(FORTUNE Magazine) – In its latest fiscal year, Regis--the world's largest operator of hair salons--topped the billion-dollar mark in revenues. For some companies, a billion dollars is no big deal. But Regis was the first hair company in history to cross that threshold, and on a hazy afternoon in mid-June, Regis threw itself a Billion Dollar Bash to celebrate. All day long, the early-summer Minnesota sky was overcast. Right before the party began, however, sun broke through the clouds. CEO Paul Finkelstein breathed a sigh of relief. "God loves this company," he said.

Yes, this may be overstating the importance of hair. But not by much. Hair is serious business, for reasons that go beyond the fact that bad hair can ruin your day. Hair is big--Americans spend about $40 billion a year clipping, curling, coloring, and cleaning it. And hair can be described in investor-friendly buzzwords: Not only is it recession-proof, since it needs cutting even when the economy is going down the drain, but it generates a recurring revenue stream, since the average person gets a haircut every six weeks. "Hair is a great business," enthuses Gregg Hymowitz, a Regis investor and a principal at Entrust Capital, an investment firm. The rest of Wall Street seems to agree: Since Regis went public in 1991, its stock price has compounded at an annual rate of about 25%.

Regis began its march into haircutting history back in 1922, when the first Regis salon was opened by one Myron Kunin, a Russian barber who had emigrated to the U.S. In 1954 he sold out to his son. The second Myron Kunin was a real estate visionary who predicted the malling of America and saw that a national mall-based brand could take the hair business to new heights. By the mid-1980s, Regis (the only national hair-care chain) had 500 salons in malls across middle America. In what could only be fate, when Kunin was ready to appoint an heir apparent, he found the perfect candidate to take the reins at Regis, Paul Finkelstein. Finkelstein isn't just any manager: He's a 1966 Harvard MBA who grew up in the hair business. His family ran a department store-based chain of hair salons.

When Finkelstein joined the company in 1987, Regis' annual sales were just $150 million. Finkelstein has shaped Regis into what's known in Wall Street parlance as a roll-up (which is not the same thing as a roller). The company is growing mainly by buying up mom-and-pop hair salons--2,000 in the past five years alone--across the country. Today, Regis operates 3,555 salons, offering $10 to $30 haircuts under the names Supercuts, MasterCuts, TradeSecret, and Regis. This strategy makes the Street a happy customer. For one thing, there's still plenty left to buy. Although Regis is the industry's biggest player by a factor of five, the company has just over 2% of the U.S. market. And since there's no competition, Regis gets bargains: It takes just three years for Regis to earn back the cost of its average acquisition.

But what really makes this company tick is not the finances of the hair business. Regis' secret is that in a low-paying service industry, it treats its employees in an incredibly high-class fashion. Christine Henning, the manager of the Regis salon at the Mall of America in suburban Minneapolis, has worked at Regis for 23 years. Her salon draws in repeat customers from as far away as Houston, London, and Saudi Arabia. "Regis is the reason I've stayed in the industry," she says. Not only has she been able to grow from a stylist to manager of a business that brings in $850,000 in revenues each year, but she's even been around the world with Regis. Every year, Regis takes its top 10% of salon managers on a trip that makes brokerage-firm rewards look cheap in comparison. This year, they're going to Barcelona; next year, the plan is Jerusalem. The company's rewards system, which includes similar trips for its top field managers, costs Regis more than $3 million a year, but it alleviates one of the industry's biggest problems, employee turnover.

Employees who work at Regis headquarters get their own bonus, in the form of a sumptuous visual feast. Kunin, who remains Regis' chairman, hangs his $100-million-plus art collection on Regis' walls, so employees get to gaze at Georgia O'Keeffe and Edward Hopper masterpieces en route to the water cooler. Gordon Nelson, a former Vidal Sassoon stylist who is now Regis' senior vice president of fashion and education, gets creative inspiration from the Winslow Homer hanging in his office. Walk into a conference room at Regis, and it's quite likely you'll see paraphernalia from Regis' latest advertising campaign draped over priceless paintings.

The company's future looks bright enough to keep Regis in oils and watercolors long after Kunin's departure. CFO Randy Pearce (who, as befits a numbers guy, patronizes the $10-a-pop MasterCuts) remembers Finkelstein (who prefers the more upscale Regis) telling him a decade ago that Regis would cross the billion-dollar mark by the turn of the century. "I thought, 'Yeah, right,' " says Pearce. With 98% of the industry left to consolidate, can the Two Billion Dollar Bash be far off?

--Bethany McLean