chains on these markets, both franchise and company-owned, has increased substantially. Management believes that salon chains will continue to have a significant

5

---

Table of Contents

influence on these markets and will continue to increase their presence. As the Company is the principal consolidator of these chains in the hair care industry, it prevails as an established exit strategy for independent salon owners and operators, which affords the Company numerous opportunities for continued selective acquisitions.

Salon Business Strategy:

        The Company's long-term goal is to provide high quality, affordable hair care services and products to a wide range of mass market consumers, which enables the Company to expand in a controlled manner. The key elements of the Company's strategy to achieve these goals are taking advantage of (1) salon growth opportunities, (2) economies of scale and (3) centralized control over salon operations in order to ensure (i) consistent, quality services and (ii) a superior selection of high quality, professional products. Each of these elements is discussed below.

        Salon Growth Opportunities.    The Company's salon expansion strategy focuses on organic (new salon construction and same-store sales growth of existing salons) and salon acquisition growth.

        Organic Growth.     The Company executes its organic growth strategy through a combination of new construction of company-owned and franchise salons, as well as same-store sales. The square footage requirements related to opening new salons allow the Company great flexibility in securing real estate for new salons as the Company has small or flexible square footage requirements for its salons. The Company's long-term outlook for organic expansion remains strong. The Company has at least one salon in all major cities in the U.S. and has penetrated every viable U.S. market with at least one concept. However, because the Company has a variety of concepts, it can place several of its salons within any given market.

        A key component to successful North American organic growth relates to site selection, as discussed in the following paragraphs.

        Salon Site Selection.    The Company's salons are located in high-traffic locations such as regional shopping malls, strip centers, lifestyle centers, Walmart Supercenters, high-street locations and department stores. The Company is an attractive tenant to landlords due to its financial strength, successful salon operations and international recognition. In evaluating specific locations for both company-owned and franchise salons, the Company seeks conveniently located, visible sites which allow guests adequate parking and quick and easy location access. Various other factors are considered in evaluating sites, including area demographics, availability and cost of space, the strength of the major retailers within the area, location and strength of competitors, proximity of other company-owned and franchise salons, traffic volume, signage and other leasehold factors in a given center or area.

        Pricing is a factor in same-store sales growth. The Company actively monitors the prices charged by its competitors in each market and makes every effort to maintain prices which remain competitive with prices of other salons offering similar services. Price increases are considered on a market-by-market basis and are established based on local market conditions.

        Salon Acquisition Growth.     In addition to organic growth, another key component of the Company's growth strategy is the acquisition of salons. With an estimated two percent worldwide market share, management believes the opportunity to continue to make selective acquisitions exists.

        Over the past 18 years, the Company has acquired 8,052 salons, expanding both in North America and internationally. When contemplating an acquisition, the Company evaluates the existing salon or salon group with respect to the same characteristics as discussed above in conjunction with site selection for constructed salons (conveniently located, visible, strong retailers

6

---

Table of Contents

within the area, etc.). The Company generally acquires mature strip center locations, which are systematically integrated within the salon concept that it most clearly emulates.

        In addition to adding new salon locations each year, the Company has an ongoing program of remodeling its existing salons, ranging from redecoration to substantial reconstruction. This program is implemented as management determines that a particular location will benefit from remodeling, or as required by lease renewals. A total of 235 and 271 salons had major remodels in fiscal years 2012 and 2011, respectively.

        Recent Salon Additions.     During fiscal year 2012, the Company constructed 319 new salons (209 company-owned and 110 franchise). Additionally, the Company acquired 13 company-owned salons, including 11 franchise salon buybacks, and purchased a 60.0 percent ownership interest in a franchise network consisting of 31 locations.

        During fiscal year 2011, the Company constructed 213 new salons (146 company-owned and 67 franchise). Additionally, the Company acquired 105 company-owned salons, including 78 franchise salon buybacks.

        Salon Closures.     The Company evaluates its salon performance on a regular basis. Upon evaluation, the Company may close a salon for operational performance or real estate issues. In either case, the closures generally occur at the end of a lease term and typically do not require significant lease buyouts.

        During fiscal year 2012, 384 salons were closed, including 333 company-owned salons and 51 franchise salons (excluding 11 franchise buybacks).

        During fiscal year 2011, 305 salons were closed, including 245 company-owned salons and 60 franchise salons (excluding 78 franchise buybacks).

        Economies of Scale.    Management believes that due to its size and number of locations, the Company has certain advantages which are not available to single location salons or small chains. Economies of scale are realized through the centralized support system offered by the home office. Additionally, due to its size, the Company has numerous financing and capital expenditure alternatives, as well as the benefits of buying retail products, supplies and salon fixtures directly from manufacturers. Furthermore, the Company can offer employee benefit programs, training and career path opportunities that are often superior to its smaller competitors.

        Centralized Control Over Salon Operations.    During fiscal year 2012 the Company implemented a new field structure to support our long-term strategy. The Company manages its expansive salon base through a combination of district leaders, regional directors, vice presidents and chief operating officers. Each district leader is responsible for the management of approximately 12 to 15 salons. Regional directors oversee the performance of six to nine district leaders or approximately 80 to 130 salons. Vice presidents manage approximately 700 to 1,000 salons while chief operating officers are responsible for the oversight of an entire consumer concept. During fiscal year 2012 the Company also created Field Human Resources and Corporate Operations departments to support salon operations. The operational hierarchy is key to the Company's ability to expand successfully.

        The Company also has an extensive training program, including the production of training DVDs for use in the salons, to ensure its stylists are knowledgeable in the latest haircutting and fashion trends and provide consistent quality hair care services. Finally, the Company tracks salon activity for all of its company-owned salons through the utilization of daily sales detail delivered from the salons' point of sale system. This information is used to reconcile cash on a daily basis.

        Consistent, Quality Service.    The Company is committed to meeting its guests' hair care needs by providing competitively priced services and products with professional and knowledgeable stylists. The

7

---

Table of Contents

Company's operations and marketing emphasize high quality services to create guest loyalty, to encourage referrals and to distinguish the Company's salons from its competitors. To promote quality and consistency of services provided throughout the Company's salons, the Company employs full and part-time artistic directors whose duties are to train salon stylists in current styling trends. The major services supplied by the Company's salons are haircutting and styling (including shampooing and conditioning), hair coloring and waving. During fiscal years 2012, 2011, and 2010, the percentage of company-owned service revenues attributable to each of these services was as follows:

        High Quality, Professional Products.     The Company's salons sell nationally recognized hair care and beauty products as well as a complete line of private label products sold under the Regis, MasterCuts and Cost Cutters labels. The retail products offered by the Company are intended to be sold only through professional salons. The top selling brands include Paul Mitchell, Biolage, Redken, It's a 10, Nioxin, Regis designLINE, Sexy Hair Concepts, Kenra, Tigi Bedhead, Moroccanoil, and the Company's various private label brands.

        The Company has the most comprehensive assortment of retail products in the industry. Although the Company constantly strives to carry an optimal level of inventory in relation to consumer demand, it is more economical for the Company to have a higher amount of inventory on hand than to run the risk of being under stocked should demand prove higher than expected. The extended shelf life and lack of seasonality related to the beauty products allows the cost of carrying inventory to be relatively low and lessens the importance of inventory turnover ratios. The Company's primary goal is to maximize revenues rather than inventory turns.

        The retail portion of the Company's business complements its salon services business. The Company's stylists and beauty consultants are compensated and regularly trained to sell hair care and beauty products to their guests. Additionally, guests are enticed to purchase products after a stylist demonstrates its effect by using it in the styling of the guest's hair.

Salon Concepts:

        The Company's salon concepts focus is on providing high quality hair care services and professional products, primarily to the middle consumer market. The Company's North American salon operations consist of 9,340 salons (including 2,016 franchise salons), operating under several concepts, each offering attractive and affordable hair care products and services in the United States, Canada and Puerto Rico. The Company's international salon operations consist of 398 hair care salons located in Europe, primarily in the United Kingdom. The number of new salons expected to be opened within the upcoming fiscal year is discussed within Management's Discussion and Analysis of Financial Condition and Results of Operations. In addition to these openings, the Company typically acquires salons each year. The number of acquired salons, and the concept under which the acquisitions will fall, vary based on the acquisition opportunities which develop throughout the year.

Salon Development

        The table on the following pages sets forth the number of system wide salons (company-owned and franchise) opened at the beginning and end of each of the last five fiscal years, as well as the number of salons opened, closed, relocated, converted and acquired during each of these periods.

8

---

Table of Contents

COMPANY-OWNED AND FRANCHISE SALON SUMMARY

9

---

Table of Contents

10

---

Table of Contents

 

11

---

Table of Contents

        In the preceding table, relocations represent a transfer of location by the same salon concept and conversions represent the transfer of one concept to another concept.

12

---

Table of Contents

        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. In recent years, the Company has expanded its Regis Salons into strip centers. As of June 30, 2012, of the 953 total Regis Salons, 156 Regis Salons were located in strip centers. The guest mix at Regis Salons is approximately 79 percent women, and both appointments and walk-in guests are common. These salons offer a full range of custom styling, cutting, hair coloring and waving services, as well as professional hair care products. Service revenues represent approximately 82 percent of the concept's total revenues. The average ticket was approximately $43 and $42 for fiscal years 2012 and 2011, respectively. Regis Salons compete in their existing markets primarily by emphasizing the high quality of the services provided. Included within the Regis Salon concept are various other trade names, including Carlton Hair, Sassoon, Hair by Stewarts, Hair Excitement, and Renee Beauty.

        The average initial capital investment required for a new Regis Salon is approximately $190,000 to $240,000, excluding average opening inventory costs of approximately $22,000. Average annual salon revenues in a Regis Salon which has been open five years or more are approximately $400,000.

        MasterCuts.    MasterCuts is a full service, mall based salon group which focuses on the walk-in consumer (no appointment necessary) that 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, hair coloring and waving services as well as professional hair care products. The guest mix at MasterCuts is approximately 58 percent women. Service revenues compose approximately 80 percent of the concept's total revenues. The average ticket was approximately $22 for fiscal years 2012 and 2011.

        The average initial capital investment required for a new MasterCuts salon is approximately $150,000 to $200,000, excluding average opening inventory costs of approximately $14,300. Average annual salon revenues in a MasterCuts salon which has been open five years or more are approximately $280,000.

        SmartStyle.    The SmartStyle salons share many operating characteristics of the Company's other salon concepts; however, they are located exclusively in Walmart Supercenters. SmartStyle has a walk-in guest base, pricing is promotional and services are focused on the family. These salons offer a full range of custom styling, cutting, hair coloring and waving services, as well as professional hair care products. The guest mix at SmartStyle Salons is approximately 75 percent women. Professional retail product sales contribute considerably to overall revenues at approximately 34 percent. Additionally, the Company has 122 franchise salons located in Walmart Supercenters. The average ticket was approximately $21 for fiscal years 2012 and 2011.

        The average initial capital investment required for a new SmartStyle salon is approximately $35,000 to $45,000, excluding average opening inventory costs of approximately $13,100. Average annual salon revenues in a SmartStyle salon which has been open five years or more are approximately $230,000.

        Strip Center Salons.    The Company's Strip Center Salons are comprised of company-owned and franchise salons operating in strip centers across North America under the following concepts:

        Supercuts.    The Supercuts concept provides consistent, high quality hair care services and professional products to its guests at convenient times and locations and at a reasonable price. This concept appeals to men, women and children, although male guests account for approximately 66 percent of the guest mix. Service revenues represent approximately 89 percent of total company-owned Supercuts revenues. The average ticket was approximately $17 for fiscal years 2012 and 2011.

13

---

Table of Contents

        The average initial capital investment required for a new Supercuts salon is approximately $80,000 to $130,000, excluding average opening inventory costs of approximately $8,800. Average annual salon revenues in a company-owned Supercuts salon which has been open five years or more are approximately $270,000.

        The Supercuts franchise salons provide consistent, high quality hair care services and professional products to guests at convenient times and locations and at a reasonable price. These Supercuts franchise salons appeal to men, women and children, although male guests account for approximately 71 percent of the guest mix. Service revenues represent approximately 92 percent of the Supercuts franchise total revenues. Average annual revenues in a Supercuts franchise salon which has been open five years or more are approximately $340,000.

        Cost Cutters (franchise salons).    The Cost Cutters concept is a full service salon concept providing value priced hair care services for men, women and children. These full service salons also sell a complete line of professional hair care products. The guest mix at Cost Cutters is split relatively evenly between men and women. Average annual salon revenues in a franchised Cost Cutters salon which has been open five years or more are approximately $280,000.

        In addition to the franchise salons, the Company operates company-owned Cost Cutters salons, as discussed below under Promenade Salons.

