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BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 12 Months Ended
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Jun. 30, 2015
Accounting Policies [Abstract] |
BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | Business Description: Regis Corporation (the Company) owns, operates and franchises hairstyling and hair care salons throughout the United States (U.S.), the United Kingdom (U.K.), Canada and Puerto Rico. Substantially all of the hairstyling and hair care salons owned and operated by the Company in the U.S., Canada and Puerto Rico are located in leased space in enclosed mall shopping centers, strip shopping centers or Walmart Supercenters. Franchised salons throughout the U.S. are primarily located in strip shopping centers. Company-owned salons in the U.K. are owned and operated in malls, leading department stores, mass merchants and high-street locations. During the second quarter of fiscal year 2014, the Company redefined its operating segments to reflect how the chief operating decision maker evaluates the business as a result of restructuring the Company's North American field organization. Based on the way the Company now manages its business, it has three reportable segments: North American Value, North American Premium and International salons. Prior to this change, the Company had two reportable operating segments: North American salons and International salons. See Note 14 to the Consolidated Statement of Operations. Concurrent with the change in reportable operating segments, the Company revised its prior period financial information to conform to the new segment structure. Historical financial information presented herein reflects this change. Consolidation: The Consolidated Financial Statements include the accounts of the Company and its subsidiaries after the elimination of intercompany accounts and transactions. All material subsidiaries are wholly owned. The Company consolidated variable interest entities where it has determined it is the primary beneficiary of those entities' operations. Revisions: The following is a summary of the impact of revisions on (loss) income from continuing operations for fiscal years 2014 and 2013:
|  | Fiscal Years
|  | 2014 |  | 2013
|  | (Dollars in thousands)
(Loss) income from continuing operations, as reported |  | $ | (137,080 | ) |  | $ | 4,166 |
Revisions: |  |  |  |
Deferred rent, pre-tax (1) |  | (157 | ) |  | (471 | )
Previous out of period items, pre-tax (2) |  | (811 | ) |  | 2,154 |
Tax impact |  | (1,826 | ) |  | (371 | )
Total revision impact |  | (2,794 | ) |  | 1,312 |
(Loss) income from continuing operations, as revised |  | $ | (139,874 | ) |  | $ | 5,478 |
_______________________________________________________________________________
(1) | The Company recognizes rental expense on a straight-line basis at the time the leased space becomes available to the Company. During the fourth quarter of fiscal year 2015, the Company determined its deferred rent balance was understated by $5.3 million. Accordingly, the Consolidated Financial Statements have been revised to correctly state its deferred rent balances and rent expense. The revisions resulted in an increase in net loss from continuing operations of $0.2 million for fiscal year 2014 and a decrease in net income from continuing operations of $0.5 million for fiscal year 2013. Accrued expenses and other noncurrent liabilities increased $1.0 and $4.2 million, respectively, at June 30, 2014 and retained earnings at June 30, 2014 decreased $5.2 million as a result of the cumulative adjustment for prior periods. This revision had no impact on cash provided by operations or net increase (decrease) in cash and cash equivalents for any year.
(2) | Also in the fourth quarter of fiscal year 2015, the Company revised certain prior year amounts in the Consolidated Balance Sheet and Statement of Operations to correctly recognize understatements of self-insurance accruals, interest expense, uncertain tax positions and cash and overstatements of inventory. The impact of these revisions resulted in an increase in net loss from continuing operations of $0.8 million for fiscal year 2014 and an increase in net income from continuing operations of $2.2 million for fiscal year 2013. Accrued expenses and other noncurrent liabilities increased $0.8 and $0.8 million, respectively, at June 30, 2014 and retained earnings at June 30, 2014 decreased by $1.6 million as a result of the cumulative adjustment for prior periods. In addition, cash and cash equivalents at June 30, 2013 increased by $0.6 million due to the revisions.
The Company assessed the materiality of these misstatements on prior periods' financial statements in accordance with SEC Staff Accounting Bulletin ("SAB") No. 99, Materiality, codified in ASC 250 ("ASC 250"), Presentation of Financial Statements, and concluded these misstatements were not material to any prior annual or interim periods. Accordingly, in accordance with ASC 250 (SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements), the Consolidated Financial Statements as of June 30, 2014 and 2013, and the years then ended, which are presented herein, have been revised. The following are selected line items from the Company's Consolidated Financial Statements illustrating the effect of these revisions:
|  | REGIS CORPORATION
|  | CONSOLIDATED BALANCE SHEET
|  | (Dollars in thousands)
|  | June 30,
|  | 2014 |
|  | As Previously Reported |  | Revision |  | As Revised |
LIABILITIES AND SHAREHOLDERS' EQUITY |  |  |  |  |  |  |
Accrued expenses |  | $ | 142,720 |  |  | $ | 1,824 |  |  | $ | 144,544 |  |
Total current liabilities |  | 384,712 |  |  | 1,824 |  |  | 386,536 |  |
Other noncurrent liabilities |  | 190,454 |  |  | 4,965 |  |  | 195,419 |  |
Total liabilities |  | 695,168 |  |  | 6,789 |  |  | 701,957 |  |
Retained earnings |  | 357,460 |  |  | (6,789 | ) |  | 350,671 |  |
Total shareholders' equity |  | 720,781 |  |  | (6,789 | ) |  | 713,992 |  |
Total liabilities and shareholders' equity |  | $ | 1,415,949 |  |  | $ | — |  |  | $ | 1,415,949 |  |
|  | REGIS CORPORATION
|  | CONSOLIDATED STATEMENT OF OPERATIONS
|  | (Dollars in thousands, except per share data)
|  | Fiscal Years
|  | 2014 |  | 2013
|  | As Previously Reported |  | Revision |  | As Revised |  | As Previously Reported |  | Revision |  | As Revised
Cost of product |  | $ | 187,204 |  |  | $ | (280 | ) |  | $ | 186,924 |  |  | $ | 228,577 |  |  | $ | 280 |  |  | $ | 228,857 |
Site operating expenses |  | 202,359 |  |  | 1,091 |  |  | 203,450 |  |  | 203,912 |  |  | (1,784 | ) |  | 202,128 |
Rent |  | 322,105 |  |  | 157 |  |  | 322,262 |  |  | 324,716 |  |  | 471 |  |  | 325,187 |
Interest expense |  | (22,290 | ) |  | — |  |  | (22,290 | ) |  | (37,594 | ) |  | 650 |  |  | (36,944 | )
(Loss) income from continuing operations before income taxes and equity in loss of affiliated companies |  | (54,328 | ) |  | (968 | ) |  | (55,296 | ) |  | 10,098 |  |  | 1,683 |  |  | 11,781 |
Income taxes |  | (71,129 | ) |  | (1,826 | ) |  | (72,955 | ) |  | 10,024 |  |  | (371 | ) |  | 9,653 |
(Loss) income from continuing operations |  | (137,080 | ) |  | (2,794 | ) |  | (139,874 | ) |  | 4,166 |  |  | 1,312 |  |  | 5,478 |
Net (loss) income |  | $ | (135,727 | ) |  | $ | (2,794 | ) |  | $ | (138,521 | ) |  | $ | 29,194 |  |  | $ | 1,312 |  |  | $ | 30,506 |
(Loss) income per share from continuing operations: |  |  |  |  |  |  |  |  |  |  |  |
Basic and diluted earnings per share(1) |  | $ | (2.43 | ) |  | $ | (0.05 | ) |  | $ | (2.48 | ) |  | $ | 0.07 |  |  | $ | 0.02 |  |  | $ | 0.10 |
Net (loss) income per share: |  |  |  |  |  |  |  |  |  |  |  |
Basic and diluted earnings per share(1) |  | $ | (2.40 | ) |  | $ | (0.05 | ) |  | $ | (2.45 | ) |  | $ | 0.51 |  |  | $ | 0.02 |  |  | $ | 0.54 |
_______________________________________________________________________________
(1) | Total is a recalculation; line items calculated individually may not sum to total due to rounding.