        Promenade Salons.    Promenade Salons are made up of successful regional company-owned salon groups acquired over the past several years 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, coloring and waving, as well as hair care products. Hair Masters offers moderately-priced services to a predominately female demographic, while the other concepts primarily cater to time-pressed, value-oriented families. The guest mix is split relatively evenly between men and women at most concepts. Service revenues represent approximately 89 percent of total company-owned Promenade revenues. The average ticket was approximately $19 and $20 for fiscal years 2012 and 2011, respectively.

        The average initial capital investment required for a new Promenade Salon is approximately $75,000 to $125,000, excluding average opening inventory costs of approximately $9,300. Average annual salon revenues in a Promenade Salon which has been open five years or more are approximately $245,000.

        Other Franchise Concepts.    This group of franchise salons includes primarily First Choice Haircutters, Magicuts, Beauty Supply Outlets, and Pro-Cuts. These concepts function primarily in the high volume, value priced hair care market segment, with key selling features of value, convenience, quality and friendliness, as well as a complete line of professional hair care products. In addition to these franchise salons, the Company operates company-owned First Choice Haircutters and Magicuts salons, as previously discussed above under "Strip Center Salons".

        During fiscal year 2012, the Company acquired a 60.0 percent ownership interest in Roosters MGC International LLC, a franchise concept that combines modern grooming techniques with classic barbershop elements. This ownership interest along with the Company's other men's franchise concepts will allow the Company to expand its focus on the male demographic.

        International Salons.    The Company's 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 the North American salons previously mentioned. However, the initial capital investment required is typically between £110,000 and £130,000 for a Regis salon, and between £60,000 and £80,000 for a Supercuts salon. Average annual salon revenues for a

14

---

Table of Contents

salon which has been open five years or more are approximately £210,000 in a Regis salon and £165,000 in a Supercuts salon. 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 on prominent high-street locations and offer a full range of custom hairstyling, cutting, coloring and waving, as well as professional hair care products. The initial capital investment required is approximately £500,000. Average annual salon revenues for a salon which has been open five years or more is approximately £770,000.

Salon Franchising Program:

        General.    The Company has various franchising programs supporting its 2,016 franchise salons as of June 30, 2012, consisting mainly of Supercuts, Cost Cutters, First Choice Haircutters, Magicuts, Pro-Cuts, and Roosters. These salons have been included in the discussions regarding salon counts and concepts on the preceding pages.

        The Company provides its franchisees with a comprehensive system of business training, stylist education, site approval and lease negotiation, professional marketing, promotion and advertising programs, and other forms of support designed to help the franchisee build a successful business.

        Standards of Operations.    The Company does not control the day to day operations of its franchisees, including hiring and firing, 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 location, 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, design and decor of stores, and trademark usage. The Company's field personnel make periodic visits to franchise stores to ensure that the stores are operating in conformity with the standards for each franchising program. All of the rights afforded to the Company with regard to the franchise 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 franchise salons.

        To further ensure conformity, the Company may enter into the lease for the store site directly with the landlord, and subsequently sublease the site to the franchisee. The franchise agreement and sublease provide the Company with the right to terminate the sublease and gain possession of the store if the franchisee fails to comply with the Company's operational policies and procedures. See Note 10 to the Consolidated Financial Statements for further information about the Company's commitments and contingencies, including leases.

        Franchise Terms.    Pursuant to their 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 concept. Franchisees are responsible for the costs of leasehold improvements, furniture, fixtures, equipment, supplies, inventory, payroll costs and certain other items, including initial working capital.

        Additional information regarding each of the major franchisee brands is listed below:

Supercuts (North America)


        The majority of existing 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. The agreements also provide the Company a right of first refusal if the store is to be sold. The franchisee must obtain the Company's approval in all instances where there is a sale of the franchise. The current franchise agreement is site specific and does not provide any territorial protection to a franchisee, although some older franchise agreements do

15

---

Table of Contents

include limited territorial protection. Development agreements for new markets include limited territory protection for the Supercuts concept. The Company has a comprehensive impact policy that resolves potential conflicts among Supercuts franchisees and/or the Company's Supercuts locations regarding proposed salon sites.


Cost Cutters, First Choice Haircutters and Magicuts (North America)


        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. All of the agreements also provide the Company a right of first refusal if the store is to be sold. The franchisee must obtain the Company's approval in all instances where there is a sale of the franchise. The current franchise agreement is site specific. Franchisees may enter into development agreements with the Company which provide limited territorial protection.


Pro-Cuts (North America)


        The majority of existing Pro-Cuts franchise agreements have a ten year term with a ten year option to renew. The agreements also provide the Company a right of first refusal if the store is to be sold or transferred. The current franchise agreement is site specific. Franchisees may enter into development agreements with the Company which provide limited territorial protection.


Roosters (North America)


        The majority of existing Roosters franchise agreements have a ten year term with a ten year renewal option. The agreements also provide the Company a right of first refusal if the store is to be sold. The franchisee must obtain the Company's approval in all instances where there is a sale of the franchisee. Upon the signing of a single store franchise agreement, franchisees may also enter into a multi-unit option agreement which provides the right to open three additional stores in a non-exclusive territory.

        Franchisee Training.    The Company provides new franchisees with training, focusing on the various aspects of store 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 store managers and stylists with extensive technical training for Supercuts franchises. For further description of the Company's education and training programs, see the "Salon Education and Training Programs" section of this document.

Salon Markets and Marketing:

        The Company maintains various advertising, sales and promotion programs for its salons, budgeting a predetermined percent of revenues for such programs. The Company has developed promotional tactics and institutional sales messages for each of its concepts targeting certain guest types and positioning each concept in the marketplace. Print, radio, television, online and billboard advertising are developed and supervised at the Company's headquarters, but most advertising is done in the immediate market of the particular salon.

        Most franchise concepts maintain separate advertising funds (the Funds) that provide comprehensive advertising and sales promotion 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 all of the fund's expenditures and operates in accordance with terms of the franchise operating and other agreements. All stores,

16

---

Table of Contents

company-owned and franchised, contribute to the 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 campaigns and system wide activities. This intensive advertising program creates significant consumer awareness, a strong concept image and high loyalty.

Salon Education and Training Programs:

        The Company has an extensive hands-on training program for their stylists which emphasizes technical training in hairstyling and cutting, hair coloring, texturizing services and hair treatment regimes, as well as guest service skills and product sales. The objective of the training programs is to ensure that guests receive professional and quality services, which the Company believes will result in additional repeat guests, referrals and product sales. The Company is currently evaluating expanding the training program based on the strategy of improving the guest experience.

        The Company has over 130 full and part-time artistic directors who train stylists on the techniques to provide salon services and instruct stylists in current styling trends. Stylist training is achieved through seminars, workshops and DVD-based programs. The Company was the first in its industry to develop a DVD-based training system in its salons and currently has over 200 DVD titles designed to enhance the technical skills of stylists.

        The Company has guest service training programs designed to improve the interaction between employees and guests. Employees are trained in the proper techniques in greeting the guest, telephone courtesy and professional behavior through a series of professionally designed DVDs, along with instructional seminars.

        The Company also provides regulatory compliance training for all its field employees. This training is designed to help supervisors and stylists understand employee regulatory requirements and compliance with these standards.

Salon Staff Recruiting and Retention:

        Recruiting quality managers and stylists is essential to the establishment and operation of successful salons. In search of salon managers, the Company's supervisory team recruits or develops and promotes from within those stylists that display initiative and commitment. The Company has been and believes it will continue to be successful in recruiting capable managers and stylists. Stylists benefit from the Company's high-traffic locations and receive a steady source of new business from walk-in guests. In addition, the Company offers a career path with the opportunity to move into managerial and training positions within the Company.

Salon Design:

        The Company's salons are designed, built and operated in accordance with uniform standards and practices developed by the Company based on its experience. Salon fixtures and equipment are generally uniform, allowing the Company to place large orders for these items with cost savings due to the economies of scale.

        The size of the Company's salons ranges from 500 to 5,000 square feet, with the typical salon having about 1,200 square feet. At present, the cost to the Company of normal tenant improvements and furnishing of a new salon, including inventories, ranges from approximately $25,000 to $225,000, depending on the size of the salon and the concept. Less than ten percent of all new salons will have costs greater than normal with a cost between $225,000 and $500,000 to furnish. International Sassoon salons costs could be even greater than the ranges above. Of the total leasehold costs, approximately 70 percent of the cost is for leasehold improvements and the balance is for salon fixtures, equipment and inventories.

17

---

Table of Contents

        The Company maintains its own design, construction and real estate department, which designs and supervises the leasehold installations, furnishing and fixturing of all new company-owned salons and certain franchise locations. The Company has developed considerable expertise in designing salons. The design and real estate staff focus on visual appeal, efficient use of space, cost and rapid completion times.

Salon Management Information Systems:

        At all of its company-owned salons, the Company utilizes a point-of-sale (POS) information system to collect daily sales information and guest demographics. Salon employees deposit cash receipts into a local bank account on a daily basis. The POS system sends the amount expected to be deposited to the corporate office, where the amount is reconciled daily with local deposits transferred into a centralized corporate bank account. The guest information is then used to determine effectiveness of promotions and the loyalty base of each salon that feed into salon operational decisions. The information is also used to generate payroll information, monitor salon performance, manage salon staffing and payroll costs, and anticipate industry pricing and staffing trends. The corporate information systems deliver information on product sales to improve its inventory control system, including recommendations for each salon of monthly product replenishments. Recent innovations to increase inventory cycle counts and install high speed connections at each salon are expected to improve stylist productivity and improve guest satisfaction with the checkout process.

        The goal of information systems is to maximize the overall value to the business while improving the output per dollar spent by implementing cost-effective solutions and services. Management believes that its information systems provide the Company with operational efficiencies as well as advantages in planning and analysis which are generally not available to competitors. The Company continually reviews and improves its information systems to ensure systems and processes are kept up to date and that they will meet the growing needs of the Company.

        Historically, because of the Company's large size and scale requirements it has been necessary for the Company to internally develop and support its own proprietary POS information system. During fiscal year 2011, the Company identified a third party POS software alternative that has a system that meets our current and future functionality requirements including enhanced guest demographics. The Company began implementing this new technology in our salons in fiscal year 2012 and will continue to implement as technology will allow, which will allow the Company to stay current and meet guests' expectations.

Salon Competition:

        The hair care industry is highly fragmented and competitive. 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 and within malls from companies which operate salons within department stores, independently owned salons and, to a lesser extent, salons which, although independently owned, are operating under franchises from a franchising company that may assist such salons in areas of training, marketing and advertising.

        At the individual salon level the barriers to enter the market are not considerable; however, barriers exist for chains to expand nationally due to the need to establish systems and infrastructure, recruitment of experienced hair care management and adequate store staff, and leasing of quality sites. The principal factors of competition in the affordable 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. In order to obtain locations in shopping malls, the Company must be competitive as to rentals and other customary tenant obligations.

18

---

Table of Contents

Hair Restoration Business Strategy:

        On July 13, 2012, the Company entered into a definitive agreement to sell Hair Club to Aderans, Co., Ltd. for cash of $163.5 million excluding closing adjustments and transaction fees. Subsequent to fiscal year 2012, the net assets of Hair Club to be sold met the accounting criteria to be classified as held for sale and will be aggregated and reported in accordance with authoritative guidance in the Company's fiscal year 2013 first quarter Form 10-Q. The Company is currently anticipating recognizing an after-tax gain in the range of $8 to $12 million upon closing of the deal. The transaction is expected to close in the first or second fiscal quarter of 2013, and is subject to customary closing conditions.

        Hair Club is the largest U.S. provider of hair loss solutions and the only company offering a comprehensive menu of proven hair loss products and services. Hair Club leverages its strong brand, best-in-class service model and comprehensive menu of hair restoration alternatives to build an increasing base of repeat guests that generate recurring cash flow for the Company. From its traditional non-surgical hair replacement systems, to hair transplants, hair therapies and hair care products and services, Hair Club offers a solution for anyone experiencing or anticipating hair loss. Hair Club's operations, presented under the Hair Restoration Centers reporting unit, consist of 98 locations (29 franchise locations) in the United States and Canada. The domestic hair restoration market is estimated to generate over $4 billion annually. The competitive landscape is highly fragmented and comprised of approximately 4,000 locations. Hair Club and its franchisees have the largest market share, with approximately five percent based on guest count. In an effort to provide privacy to its guests, Hair Club offices are located primarily in office and professional buildings within larger metropolitan areas.

        The following table sets forth the number of company-owned and franchise hair restoration centers opened at the beginning and end of each of the last five fiscal years, as well as the number of centers opened, closed, relocated and acquired during each of these periods:

19

---

Table of Contents

Affiliated Ownership Interests:

        The Company maintains ownership interests in salons, beauty schools and hair restoration centers. The primary ownership interests are in Provalliance, EEG and Hair Club for Men, Ltd., which are accounted for as equity method investments.