|  | REGIS CORPORATION
|  | CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
|  | (Dollars in thousands)
|  | Fiscal Years
|  | 2014 |  | 2013
|  | As Previously Reported |  | Revision |  | As Revised |  | As Previously Reported |  | Revision |  | As Revised
Net (loss) income |  | $ | (135,727 | ) |  | $ | (2,794 | ) |  | $ | (138,521 | ) |  | $ | 29,194 |  |  | $ | 1,312 |  |  | $ | 30,506 |
Comprehensive loss |  | $ | (133,632 | ) |  | $ | (2,794 | ) |  | $ | (136,426 | ) |  | $ | (5,364 | ) |  | $ | 1,312 |  |  | $ | (4,052 | )
|  | REGIS CORPORATION
|  | CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
|  | (Dollars in thousands)
|  | Fiscal Years
|  | Retained Earnings |  | Total
|  | As Previously Reported |  | Revision |  | As Revised |  | As Previously Reported |  | Revision |  | As Revised
Balance, June 30, 2012 |  | $ | 484,229 |  |  | $ | (5,307 | ) |  | $ | 478,922 |  |  | $ | 889,157 |  |  | $ | (5,307 | ) |  | $ | 883,850 |
Net income |  | 29,194 |  |  | 1,312 |  |  | 30,506 |  |  | 29,194 |  |  | 1,312 |  |  | 30,506 |
Balance, June 30, 2013 |  | 499,760 |  |  | (3,995 | ) |  | 495,765 |  |  | 857,414 |  |  | (3,995 | ) |  | 853,419 |
Net loss |  | (135,727 | ) |  | (2,794 | ) |  | (138,521 | ) |  | (135,727 | ) |  | (2,794 | ) |  | (138,521 | )
Balance, June 30, 2014 |  | $ | 357,460 |  |  | $ | (6,789 | ) |  | $ | 350,671 |  |  | $ | 720,781 |  |  | $ | (6,789 | ) |  | $ | 713,992 |
|  | REGIS CORPORATION
|  | CONSOLIDATED STATEMENT OF CASH FLOWS
|  | (Dollars in thousands)
|  | Fiscal Years
|  | 2014 |  | 2013
|  | As Previously Reported |  | Revision |  | As Revised |  | As Previously Reported |  | Revision |  | As Revised
Cash flows from operating activities: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net (loss) income |  | $ | (135,727 | ) |  | $ | (2,794 | ) |  | $ | (138,521 | ) |  | $ | 29,194 |  |  | $ | 1,312 |  |  | $ | 30,506 |
Deferred income taxes |  | 68,781 |  |  | 1,854 |  |  | 70,635 |  |  | 10,322 |  |  | 579 |  |  | 10,901 |
Changes in operating assets and liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Inventories |  | 2,555 |  |  | (280 | ) |  | 2,275 |  |  | (10,745 | ) |  | 280 |  |  | (10,465 | )
Other current assets |  | (6,503 | ) |  | 524 |  |  | (5,979 | ) |  | (8,064 | ) |  | 340 |  |  | (7,724 | )
Other assets |  | (103 | ) |  | 15 |  |  | (88 | ) |  | 239 |  |  | — |  |  | 239 |
Accounts payable |  | 1,907 |  |  | — |  |  | 1,907 |  |  | 19,086 |  |  | (650 | ) |  | 18,436 |
Accrued expenses |  | 3,505 |  |  | 450 |  |  | 3,955 |  |  | (26,431 | ) |  | (731 | ) |  | (27,162 | )
Other noncurrent liabilities |  | (11,502 | ) |  | (417 | ) |  | (11,919 | ) |  | 459 |  |  | (482 | ) |  | (23 | )
Net cash provided by operating activities |  | 117,403 |  |  | (648 | ) |  | 116,755 |  |  | 69,148 |  |  | 648 |  |  | 69,796 |
Cash: Beginning of Year |  | 200,488 |  |  | 648 |  |  | 201,136 |  |  | 111,943 |  |  | — |  |  | 111,943 |
Cash: End of Year |  | 378,627 |  |  | — |  |  | 378,627 |  |  | 200,488 |  |  | 648 |  |  | 201,136 |
Variable Interest Entities: The Company has or has had interests in certain privately held entities through arrangements that do not involve voting interests. Such entities, known as a variable interest entity (VIE), are required to be consolidated by its primary beneficiary. The Company evaluates whether or not it is the primary beneficiary for each VIE using a qualitative assessment that considers the VIE's purpose and design, the involvement of each of the interest holders and the risk and benefits of the VIE. As of June 30, 2015, the Company has one VIE, Roosters MGC International LLC (Roosters), where the Company is the primary beneficiary. The Company owns a 60.0% ownership interest in Roosters. As of June 30, 2015, total assets, total liabilities and total shareholders' equity of Roosters were $6.6, $1.5 and $5.1 million, respectively. Net income attributable to the non-controlling interest in Roosters was immaterial for fiscal years 2015, 2014 and 2013. Shareholders' equity attributable to the non-controlling interest in Roosters was $1.9 million and $1.8 million as of June 30, 2015 and 2014 and recorded within retained earnings on the Consolidated Balance Sheet. The Company utilized consolidation of variable interest entities guidance to determine whether or not its investment in Empire Education Group, Inc. (EEG) was a VIE, and if so, whether the Company was the primary beneficiary of the VIE. The Company concluded that EEG was not a VIE based on the fact that EEG had sufficient equity at risk. The Company accounts for EEG as an equity investment under the voting interest model, as the Company has granted the other shareholder of EEG an irrevocable proxy to vote a certain number of the Company’s shares such that the other shareholder of EEG has voting control of 51.0% of EEG’s common stock, as well as the right to appoint four of the five members of EEG’s Board of Directors. Use of Estimates: The preparation of Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents: Cash equivalents consist of investments in short-term, highly liquid securities having original maturities of three months or less, which are made as a part of the Company's cash management activity. The carrying values of these assets approximate their fair market values. The Company primarily utilizes a cash management system with a series of separate accounts consisting of lockbox accounts for receiving cash, concentration accounts that funds are moved to, and several "zero balance" disbursement accounts for funding of payroll and accounts payable. As a result of the Company's cash management system, checks issued, but not presented to the banks for payment, may create negative book cash balances. There were no checks outstanding in excess of related book cash balances at June 30, 2015 and 2014. The Company has restricted cash primarily related to contractual obligations to collateralize its self-insurance program. The restricted cash arrangement can be canceled by the Company at any time if substituted with letters of