        The Company maintains a 46.7 percent ownership interest in Provalliance. The fiscal year 2008 merger of the operations of the European operating subsidiaries with the Franck Provost Salon Group created a newly formed entity, Provalliance. The Franck Provost Salon Group management structure has a proven platform to build and acquire company-owned stores as well as a strong franchise operating group that is positioned for expansion. In March of 2011, the Company acquired approximately 17 percent additional equity interest in Provalliance. In April 2012, the Company entered into a Share Purchase Agreement (Agreement) to sell the Company's 46.7 percent equity interest in Provalliance to the Provost Family for a purchase price of €80 million. The transaction is expected to close no later than September 30, 2012 and is subject to the Provost Family securing financing for the purchase price.

        The Company maintains a 55.1 percent ownership interest in EEG. Contributing the Company's beauty schools in fiscal year 2008 to EEG leverages EEG's management expertise, while enabling the Company to maintain a vested interest in the beauty school industry.

        The Company's 50.0 percent ownership in Hair Club for Men, Ltd., which operates Hair Club centers in Illinois and Wisconsin, is included in the definitive agreement entered into on July 13, 2012 to divest Hair Club. The transaction is expected to close during the first half of fiscal year 2013.

Corporate Trademarks:

        The Company holds numerous trademarks, both in the United States and in many foreign countries. The most recognized trademarks are "Regis Salons," "Supercuts," "MasterCuts," "SmartStyle," "Cost Cutters," "Hair Masters," "First Choice Haircutters," "Magicuts" and "Hair Club for Men and Women."

        "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.

        Although the Company believes the use of these trademarks is an element in establishing and maintaining its reputation as a national operator of high quality hairstyling salons, and is committed to protecting these trademarks by vigorously challenging any unauthorized use, the Company's success and continuing growth are the result of the quality of its salon location selections and real estate strategies.

Corporate Employees:

        During fiscal year 2012, the Company had approximately 52,000 full- and part-time employees worldwide, of which approximately 46,000 employees were located in the United States. None of the Company's employees is subject to a collective bargaining agreement and the Company believes that its employee relations are amicable.

Executive Officers:

        On July 11, 2012, the Company announced that Daniel Hanrahan was named President and CEO, effective August 6, 2012, and also became a member of the Regis Board of Directors on that date. In January 2012, Eric Bakken, Executive Vice President, General Counsel and Business Development, was appointed to assume the role of Interim Corporate Chief Operating Officer. Randy Pearce retired as President effective June 30, 2012. Paul Finkelstein retired as Chief Executive Officer effective February 2012.

20

---

Table of Contents

        Information relating to Executive Officers of the Company follows:

        Daniel Hanrahan was appointed to President and Chief Executive Officer in August 2012. He most recently served as President of Celebrity Cruises at Royal Caribbean Cruises Ltd. from February 2005 to July 2012, and as its President and Chief Executive Officer since September 2007.

        Eric Bakken has served as Executive Vice President since 2010. He was appointed to Interim Corporate Chief Operating Officer in January 2012. He performed the function of principal executive officer between July 2012 and August 2012. He served as Senior Vice President from 2006 to 2009, General Counsel from 2004 to 2006, as Vice President, Law from 1998 to 2004 and as a lawyer to the Company from 1994 to 1998.

        Norma Knudsen has served as Executive Vice President, Merchandising since July 2006. She served as Chief Operating Officer, Trade Secret from February 1999 through 2009 and as Vice President, Trade Secret Operations from 1995 to 1999.

        Brent Moen was appointed to Senior Vice President and Chief Financial Officer in 2011. He served as Vice President and Corporate Controller from 2006 to 2011, as Vice President of Finance from 2002 to 2006, and as Director of Finance from 2000 to 2002.

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 both the Alberta Franchise Act and the Ontario Franchise Act. The offering of franchises in Canada occurs by way of a disclosure document, which contains certain disclosures required by the Ontario and Alberta Franchise Acts. Both the Ontario and Alberta Franchise Acts 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.

21

---

Table of Contents

        Governmental regulations surrounding franchise operations in Europe are similar to those in the United States. 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.

        In June 2012, the United States Supreme Court upheld the Patient Protection and Affordable Care Act (Act). We expect the Act will increase our annual employee healthcare costs, with significant increases commencing in fiscal year 2014.

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 15 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 regarding issuers that file electronically.

        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.

Item 1A.    Risk Factors

Changes in the general economic environment may impact our business and results of operations.

        Changes to the United States, Canadian, United Kingdom, Asian and other European economies have an impact on our business. General economic factors that are beyond our control, such as interest rates, recession, inflation, deflation, tax rates and policy, energy costs, unemployment trends, and other matters that influence consumer confidence and spending, may impact our business. In particular, visitation patterns to our salons and hair restoration centers can be adversely impacted by increases in unemployment rates and decreases in discretionary income levels.

If we continue to have negative same-store sales our business and results of operations may be affected.

        Our success depends, in part, upon our ability to improve sales, as well as both gross margins and operating margins. Comparable 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, fashion trends, competition, current economic conditions, changes in our product assortment, the success of marketing

22

---

Table of Contents

programs and weather conditions. These factors may cause our comparable same-store sales results to differ materially from prior periods and from our expectations. Our comparable same-store sales results for the twelve months ended June 30, 2012 declined 3.1 percent compared to the twelve months ended June 30, 2011. During fiscal year 2012, we impaired $67.7 and $78.4 million of goodwill associated with our Regis salon concept and Hair Restoration Centers reporting units, respectively. We impaired $74.1 million of goodwill associated with our Promenade salon concept during fiscal year 2011 and $35.3 million of goodwill associated with our Regis salon concept during fiscal year 2010. We also impaired $41.7 million of goodwill associated with our salon concepts in the United Kingdom during fiscal year 2009. If negative same-store sales continue and we are unable to offset the impact with operational savings, our financial results may be further affected. We may be required to take additional impairment charges and to impair certain long-lived assets and goodwill and such impairments could be material to our consolidated balance sheet and results of operations. The concept that has the highest likelihood of impairment is Promenade. As previously disclosed, the Company has agreed to sell the Hair Restoration Centers reporting unit in the first half of fiscal year 2013; however, until this reporting unit is sold it is reasonably likely there could be impairment of goodwill in future periods.

        If we are unable to improve our comparable same-store sales on a long-term basis or offset the impact with operational savings, our financial results may be affected. Furthermore, continued declines in same-store sales performance may cause us to be in default of certain covenants in our financing arrangements.

The Board of Directors is engaged in a strategic review of non-core assets that may impact our business and results of operations.

        Our strategic review of non-core assets may adversely affect our financial condition and operating results or impose other risk, such as the following:

•

Disruption of our business or distraction of our employees and management;



•

Difficulty recruiting, hiring, motivating and retaining talented and skilled personnel;



•

Increased stock price volatility;



•

Difficulty in establishing, maintaining or negotiating business or strategic relationships or transactions; and



•

Increased advisory fees.

        On July 13, 2012, the Company entered into a definitive agreement to sell its Hair Club for Men and Women business (Hair Club), a provider of hair restoration services. The transaction is expected to close during the first half of fiscal year 2013.

Changes in our management and organizational structure may affect our operating results.

        On July 11, 2012, the Company announced that Mr. Daniel J. Hanrahan was appointed President and Chief Executive Officer of the Company, effective August 6, 2012. The changes to our management and organizational structure may adversely affect our financial condition and operating results or impose other risk, such as the following:

•

Disruption of our business or distraction of our employees and management;



•

Difficulty recruiting, hiring, motivating and retaining talented and skilled personnel;



•

Increased stock price volatility; and



•

Difficulty in establishing, maintaining or negotiating business or strategic relationships or transactions.

23

---

Table of Contents

Failure to control cost 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.

Changes in our key relationships may adversely affect our operating results.

        We maintain key relationships with certain companies, including Walmart. Termination or modification of any of these relationships, including Walmart, could significantly reduce our revenues and have a material and adverse impact on our business, our operating results and our ability to grow.

Changes in fashion trends may impact our revenue.

        Changes in consumer tastes and fashion trends can have an impact on our financial performance. For example, trends in wearing longer hair may reduce the number of visits to, and therefore, sales at our salons.

The health care reform legislation may adversely affect our operating results.

        In March 2010, the United States government enacted comprehensive health care reform legislation, which, among other things, includes guaranteed coverage requirements, eliminates pre-existing condition exclusions and annual and lifetime maximum limits, restricts the extent to which policies can be rescinded and imposes new and significant taxes on health insurers and health care benefits. The current legislation imposed implementation dates beginning in 2010 and extending through 2020, with many of the reform components requiring additional guidance from government agencies or federal regulators. Due to the lack of interpretative guidance and the phased-in nature of the reform, it is difficult to determine at this time what the impact of the health care reform legislation will be on our future financial results. Possible adverse impacts of the health care reform legislation include, but are not limited to, increased costs, exposure to expanded liability and requirements for us to revise the way we provide health care and other benefits to our employees. As a result, the impact of the health care reform legislation could have a material and adverse impact on our results of operations.

Changes in regulatory and statutory laws may result in increased costs to our business.

        With approximately 12,600 locations and 52,000 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 or increase costs to provide employee benefits may result in additional costs to our company. Compliance with new, complex and changing laws may cause our expenses to increase. In addition, any non-compliance with these laws could result in fines, product recalls and enforcement actions or otherwise restrict our ability to market certain products, which could adversely affect our business, financial condition and results of operations. We are also subject to laws that affect the franchisor-franchisee relationship.

If we are not able to successfully compete in our business segments, our financial results may be affected.

        Competition on a market by market basis remains strong as many smaller chain competitors are franchise systems with local operating strength in certain markets. Therefore, our ability to raise prices in certain markets can be adversely impacted by this competition. If we are not able to raise prices, our ability to grow same-store sales and increase our revenue and earnings may be impaired.

24

---

Table of Contents

If our joint ventures are unsuccessful our financial results may be affected.

        We have entered into joint venture arrangements with other companies in the hair salon and beauty school businesses in order to maintain and expand our operations in the United States, Asia and continental Europe. If our joint venture partners are unwilling or unable to devote their financial resources or marketing and operational capabilities to our joint venture businesses, or if any of our joint ventures are terminated, we may not be able to realize anticipated revenues and profits in the countries where our joint ventures operate and our business could be materially adversely affected. If our joint venture arrangements are not successful, we may have a limited ability to terminate or modify these arrangements. If any of our joint ventures are terminated, there can be no assurance that we will be able to attract new joint venture partners to continue the activities of the terminated joint venture or to operate independently in the countries in which the terminated joint venture conducted business.

        On April 9, 2012, the Company entered into the Agreement to sell the Company's 46.7 percent equity interest in Provalliance to the Provost family for a purchase price of €80 million. The transaction is expected to close no later than September 30, 2012 and is subject to the Provost family securing financing for the purchase price. The purchase price was negotiated independently of the equity put and the equity put and equity call will automatically terminate upon closing. If the closing does not occur by September 30, 2012, the Provost family will not be entitled to exercise their equity put rights until September 30, 2014.

        In connection with executing the Agreement, the Company recorded a $37.4 million other than temporary impairment charge during the twelve months ended June 30, 2012 related to the difference between the purchase price and carrying value of its investment in Provalliance.

        During fiscal year 2012, we recorded an impairment of $19.4 million related to our investment in EEG. During fiscal year 2011, we recorded an impairment of $9.2 million related to our investment in MY Style. During fiscal year 2009, we recorded impairments of $25.7 million and $7.8 million ($4.8 million net of tax) related to our investment in Provalliance and investment in and loans to Intelligent Nutrients, LLC, respectively. Due to economic and other factors, we may be required to take additional impairment charges related to our investments and such impairments could be material to our consolidated balance sheet and results of operations. In addition, our joint venture partners may be required to take impairment charges related to long-lived assets and goodwill, and our share of such impairment charges could be material to our consolidated balance sheet and results of operations. Specific to EEG, the for-profit post secondary educational market has experienced further and substantial declines in late July and August of 2012. Should this continue or not reverse, an additional impairment would be more likely than not during fiscal year 2013. For example, during fiscal year 2012 we recorded $8.7 million for our share of an intangible asset impairment recorded by EEG. Our share of our investment's goodwill balances as of June 30, 2012 is approximately $95 million. Upon completion of the sale of Provalliance our share of our investment's goodwill balances will decrease to approximately $16 million.

We are subject to default risk on our accounts and notes receivable.