credit. The restricted cash balance is classified within other current assets on the Consolidated Balance Sheet. Receivables and Allowance for Doubtful Accounts: The receivable balance on the Company's Consolidated Balance Sheet primarily includes credit card receivables and accounts and notes receivable from franchisees. The balance is presented net of an allowance for expected losses (i.e., doubtful accounts), primarily related to receivables from the Company's franchisees. The Company monitors the financial condition of its franchisees and records provisions for estimated losses on receivables when it believes franchisees are unable to make their required payments based on factors such as delinquencies and aging trends. The allowance for doubtful accounts is the Company's best estimate of the amount of probable credit losses related to existing accounts and notes receivables. As of June 30, 2015 and 2014, the allowance for doubtful accounts was $1.3 and $0.9 million, respectively. Inventories: Inventories of finished goods consist principally of hair care products for retail product sales. A portion of inventories are also used for salon services consisting of hair color, hair care products including shampoo and conditioner and hair care treatments including permanents, neutralizers and relaxers. Inventories are stated at the lower of cost or market, with cost determined on a weighted average cost basis. Physical inventory counts are performed annually in the fourth quarter of the fiscal year. Product and service inventories are adjusted based on the physical inventory counts. During the fiscal year, cost of retail product sold to salon guests is determined based on the weighted average cost of product sold, adjusted for an estimated shrinkage factor and the cost of product used in salon services is determined by applying estimated percentage of total cost of service and product to service revenues. The estimated percentage related to service inventories is updated quarterly based on cycle count results and other factors that could impact the Company's margin rate estimates such as service sales mix, discounting and special promotions. The Company has inventory valuation reserves for excess and obsolete inventories, or other factors that may render inventories unmarketable at their historical costs. Estimates of the future demand for the Company's inventory and anticipated changes in formulas and packaging are some of the other factors used by management in assessing the net realizable value of inventories. During fiscal years 2014 and 2013, the Company recorded inventory write-downs of $0.9 and $12.6 million, respectively, associated with standardizing plan-o-grams, eliminating retail products and consolidating from four owned-brand product lines to one. Property and Equipment: Property and equipment are carried at cost, less accumulated depreciation and amortization. Depreciation of property and equipment is computed using the straight-line method over their estimated useful asset lives (30 to 39 years for buildings, 10 years for improvements and three to ten years for equipment, furniture and software). Depreciation expense was $66.6, $79.7 and $81.8 million in fiscal years 2015, 2014 and 2013, respectively. The Company capitalizes both internal and external costs of developing or obtaining computer software for internal use. Costs incurred to develop internal-use software during the application development stage are capitalized, while data conversion, training and maintenance costs associated with internal-use software are expensed as incurred. Estimated useful lives range from five to seven years. Expenditures for maintenance and repairs and minor renewals and betterments, which do not improve or extend the life of the respective assets, are expensed. All other expenditures for renewals and betterments are capitalized. The assets and related depreciation and amortization accounts are adjusted for property retirements and disposals with the resulting gain or loss included in operating income. Fully depreciated or amortized assets remain in the accounts until retired from service. Long-Lived Asset Impairment Assessments, Excluding Goodwill: The Company assesses the impairment of long-lived assets at the individual salon level, as this is the lowest level for which identifiable cash flows are largely independent of other groups of assets and liabilities, when events or changes in circumstances indicate the carrying value of the assets or the asset grouping may not be recoverable. Factors considered in deciding when to perform an impairment review include significant under-performance of an individual salon in relation to expectations, significant economic or geographic trends, and significant changes or planned changes in our use of the assets. Impairment is evaluated based on the sum of undiscounted estimated future cash flows expected to result from use of the long-lived assets that do not recover the carrying values. If the undiscounted estimated cash flows are less than the carrying value of the assets, the Company calculates an impairment charge based on the assets' estimated fair value. The fair value of the long-lived assets is estimated using a discounted cash flow model based on the best information available, including salon level revenues and expenses. Long-lived asset impairment charges are recorded within depreciation and amortization in the Consolidated Statement of Operations. Judgments made by management related to the expected useful lives of long-lived assets and the ability to realize undiscounted cash flows in excess of the carrying amounts of such assets are affected by factors such as the ongoing maintenance and improvement of the assets, changes in economic conditions and changes in operating performance. As the ongoing expected cash flows and carrying amounts of long-lived assets are assessed, these factors could cause the Company to realize material impairment charges. A summary of long-lived asset impairment charges follows:
|  | Fiscal Years
|  | 2015 |  | 2014 |  | 2013