        We have outstanding accounts and notes receivable subject to collectability. If the counterparties are unable to repay the amounts due or if payment becomes unlikely our results of operations would be adversely affected. For example, in fiscal year 2011 the Company recorded a $31.2 million valuation reserve on the note receivable from the purchaser of Trade Secret to reflect the net realizable value.

Changes in manufacturers' choice of distribution channels may negatively affect our revenues.

        The retail products that we sell are licensed to be carried exclusively by professional salons. The products we purchase for sale in our salons are purchased pursuant to purchase orders, as opposed to long-term contracts and generally can be terminated by the producer without much advance notice.

25

---

Table of Contents

Should the various product manufacturers decide to utilize other distribution channels, such as large discount retailers, it could negatively impact the revenue earned from product sales.

Changes to interest rates and foreign currency exchange rates may impact our results from operations.

        Changes in interest rates will have an impact on our expected results from operations. Currently, we manage the risk related to fluctuations in interest rates through the use of fixed rate debt instruments and other financial instruments.

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. 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.

        In fiscal year 2012 the Company began the process of implementing a new point-of-sale system in our salons and will continue to implement as technology will allow. Failure to effectively implement the point-of-sale system may adversely affect our operating results.

If we fail to protect the security of personal information about our guests, we could be subject to 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. If we experience a data security breach, we could be exposed to government enforcement actions and private litigation. In addition, 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.

Certain of the terms and provisions of the convertible notes we issued in July 2009 may adversely affect our financial condition and operating results and impose other risks.

        In July 2009, we issued $172.5 million aggregate principal amount of our 5.0 percent convertible senior notes due 2014 in a public offering. Certain terms of the notes we issued may adversely affect our financial condition and operating results or impose other risks, such as the following:

•

Holders of notes may convert their notes into shares of our common stock, which may dilute the ownership interest of our shareholders,



•

If we elect to settle all or a portion of the conversion obligation exercised by holders of the notes through the payment of cash, it could adversely affect our liquidity,



•

Holders of notes may require us to purchase their notes upon certain fundamental changes, and any failure by us to purchase the notes in such event would result in an event of default with respect to the notes,



•

The fundamental change provisions contained in the notes may delay or prevent a takeover attempt of the Company that might otherwise be beneficial to our investors,



•

Our ability to pay principal and interest on the notes depends on our future operating performance and any failure by us to make scheduled payments could allow the note holders to declare all outstanding principal and interest to be due and payable, result in termination of other debt commitments and foreclosure proceedings by other lenders, or force us into bankruptcy or liquidation, and

26

---

Table of Contents

•

The debt obligations represented by the notes may limit our ability to obtain additional financing, require us to dedicate a substantial portion of our cash flow from operations to pay our debt, limit our ability to adjust rapidly to changing market conditions and increase our vulnerability to downtowns in general economic conditions in our business.

Item 1B.    Unresolved Staff Comments

        None.

Item 2.    Properties

        The Company's corporate offices are headquartered in a 270,000 square foot, four building complex in Edina, Minnesota owned or leased by the Company. The Company also operates small offices in Toronto, Canada; Coventry and London, England; Boca Raton, Florida; and Chattanooga, Tennessee. 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 may be expanded to 290,000 square feet to accommodate future growth.

        The Company operates all of its salon locations and hair restoration centers 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 domestic locations.

        The Company also leases the premises in which certain 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. See Note 10 to the Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.

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. In addition, the Company is a nominal defendant, and nine current and former directors and officers of the Company are named defendants, in a shareholder derivative action in Minnesota state court. The derivative shareholder alleges that the individual defendants breached their fiduciary duties to the Company in connection with their approval of certain executive compensation arrangements and certain related party transactions. A Special Litigation Committee has been formed per the direction of the judge in the matter. The Company is working with outside counsel to formulate its next steps in keeping with the court. 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.

27

---

Table of Contents

        During fiscal year 2012, the Company was awarded $1.1 million in conjunction with a class-action lawsuit.

        During fiscal year 2011, the Company settled a legal claim with the former owner of Hair Club for $1.7 million.

        During fiscal year 2010, the Company settled two legal claims regarding certain guest and employee matters for an aggregate charge of $5.2 million plus a commitment to provide discount coupons. During the twelve months ended June 30, 2011 and 2010, payments aggregating $4.3 million and $0.9 million, respectively, were made.

Item 4.    Mine Safety Disclosures

        None.

PART II

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Repurchase of Equity Securities

(a)

Market Price of and Dividends on the Registrant's Common Equity and Related Stockholder Matters; Performance Graph

        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 2012 and 2011 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 13, 2012, Regis shares were owned by approximately 22,000 shareholders based on the number of record holders and an estimate of individual participants in security position listings. The common stock price was $17.14 per share on August 13, 2012.

        The Company paid quarterly dividends of $0.06 per share during fiscal year 2012 and during each of the three month periods ended March 31, 2011 and June 30, 2011. The Company paid quarterly dividends of $0.04 per share during each of the three month periods ended September 30, 2010 and December 31, 2010. The Company expects to continue paying regular quarterly dividends in the foreseeable future.

        Notwithstanding anything to the contrary set forth in any of our previous filings under the Securities Act of 1933 or the Securities Exchange Act of 1934 that might incorporate future filings or this Annual Report, the following performance graph and accompanying data shall not be deemed to be incorporated by reference into any such filings. In addition, they shall not be deemed to be "soliciting material" or "filed" with the SEC.

        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

28

---

Table of Contents

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., Coinstar, Inc., Cracker Barrel Old Country Store, DineEquity, Inc., Fossil, Inc., Fred's, Inc., Green Mountain Coffee Roasters, 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, 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 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, 2007 and those dividends, if any, were reinvested.

Comparison of 5 Year Cumulative Total Return
Assumes Initial Investment of $100
June 2012

(b)

Share Repurchase Program

        In May 2000, the Company's Board of Directors (BOD) approved a stock repurchase program. Originally, the program authorized up to $50.0 million to be expended for the repurchase of the Company's stock. The BOD elected to increase this maximum to $100.0 million in August 2003, to $200.0 million on May 3, 2005, and to $300.0 million on April 26, 2007. The timing and amounts of any repurchases will depend on many factors, including the market price of the common stock and overall

29

---

Table of Contents

market conditions. Historically, the repurchases to date have been made primarily to eliminate the dilutive effect of shares issued in conjunction with acquisitions, restricted stock grants and stock option exercises. All repurchased shares become authorized but unissued shares of the Company. This repurchase program has no stated expiration date. As of June 30, 2012, 2011, and 2010, a total accumulated 6.8 million shares have been repurchased for $226.5 million. As of June 30, 2012, $73.5 million remains to be spent on share repurchases under this program.

        The Company did not repurchase any of its common stock through its share repurchase program during the twelve months ended June 30, 2012 and 2011.

CEO and CFO Certifications

        The certifications by our chief executive officer (CEO) and chief financial officer required under Section 302 of the Sarbanes-Oxley Act of 2002, have been filed as exhibits to this Annual Report on Form 10-K. Our CEO's annual certification pursuant to NYSE Corporate Governance Standards Section 303A.12(a) that our CEO was not aware of any violation by the Company of the NYSE's Corporate Governance listing standards was submitted to the NYSE on November 23, 2011.

Item 6.    Selected Financial Data

        Beginning with the period ended December 31, 2008 the operations of Trade Secret concept within the North American reportable segment were accounted for as discontinued operations. All periods presented will reflect Trade Secret as a discontinued operation. The following discussion of results of operations will reflect results from continuing operations. Discontinued operations will be discussed at the end of this section.

        The following table sets forth, in thousands (except per share data), for the periods indicated, selected financial data derived from the Company's Consolidated Financial Statements in Part II, Item 8.

30

---

Table of Contents

31

---

Table of Contents

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. Our MD&A is presented in five sections:

•

Management's Overview



•

Critical Accounting Policies



•

Overview of Fiscal Year 2012 Results



•

Results of Operations



•

Liquidity and Capital Resources

MANAGEMENT'S OVERVIEW

        Regis Corporation (RGS) owns or franchises beauty salons and hair restoration centers. As of June 30, 2012, we owned, franchised or held ownership interests in approximately 12,600 worldwide locations. Our locations consisted of 9,738 system wide North American and international salons, 98 hair restoration centers, and 2,811 locations in which we maintain a non-controlling ownership interest less than 100 percent. Our salon concepts offer generally similar products and services and serve mass market consumers. Our salon operations are organized to be managed based on geographical location. Our North American salon operations include 9,340 salons, including 2,016 franchise salons, operating in the United States, Canada and Puerto Rico primarily under the trade names of Regis Salons, MasterCuts, SmartStyle, Supercuts and Cost Cutters. Our international salon operations include 398 salons located in Europe, primarily in the United Kingdom. Hair Club for Men and Women includes 98 North American locations, including 29 franchise locations. During fiscal year 2012, we had approximately 52,000 corporate employees worldwide.

        Our fiscal year 2013 growth strategy is focused on improving the guest experience. We plan to execute our strategy by putting guests and stylists first, leveraging the power of our salon brands, focusing on technology and connectivity, and reviewing our non-core assets. Initiatives include:

•

Putting guests and stylists first by improving both the experience for the person in the chair and behind the chair. The Company continues to work on attracting, developing and retaining the best stylists through orientation programs, training and development and rewards and recognition through a performance driven culture.



•

Leveraging the power of our salon brands through focusing on the best brands within the best markets.



•

Using technology and connectivity, including internet in the salons, to enhance effectiveness of field management and improve guest satisfaction and retention.



•

Reviewing non-core assets.

32

---

Table of Contents

Salon Business

        The strength of our salon business is in the fundamental similarity and broad appeal of our salon concepts. Each concept generally targets the middle market guest, however, each attracts a different demographic.

        We execute our salon growth strategy by focusing on real estate. Our salon real estate strategy is to add new units in convenient locations with good visibility and guest traffic, as well as appropriate trade demographics. Our various salon and product concepts operate in a wide range of retailing environments, including regional shopping malls, strip centers and Walmart Supercenters. We believe that the availability of real estate will augment our ability to achieve the aforementioned long-term growth objectives.

        Organic salon revenue is achieved through the combination of new salon construction and salon same-store sales results. Older, unprofitable salons will be closed or relocated. Although we have generally been experiencing negative same-store sales we believe our strategy of focusing on the in-salon guest experience will improve same-store sales.

        Historically, our salon acquisitions have varied in size from as small as one salon to over one thousand salons. The median acquisition size is approximately ten salons. From fiscal year 1994 to fiscal year 2012, we acquired 8,052 salons, net of franchise buybacks.

Hair Restoration Business

        In December 2004, we acquired Hair Club for Men and Women. Hair Club for Men and Women is a provider of hair loss solutions with an estimated five percent share of the $4 billion domestic market. This industry is comprised of numerous locations domestically and is highly fragmented. In an effort to provide confidentiality for guests, the hair restoration centers operate primarily in professional or medical office buildings. Further, the hair restoration business is more marketing intensive. As a result, organic growth at hair restoration centers is dependant on successfully generating new leads and converting them into hair restoration guests.

        During the fiscal year ended June 30, 2012, the Company began reviewing alternatives for non-core assets. On July 13, 2012, the Company entered into a definitive agreement to sell its Hair Club for Men and Women business (Hair Club), a provider of hair restoration services. The transaction is expected to close during the first half of fiscal year 2013.

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 contained in Part II, Item 8 of this Form 10-K. We believe the following accounting policies are most critical to aid in fully understanding and evaluating our reported financial condition and results of operations.

33

---

Table of Contents

Investment In and Loans to Affiliates

        The Company has equity investments in securities of certain privately held entities. The Company accounts for these investments under the equity method of accounting. The Company also has loan receivables from certain of these entities. 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. During fiscal year 2012, we recorded an impairment of $19.4 million related to our investment in EEG. In addition, during fiscal year 2012 we recorded a net $17.2 million other than temporary net impairment charge associated with the Share Purchase Agreement to sell the Company's 46.7 percent equity interest in Provalliance to the Provost Family for a purchase price of €80 million. During fiscal year 2011, we recorded an impairment of $9.2 million related to our investment in MY Style.

Note Receivables, Net

        The note receivable balances within the Company's Consolidated Balance Sheet primarily include note receivables related to the Company's investments in EEG and MY Style, a note receivable with the purchaser of Trade Secret and note receivables with our franchisees. The balances are presented net of a valuation reserve for estimated losses. The Company monitors the financial condition of its counterparties with an outstanding note receivable and records provisions for estimated losses on receivables when it believes the counterparties are unable to make their required payments. The valuation reserve is the Company's best estimate of the amount of probable credit losses related to existing notes receivable.

        During the third quarter of fiscal year 2011, the Company did not receive a scheduled interest payment related to the outstanding note receivable with the purchaser of Trade Secret, the fair value of the collateral decreased to a level below the carrying value of the outstanding note receivable, and the purchaser of Trade Secret provided the Company with a new five year business plan that was well below their original projections. Due to these factors that occurred during the third quarter of fiscal year 2011, the Company evaluated the note receivable for impairment based on a probability weighted expected future cash flow analysis. During the third quarter of fiscal year 2011, the Company recorded a $9.0 million valuation reserve for the excess of the carrying value of the note receivable over the present value of expected future cash flows.

        During the fourth quarter of fiscal year 2011, the Company did not receive a scheduled interest payment related to the outstanding note receivable with the purchaser of Trade Secret and the fair value of the collateral continued to decrease and was at a level significantly below the carrying value of the outstanding note receivable. In addition, the Company received updated financial projections that were below the projections received during the third quarter of fiscal year 2011. Due to these negative financial events in the fourth quarter of fiscal year 2011, the Company performed an extensive evaluation on the Company's option to realize the collateral under the note receivable and recorded an additional $22.2 million valuation reserve that fully reserved the carrying value of the note receivable as of June 30, 2011. The carrying value of the note receivable continues to be fully reserved at June 30, 2012.

Goodwill

        Goodwill is tested for impairment annually or at the time of a triggering event. In evaluating whether goodwill is impaired, the Company compares the carrying value of each reporting unit, including goodwill, to the estimated fair value of the reporting unit. The carrying value of each reporting unit is based on the assets and liabilities associated with the operations of the reporting unit,

34

---

Table of Contents

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.

        The Company calculates the estimated fair value of the reporting units based on discounted future cash flows that utilize estimates in annual revenue, gross margins, fixed expense rates, allocated corporate overhead, and long-term growth rates for determining terminal value. The Company's estimated future cash flows also take into consideration acquisition integration and maturation. Where available and as appropriate, comparative market multiples are used in conjunction with the results of the discounted cash flows. The Company considers its various concepts to be reporting units when testing for goodwill impairment because that is where the goodwill resides. The Company periodically engages third-party valuation consultants to assist in evaluation of the Company's estimated fair value calculations.

        In the situations where a reporting unit's carrying value exceeds its estimated fair value, the amount of the impairment loss must be measured. The measurement of impairment is calculated by determining the implied fair value of a reporting unit's goodwill. In calculating the implied fair value of goodwill, the fair value of the reporting unit is allocated to all other assets and liabilities of that unit based on the relative fair values under the assumption of a taxable transaction. The excess of the fair value of the reporting unit over the amount assigned to its assets and liabilities is the implied fair value of goodwill. The goodwill impairment is measured as the excess of the carrying value of goodwill over its implied fair value.

        As previously disclosed, the Company concluded that it was reasonably likely that goodwill for the Regis and Hair Restoration Centers reporting units might become impaired in future periods.

        As a result of the Company's annual impairment testing of goodwill during the fourth quarter of fiscal year 2012, a $67.7 million impairment charge was recorded within continuing operations for the excess of the carrying value of goodwill over the implied fair value of the goodwill for the Regis salon concept. The Regis salon concept reported same-store sales of negative 4.0 percent for the ten months ended April 30, 2012, which was unfavorable compared to the Company's budgeted same-store sales. Visitation patterns did not rebound as quickly as the Company originally projected. Accordingly, the Company reduced the budgeted financial projections for future years. After the impairment charge the Regis salon concept reporting unit had $35.1 million of goodwill. The impairment was only partially deductible for tax purposes resulting in a tax benefit of $12.5 million.

        During the three months ended December 31, 2011 the Company updated the projections for the Hair Restoration Centers reporting unit used in the fiscal 2011 annual impairment test to reflect the impact of recent industry developments, including a slow down in revenue growth and increasing supply costs. The Company determined there was a triggering event as it was more likely than not that the fair value of the Hair Restoration Centers was below carrying value and performed an interim impairment test of goodwill during the three months ended December 31, 2011.

        As a result of the Company's interim impairment test of goodwill related to the Hair Restoration Centers reporting unit during the second quarter of fiscal year 2012, a $78.4 million impairment charge was recorded within continuing operations for the excess of the carrying value of goodwill over the implied fair value of the goodwill for the Hair Restorations Centers reporting unit. After the impairment charge the Hair Restoration Centers reporting unit had $74.4 million of goodwill. The impairment was only partially deductible for tax purposes resulting in a tax benefit of $5.9 million. See further discussion on the effective tax rate for the twelve months ended June 30, 2012 within Note 12 to the Consolidated Financial Statements.

35

---

Table of Contents

        A summary of the critical assumptions utilized during the fiscal year 2012 annual impairment test of the Regis salon concept are outlined below:

        Annual revenue growth.     Annual revenue growth is primarily driven by assumed same-store sales rates of approximately negative 2.0 to positive 3.0 percent. Other considerations include anticipated economic conditions and moderate acquisition growth.

        Gross margin.    Adjusted for anticipated salon closures, new salon construction and acquisitions estimated future gross margins were held constant.

        Fixed expense rates.     Fixed expense rate increases of approximately 1.0 to 2.0 percent based on anticipated inflation. Fixed expenses consisted of rent, site operating, and allocated general and administrative corporate overhead.

        Allocated corporate overhead.    Corporate overhead incurred by the home office based on the number of Regis salons as a percent of total company-owned salons.

        Long-term growth.     A long-term growth rate of 2.5 percent was applied to terminal cash flow based on anticipated economic conditions.

        Discount rate.     A discount rate of 11.0 percent based on the weighted average cost of capital that equals the rate of return on debt capital and equity capital weighted in proportion to the capital structure common to the industry.

        The following table summarizes the approximate impact that a change in certain critical assumptions would have on the estimated fair value of our Regis salon concept reporting unit (the approximate impact of the change in the critical assumptions assumes all other assumptions and factors remain constant):

        As of our fiscal year 2012 annual impairment test, the estimated fair value of the Hair Restoration Centers reporting unit exceeded its respective carrying value by approximately 18.0 percent. As previously disclosed, the Company has agreed to sell the Hair Restoration Centers reporting unit in the first half of fiscal year 2013; however, until this reporting unit is sold it is reasonably likely that there could be impairment of the Hair Restoration Centers reporting unit's goodwill in future periods. The sensitivity of the Company's critical assumptions in estimating fair value of this reporting unit, the Company has provided additional information related to this reporting unit.

        A summary of the critical assumptions utilized during the fiscal year 2012 interim impairment test of the Hair Restoration Centers reporting unit are outlined below:

        Annual revenue growth.     Annual revenue growth is primarily driven by assumed same-store sales rates of approximately positive 1.0 to positive 3.0 percent. Other considerations include anticipated economic conditions and moderate acquisition growth.

        Gross margin.     Adjusted for anticipated center closures, new center construction and acquisitions. In addition, estimated future gross margins were adjusted for increasing supply costs.

36

---

Table of Contents

        Fixed expense rates.     Fixed expense rate increases of approximately 1.0 to 2.0 percent based on anticipated inflation. Fixed expenses consisted of rent, site operating, and allocated general and administrative corporate overhead.

        Allocated corporate overhead.     Corporate overhead incurred by the home office is not allocated as the Hair Restoration Centers reporting unit incurs its own overhead.

        Long-term growth.    A long-term growth rate of 2.5 percent was applied to terminal cash flow based on anticipated economic conditions.

        Discount rate.     A discount rate of 12.0 percent based on the weighted average cost of capital that equals the rate of return on debt capital and equity capital weighted in proportion to the capital structure common to the industry.

        Structure.     A nontaxable structure based on the highest economic value and feasibility of the assumed structure.

        The following table summarizes the approximate impact that a change in certain critical assumptions would have on the estimated fair value of our Hair Restoration Centers reporting unit goodwill balance (the approximate impact of the change in the critical assumptions assumes all other assumptions and factors remain constant):

        As of our fiscal year 2012 annual impairment test, the estimated fair value of the Promenade salon concept exceeded its respective carrying value by approximately 14.0 percent. As it is reasonably likely that there could be impairment of the Promenade salon concept's goodwill in future periods along with the sensitivity of the Company's critical assumptions in estimating fair value of this reporting unit, the Company has provided additional information related to this reporting unit.

        A summary of the critical assumptions utilized during the fiscal year 2012 annual impairment test of the Promenade salon concept are outlined below:

        Annual revenue growth.     Annual revenue growth is primarily driven by assumed same-store sales rates of approximately negative 2.0 to positive 6.0 percent. Other considerations include anticipated economic conditions and moderate acquisition growth.

        Gross margin.    Adjusted for anticipated salon closures, new salon construction and acquisitions estimated future gross margins were held constant.

        Fixed expense rates.     Fixed expense rate increases of approximately 1.0 to 2.0 percent based on anticipated inflation. Fixed expenses consisted of rent, site operating, and allocated general and administrative corporate overhead.

        Allocated corporate overhead.    Corporate overhead incurred by the home office based on the number of Promenade company-owned salons as a percent of total company-owned salons.

        Long-term growth.     A long-term growth rate of 3.0 percent was applied to terminal cash flow based on anticipated economic conditions.

37

---

Table of Contents

        Discount rate.     A discount rate of 11.0 percent based on the weighted average cost of capital that equals the rate of return on debt capital and equity capital weighted in proportion to the capital structure common to the industry.

        The following table summarizes the approximate impact that a change in certain critical assumptions would have on the estimated fair value of our Promenade salon concept goodwill balance (the approximate impact of the change in the critical assumptions assumes all other assumptions and factors remain constant):

        The respective fair values of the Company's remaining reporting units exceeded fair value by greater than 20.0 percent at June 30, 2012. While the Company has determined the estimated fair values of Promenade to be appropriate based on the historical level of revenue growth, operating income and cash flows, it is reasonably likely that Promenade may experience additional impairment in future periods. As previously disclosed, the Company has agreed to sell the Hair Restoration Centers reporting unit in the first half of fiscal year 2013; however, until this reporting unit is sold it is reasonably likely there could be impairment of the Hair Restoration Centers reporting unit's goodwill in future periods. The term "reasonably likely" refers to an occurrence that is more than remote but less than probable in the judgment of the Company. Because some of the inherent assumptions and estimates used in determining the fair value of the reportable segment are outside the control of management, changes in these underlying assumptions can adversely impact fair value. Potential impairment of a portion or all of the carrying value of goodwill for the Promenade salon concept and Hair Restoration Centers reporting units is dependent on many factors and cannot be predicted with certainty.

        As of June 30, 2012, the Company's estimated fair value, as determined by the sum of our reporting units' fair value reconciled to within a reasonable range of our market capitalization which included an assumed control premium.

        A summary of the Company's goodwill balance as of June 30, 2012 and 2011 by reporting unit is as follows:

        We impaired $74.1 million of goodwill associated with our Promenade salon concept during fiscal year 2011 and $35.3 million of goodwill associated with our Regis salon concept during fiscal year 2010.

38

---

Table of Contents

Long-Lived Assets, Excluding Goodwill

        We assess the impairment of long-lived assets annually or when events or changes in circumstances indicate that the carrying value of the assets or the asset grouping may not be recoverable. Our impairment analysis on salon property and equipment is performed on a salon by salon basis. The Company's test for impairment is performed at a salon level as this is the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. 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 related salon assets that does not recover the carrying value of the salon assets. When the sum of a salon's undiscounted estimated future cash flow is zero or negative, impairment is measured as the full carrying value of the related salon's equipment and leasehold improvements. When the sum of a salon's undiscounted cash flows is greater than zero but less than the carrying value of the related salon's equipment and leasehold improvements, a discounted cash flow analysis is performed to estimate the fair value of the salon assets and impairment is measured as the difference between the carrying value of the salon assets and the estimated fair value. The fair value estimate is based on the best information available, including market data.

        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 us to realize material impairment charges.

        During fiscal years 2012, 2011, and 2010, $6.6, $6.7, and $6.4 million, respectively, of impairments were recorded within depreciation and amortization in the Consolidated Statement of Operations.

Purchase Price Allocation

        The acquisition purchase prices are allocated to assets acquired, including identifiable intangible assets, and liabilities assumed based on their estimated fair values at the dates of acquisition. Fair value is estimated based on the amount for which the asset or liability could be bought or sold in a current transaction between willing parties. For our acquisitions, the majority of the purchase price that is not allocated to identifiable assets, or liabilities assumed, is accounted for as residual goodwill rather than identifiable intangible assets. This stems from the value associated with the walk-in guest base of the acquired salons, the value of which is not recorded as an identifiable intangible asset under current accounting guidance and the limited value of the acquired leased site and guest preference associated with the acquired hair salon brand. Residual goodwill further represents our opportunity to strategically combine the acquired business with our existing structure to serve a greater number of guests through our expansion strategies. Identifiable intangible assets purchased in fiscal year 2012, 2011, and 2010 acquisitions totaled $0.6, $2.0, and $0.1 million, respectively. The residual goodwill generated by fiscal year 2012, 2011, and 2010 acquisitions totaled $5.0, $12.5, and $2.6 million, respectively. See Note 4 to the Consolidated Financial Statements for further information.