|  | (Dollars in thousands)
North American Value |  | $ | 9,612 |  |  | $ | 11,714 |  |  | $ | 5,031 |
North American Premium |  | 4,804 |  |  | 5,014 |  |  | 3,042 |
International |  | 188 |  |  | 1,599 |  |  | 151 |
Total |  | $ | 14,604 |  |  | $ | 18,327 |  |  | $ | 8,224 |
Goodwill: As of June 30, 2015 and 2014, the North American Value reporting unit had $419.0 and $425.3 million of goodwill, respectively and the North American Premium and International reporting units had no goodwill. See Note 4 to the Consolidated Financial Statements. The Company tests goodwill impairment on an annual basis, during the Company’s fourth fiscal quarter, and between annual tests if an event occurs, or circumstances changes, that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Goodwill impairment test is performed at the reporting unit level, which are the same as the Company’s operating segments. The goodwill test involves a two-step process. The first step is a comparison of the reporting unit’s fair value to its carrying value, including goodwill. If the reporting unit’s fair value exceeds its carrying value, no further procedures are required. However, if the reporting unit’s fair value is less than the carrying value, an impairment of goodwill may exist, requiring a second step to measure the amount of impairment loss. If the implied fair value of goodwill is less than the recorded goodwill, an impairment charge is recorded for the difference. In applying the goodwill impairment test, the Company may assess qualitative factors to determine whether it is more likely than not that the fair value of the reporting units is less than its carrying value (“Step 0”). Qualitative factors may include, but are not limited to, economic, market and industry condition, cost factors, and overall financial performance of the reporting unit. If after assessing these qualitative factors, the Company determines it is “more-likely-than-not” that the carrying value is less than the fair value, then performing the two-step impairment test is unnecessary. The carrying value of each reporting unit is based on the assets and liabilities associated with the operations of the reporting unit, including allocation of shared or corporate balances among reporting units. Allocations are generally based on the number of salons in each reporting unit as a percent of total company-owned salons. For the two-step impairment test, the Company calculates estimated fair values of the reporting units based on discounted future cash flows utilizing estimates in annual revenue, service and product margins, fixed expense rates, allocated corporate overhead, and long-term growth rates for determining terminal value. Where available and as appropriate, comparative market multiples are used in conjunction with the results of the discounted cash flows. The Company periodically engages third-party valuation consultants to assist in evaluating the Company's estimated fair value calculations. Following is a description of the goodwill impairment analyses for each of the fiscal years: Fiscal Year 2015 During the Company’s annual impairment test, the Company assessed qualitative factors to determine whether it is more likely than not that the fair value of the reporting units is less than its carrying value (“Step 0”). The Company determined it is “more-likely-than-not” that the carrying value is less than the fair value. Accordingly, the Company did not perform a two-step quantitative analysis. Fiscal Year 2014 During the second quarter of fiscal year 2014, the Company experienced two triggering events that resulted in the Company testing its goodwill for impairment. First, the Company redefined its operating segments to reflect how the chief operating decision maker evaluates the business as a result of restructuring the Company's North American field organization. Based on the changes to the Company's operating segment structure, goodwill has been reallocated to the new reporting units at June 30, 2014. See Note 14 to the Consolidated Financial Statements. Second, the Regis and Promenade reporting units reported lower than projected same-store sales that were unfavorable compared to the Company’s projections used in the fiscal year 2013 annual goodwill impairment test. Accordingly, during the second quarter of fiscal year 2014, the Company performed interim goodwill impairment tests on its former Regis and Promenade reporting units. The impairment tests resulted in a $34.9 million non-cash goodwill impairment charge on the former Regis reporting unit and no impairment on the former Promenade reporting unit, as its estimated fair value exceeded its carrying value by approximately 12.0%. See Note 9 to the Consolidated Financial Statements. Fiscal Year 2013 During the Company’s annual impairment test, the Company performed the first step of the quantitative goodwill impairment test and determined that the fair value exceeded the carrying value for each of the Company’s reporting units. Accordingly, the Company did not perform any further analysis. As of June 30, 2015, the Company's estimated fair value, as determined by the sum of our reporting units' fair value, reconciled within a reasonable range of our market capitalization, which included an assumed control premium of 25.0%. Investments In Affiliates: The Company has equity investments in securities of certain privately held entities. The Company accounts for these investments under the equity or cost method of accounting. Investments accounted for under the equity method are recorded at the amount of the Company's investment and adjusted each period for the Company's share of the investee's income or loss. Investments are reviewed for changes in circumstance or the occurrence of events that suggest the Company's investment may not be recoverable. During fiscal years 2015 and 2013, the Company recorded non-cash impairments of $4.7 and $17.9 million, respectively, related to its investment in EEG. Due to economic, regulatory and other factors, the Company may be required to take additional non-cash impairment charges related to its investments and such non-cash impairments could be material to its consolidated balance sheet and results of operations. Additionally, the Company recorded its share, $6.9 million, of a non-cash deferred tax asset valuation allowance recorded by EEG during fiscal year 2015. During fiscal years 2014 and 2013, the Company recorded its share, $21.2 and $2.1 million, respectively, of non-cash impairment charges recorded directly by EEG for goodwill and long-lived and intangible assets. EEG has no remaining goodwill. The exposure to loss related to the Company's involvement with EEG is the $14.8 million carrying value of the investment. See Note 5 to the Consolidated Financial Statements. 