Self-Insurance Accruals

        The Company uses a combination of third party insurance and self-insurance for a number of risks including workers' compensation, health insurance, employment practice liability and general liability claims. The liability represents the Company's estimate of the undiscounted ultimate cost of uninsured claims incurred as of the balance sheet date.

39

---

Table of Contents

        The workers' compensation, general liability and employment practice liability analysis includes applying loss development factors to the Company's historical claims data (total paid and incurred amounts per claim) for all policy years where the Company has not reached its aggregate limits to project the future development of incurred claims. The workers' compensation analysis is performed for three models; California, Texas and all other states. A variety of accepted actuarial methodologies are followed to determine these liabilities, including several methods to predict the loss development factors for each policy period. These liabilities are determined by modeling the frequency (number of claims) and severity (cost of claims), fitting statistical distributions to the experience, and then running simulations. A similar analysis is performed for both general liability and employment practices liability; however, it is a single model for all liability claims rather than the three separate models used for workers' compensation.

        The health insurance analysis utilizes trailing twelve months of paid and 24 months of incurred medical and prescription claims to project the amount of incurred but not yet reported claims liability amount. The lag factors are developed based on the Company's specific claim data utilizing a completion factor methodology. The developed factor, expressed as a percentage of paid claims, is applied to the trailing twelve months of paid claims to calculate the estimated liability amount. The calculated liability amount is reviewed for reasonableness based on reserve adequacy ranges for historical periods by testing prior reserve levels against actual expenses to date.

        Although the Company does not expect the amounts ultimately paid to differ significantly from the estimates, self-insurance accruals could be affected if future claims experience differs significantly from the historical trends and actuarial assumptions. For fiscal years 2012 and 2011, the Company recorded increases in expense from changes in estimates related to prior year open policy periods of $0.7 and $1.4 million, respectively. For fiscal year 2010, the Company recorded a decrease in expense from changes in estimates related to prior year open policy periods of $1.7 million. A 10.0 percent change in the self-insurance reserve would affect income from continuing operations before income taxes and equity in (loss) income of affiliated companies by $4.8, $4.6, and $4.5 million for the three years ended June 30, 2012, 2011 and 2010, respectively. The Company updates loss projections twice each year and adjusts its recorded liability to reflect the current projections. The updated loss projections consider new claims and developments associated with existing claims for each open policy period. As certain claims can take years to settle, the Company has multiple policy periods open at any point in time.

Income Taxes

        In determining income for financial statement purposes, management must make certain estimates and judgments. These estimates and judgments occur in the calculation of certain tax liabilities and in the determination of the recoverability of certain deferred tax assets which arise from temporary differences between the tax and financial statement recognition of revenue and expense.

        Management must assess the likelihood that deferred tax assets will be recovered. If recovery is not likely, we must increase our provision for taxes by recording a reserve, in the form of a valuation allowance, for the deferred tax assets that will not ultimately be recoverable. Should there be a change in our ability to recover our deferred tax assets, our tax provision would increase in the period in which it is determined that the recovery is not likely.

        In addition, the calculation of tax liabilities involves dealing with uncertainties in the application of complex tax regulations. Management recognizes a reserve for potential liabilities for anticipated tax audit issues in the United States and other tax jurisdictions based on our estimate of whether additional taxes will be due. If payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary. If our estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result. In the United States, fiscal years 2009

40

---

Table of Contents

and after remain open for federal tax audit. For state tax audits, the statute of limitations generally spans three to four years, resulting in a number of states remaining open for tax audits dating back to fiscal year 2008. However, the Company is under audit in a number of states in which the statute of limitations has been extended for fiscal years 2006 and forward. Internationally, including Canada, the statute of limitations for tax audits varies by jurisdiction, but generally ranges from three to five years.

        As of June 30, 2012 the Company's liability for uncertain tax positions was $4.4 million. See Note 12 to the Consolidated Financial Statements for further information.

Contingencies

        We are involved in various lawsuits and claims that arise from time to time in the ordinary course of our business. Accruals are recorded for such contingencies based on our assessment that the occurrence is probable, and where determinable, an estimate of the liability amount. Management considers many factors in making these assessments including past history and the specifics of each case. However, litigation is inherently unpredictable and excessive verdicts do occur, which could have a material impact on our Consolidated Financial Statements.

        During fiscal year 2012, the Company was awarded $1.1 million in conjunction with a class-action lawsuit.

        During fiscal year 2011, the Company settled a legal claim with the former owner of Hair Club for $1.7 million.

        During fiscal year 2010, the Company settled two legal claims regarding certain guest and employee matters for an aggregate charge of $5.2 million plus a commitment to provide discount coupons. During the twelve months ended June 30, 2011, the final payments aggregating $4.3 million were made.

OVERVIEW OF FISCAL YEAR 2012 RESULTS

        The following summarizes key aspects of our fiscal year 2012 results:

•

Revenues decreased 2.2 percent during fiscal year 2012. The Company experienced a decline in guest visitation and average ticket price, resulting in a decrease in consolidated same-store sales of 3.1 percent. Partially offsetting the decrease in revenues was the benefit of the additional day from leap year.



•

The Company recorded goodwill impairment charges of $67.7 and $78.4 million associated with our Regis salon concept and Hair Restoration reporting units, respectively, during fiscal year 2012.



•

Long-lived asset impairment charges of $6.6 million were recorded during fiscal year 2012.



•

The Company recorded a $17.2 million net impairment charge associated with the Agreement entered into during fiscal year 2012 to sell the Company's 46.7 percent equity interest in Provalliance to the Provost Family for a purchase price of €80 million. The transaction is expected to close no later than September 30, 2012 and is subject to the Provost Family securing financing for the purchase price. The $17.2 million net impairment charge recorded within equity in (loss) income of affiliated companies in the Consolidated Statement of Operations consists of a $37.4 million impairment charge related to the difference between the purchase price and carrying value of the Company's investment in Provalliance, partially offset by a $20.2 million decrease in the fair value of the Equity Put.



•

The Company recorded a $19.4 million other than temporary impairment on its investment in EEG.

41

---

Table of Contents

•

The Company recorded incremental depreciation expense of $16.2 million ($10.2 million net of tax or $0.18 per diluted share) associated with the adjustment to the useful life of the Company's POS system.



•

During fiscal year 2012, the Company reduced the home office workforce by approximately 120 employees. The Company recorded $9.8 million in senior management restructuring and other severance charges. In addition the Company recorded $2.8 million in other restructuring charges associated with one-time costs with implementing the Company's new strategy.



•

The Company recorded $1.8 million in deferred compensation expense associated with amending the deferred compensation contracts such that the benefits are based on years of service and employees' compensation as of June 30, 2012.



•

The Company recorded charges of $4.9 million associated with professional fees incurred in connection with the contested proxy and the exploration of alternatives for non-core assets.



•

The Company recorded a $1.1 million favorable legal settlement during fiscal year 2012.



•

During fiscal year 2012, the Company recorded a $1.1 million tax benefit in discontinued operations related to the release of tax reserves associated with the disposition of the Trade Secret salon concept.



•

The annual effective income tax rate of 5.8 percent was negatively impacted by the goodwill impairment charges which are partially non-deductible for tax purposes. This resulted in the Company recording less of a tax benefit on the pre-tax loss than what would normally be expected utilizing the Company's historical range of tax rates.

RESULTS OF OPERATIONS

        The following discussion of results of operations will reflect results from continuing operations. Discontinued operations will be discussed at the end of this section.

Consolidated Results of Operations

        The following table sets forth, for the periods indicated, certain information derived from our Consolidated Statement of Operations in Item 8, expressed as a percent of revenues. The percentages are computed as a percent of total revenues, except as noted.

42

---

Table of Contents

Results of Operations as a Percent of Revenues

Consolidated Revenues

        Consolidated revenues primarily include revenues of company-owned salons, product and equipment sales to franchisees, hair restoration center revenues, and franchise royalties and fees. As compared to the prior fiscal year, consolidated revenues decreased 2.2 percent during fiscal year 2012 and decreased 1.4 percent during fiscal year 2011. The following table details our consolidated revenues by concept. All service revenues, product revenues (which include product and equipment sales to

43

---

Table of Contents

franchisees), and franchise royalties and fees are included within their respective concept within the table.

        The decreases of 2.2, 1.4, and 2.9 percent in consolidated revenues during fiscal years 2012, 2011, and 2010, respectively, were driven by the following:

44

---

Table of Contents

        We acquired 13 company-owned salons (including 11 franchise buybacks), and did not acquire or buy back hair restoration centers from franchisees during fiscal year 2012 compared to 105 company-owned salons (including 78 franchise buybacks), and bought back four hair restoration centers from franchisees during fiscal year 2011. The same-store sales decrease of 3.1 percent was due to a decrease in same-store guest visits and marginal declines in average ticket. The Company constructed 209 company-owned salons and six hair restoration centers. We closed 384 and 305 salons (including 51 and 60 franchise salons) during the twelve months ended June 30, 2012 and 2011, respectively.

        We acquired 105 company-owned salons (including 78 franchise buybacks), and bought back four hair restoration centers from franchisees during fiscal year 2011 compared to 26 company-owned salons (including 23 franchise buybacks), and bought back zero hair restoration centers from franchisees during fiscal year 2010. The same-store sales decrease of 1.7 percent was due to a decline in same-store guest visits, partially offset by an increase in average ticket. The Company constructed 146 company-owned salons during the twelve months ended June 30, 2011. We closed 305 and 269 salons (including 60 and 65 franchise salons) during the twelve months ended June 30, 2011 and 2010, respectively.

        During fiscal year 2012, there was no foreign currency impact on revenues as the weakening of the United States dollar against the Canadian dollar was offset by the strengthening of the United Stated dollar against the British pound and Euro as compared to the prior fiscal year's exchange rates. During fiscal year 2011, the foreign currency impact was driven by the weakening of the United States dollar against the Canadian dollar and British pound, as compared to the prior fiscal year's exchange rates. During fiscal year 2010, the foreign currency impact was driven by the weakening of the United States dollar against the Canadian dollar, partially offset by the strengthening of the United Stated dollar against the British pound and Euro as compared to the prior fiscal year's exchange rates. Consolidated revenues are primarily composed of service and product revenues, as well as franchise royalties and fees. Fluctuations in these three major revenue categories were as follows:

        Service Revenues.    Service revenues include revenues generated from company-owned salons and service revenues generated by hair restoration centers. Consolidated service revenues were as follows:

        The decrease in service revenues during fiscal year 2012 was due the closure of 333 company-owned salons and same-store service sales decreasing 3.5 percent. The decrease in same-store services sales was primarily a result of a decline in same-store guest visits and a decline in average ticket due to promotional programs designed to generate additional guest visits in the salons with the promotional programs. Partially offsetting the decrease was growth due to new and acquired salons during the twelve months ended June 30, 2012 and the additional day from leap year.

        The decrease in service revenues during fiscal year 2011 was due to same-store service sales decreasing 2.3 percent, as a result of a decline in same-store guest visits. Partially offsetting the decrease was growth due to new and acquired salons during the twelve months ended June 30, 2011, price increases, sales mix as the company continues to increase hair color and waxing services, and the weakening of the United States dollar against the Canadian dollar during the twelve months ended June 30, 2011.

        The decrease in service revenues during fiscal year 2010 was due to same-store service sales decreasing 3.4 percent, as many guests have continued to lengthen their visitation pattern due to the

45

---

Table of Contents

economy. In addition, service revenues decreased due to the strengthening of the United States dollar against the British pound. Partially offsetting the decrease was growth due to acquisitions during the twelve months and the weakening of the United States dollar against the Canadian dollar during the twelve months ended June 30, 2010.

        Product Revenues.    Product revenues are primarily sales at company-owned salons and hair restoration centers, and sales of product and equipment to franchisees. Consolidated product revenues were as follows:

        The decrease in product revenues during fiscal year 2012 was primarily due to same-store product sales decreasing 1.7 percent, and the closure of 333 company-owned locations, partially offset by the additional day from leap year and an increase in product sales to franchisees as a result of an increase in franchise locations.

        The decrease in product revenues during fiscal year 2011 was primarily due to the decrease in product sales to the purchaser of Trade Secret from $20.0 million in fiscal year 2010 to zero in fiscal year 2011. Partially offsetting the decrease was same-store product sales increasing 0.4 percent, product sales from new and acquired salons, and the weakening of the United States dollar against the Canadian dollar during the twelve months ended June 30, 2011.

        The decrease in product revenues during fiscal year 2010 was primarily due to the decrease in product sales to the purchaser of Trade Secret from $32.2 in fiscal year 2009 to $20.0 in fiscal year 2010, as well as due to same-store product sales decreasing 2.3 percent and the strengthening of the United States dollar against the British pound. Partially offsetting the decrease was the weakening of the United States dollar against the Canadian dollar during the twelve months ended June 30, 2010.

        Royalties and Fees.    Consolidated franchise revenues, which include royalties and franchise fees, were as follows:

        Total franchise locations open at June 30, 2012 and 2011 were 2,045 (including 29 franchise hair restoration centers) and 1,965 (including 29 franchise hair restoration centers), respectively. During fiscal year 2012, we purchased a 60.0 percent ownership interest in a franchise network, consisting of 31 franchise locations. In addition, we purchased 11 of our franchise salons during the twelve months ended June 30, 2012. The increase in royalties and fees was also due to same-store sales increases at franchise locations.

        Total franchise locations open at June 30, 2011 and 2010 were 1,965 (including 29 franchise hair restoration centers) and 2,053 (including 33 franchise hair restoration centers), respectively. The

46

---

Table of Contents

decrease in franchise locations was offset by the impact of the weakening of the United States dollar against the Canadian dollar.

        Total franchise locations open at June 30, 2010 and 2009 were 2,053 (including 33 franchise hair restoration centers) and 2,078 (including 33 franchise hair restoration centers), respectively. The increase in consolidated franchise revenues during fiscal year 2010 was primarily due to the weakening of the United States dollar against the Canadian dollar during the twelve months ended June 30, 2010.

Gross Margin (Excluding Depreciation)

        Our cost of revenues primarily includes labor costs related to salon employees and hair restoration center employees, the cost of product used in providing services and the cost of products sold to guests and franchisees. The resulting gross margin was as follows:

        Service Margin (Excluding Depreciation).    Service margin was as follows:

        Service margin as a percent of service revenues during fiscal year 2012 was consistent with fiscal year 2011. Lower commissions as a result of leveraged pay plans for new stylists and a decrease in salon health insurance costs due to lower claims were offset by decreased productivity in our North American segment and an increase in the cost of labor within our Hair Restoration Centers segment.

        The basis point decrease in service margins as a percent of service revenues during fiscal year 2011 was primarily due to an unexpected increase in salon health insurance costs due to several unusually large claims and an increase in payroll taxes as a result of states increasing unemployment taxes.

        The basis point improvement in service margins as a percent of service revenues during fiscal year 2010 was primarily due to the benefit of the new leveraged salon pay plans implemented in the 2009 calendar year. Increases in salon health insurance and payroll taxes partially offset the basis point improvement.

47

---

Table of Contents

        Product Margin (Excluding Depreciation).    Product margin was as follows:

        Trade Secret, Inc. was sold by Regis Corporation on February 16, 2009. The agreement included a provision that Regis Corporation would supply product to the purchaser at cost for a transition period. The agreement was substantially completed as of September 30, 2009.

        The following tables breakout product revenues, cost of product and product margin as a percent of product revenues between product and product sold to the purchaser of Trade Secret.

 

 

        The basis point decrease in product margin as a percentage of product revenues during fiscal year 2012 was primarily due to an increase in the cost of hair systems in our Hair Restoration Centers segment and increases in freight costs due to higher fuel prices. Partially offsetting the basis point decrease was a reduction in commissions paid to new employees on retail product sales in our North American segment.

        The basis point decrease in product margin other than sold to purchaser of Trade Secret as a percentage of product revenues during fiscal year 2011 was primarily due to an increase in sales of slightly lower-profit margin appliances in our International segment and an increase in the cost of hair systems in our Hair Restoration Centers segment, partially offset by reduced commissions paid to new employees on retail product sales in our North American segment.

48

---

Table of Contents

        The basis point improvement in product margin other than sold to purchaser of Trade Secret as a percentage of product revenues during fiscal year 2010 was due to a planned reduction in retail commissions paid to new employees on retail product sales.

Site Operating Expenses

        This expense category includes direct costs incurred by our salons and hair restoration centers, such as on-site advertising, workers' compensation, insurance, utilities and janitorial costs. Site operating expenses were as follows:

        The basis point increase in site operating expenses as a percent of consolidated revenues during fiscal year 2012 was primarily due to negative leverage from the decrease in same-store sales.

        Site operating expenses as a percent of consolidated revenues during fiscal year 2011 was consistent with fiscal year 2010. A reduction in legal claims expense and a favorable sales tax audit adjustment were offset by a planned increase in advertising expense within the Company's Promenade concept and an increase in self-insurance accruals.

        The basis point increase in site operating expenses as a percent of consolidated revenues during fiscal year 2010 was primarily due to higher self-insurance expense. The Company recorded a reduction in self-insurance accruals of $1.7 million in fiscal year 2010 compared to a $9.9 million reduction in fiscal year 2009. In addition the Company settled two legal claims related to guest and employee matters resulting in a $5.2 million charge during fiscal year 2010.

General and Administrative

        General and administrative (G&A) includes costs associated with our field supervision, salon training and promotions, product distribution centers and corporate offices (such as salaries and professional fees), including costs incurred to support franchise and hair restoration center operations. G&A expenses were as follows:

        The basis point improvement in G&A costs as a percentage of consolidated revenues during fiscal year 2012 was primarily due to the comparable prior period including a $31.2 million valuation reserve

49

---

Table of Contents

on the note receivable with the purchaser of Trade Secret. Also contributing to the improvement during fiscal year 2012 was a reduction in salaries and other employee benefits as a result of the reduction in home office workforce that occurred in January 2012. Partially offsetting the basis point improvement were incremental costs associated with the Company's senior management restructuring, severance charges, and professional fees incurred in connection with the contested proxy and the exploration of alternatives for non-core assets.

        The basis point increase in G&A costs as a percentage of consolidated revenues during fiscal year 2011 was primarily due to the $31.2 million valuation reserve on the note receivable with the purchaser of Trade Secret, incremental costs associated with the Company's senior management restructure, expenditures associated with the Regis salon concept re-imaging project, professional fees incurred related to the exploration of strategic alternatives and information technology projects, legal claims expense and negative leverage on fixed costs within this category due to negative same-store sales.

        The basis point increase in G&A costs as a percentage of consolidated revenues during fiscal year 2010 was primarily due to negative leverage from the decrease in same-store sales, partially offset by the continuation of cost savings initiatives implemented by the Company.

Rent

        Rent expense, which includes base and percentage rent, common area maintenance and real estate taxes, was as follows:

        The basis point increase in rent expense as a percent of consolidated revenues during fiscal year 2012 was primarily due to negative leverage in this fixed cost category due to negative same-store sales, partially offset by favorable common area maintenance adjustments from landlords and salon closures.

        The basis point increase in rent expense as a percent of consolidated revenues during fiscal year 2011 was primarily due to negative leverage in this fixed cost category due to negative same-store sales, partially offset by a favorable reduction to our common area maintenance expenses.

        The basis point increase in rent expense as a percent of consolidated revenues during fiscal year 2010 was primarily due to negative leverage in this fixed cost category, partially offset by a reduction in our percentage rent payments, both due to negative same-store sales.

50

---

Table of Contents

Depreciation and Amortization

        Depreciation and amortization expense (D&A) was as follows:

        The basis point increase in D&A as a percent of consolidated revenues during fiscal year 2012 was primarily due to $16.2 million of accelerated depreciation expense in the current year resulting from the useful life adjustment of the Company's internally developed point-of-sale system and negative leverage from the decrease in same-store sales. Partially offsetting the basis point increase was the continuation of a decrease in depreciation expense from the reduction in salon construction beginning in fiscal year 2009 as compared to historical levels prior to fiscal year 2009.

        The basis point decrease in D&A as a percent of consolidated revenues during fiscal year 2011 was primarily due to a decrease in depreciation expense from a reduction in salon construction beginning in fiscal year 2009 as compared to historical levels prior to fiscal year 2009. The basis point decrease was partially offset by negative leverage from the decrease in same-store sales.

        The basis point improvement in D&A as a percent of consolidated revenues during fiscal year 2010 was primarily due to a reduction in the impairment of property and equipment at underperforming locations as compared to fiscal year 2009. The Company recorded impairment charges of $6.4 and $10.2 million during fiscal years 2010 and 2009, respectively. Partially offsetting the improvements was a decline due to negative leverage from the decrease in same-store sales.

Goodwill Impairment

        Goodwill impairment was as follows:

        The Company recorded goodwill impairment charges totaling $67.7 and $78.4 million related to the Regis salon concept and Hair Restoration Centers reporting units, respectively, during fiscal year 2012. Due to the continuation of a decrease in same-store sales, the estimated fair value of the Regis salon operations was less than the carrying value of this concept's net assets, including goodwill. The $67.7 million impairment charge was the excess of the carrying value of goodwill over the implied fair value of goodwill for the Regis salon operations. Due to the impact of recent industry developments, including a slow down in revenue growth and increasing supply costs, the estimated fair value of the

51

---

Table of Contents

Hair Restoration Centers operations was less than the carrying value of this reporting unit's net assets, including goodwill. The $78.4 million impairment charge was the excess of the carrying value of goodwill over the implied fair value of goodwill for the Hair Restoration Centers reporting unit.

        The Company recorded a $74.1 million goodwill impairment charge related to the Promenade salon concept during fiscal year 2011. Due to lower than expected earnings and same-store sales, the estimated fair value of the Promenade salon operations was less than the carrying value of this concept's net assets, including goodwill. The $74.1 million impairment charge was the excess of the carrying value of goodwill over the implied fair value of goodwill for the Promenade salon operations.

        The Company recorded a $35.3 million goodwill impairment charge related to the Regis salon concept during fiscal year 2010. Due to the current economic conditions, the estimated fair value of the Regis salon operations was less than the carrying value of this concept's net assets, including goodwill. The $35.3 million impairment charge was the excess of the carrying value of goodwill over the implied fair value of goodwill for the Regis salon operations.

Lease Termination Costs

        Lease termination costs were as follows:

        As the Company's June 2009 plans to close underperforming company-owned salons were substantially complete as of June 30, 2010, the Company did not incur lease termination costs during the twelve months ended June 30, 2012 and 2011.

        The fiscal year 2010 lease termination costs are associated with the Company's June 2009 plan to close underperforming United Kingdom company-owned salons in fiscal year 2010. During fiscal year 2010 we closed 29 salons under the June 2009 plan.

Interest Expense

        Interest expense was as follows:

52

---

Table of Contents

        The basis point improvement in interest as a percent of consolidated revenues during the twelve months ended June 30, 2012 was primarily due to decreased debt levels as compared to fiscal year 2011.

        The basis point improvement in interest as a percent of consolidated revenues during the twelve months ended June 30, 2011 was primarily due to a reduction in interest expense due to the twelve months ended June 30, 2010 including $18.0 million of make-whole payments and other fees associated with the repayment of private placement debt, and decreased debt levels during fiscal year 2011.

        The basis point increase in interest as a percent of consolidated revenues during the twelve months ended June 30, 2010 was primarily due to $18.0 million of make-whole payments and other fees associated with the repayment of private placement debt. The increase due to the make-whole payments and other fees was partially offset by a reduction in interest expense due to decreased debt levels.

Interest Income and Other, net

        Interest income and other, net was as follows:

        Interest income and other, net as a percent of consolidated revenues during the twelve months ended June 30, 2012, was consistent with the comparable prior period as there was a favorable foreign currency impact related to the Company's investment in MY Style and a favorable legal settlement during fiscal year 2012 that were offset by the prior year comparable period including higher fees received for warehousing services provided to the purchaser of Trade Secret.

        The basis point decrease in the interest income and other, net as a percent of consolidated revenues during the twelve months ended June 30, 2011 was primarily due to the foreign currency impact of the Company's investment in MY Style, $1.9 million received from the purchaser of Trade Secret in the comparable prior period for administrative services, and $1.9 million in interest income recorded in the comparable prior period on the outstanding note receivable due from the purchaser of Trade Secret.

        Interest income and other, net as a percent of consolidated revenues during the twelve months ended June 30, 2010 was consistent with the twelve months ended June 30, 2009. Interest income increased as a result of higher cash balances available to earn interest, partially offset by a decline in rates.