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. The Company estimates self-insurance liabilities using a number of factors, primarily based on independent third-party actuarially-determined amounts, historical claims experience, estimates of incurred but not reported claims, demographic factors and severity factors. 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 historical trends and actuarial assumptions. For fiscal years 2015, 2014 and 2013, the Company recorded increases (decreases) in expense from changes in estimates related to prior year open policy periods of $0.1, $(2.0) and $(1.1) million, respectively. A 10.0% change in the self-insurance reserve would affect (loss) income from continuing operations before income taxes and equity in loss of affiliated companies by approximately $4.8 million for fiscal year 2015, 2014 and 2013. The Company updates loss projections quarterly and adjusts its recorded liability to reflect updated 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. As of June 30, 2015, the Company had $18.3 and $29.9 million recorded in current liabilities and noncurrent liabilities, respectively, related to the Company's self-insurance accruals. As of June 30, 2014, the Company had $14.9 and $32.7 million recorded in current liabilities and noncurrent liabilities, respectively, related to the Company's self-insurance accruals. Deferred Rent and Rent Expense: The Company leases most salon locations under operating leases. Rent expense is recognized on a straight-line basis over the lease term. Tenant improvement allowances funded by landlord incentives, rent holidays and rent escalation clauses which provide for scheduled rent increases during the lease term or for rental payments commencing at a date other than the date of initial occupancy are recorded in the Consolidated Statements of Operations on a straight-line basis over the lease term (including one renewal period if renewal is reasonably assured based on the imposition of an economic penalty for failure to exercise the renewal option). The difference between the rent due under the stated periods of the lease and the straight-line basis is recorded as deferred rent within accrued expenses and other noncurrent liabilities in the Consolidated Balance Sheet. For purposes of recognizing incentives and minimum rental expenses on a straight-line basis, the Company uses the date it obtains the legal right to use and control the leased space to begin amortization, which is generally when the Company enters the space and begins to make improvements in preparation of its intended use. Certain leases provide for contingent rents, which are determined as a percentage of revenues in excess of specified levels. The Company records a contingent rent liability in accrued expenses on the Consolidated Balance Sheet, along with the corresponding rent expense in the Consolidated Statement of Operations, when specified levels have been achieved or when management determines that achieving the specified levels during the fiscal year is probable. See earlier discussion in Note 1 to the Consolidated Financial Statements for the discussion of revision. Revenue Recognition and Deferred Revenue: Company-owned salon revenues are recognized at the time when the services are provided. Product revenues are recognized when the guest receives and pays for the merchandise. Revenues from purchases made with gift cards are also recorded when the guest takes possession of the merchandise or services are provided. Gift cards issued by the Company are recorded as a liability (deferred revenue) until they are redeemed. Product sales by the Company to its franchisees are included within product revenues on the Consolidated Statement of Operations and recorded at the time product is shipped to franchise locations. Franchise revenues primarily include royalties, initial franchise fees and net rental income. Royalties are recognized as revenue in the month in which franchisee services are rendered. The Company recognizes revenue from initial franchise fees at the time franchise locations are opened, as this is generally when the Company has performed all initial services required under the franchise agreement. Classification of Expenses: The following discussion provides the primary costs classified in each major expense category: Beginning in fiscal year 2014, costs associated with field leaders, excluding salons within the North American Premium segment, that were previously recorded within General and Administrative expense are now categorized within Cost of Service and Site Operating expense as a result of the field reorganization that took place in the fourth quarter of fiscal year 2013. Previously, field leaders did not work on the salon floor daily. As reorganized, field leaders now spend most of their time on the salon floor leading and mentoring stylists and serving guests. As a result, district and senior district leader labor costs are now reported within Cost of Service rather than General and Administrative expenses and their travel costs are reported within Site Operating expenses rather than General and Administrative expenses. Cost of service— labor costs related to salon employees, costs associated with our field supervision (fiscal years 2015 and 2014) and the cost of product used in providing service. Cost of product— cost of product sold to guests, labor costs related to selling retail product and the cost of product sold to franchisees. Site operating— direct costs incurred by the Company's salons, such as advertising, workers' compensation, insurance, utilities, travel costs associated with our field supervision (fiscal years 2015 and 2014) and janitorial costs. General and administrative— costs associated with our field supervision (fiscal year 2013), salon training and promotions, distribution centers and corporate offices (such as salaries and professional fees), including cost incurred to support franchise operations. Consideration Received from Vendors: The Company receives consideration for a variety of vendor-sponsored programs. These programs primarily include volume rebates and promotion and advertising reimbursements. With respect to volume rebates, the Company estimates the amount of rebate it will receive and accrues it as a reduction to the cost of inventory over the period in which the rebate is earned based upon historical purchasing patterns and the terms of the volume rebate program. A quarterly analysis is performed in order to ensure the estimated rebate accrued is reasonable and any necessary adjustments are recorded. Shipping and Handling Costs: Shipping and handling costs are incurred to store, move and ship product from the Company's distribution centers to company-owned and franchise locations and include an allocation of internal overhead. Such shipping and handling costs related to product shipped to company-owned locations are included in site operating expenses in the Consolidated Statement of Operations. Shipping and handling costs related to shipping product to franchise locations totaled $3.6, $3.2 and $3.6 million during fiscal years 2015, 2014 and 2013, respectively and are included within general and administrative expenses on the Consolidated Statement of Operations. Any amounts billed to franchisees for shipping and handling are included in product revenues within the Consolidated Statement of Operations. Advertising: Advertising costs, including salon collateral material, are expensed as incurred. Advertising costs expensed and included in continuing operations in fiscal years 2015, 2014 and 2013 was $38.7, $40.6 and $39.2 million, respectively. Advertising Funds: The Company has various franchising programs supporting certain of its franchise salon concepts. Most maintain advertising funds that provide comprehensive advertising and sales promotion support. The Company is required to participate in the advertising funds for company-owned locations under the same salon concept. The Company assists in the administration of the advertising funds. However, a group of individuals consisting of franchisee representatives has control over all of the expenditures and operates the funds in accordance with franchise operating and other agreements. The Company records advertising expense in the period the company-owned salon makes contributions to the respective advertising fund. During fiscal years 2015, 2014 and 2013, total contributions to the franchise advertising funds totaled $18.0, $18.6 and $19.0 million, respectively. The Company records all advertising funds as assets and liabilities within the Company's Consolidated Balance Sheet. As of June 30, 2015 and 2014, approximately $24.1 and $26.8 million, respectively, representing the advertising funds' assets and liabilities were recorded within total assets and total liabilities in the Company's Consolidated Balance Sheet. Stock-Based Employee Compensation Plans: The Company recognizes stock-based compensation expense based on the fair value of the awards at the grant date. Compensation expense is recognized on a straight-line basis over the requisite service period of the award (or to the date a participant becomes eligible for retirement, if earlier). The Company uses option pricing methods that require the input of subjective assumptions, including the expected term, expected volatility, dividend yield and risk-free interest rate. The Company estimates the likelihood and the rate of achievement for performance sensitive stock-based awards at the end of each reporting period. Changes in the estimated rate of achievement can have a significant effect on the recorded stock-based compensation expense as the effect of a change in the estimated achievement level is recognized in the period the change occurs. Preopening Expenses: Non-capital expenditures such as payroll, training costs and promotion incurred prior to the opening of a new location are expensed as incurred. Sales Taxes: Sales taxes are recorded on a net basis (rather than as both revenue and an expense) within the Company's Consolidated Statement of Operations. Income Taxes: Deferred income tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the Consolidated Financial Statements or income tax returns. Deferred income tax assets and liabilities are determined based on the differences between the financial statement and tax basis of assets and liabilities using currently enacted tax rates in effect for the years in which the differences are expected to reverse. A valuation allowance is established for any portion of deferred tax assets that are not considered more likely than not to be realized. The Company evaluates all evidence, including recent financial performance, the existence of cumulative year losses and our forecast of future taxable income, to assess the need for a valuation allowance against our deferred tax assets. While the determination of whether or not to record a valuation allowance is not fully governed by a specific objective test, accounting guidance places significant weight on recent financial performance. During fiscal year 2015, the Company was no longer able to conclude that it was more likely than not that the majority of its Canadian deferred tax assets would be fully realized and established a $2.1 million valuation allowance on these deferred tax assets. The primary cause for the Canadian valuation allowance was due to the recent negative financial performance in Canada and cumulative losses incurred in recent years. During fiscal year 2014, the Company established an $86.6 million valuation allowance on its U.S. and U.K. deferred tax assets. The Company will continue to assess its ability to realize its deferred tax assets on a quarterly basis and will reverse the valuation allowance and record a tax benefit when the Company generates sufficient sustainable pretax earnings to make the realizability of the deferred tax assets more likely than not. The Company reserves for unrecognized tax benefits, interest and penalties related to anticipated tax audit issues in the U.S. and other tax jurisdictions based on an estimate of whether additional taxes will be due. If payment of these amounts ultimately proves to be unnecessary, the reversal of these liabilities would result in tax benefits being recognized in the period in which it is determined that the liabilities are no longer necessary. If the estimate of unrecognized tax benefits, interest and penalties proves to be less than the ultimate assessment, additional expenses would result. Inherent in the measurement of deferred balances are certain judgments and interpretations of tax laws and published guidance with respect to the Company's operations. Income tax expense is primarily the current tax payable for the period and the change during the period in certain deferred tax assets and liabilities. Net (Loss) Income Per Share: The Company's basic earnings per share is calculated as net (loss) income divided by weighted average common shares outstanding, excluding unvested outstanding restricted stock awards and restricted stock units. The Company's dilutive earnings per share is calculated as net (loss) income divided by weighted average common shares and common share equivalents outstanding, which includes shares issuable under the Company's stock option plan and long-term incentive plan and dilutive securities. Stock-based awards with exercise prices greater than the average market value of the Company's common stock are excluded from the computation of diluted earnings per share. The Company's diluted earnings per share will also reflect the assumed conversion under the Company's convertible debt if the impact is dilutive, along with the exclusion of related interest expense, net of taxes. The impact of the convertible debt is excluded from the computation of diluted earnings per share when interest expense per common share obtainable upon conversion is greater than basic earnings per share. Comprehensive (Loss) Income: Components of comprehensive (loss) income include net (loss) income, foreign currency translation adjustments, changes in fair value of derivative instruments, recognition of deferred compensation and reclassification adjustments, net of tax within shareholders' equity. Foreign Currency Translation: Financial position, results of operations and cash flows of the Company's international subsidiaries are measured using local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at the exchange rates in effect at each fiscal year end. Translation adjustments arising from the use of differing exchange rates from period to period are included in accumulated other comprehensive income within shareholders' equity. Statement of Operations accounts are translated at the average rates of exchange prevailing during the year. During fiscal years 2015, 2014 and 2013, the foreign currency (loss) gain recorded within interest income and other, net in the Consolidated Statement of Operations was $(1.3), $0.1 and $33.4 million, respectively. During fiscal year 2013, the Company recognized a $33.8 million foreign currency translation gain in connection with the sale of Provalliance and subsequent liquidation of all foreign entities with Euro denominated operations within interest income and other, net in the Consolidated Statement of Operations. Accounting Standards Recently Issued But Not Yet Adopted by the Company: Revenue from Contracts with Customers In May 2014, the Financial Accounting Standards Board ("FASB") issued updated guidance for revenue recognition. The updated accounting guidance provides a comprehensive new revenue recognition model that requires a Company to recognize revenue to depict the exchange for goods or services to a customer at an amount that reflects the consideration it expects to receive for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. The guidance was effective for the Company beginning in the first quarter of fiscal year 2018. In July 2015, the FASB deferred the effective date one year and is now effective for the Company in the first quarter of fiscal year 2019. Early adoption as of the original effective date will be permitted. The standard allows for either “full retrospective” adoption, meaning the standard is applied to all of the periods presented, or “modified retrospective” adoption, meaning the standard is applied only to the most current period presented in the financial statements. The Company does not expect the adoption of this update to have a material impact on the Company's consolidated financial statements and is evaluating the effect this guidance will have on its related disclosures. Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity In April 2014, the FASB updated the accounting guidance related to the definition of a discontinued operation and related disclosures. The updated accounting guidance defines a discontinued operation as a disposal of a component or a group of components that is to be disposed of or is classified as held for sale and represents a strategic shift that has or will have a major effect on an entity's operations and financial results. The updated guidance is effective for the Company beginning in the first quarter of fiscal year 2016 with early adoption permitted. The Company does not expect the adoption of this update to have a material impact on the Company’s consolidated financial statements.

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