53

---

Table of Contents

Income Taxes

        Our reported effective tax rate was as follows:

        The basis point increase in our overall effective income tax rate for fiscal year 2012 was primarily due to the impact of the goodwill impairment charges recorded during fiscal year 2012 as compared to the impact of the goodwill impairment charge recorded during fiscal year 2011. The majority of the goodwill impairment charges recorded during fiscal year 2012 were non-deductible for tax purposes. This adversely impacted the annual effective tax rate by 37.9% as compared to the prior year impact of 10.4%. Additionally, the impact of employment credits related to the Small Business and Work Opportunity Act of 2007 resulted in less of a tax benefit to the annual effective tax rate when compared to the prior year. This was due to the prior year employment credits having a larger favorable impact to the prior year effective tax rate because of the lower book loss recorded during fiscal year 2011. Absent new legislation being enacted, these credits expired on December 31, 2011.

        For fiscal year 2011, the Company reported a $25.6 million loss from continuing operations before income taxes as compared to income from continuing operations before income taxes of $53.2 and $78.8 million in fiscal years 2010 and 2009, respectively. The rate reconciliation items have a greater impact on the annual effective income tax rate in fiscal year 2011 as the magnitude of the loss from continuing operations before income taxes is less than the magnitude of income from continuing operations before income taxes in fiscal year 2010. The annual effective tax rate was favorably impacted by the employment credits related to the Small Business and Work Opportunity Tax Act of 2007. Partially offsetting the favorable impact of the employment credits was the adverse impact of the pre-tax non-cash goodwill impairment charge of $74.1 million recorded during the third quarter of fiscal year 2011, which is only partially deductible for tax purposes. Additionally, the foreign income taxes at other than U.S. rates adversely impacted the annual effective tax rate due to a decrease in foreign income from continuing operations before income taxes and other foreign non-deductible items.

        The basis point improvement in our overall effective income tax rate for the fiscal year ended June 30, 2010 was primarily due to a decrease in the impact of the non-cash goodwill impairment charge recorded during the year ended June 30, 2010 compared to the impact of the non-cash goodwill impairment charge recorded during the year ended June 30, 2009 and an increase in the employment credits received. In addition, a 0.9 percent decrease in the tax rate was due to adjustments to the income tax balances, which had a smaller impact than the charge recorded in the prior year related to the adjustment of prior year deferred income taxes.

54

---

Table of Contents

Equity in (Loss) Income of Affiliated Companies, Net of Income Taxes

        Equity in (loss) income of affiliates, representing the income or loss generated by our equity investment in Empire Education Group, Inc., Provalliance, and other equity method investments was as follows:

        The loss in affiliated companies, net of taxes for the year ended June 30, 2012 was primarily due to the impairment losses of $17.2 and $19.4 million recorded on our investments in Provalliance and EEG, respectively. On April 9, 2012, the Company entered into the Agreement to sell the Company's 46.7 percent equity interest in Provalliance to the Provost Family for a purchase price of €80 million. In conjunction, the Company recorded a $37.4 million other than temporary impairment charge on its investment in Provalliance and $20.2 million reduction in the fair value of the Equity Put, resulting in a net impairment charge of $17.2 million. The Company recorded a $19.4 million other than temporary impairment charge for the excess of the carrying value of its investment in EEG over the fair value. The Company also recorded its $8.7 million share of an intangible asset impairment recorded directly by EEG. These impairments recorded during fiscal year 2012 were partially offset by our share of earnings of $9.7, $4.7 and $0.8 million recorded for our investments in Provalliance, EEG and Hair Club for Men, Ltd., respectively. See Note 6 to the Consolidated Financial Statements for further discussion of each respective affiliated company.

        Equity in income of affiliated companies, net of taxes for the year ended June 30, 2011 was due to equity in income of $7.8, $5.5 and $0.6 million recorded for our investments in Provalliance, EEG and Hair Club for Men, Ltd., respectively. In addition, the Company recorded a $9.0 million impairment loss related to the Company's investment in MY Style. The impairment charge was based on the decline in equity value of MY Style as a result of changes in projected revenue growth after the natural disasters that occurred in Japan during March 2011. The Company also recorded a $2.4 million net gain related to the settlement of a portion of the Company's equity put liability and additional ownership of the Frank Provost Group in Provalliance.

        Equity in income of affiliated companies, net of taxes for the year ended June 30, 2010 was due to equity in income of $4.1, $6.4 and $0.9 million recorded for our investments in Provalliance, EEG and Hair Club for Men, Ltd., respectively.

Income from Discontinued Operations, net of Taxes

        Income from discontinued operations was as follows:

55

---

Table of Contents

        During fiscal year 2012, the Company recorded a $1.1 million tax benefit in discontinued operations related to the release of tax reserves associated with the disposition of the Trade Secret salon concept.

        During fiscal year 2010, the Company recorded a $3.0 million tax benefit in discontinued operations to correct the prior year calculation of the income tax benefit related to the disposition of the Trade Secret Salon concept.

Recent Accounting Pronouncements

        Recent accounting pronouncements are discussed in Note 1 to the Consolidated Financial Statements.

Effects of Inflation

        We compensate some of our salon employees with percentage commissions based on sales they generate, thereby enabling salon payroll expense as a percent of company-owned salon revenues to remain relatively constant. Accordingly, this provides us certain protection against inflationary increases, as payroll expense and related benefits (our major expense components) are variable costs of sales. In addition, we may increase pricing in our salons to offset any significant increases in wages. Therefore, we do not believe inflation has had a significant impact on the results of our operations.

Constant Currency Presentation

        The presentation below demonstrates the effect of foreign currency exchange rate fluctuations from year to year. To present this information, current period results for entities reporting in currencies other than United States dollars are converted into United States dollars at the average exchange rates in effect during the corresponding period of the prior fiscal year, rather than the actual average exchange rates in effect during the current fiscal year. Therefore, the foreign currency impact is equal to current year results in local currencies multiplied by the change in the average foreign currency exchange rate between the current fiscal period and the corresponding period of the prior fiscal year.

        During the fiscal year ended June 30, 2012, foreign currency translation had a minimal net impact on consolidated revenues as the weakening of the British Pound and Euro against the United States dollar was offset by the strengthening of the Canadian dollar against the United States dollar.

        During the fiscal year ended June 30, 2011, foreign currency translation had a favorable impact on consolidated revenues due to the strengthening of the Canadian dollar and British Pound against the United States dollar.

        During the fiscal year ended June 30, 2010, foreign currency translation had a favorable impact on consolidated revenues due to the strengthening of the Canadian dollar against the United States dollar, partially offset by the weakening of the British pound and Euro against the United States dollar.

56

---

Table of Contents

Results of Operations by Segment

        Based on our internal management structure, we report three segments: North American salons, International salons and Hair Restoration Centers. Significant results of operations are discussed below with respect to each of these segments.

North American Salons

        North American Salon Revenues.    Total North American salon revenues were as follows:

        The percentage decreases during the years ended June 30, 2012, 2011, and 2010 were due to the following factors:

        We acquired 12 North American salons during the twelve months ended June 30, 2012, including 11 franchise buybacks. The same-store sales decrease of 3.2 percent for fiscal year 2012 was the result of a decline in guest visitations and a decrease in average ticket. The Company constructed and closed 191 and 317 company-owned salons, respectively during the twelve months ended June 30, 2012.

        We acquired 105 North American salons during the twelve months ended June 30, 2011, including 78 franchise buybacks. The same-store sales decrease of 1.8 percent was the result of a decline in same-store guest visits, partially offset by an increase in average ticket. The foreign currency impact during fiscal year 2011 resulted primarily from the weakening of the United States dollar against the Canadian dollar. The Company constructed and closed 133 and 230 company-owned salons, respectively during the twelve months ended June 30, 2011.

        We acquired 26 North American salons during the twelve months ended June 30, 2010, including 23 franchise buybacks. The same-store sales decrease of 3.3 percent was the result of a decline in same-store guest visits, partially offset by an increase in average ticket. The foreign currency impact during fiscal year 2010 resulted from the weakening of the United States dollar against the Canadian dollar as compared to the exchange rate for fiscal year 2009. The Company constructed and closed 137 and 162 company-owned salons, respectively during the twelve months ended June 30, 2010.

57

---

Table of Contents

        North American Salon Operating Income.    Operating income for the North American salons was as follows:

        The basis point increase in North American salon operating income as a percent of North American salon revenues during fiscal year 2012 was primarily due to the $67.7 million goodwill impairment of the Company's Regis salon concept was less than the $74.1 million goodwill impairment of the Company's Promenade salon concept in fiscal year 2011. The basis point increase was also due to improved service margins, partially offset by negative leverage in fixed cost categories due to negative same-store sales.

        The basis point decrease in North American salon operating income as a percent of North American salon revenues during fiscal year 2011 was primarily due to the $74.1 million goodwill impairment of the Company's Promenade salon concept and negative leverage in fixed cost categories due to negative same-store sales. Partially offsetting the basis point decrease was lower depreciation expense due to a reduction in salon construction.

        The basis point decrease in North American salon operating income as a percent of North American salon revenues during fiscal year 2010 was primarily due to the $35.3 million goodwill impairment of the Company's Regis salon concept and negative leverage in fixed cost categories due to negative same-store sales. In addition, the basis point decrease was due to the settlement of two legal claims regarding guest and employee matters totaling $5.2 million, higher self-insurance expense (the Company recorded reduction in self-insurance accruals of $1.7 million in the twelve months ended June 30, 2010 compared to a $9.9 million reduction in the twelve months ended June 30, 2009), partially offset by the Company's cost saving initiatives and gross margin improvement.

International Salons

        International Salon Revenues.    Total International salon revenues were as follows:

58

---

Table of Contents

        The percentage decreases during the years ended June 30, 2012, 2011, and 2010 were due to the following factors:

        We acquired one International salon during the twelve months ended June 30, 2012. Same-store sales decreased 9.1 percent due to a decline in guest visits. The Company constructed 13 company-owned salons (net of relocations) during the twelve months ended June 30, 2012. The foreign currency impact during fiscal year 2012 resulted from the strengthening of the United States dollar against the British Pound. We closed 16 company-owned salons during the twelve months ended June 30, 2012.

        We did not acquire any International salons during the twelve months ended June 30, 2011. Same-store sales decreased 3.1 percent due to a decline in guest visits. The Company constructed 11 company-owned salons (net of relocations) during the twelve months ended June 30, 2011. The foreign currency impact during fiscal year 2011 resulted from the weakening of the United States dollar against the British Pound. We closed 15 company-owned salons during the twelve months ended June 30, 2011.

        We did not acquire any International salons during the twelve months ended June 30, 2010. Same-store sales decreased 3.8 percent due to a decline in guest visits. The Company constructed 2 company-owned salons during the twelve months ended June 30, 2010. The foreign currency impact during fiscal year 2010 resulted from the strengthening of the United States dollar against the British Pound and Euro as compared to the exchange rates for fiscal year 2009. We closed 42 company-owned salons during the twelve months ended June 30, 2010, of which 29 related to the June 2009 plan to close underperforming salons in the United Kingdom.

        International Salon Operating Income.    Operating income for the International salons was as follows:

59

---

Table of Contents

        The basis point decrease in International salon operating income as a percent of International salon revenues during fiscal year 2012 was primarily due to negative leverage on fixed costs due to a decrease in same-store sales.

        The basis point improvement in International salon operating income as a percent of International salon revenues during fiscal year 2011 was primarily due to $2.1 million of lease termination costs recognized during fiscal year 2010 associated with the Company's planned closure of underperforming salons. Partially offsetting the basis point improvement was a decline on product margins from mix play, as a larger than expected percentage of our product sales came from lower-margin products.

        The basis point improvement in International salon operating income as a percent of International salon revenues during fiscal year 2010 was primarily due to the comparable prior period including a $41.7 million goodwill impairment of the United Kingdom reporting unit and higher impairment charges related to the impairment of property and equipment at underperforming locations. In addition the Company's planned closure of underperforming United Kingdom salons and the continuation of the Company's expense control and payroll management contributed to the basis point improvement during fiscal year 2010.

Hair Restoration Centers

        Hair Restoration Center Revenues.    Total Hair Restoration Centers revenues were as follows:

        The percentage increases during the years ended June 30, 2012, 2011, and 2010 were due to the following factors:

        The increase in Hair Restoration Centers revenues during fiscal year 2012 was due to the increase in same-store sales of 2.9 percent, the construction of six hair restoration centers and the four acquired hair restoration centers during fiscal year 2011.

        The increase in Hair Restoration Centers revenues during fiscal year 2011 was due to the increase in same-store sales of 1.2 percent, the acquisition of four hair restoration centers, all of which were franchise buybacks, and the construction of three hair restoration centers.

        The increase in Hair Restoration Centers revenues during fiscal year 2010 was due to the increase in same-store sales of 0.4 percent and the construction of four hair restoration centers.

60

---

Table of Contents

        Hair Restoration Center Operating (Loss) Income.    Operating (loss) income for our Hair Restoration Centers was as follows: