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Sally Beauty Holdings, Inc. - Quarter Report: 2020 December (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED: DECEMBER 31, 2020

-OR-

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File No. 1-33145

 

SALLY BEAUTY HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware

 

36-2257936

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

3001 Colorado Boulevard

 

 

Denton, Texas

 

76210

(Address of principal executive offices)

 

(Zip Code)

 

(940) 898-7500

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report): N/A

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

Title of each classTrading SymbolName of each exchange on which registered

Common Stock, $0.01 par valueSBHThe New York Stock Exchange

 

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    No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes    No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

Smaller reporting company

 

Emerging growth company

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes      No 

As of February 1, 2021, there were 112,814,336 shares of the issuer’s common stock outstanding.

 

 

 

 


 

TABLE OF CONTENTS

 

 

Page

PART I — FINANCIAL INFORMATION

 

 

 

Item 1. Financial Statements

5

Item 2. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations

17

Item 3. Quantitative And Qualitative Disclosures About Market Risk

22

Item 4. Controls And Procedures

22

 

 

PART II — OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

23

Item 1A. Risk Factors

23

Item 6. Exhibits

23

 

 


2


In this Quarterly Report, references to “the Company,” “Sally Beauty,” “our company,” “we,” “our,” “ours” and “us” refer to Sally Beauty Holdings, Inc. and its consolidated subsidiaries unless otherwise indicated or the context otherwise requires.

cautionary notice regarding forward-looking statements

Statements in this Quarterly Report on Form 10-Q and in the documents incorporated by reference herein which are not purely historical facts or which depend upon future events may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which we refer to as the Exchange Act. Words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “would” or similar expressions may also identify such forward-looking statements. Forward-looking statements may relate to, among other things, the impact on our business, operations and financial results of the novel coronavirus (“COVID-19”) pandemic.

Readers are cautioned not to place undue reliance on forward-looking statements as such statements speak only as of the date they were made and involve risks and uncertainties that could cause actual events or results to differ materially from the events or results described in the forward-looking statements. The most important factors which could cause our actual results to differ from our forward-looking statements are set forth in our description of risk factors in Item 1A contained in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020, which should be read in conjunction with the forward-looking statements in this report. Forward-looking statements speak only as of the date they are made, and we do not undertake any obligation to update any forward-looking statement.

The events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than we have described. As a result, our actual results may differ materially from the results contemplated by these forward-looking statements.

 

3


 

WHERE YOU CAN FIND MORE INFORMATION

Our quarterly financial results and other important information are available by calling our Investor Relations Department at (940) 297-3877.

We maintain a website at www.sallybeautyholdings.com where investors and other interested parties may obtain, free of charge, press releases and other information as well as gain access to our periodic filings with the Securities and Exchange Commission (“SEC”). The information contained on this website should not be considered to be a part of this or any other report filed with or furnished to the SEC.

 

4


PART I — FINANCIAL INFORMATION

Item 1.  Financial Statements.

The following condensed consolidated balance sheets as of December 31, 2020, and September 30, 2020, the condensed consolidated statements of earnings, condensed consolidated statements of comprehensive income, the condensed consolidated statements of stockholders’ equity and the condensed consolidated statements of cash flows for the three months ended December 31, 2020 and 2019, are those of Sally Beauty Holdings, Inc. and its subsidiaries.

5


SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except par value data)

 

 

 

 

December 31,

2020

 

 

September 30,

2020

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

537,644

 

 

$

514,151

 

Trade accounts receivable, net

 

 

40,046

 

 

 

35,590

 

Accounts receivable, other

 

 

27,904

 

 

 

20,839

 

Inventory

 

 

895,984

 

 

 

814,503

 

Other current assets

 

 

44,300

 

 

 

48,014

 

Total current assets

 

 

1,545,878

 

 

 

1,433,097

 

Property and equipment, net of accumulated depreciation of $725,437 at

   December 31, 2020, and $694,709 at September 30, 2020

 

 

305,225

 

 

 

315,029

 

Operating lease assets

 

 

519,985

 

 

 

525,634

 

Goodwill

 

 

546,027

 

 

 

540,038

 

Intangible assets, excluding goodwill, net of accumulated amortization of

   $68,590 at December 31, 2020, and $63,491 at September 30, 2020

 

 

58,819

 

 

 

58,283

 

Other assets

 

 

23,714

 

 

 

23,066

 

Total assets

 

$

2,999,648

 

 

$

2,895,147

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current maturities of long-term debt

 

$

186

 

 

$

180

 

Accounts payable

 

 

285,636

 

 

 

236,333

 

Accrued liabilities

 

 

133,328

 

 

 

170,665

 

Current operating lease liabilities

 

 

154,090

 

 

 

153,267

 

Income taxes payable

 

 

17,096

 

 

 

2,917

 

Total current liabilities

 

 

590,336

 

 

 

563,362

 

Long-term debt

 

 

1,798,154

 

 

 

1,796,897

 

Long-term operating lease liabilities

 

 

390,873

 

 

 

394,375

 

Other liabilities

 

 

29,406

 

 

 

32,976

 

Deferred income tax liabilities, net

 

 

92,013

 

 

 

92,094

 

Total liabilities

 

 

2,900,782

 

 

 

2,879,704

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock, $0.01 par value. Authorized 500,000 shares; 112,814 and

   112,824 shares issued and 112,538 and 112,405 shares outstanding at

   December 31, 2020, and September 30, 2020, respectively

 

 

1,125

 

 

 

1,124

 

Preferred stock, $0.01 par value. Authorized 50,000 shares; none issued

 

 

 

 

 

 

Additional paid-in capital

 

 

4,556

 

 

 

1,913

 

Accumulated earnings

 

 

174,300

 

 

 

117,109

 

Accumulated other comprehensive loss, net of tax

 

 

(81,115

)

 

 

(104,703

)

Total stockholders’ equity

 

 

98,866

 

 

 

15,443

 

Total liabilities and stockholders’ equity

 

$

2,999,648

 

 

$

2,895,147

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

6


SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Earnings

(In thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2020

 

 

2019

 

Net sales

 

$

936,022

 

 

$

980,208

 

Cost of goods sold

 

 

465,298

 

 

 

505,360

 

Gross profit

 

 

470,724

 

 

 

474,848

 

Selling, general and administrative expenses

 

 

366,170

 

 

 

377,930

 

Restructuring

 

 

232

 

 

 

2,531

 

Operating earnings

 

 

104,322

 

 

 

94,387

 

Interest expense

 

 

25,978

 

 

 

21,541

 

Earnings before provision for income taxes

 

 

78,344

 

 

 

72,846

 

Provision for income taxes

 

 

21,153

 

 

 

19,631

 

Net earnings

 

$

57,191

 

 

$

53,215

 

Earnings per share:

 

 

 

 

 

 

 

 

Basic

 

$

0.51

 

 

$

0.46

 

Diluted

 

$

0.50

 

 

$

0.45

 

Weighted-average shares:

 

 

 

 

 

 

 

 

Basic

 

 

112,475

 

 

 

116,125

 

Diluted

 

 

113,828

 

 

 

117,154

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

7


SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2020

 

 

2019

 

Net earnings

 

$

57,191

 

 

$

53,215

 

Other comprehensive income:

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

25,007

 

 

 

14,961

 

Interest rate caps, net of tax

 

 

175

 

 

 

109

 

Foreign exchange contracts, net of tax

 

 

(1,594

)

 

 

(200

)

Other comprehensive income, net of tax

 

 

23,588

 

 

 

14,870

 

Total comprehensive income

 

$

80,779

 

 

$

68,085

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

8


SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders’ Equity

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Other

 

 

Total

 

 

Common Stock

Paid-in

 

 

Accumulated

 

 

Comprehensive

 

 

Stockholders’

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Loss

 

 

Equity

 

Balance at September 30, 2020

 

112,405

 

 

$

1,124

 

 

$

1,913

 

 

$

117,109

 

 

$

(104,703

)

 

$

15,443

 

Net earnings

 

 

 

 

 

 

 

 

 

 

57,191

 

 

 

 

 

 

57,191

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

23,588

 

 

 

23,588

 

Share-based compensation

 

 

 

 

 

 

 

2,893

 

 

 

 

 

 

 

 

 

2,893

 

Stock issued for equity awards

 

133

 

 

 

1

 

 

 

(250

)

 

 

 

 

 

 

 

 

(249

)

Balance at December 31, 2020

 

112,538

 

 

$

1,125

 

 

$

4,556

 

 

$

174,300

 

 

$

(81,115

)

 

$

98,866

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Accumulated

 

 

Other

 

 

Total

 

 

Common Stock

Paid-in

 

 

(Deficit)

 

 

Comprehensive

 

 

Stockholders’

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Loss

 

 

Equity (Deficit)

 

Balance at September 30, 2019

 

116,725

 

 

$

1,167

 

 

$

 

 

$

55,797

 

 

$

(117,287

)

 

$

(60,323

)

Cumulative effect of ASC 842 adoption

 

 

 

 

 

 

 

 

 

 

(445

)

 

 

 

 

 

(445

)

Net earnings

 

 

 

 

 

 

 

 

 

 

53,215

 

 

 

 

 

 

53,215

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

14,870

 

 

 

14,870

 

Repurchases and cancellations of

   common stock

 

(766

)

 

 

(7

)

 

 

(6,237

)

 

 

(5,113

)

 

 

 

 

 

(11,357

)

Share-based compensation

 

 

 

 

 

 

 

3,473

 

 

 

 

 

 

 

 

 

3,473

 

Stock issued for equity awards

 

206

 

 

 

2

 

 

 

2,764

 

 

 

 

 

 

 

 

 

2,766

 

Balance at December 31, 2019

 

116,165

 

 

$

1,162

 

 

$

 

 

$

103,454

 

 

$

(102,417

)

 

$

2,199

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

9


SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Three Months Ended December 31,

 

 

 

2020

 

 

2019

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

 

Net earnings

 

$

57,191

 

 

$

53,215

 

Adjustments to reconcile net earnings to net cash provided by operating

   activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

26,386

 

 

 

27,076

 

Share-based compensation expense

 

 

2,893

 

 

 

3,473

 

Amortization of deferred financing costs

 

 

1,496

 

 

 

887

 

Gain on early extinguishment of debt

 

 

 

 

 

(223

)

Loss on disposal of equipment and other property

 

 

1,589

 

 

 

 

Deferred income taxes

 

 

229

 

 

 

555

 

Changes in (exclusive of effects of acquisitions):

 

 

 

 

 

 

 

 

Trade accounts receivable

 

 

(3,502

)

 

 

2,457

 

Accounts receivable, other

 

 

(8,643

)

 

 

8,793

 

Inventory

 

 

(67,764

)

 

 

(30,138

)

Other current assets

 

 

3,220

 

 

 

(482

)

Other assets

 

 

(240

)

 

 

(2,480

)

Operating leases, net

 

 

2,996

 

 

 

 

Accounts payable and accrued liabilities

 

 

12,401

 

 

 

(11,930

)

Income taxes payable

 

 

14,307

 

 

 

10,352

 

Other liabilities

 

 

(3,573

)

 

 

770

 

Net cash provided by operating activities

 

 

38,986

 

 

 

62,325

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

 

Payments for property and equipment, net of proceeds

 

 

(15,483

)

 

 

(40,875

)

Acquisitions, net of cash acquired

 

 

(2,025

)

 

 

(1,944

)

Net cash used by investing activities

 

 

(17,508

)

 

 

(42,819

)

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of long-term debt

 

 

 

 

 

232,000

 

Repayments of long-term debt

 

 

(63

)

 

 

(247,830

)

Payments for common stock repurchased

 

 

 

 

 

(11,357

)

Proceeds from equity awards

 

 

 

 

 

2,766

 

Employee withholding taxes paid related to net share settlement of equity awards

 

 

(249

)

 

 

 

Net cash used by financing activities

 

 

(312

)

 

 

(24,421

)

Effect of foreign exchange rate changes on cash and cash equivalents

 

 

2,327

 

 

 

682

 

Net increase (decrease) in cash and cash equivalents

 

 

23,493

 

 

 

(4,233

)

Cash and cash equivalents, beginning of period

 

 

514,151

 

 

 

71,495

 

Cash and cash equivalents, end of period

 

$

537,644

 

 

$

67,262

 

Supplemental Cash Flow Information:

 

 

 

 

 

 

 

 

Interest paid

 

$

43,439

 

 

$

33,297

 

Income taxes paid

 

$

2,609

 

 

$

9,216

 

Capital expenditures incurred but not paid

 

$

6,707

 

 

$

3,491

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

 


 

10


 

Sally Beauty Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1.   Basis of Presentation

The condensed consolidated interim financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and pursuant to the rules and regulations of the SEC. Accordingly, certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC, although we believe that the disclosures are adequate to make the information not misleading. These condensed consolidated interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020. In the opinion of management, these condensed consolidated interim financial statements reflect all adjustments that are of a normal recurring nature and which are necessary to present fairly our consolidated financial position as of December 31, 2020 and September 30, 2020, and our consolidated results of operations, consolidated comprehensive income, and consolidated statements of stockholders’ equity and our consolidated cash flows for the three months ended December 31, 2020 and 2019.

Our operating results for the three months ended December 31, 2020, may not be indicative of the results that may be expected for the full fiscal year ending September 30, 2021, in particular as a result of the uncertainty around the continuing effects of the COVID-19 pandemic on future periods. Due to the uncertainty over the duration and severity of the economic and operational impacts of COVID-19, the adverse impact of the pandemic may continue further into our fiscal year 2021 and possibly beyond, and it may be material.

2.   Significant Accounting Policies

We adhere to the same accounting policies in the preparation of our condensed consolidated interim financial statements as we do in the preparation of our full-year consolidated financial statements. As permitted under GAAP, interim accounting for certain expenses, including income taxes, is based on full-year assumptions. For interim financial reporting purposes, income taxes are recorded based upon estimated annual effective income tax rates.

3.   Recent Accounting Pronouncements 

In December 2019, the FASB issued ASU No. 2019-12 which simplifies the accounting for income taxes by removing an exception related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period with year to date losses and the recognition of deferred tax liabilities for outside basis differences. Additionally, the update clarifies and simplifies other areas of ASC 740, Income Taxes. For public companies, the amendments in the update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted, but all amendments must be adopted at once. The amendments in this update have different adoption methods including prospective basis, retrospective basis, and a modified retrospective basis dependent on the specific change. We are currently evaluating the impact of this update, but based on our preliminary assessment we do not believe this will have a material impact to our results of operations or financial position.

4.   Revenue Recognition

Substantially all of our revenue is derived through the sale of merchandise at the point-of-sale. Revenue is recognized net of estimated sales returns and sales taxes. We estimate sales returns based on historical data.

Changes to our contract liabilities for the period were as follows (in thousands):

September 30, 2020

 

 

 

 

 

$

13,947

 

Loyalty points and gift cards issued but not redeemed, net of estimated breakage

 

 

5,709

 

Revenue recognized from beginning liability

 

 

(3,476

)

December 31, 2020

 

 

 

 

 

$

16,180

 

See Note 11, Business Segments, for additional information regarding the disaggregation of our sales revenue.

11


 

5.   Fair Value Measurements

Fair value on recurring basis

Consistent with the three-level hierarchy defined in ASC Topic 820, Fair Value Measurement, as amended, we categorize our financial assets and liabilities as follows (in thousands):

 

 

Classification

 

Fair Value Hierarchy Level

 

December 31,

2020

 

 

September 30,

2020

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

Cash and cash equivalents

 

Level 1

 

$

 

 

$

194,612

 

Interest rate caps

 

Other assets

 

Level 2

 

 

18

 

 

 

27

 

Total assets

 

 

 

 

 

$

18

 

 

$

194,639

 

.

 

 

 

 

 

 

 

 

 

 

 

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

Accrued liabilities

 

Level 2

 

$

1,587

 

 

$

 

 

Other fair value disclosures

 

 

 

 

December 31, 2020

 

 

September 30, 2020

 

 

 

Fair Value Hierarchy Level

 

Carrying Value

 

 

Fair Value

 

 

Carrying Value

 

 

Fair Value

 

Long-term debt, excluding capital leases

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior notes

 

Level 1

 

$

1,177,380

 

 

$

1,234,206

 

 

$

1,177,380

 

 

$

1,217,707

 

Term loan B

 

Level 2

 

 

635,788

 

 

 

632,623

 

 

 

635,788

 

 

 

619,397

 

Total long-term debt

 

 

 

$

1,813,168

 

 

$

1,866,829

 

 

$

1,813,168

 

 

$

1,837,104

 

 

The table above excludes amounts, if any, related to our ABL facility as the balance approximates fair value due to the short-term nature of our borrowings.

6.   Stockholders’ Equity

Share Repurchases

In August 2017, our Board of Directors approved a share repurchase program authorizing the Company to repurchase up to $1.0 billion of its common stock, subject to certain limitations governed by our debt agreements, over an approximate four-year period expiring on September 30, 2021.

Information related to our shares repurchased and subsequently retired were as follows (in thousands):

 

 

Three Months Ended

December 31,

 

 

 

2020

 

 

2019

 

Number of shares repurchased

 

 

 

 

 

766

 

Total cost of share repurchased

 

$

 

 

$

11,357

 

Accumulated Other Comprehensive Loss

The change in accumulated other comprehensive loss (“AOCL”) was as follows (in thousands):

 

 

Foreign Currency Translation Adjustments

 

 

Interest Rate Caps

 

 

Foreign Exchange Contracts

 

 

Total

 

Balance at September 30, 2020

 

$

(102,111

)

 

$

(3,003

)

 

$

411

 

 

$

(104,703

)

Other comprehensive income (loss) before

    reclassification, net of tax

 

 

25,007

 

 

 

(69

)

 

 

(1,224

)

 

 

23,714

 

Reclassification to net earnings, net of tax

 

 

 

 

 

244

 

 

 

(370

)

 

 

(126

)

Balance at December 31, 2020

 

$

(77,104

)

 

$

(2,828

)

 

$

(1,183

)

 

$

(81,115

)

The tax impact for the changes in other comprehensive loss and the reclassifications to net earnings were not material.

12


 

7.   Weighted-Average Shares

The following table sets forth the reconciliation of basic and diluted weighted-average shares (in thousands):

 

 

 

Three Months Ended

December 31,

 

 

 

2020

 

 

2019

 

Weighted-average basic shares

 

 

112,475

 

 

 

116,125

 

Dilutive securities:

 

 

 

 

 

 

 

 

Stock option and stock award programs

 

 

1,353

 

 

 

1,029

 

Weighted-average diluted shares

 

 

113,828

 

 

 

117,154

 

 

 

 

 

 

 

 

 

 

Anti-dilutive options excluded from our computation of diluted shares

 

 

6,009

 

 

 

5,132

 

 

8. Goodwill and Intangible Assets

Due to the uncertainty around COVID-19, our projected future cash flows may differ materially from actual results. We considered potential triggering events and determined there were none during the three months ended December 31, 2020. No material impairment losses were recognized in the current or prior periods presented in connection with our goodwill and other intangible assets.

For the three months ended December 31, 2020 and 2019, amortization expense related to other intangible assets was $1.7 million and $2.4 million, respectively.

Additionally, goodwill increased primarily from the effects of foreign currency exchange rates of $6.1 million during the three months ended December 31, 2020.

9.   Short-term Borrowings and Long-term Debt

At December 31, 2020, there were no outstanding borrowings and we had $461.0 million available for borrowing under our ABL facility, including the Canadian sub-facility, subject to the conditions contained therein. Our ABL facility matures on July 6, 2022.

Please see Note 13, Subsequent Event, for further information about our debt.  

Covenants

The agreements governing our ABL facility, term loan B and the senior notes contain a customary covenant package that places restrictions on the disposition of assets, the granting of liens and security interests, the prepayment of certain indebtedness, and other matters with customary events of default, including customary cross-default and/or cross-acceleration provisions. As of December 31, 2020, we were in compliance with all debt covenants and all the net assets of our consolidated subsidiaries were unrestricted from transfer.

10.    Derivative Instruments and Hedging Activities

During the three months ended December 31, 2020, we did not purchase or hold any derivative instruments for trading or speculative purposes. See Note 5, Fair Value Measurements, for the classification and fair value of our derivative instruments.

Designated Cash Flow Hedges

Foreign Currency Forwards

We regularly enter into foreign currency forwards to mitigate our exposure to exchange rate changes on inventory purchases in U.S. dollars by our foreign subsidiaries. At December 31, 2020, the notional amount we held through these forwards, based upon exchange rates at December 31, 2020, was as follows (in thousands):

Notional Currency

 

Notional Amount

 

Euro

 

$

13,916

 

Mexican Peso

 

 

10,932

 

Canadian Dollar

 

 

3,767

 

Total

 

$

28,615

 

 

We record quarterly, net of income tax, the changes in fair value related to the foreign currency forwards into AOCL. As the forwards are exercised, the realized value is recognized into cost of goods sold based on inventory turns. For the three months ended December

13


 

31, 2020, we recognized a $0.4 million gain into cost of goods sold on our condensed consolidated statements of earnings. Based on December 31, 2020, valuations and exchange rates, we expect to reclassify losses of approximately $1.3 million into cost of goods sold over the next 12 months.

Interest Rate Caps

In July 2017, we purchased two interest rate caps with an initial aggregate notional amount of $550 million (the “interest rate caps”) to mitigate the exposure to higher interest rates in connection with our term loan B. The interest rate caps are comprised of individual caplets that expire ratably through June 30, 2023, and are designated as cash flow hedges. Accordingly, changes in fair value of the interest rate caps are recorded quarterly, net of income tax, and are included in AOCL. Over the next 12 months, we expect to reclassify approximately $1.3 million into interest expense, which represents the original value of the expiring caplets.

The effects of our interest rate caps on our condensed consolidated statements of earnings were not material for the three months ended December 31, 2020.

11.   Business Segments

Segment data for the three months ended December 31, 2020 and 2019, is as follows (in thousands):

 

 

 

Three Months Ended

December 31,

 

 

 

2020

 

 

2019

 

Net sales:

 

 

 

 

 

 

 

 

Sally Beauty Supply ("SBS")

 

$

547,670

 

 

$

569,147

 

Beauty Systems Group ("BSG")

 

 

388,352

 

 

 

411,061

 

Total

 

$

936,022

 

 

$

980,208

 

Earnings before provision for income taxes:

 

 

 

 

 

 

 

 

Segment operating earnings:

 

 

 

 

 

 

 

 

SBS

 

$

95,128

 

 

$

74,225

 

BSG

 

 

48,572

 

 

 

62,434

 

Segment operating earnings

 

 

143,700

 

 

 

136,659

 

Unallocated expenses

 

 

39,146

 

 

 

39,741

 

Restructuring

 

 

232

 

 

 

2,531

 

Consolidated operating earnings

 

 

104,322

 

 

 

94,387

 

Interest expense

 

 

25,978

 

 

 

21,541

 

Earnings before provision for income taxes

 

$

78,344

 

 

$

72,846

 

 

Sales between segments, which are eliminated in consolidation, were not material during the three months ended December 31, 2020 and 2019.

Disaggregation of net sales by segment

 

 

Three Months Ended

December 31,

 

SBS

 

2020

 

 

2019

 

Hair color

 

 

35.4

%

 

 

29.4

%

Hair care

 

 

18.6

%

 

 

19.4

%

Skin and nail care

 

 

14.2

%

 

 

14.0

%

Styling tools

 

 

12.8

%

 

 

14.9

%

Salon supplies and accessories

 

 

7.9

%

 

 

7.7

%

Textured hair products

 

 

5.5

%

 

 

6.1

%

Other beauty items

 

 

5.6

%

 

 

8.5

%

Total

 

 

100.0

%

 

 

100.0

%

 

14


 

 

 

 

Three Months Ended

December 31,

 

BSG

 

2020

 

 

2019

 

Hair color

 

 

40.8

%

 

 

37.5

%

Hair care

 

 

35.0

%

 

 

34.5

%

Skin and nail care

 

 

8.2

%

 

 

8.1

%

Styling tools

 

 

7.1

%

 

 

3.6

%

Other beauty items

 

 

2.6

%

 

 

5.8

%

Promotional items

 

 

6.3

%

 

 

10.5

%

Total

 

 

100.0

%

 

 

100.0

%

The following tables disaggregate our segment revenue by sales channels:

 

 

Three Months Ended

December 31,

 

SBS

 

2020

 

 

2019

 

Company-operated stores

 

 

93.9

%

 

 

95.8

%

E-commerce

 

 

6.0

%

 

 

4.0

%

Franchise stores

 

 

0.1

%

 

 

0.2

%

Total

 

 

100.0

%

 

 

100.0

%

 

 

 

Three Months Ended

December 31,

 

BSG

 

2020

 

 

2019

 

Company-operated stores

 

 

69.6

%

 

 

69.4

%

Distributor sales consultants

 

 

14.3

%

 

 

17.9

%

E-commerce

 

 

8.5

%

 

 

7.3

%

Franchise stores

 

 

7.6

%

 

 

5.4

%

Total

 

 

100.0

%

 

 

100.0

%

 

12.   Restructuring

 

Restructuring expense for the three months ended December 31, 2020 and 2019, are as follows (in thousands):

 

 

Three Months Ended

December 31,

 

 

 

2020

 

 

2019

 

Project Surge

 

$

190

 

 

$

1,253

 

Transformation Plan

 

 

42

 

 

 

1,278

 

Total expense

 

$

232

 

 

$

2,531

 

Project Surge

In November 2019, we announced that we were launching Project Surge, which takes the successful elements of the North American Sally Beauty transformation and integrates them into our European operations, with the support and participation of several key leaders from the corporate headquarters. As part of this plan, we are focusing on several operating elements, including a review of our talent and operating structure.

The liability related to Project Surge, which is included in accrued liabilities on our condensed consolidated balance sheets, is as follows (in thousands):

Project Surge

 

Liability at

September 30,

2020

 

 

Expenses

 

 

Expenses Paid or Otherwise Settled

 

 

Adjustments

 

 

Liability at

December 31,

2020

 

Workforce reductions

 

$

 

 

$

150

 

 

$

150

 

 

$

 

 

$

 

Other

 

 

 

 

 

40

 

 

 

40

 

 

 

 

 

 

 

Total

 

$

 

 

$

190

 

 

$

190

 

 

$

 

 

$

 

15


 

 

Expenses incurred during the three months ended December 31, 2020, represent costs incurred by SBS of $0.2 million.

Transformation Plan

We previously disclosed a plan to focus on certain core business strategies. In addition to optimizing our supply chain network with changes to our transportation model and network of nodes, we are improving our marketing and digital commerce capabilities, and advancing our merchandising transformation efforts. In addition, we expanded our plan and announced a reduction in workforce within our field and headquarters. All these together, make up our Transformation Plan.

The liability related to the Transformation Plan, which is included in accrued liabilities on our condensed consolidated balance sheets, is as follows (in thousands):

Transformation Plan

 

Liability at

September 30,

2020

 

 

Expenses

 

 

Expenses Paid or Otherwise Settled

 

 

Adjustments

 

 

Liability at

December 31,

2020

 

Workforce reductions

 

$

65

 

 

$

7

 

 

$

72

 

 

$

 

 

$

 

Other

 

 

 

 

 

35

 

 

 

35

 

 

 

 

 

 

 

Total

 

$

65

 

 

$

42

 

 

$

107

 

 

$

 

 

$

 

Expenses incurred during the three months ended December 31, 2020, represent costs incurred by SBS of $0.1 million.

13. Subsequent Event

On January 5, 2021, we announced that we fully repaid the outstanding balance of $213.2 million on our term loan B fixed portion. The repayment was funded with excess cash and reflects our continued progress toward deleveraging the balance sheet. In connection with this repayment, we recognized an approximately $1 million loss on the extinguishment of debt from the write-off of unamortized deferred financing costs.

16


 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

This section discusses management’s view of the financial condition, results of operations and cash flows of Sally Beauty. This section should be read in conjunction with the information contained in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020, and our other filings with the Securities and Exchange Commission, including the Risk Factors sections therein, and information contained elsewhere in this Quarterly Report, including the condensed consolidated interim financial statements and notes to those financial statements. The results of operations for any interim period may not necessarily be indicative of the results that may be expected for any future interim period or the entire fiscal year, in particular as a result of the uncertainty of the continued effects of the COVID-19 pandemic on future periods.

Highlights for the Three Months Ended December 31, 2020

 

During the three months ended December 31, 2020, we experienced further disruption to sales from COVID-19, including temporary store closures in international markets, government-mandated store capacity restrictions and salon shut-downs in California and parts of Canada for part of the quarter;

 

Consolidated net sales for the three months ended December 31, 2020, decreased $44.2 million, or 4.5%, to $936.0 million, compared to the three months ended December 31, 2019;

 

Consolidated same store sales decreased 3.7% for the three months ended December 31, 2020, while our global e-commerce sales increased 48.0%, compared to the three months ended December 31, 2019;

 

Consolidated gross profit for the three months ended December 31, 2020, decreased $4.1 million, or 0.9%, to $470.7 million, compared to the three months ended December 31, 2019. Gross margin increased 190 basis points to 50.3% for the three months ended December 31, 2020, compared to the three months ended December 31, 2019;

 

Consolidated operating earnings for the three months ended December 31, 2020, increased $9.9 million, or 10.5%, to $104.3 million, compared to the three months ended December 31, 2019. Operating margin increased 150 basis points to 11.1% for the three months ended December 31, 2020, compared to the three months ended December 31, 2019;

 

Consolidated net earnings for the three months ended December 31, 2020 increased $4.0 million, or 7.5%, to $57.2 million, compared to the three months ended December 31, 2019;

 

For the three months ended December 31, 2020, we had diluted earnings per share of $0.50, compared to $0.45 for the three months ended December 31, 2019; and

 

Cash provided by operations was $37.4 million for the three months ended December 31, 2020, compared to $62.3 million for the three months ended December 31, 2019.

 

Impact of COVID-19 on Our Business and Business Strategy Update

As mentioned above, we continued to see the impact of COVID-19 on our sales into our first fiscal quarter as we had temporary store closures in international markets, restricted store capacity in certain markets and salon shut-downs in California and parts of Canada for part of the quarter.

However, we continued to make progress against our key business initiatives, which include leveraging and optimizing our elevated digital capabilities, growing customer engagement and loyalty, and completing the final steps in our successful transformation journey.

The effects of the COVID-19 pandemic and related responses had a noticeable impact on our first quarter fiscal year 2021 results of operations and cash flows. Furthermore, due to the uncertainty over the duration and severity of the economic and operational impacts of COVID-19, the adverse impact of the pandemic may continue further into our fiscal year 2021 and possibly beyond, and it may be material.


17


 

 

Overview

Key Operating Metrics

The following table sets forth, for the periods indicated, information concerning key measures we rely on to evaluate our operating performance (dollars in thousands):

 

 

 

Three Months Ended

December 31,

 

 

 

2020

 

 

2019

 

 

Increase (Decrease)

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBS

 

$

547,670

 

 

$

569,147

 

 

$

(21,477

)

 

 

(3.8

)%

BSG

 

 

388,352

 

 

 

411,061

 

 

 

(22,709

)

 

 

(5.5

)%

Consolidated

 

$

936,022

 

 

$

980,208

 

 

$

(44,186

)

 

 

(4.5

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBS

 

$

315,811

 

 

$

308,989

 

 

$

6,822

 

 

 

2.2

%

BSG

 

 

154,913

 

 

 

165,859

 

 

 

(10,946

)

 

 

(6.6

)%

Consolidated

 

$

470,724

 

 

$

474,848

 

 

$

(4,124

)

 

 

(0.9

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment gross margin:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBS

 

 

57.7

%

 

 

54.3

%

 

340

 

 

bps

 

BSG

 

 

39.9

%

 

 

40.3

%

 

(40)

 

 

bps

 

Consolidated

 

 

50.3

%

 

 

48.4

%

 

190

 

 

bps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment operating earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBS

 

$

95,128

 

 

$

74,225

 

 

$

20,903

 

 

 

28.2

%

BSG

 

 

48,572

 

 

 

62,434

 

 

 

(13,862

)

 

 

(22.2

)%

Segment operating earnings

 

 

143,700

 

 

 

136,659

 

 

 

7,041

 

 

 

5.2

%

Unallocated expenses and restructuring (a)

 

 

39,378

 

 

 

42,272

 

 

 

(2,894

)

 

 

(6.8

)%

Consolidated operating earnings

 

 

104,322

 

 

 

94,387

 

 

 

9,935

 

 

 

10.5

%

Interest expense

 

 

25,978

 

 

 

21,541

 

 

 

4,437

 

 

 

20.6

%

Earnings before provision for income taxes

 

 

78,344

 

 

 

72,846

 

 

 

5,498

 

 

 

7.5

%

Provision for income taxes

 

 

21,153

 

 

 

19,631

 

 

 

1,522

 

 

 

7.8

%

Net earnings

 

$

57,191

 

 

$

53,215

 

 

$

3,976

 

 

 

7.5

%

 

 

.

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of stores at end-of-period (including franchises):

 

 

 

 

 

 

 

 

 

SBS

 

 

3,645

 

 

 

3,703

 

 

 

(58

)

 

 

(1.6

)%

BSG

 

 

1,384

 

 

 

1,369

 

 

 

15

 

 

 

1.1

%

Consolidated

 

 

5,029

 

 

 

5,072

 

 

 

(43

)

 

 

(0.8

)%

Same store sales growth (decline) (b):

 

 

 

 

 

 

 

 

 

 

 

 

 

SBS

 

 

(3.3

)%

 

 

(1.1

)%

 

(220)

 

 

bps

 

BSG

 

 

(4.6

)%

 

 

1.2

%

 

(580)

 

 

bps

 

Consolidated

 

 

(3.7

)%

 

 

(0.3

)%

 

(340)

 

 

bps

 

 

 

(a)

Unallocated expenses consist of corporate and shared costs and are included in selling, general and administrative expenses in our consolidated statements of earnings. See Note 12, Restructuring, of the Notes to Condensed Consolidated Financial Statements for details on our restructuring charges.

(b)

For the purpose of calculating our same store sales metrics, we compare the current period sales for stores open for 14 months or longer as of the last day of a month with the sales for these stores for the comparable period in the prior fiscal year. Our same store sales are calculated in constant dollars and include e-commerce sales from certain digital platforms, but do not generally include the sales from stores relocated until 14 months after the relocation. The sales from stores acquired are excluded from our same store sales calculation until 14 months after the acquisition.


18


 

 

Results of Operations

The Three Months Ended December 31, 2020, compared to the Three Months Ended December 31, 2019

Net Sales

Consolidated. Consolidated net sales include a positive impact from changes in foreign currency exchange rates of $3.5 million, or 0.4% of consolidated net sales.

SBS. The decrease in net sales for SBS was primarily driven by the following (in thousands):

Same store sales

 

$

(17,525

)

Other (a)

 

 

(7,033

)

Foreign currency exchange

 

 

3,081

 

Total

 

$

(21,477

)

 

(a)

Other consists of non-store sales, which include catalog and internet sales of our Sinelco Group subsidiaries.

SBS experienced lower unit volume caused primarily by the impact of the temporary closure of certain customer-facing store operations in various markets globally due to the effects of COVID-19 and fewer company-operated stores. The challenges faced by lower unit volume were partially offset by an increase in average unit prices, resulting from a change in product mix to higher-priced products and the cancellation of most promotional activity.

BSG. The decrease in net sales for BSG was primarily driven by the following (in thousands):

Distributor sales consultants

 

$

(12,838

)

Same store sales

 

 

(12,795

)

Other (a)

 

 

2,502

 

Foreign currency exchange

 

 

422

 

Total

 

$

(22,709

)

 

(a)

Other consists of stores outside same store sales, included recently acquired businesses, and sales to our franchisees.

BSG experienced lower unit volume primarily as a result of the temporary closure and restricted capacity of certain customer-facing store operations in various markets in the U.S. and Canada as well as salon closures in parts of California and Canada due to the effects of COVID-19. These negative impacts were partially offset by an increase in average unit prices resulting primarily from lower promotional activity.

Gross Profit

Consolidated. Consolidated gross profit decreased for the three months ended December 31, 2020, due to lower net sales in both segments and a lower gross margin in BSG, partially offset by a higher gross margin in SBS.  

SBS. SBS’s gross profit increased for the three months ended December 31, 2020, as a result of a higher gross margin, partially offset by lower net sales. SBS’s gross margin increased primarily as a result of fewer promotions.

BSG. BSG’s gross profit decreased for the three months ended December 31, 2020, as a result of lower net sales and a lower gross margin. BSG’s gross margin decreased primarily as a result of higher capitalized inventory costs from lower inventory purchases.

Selling, General and Administrative Expenses

Consolidated. Consolidated selling, general and administrative expenses decreased primarily as a result of cost saving initiatives in response to COVID-19, including savings associated with lower compensation and compensation-related expenses and advertising expenses, and the suspension or elimination of all non-critical projects and non-essential spend. These decreases were partially offset by increased shipping costs resulting from increased e-commerce volume and incremental costs from businesses acquired in the past 12 months. Consolidated selling, general and administrative expenses, as a percentage of net sales, increased 50 basis points to 39.1% for the three months ended December 31, 2020, due to the decrease in sales.

SBS. SBS’s selling, general and administrative expenses decreased $14.1 million, or 6.0%, for the three months ended December 31, 2020, primarily due to our response to COVID-19. The decrease was driven by lower compensation and compensation-related expenses of $12.0 million and lower advertising expenses of $4.9 million. These decreases were partially offset by an increase in shipping costs of $3.0 million, resulting primarily from increased e-commerce volume, and incremental store expense for personal protective equipment and cleaning protocols related to COVID-19 safety procedures.

BSG. BSG’s selling, general and administrative expenses increased $2.9 million, or 2.8%, for the three months ended December 31, 2020. The increase was driven primarily by an increase in shipping costs of $3.0 million, resulting primarily from increased e-

19


 

commerce volume, and incremental expenses from recently acquired businesses in the past 12 months. These increases were partially offset by lower compensation and compensation-related expenses of $1.5 million.

Unallocated. Unallocated selling, general and administrative expenses, which represent certain corporate costs that have not been charged to our reporting segments, decreased $0.6 million, or 1.5%, for the three months ended December 31, 2020, primarily from lower costs associated with travel in response to COVID-19.

Restructuring

For the three months ended December 31, 2020, we incurred restructuring charges of $0.2 million primarily in connection with the Project Surge. For the three months ended December 31, 2019, we recognized charges of $2.5 million in connection with Project Surge and the Transformation Plan. See Note 12, Restructuring, of the Notes to Condensed Consolidated Financial Statements included in Item 1 of this Quarterly Report for more information about our restructuring plans.

Interest Expense

The increase in interest expense is primarily from incremental interest on the senior notes issued in April 2020 of $6.6 million, partially offset by the impact of lower interest rates on our term loan B variable tranche of $1.8 million and a lower outstanding balance on our term loan B fixed tranche of $0.9 million. See “Liquidity and Capital Resources” below for additional information.

Provision for Income Taxes

The effective tax rates were 27.0% and 26.9%, for the three months ended December 31, 2020, and 2019, respectively.

Liquidity and Capital Resources

We are highly leveraged and a substantial portion of our liquidity needs will arise from debt service on our outstanding indebtedness and from funding the costs of operations, working capital, capital expenditures, debt repayment and share repurchases. Working capital (current assets less current liabilities) increased $85.8 million, to $955.5 million at December 31, 2020, compared to $869.7 million at September 30, 2020, resulting primarily from an increase in inventory. The increase in inventory resulted from investments in key products to reach desired inventory levels.

At December 31, 2020, cash and cash equivalents were $537.6 million. Based upon the current level of operations and anticipated growth, we anticipate that existing cash balances (excluding certain amounts permanently invested in connection with foreign operations), funds expected to be generated by operations and funds available under the ABL facility will be sufficient to fund working capital requirements, potential acquisitions, anticipated capital expenditures, including information technology upgrades and store remodels, and debt repayments over the next 12 months. Due to the impact of COVID-19, we have shifted our focus to being proactive in maintaining our financial flexibility.

We utilize our ABL facility for the issuance of letters of credit, certain working capital and liquidity needs, and to manage normal fluctuations in our operational cash flow. In that regard, we may from time to time draw funds under the ABL facility for general corporate purposes including funding of capital expenditures, acquisitions, interest payments due on our indebtedness, paying down other debt and opportunistic share repurchases. During the three months ended December 31, 2020, we did not borrow on our ABL facility. As of December 31, 2020, we had $461.0 million available for borrowings under our ABL facility, subject to borrowing base limitations, as reduced by outstanding letters of credit. Amounts drawn on our ABL facility are generally paid down with cash provided by our operating activities.

Share Repurchase Programs

During the three months ended December 31, 2020, we did not repurchase any common stock. As of December 31, 2020, we had authorization of approximately $726.1 million of additional potential share repurchases remaining under the 2017 Share Repurchase Program.

Historical Cash Flows

Historically, our primary source of cash has been net funds provided by operating activities and, when necessary, borrowings under our ABL facility. While historically, the primary uses of cash have been for share repurchases, capital expenditures, repayments and servicing of long-term debt and acquisitions, we have shifted our focus in the short-term to reduce cash expenditures.

Net Cash Provided by Operating Activities

Net cash provided by operating activities during the three months ended December 31, 2020, decreased $23.3 million to $39.0 million, compared to the three months ended December 31, 2019, mainly due to increased inventory purchases, in connection with inventory investments to improve stock levels for key products, and the timing of our vendor receivables, partially offset by an increase in our accounts payable in connection with increased inventory purchases.

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Net Cash Used by Investing Activities

Net cash used by investing activities during the three months ended December 31, 2020, decreased $25.3 million to $17.5 million, compared to the three months ended December 31, 2019. This change was primarily a result of our focus on reduced capital expenditures.

Net Cash Used by Financing Activities

Net cash used by financing activities during the three months ended December 31, 2020, decreased $24.1 million to $0.3 million, compared to the three months ended December 31, 2019. The decrease was driven by the absence of debt borrowings and minimal repayments during the current quarter and not repurchasing our common stock under our share repurchase program.

Long-Term Debt and Guarantor Financial Information

At December 31, 2020, we had $1,813.2 million in debt, not including capital leases, unamortized debt issuance costs and debt discounts, in the aggregate, of $14.8 million. Our debt consisted of $1,177.4 million of senior notes outstanding and a term loan with an outstanding principal balance of $635.8 million. As of December 31, 2020, there were no outstanding principal borrowings under our ABL facility.

We are currently in compliance with the agreements and instruments governing our debt, including our financial covenants.

See Note 9, Short-term Borrowings and Long-term Debt, and Note 13, Subsequent Event, for more information on our debt.

Guarantor Financial Information

We are providing the following information in compliance with Rule 13-01 of Regulation S-X for guaranteed issued securities that have been registered under such regulation. Currently, our issued securities consist of the 5.625% Senior Notes due 2025 and the 5.50% Senior Notes due 2023. These debt instruments were issued by our wholly-owned subsidiaries, Sally Holdings LLC and Sally Capital Inc. (the “Issuers”), under a shelf registration statement.

These notes are unsecured debt instruments guaranteed by us and certain of our wholly-owned domestic subsidiaries (together, the “Guarantors”) and have certain restrictions on the ability to pay restrictive payments to Sally Beauty. The guarantees are joint and several, and full and unconditional. Certain other subsidiaries, including our foreign subsidiaries, do not serve as guarantors.

The following summarized consolidating financial information represents financial information for the Issuers and the Guarantors on a combined basis. All transactions and intercompany balances between these combined entities has been eliminated.

The following table presents the summarized balance sheets information for the Issuers and the Guarantors as of December 31, 2020 and September 30, 2020 (in thousands):

 

 

December 31, 2020

 

 

September 30, 2020

 

Inventory

 

$

681,568

 

 

$

615,092

 

Intercompany receivable

 

$

77,499

 

 

$

75,892

 

Current assets

 

$

1,244,851

 

 

$

1,166,250

 

Total assets

 

$

2,344,371

 

 

$

2,281,896

 

Current liabilities

 

$

343,132

 

 

$

325,380

 

Total liabilities

 

$

2,667,543

 

 

$

2,657,033

 

The following table presents the summarized statement of income information for three months ended December 31, 2020 (in thousands):

Net sales

 

 

 

$

759,620

 

Gross profit

 

 

 

$

385,129

 

Earnings before provision for income taxes

 

 

 

$

62,595

 

Net earnings

 

 

 

$

45,830

 

Contractual Obligations

There have been no material changes outside the ordinary course of our business in any of our contractual obligations since September 30, 2020.

Off-Balance Sheet Financing Arrangements

At December 31, 2020, and September 30, 2020, we had no off-balance sheet financing arrangements other than outstanding letters of credit related to inventory purchases and self-insurance programs.

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Critical Accounting Estimates

There have been no material changes to our critical accounting estimates or assumptions since September 30, 2020.

Recent Accounting Pronouncements

See Note 3, Recent Accounting Pronouncements, of the Notes to Condensed Consolidated Financial Statements in Item 1 – “Financial Statements” in Part I – Financial Information.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

As a multinational corporation, we are subject to certain market risks including foreign currency fluctuations, interest rates and government actions. There have been no material changes to our market risks from September 30, 2020. See our disclosures about market risks contained in Item 7A. “Quantitative and Qualitative Disclosures about Market Risk” in Part II of our Annual Report on Form 10-K for the fiscal year ended September 30, 2020.

Item 4.  Controls and Procedures

Controls Evaluation and Related CEO and CFO Certifications.   Our management, with the participation of our principal executive officer (“CEO”) and principal financial officer (“CFO”), conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2020. The controls evaluation was conducted by our Disclosure Committee, comprised of senior representatives from our finance, accounting, internal audit, and legal departments under the supervision of our CEO and CFO.

Certifications of our CEO and our CFO, which are required in accordance with Rule 13a-14 of the Exchange Act, are attached as exhibits to this Quarterly Report. This “Controls and Procedures” section includes the information concerning the controls evaluation referred to in the certifications and it should be read in conjunction with the certifications for a more complete understanding of the topics presented.

Limitations on the Effectiveness of Controls.   We do not expect that our disclosure controls and procedures will prevent all errors and all fraud. A system of controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the system are met. Because of the limitations in all such systems, no evaluation can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Furthermore, the design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how unlikely. Because of these inherent limitations in a cost-effective system of controls and procedures, misstatements or omissions due to error or fraud may occur and not be detected.

Scope of the Controls Evaluation.   The evaluation of our disclosure controls and procedures included a review of their objectives and design, our implementation of the controls and procedures and the effect of the controls and procedures on the information generated for use in this Quarterly Report. In the course of the evaluation, we sought to identify whether we had any data errors, control problems or acts of fraud and to confirm that appropriate corrective action, including process improvements, was being undertaken if needed. This type of evaluation is performed on a quarterly basis so that conclusions concerning the effectiveness of our disclosure controls and procedures can be reported in our Quarterly Reports on Form 10-Q and our Annual Reports on Form 10-K. Many of the components of our disclosure controls and procedures are also evaluated by our internal audit department, by our legal department and by personnel in our finance organization. The overall goals of these various evaluation activities are to monitor our disclosure controls and procedures on an ongoing basis and to maintain them as dynamic systems that change as conditions warrant.

Conclusions regarding Disclosure Controls.  Based on the required evaluation of our disclosure controls and procedures, our CEO and CFO have concluded that, as of December 31, 2020, we maintain disclosure controls and procedures that are effective in providing reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting.   During our most recent fiscal quarter, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

We are involved, from time to time, in various claims and lawsuits incidental to the conduct of our business in the ordinary course. We carry insurance coverage in such amounts in excess of our self-insured retention as we believe to be reasonable under the circumstances and that may or may not cover any or all of our liabilities in respect of these matters. We do not believe that the ultimate resolution of these matters will have a material adverse impact on our consolidated financial position, cash flows or results of operations.

We are subject to a number of U.S., federal, state and local laws and regulations, as well as the laws and regulations applicable in each foreign country or jurisdiction in which we do business. These laws and regulations govern, among other things, the composition, packaging, labeling and safety of the products we sell, the methods we use to sell these products and the methods we use to import these products. We believe that we are in material compliance with such laws and regulations, although no assurance can be provided that this will remain true going forward.

Item 1A.  Risk Factors

In addition to the other information set forth in this Quarterly Report, you should carefully consider the factors contained in Item 1A. “Risk Factors” in Part I of our Annual Report on Form 10-K for the fiscal year ended September 30, 2020, which could materially affect our business, financial condition or future results. There have been no material changes from the risk factors disclosed in such Annual Report. The risks described in such Annual Report and herein are not the only risks facing our company.

Item 6.  Exhibits

 

 

Exhibit No.

 

Description

 

 

 

3.1

 

Third Restated Certificate of Incorporation of Sally Beauty Holdings, Inc., dated January 30, 2014, which is incorporated herein by reference from Exhibit 3.3 to the Company’s Current Report on Form 8-K filed on January 30, 2014

 

 

 

3.2

 

Amended and Restated Bylaws of Sally Beauty Holdings, Inc., dated April 26, 2017, which is incorporated herein by reference from Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on April 28, 2017

 

 

 

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List of Subsidiary Guarantors*

 

 

 

31.1

 

Rule 13a-14(a)/15d-14(a) Certification of Christian A. Brickman*

 

 

 

31.2

 

Rule 13a-14(a)/15d-14(a) Certification of Marlo M. Cormier*

 

 

 

32.1

 

Section 1350 Certification of Christian A. Brickman*

 

 

 

32.2

 

Section 1350 Certification of Marlo M. Cormier*

 

 

 

101

 

The following financial information from our Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2020, formatted in iXBRL (Inline Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets; (ii) the Condensed Consolidated Statements of Earnings; (iii) the Condensed Consolidated Statements of Comprehensive Income; (iv) the Condensed Consolidated Statements of Stockholders’ Equity; (v) the Condensed Consolidated Statements of Cash Flows; and (vi) the Notes to Condensed Consolidated Financial Statements.

 

 

 

104

 

The cover page from our Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2020, formatted in Inline XBRL (contained in Exhibit 101).

 

* Included herewith

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

SALLY BEAUTY HOLDINGS, INC.

 

 

 

(Registrant)

 

 

 

 

Date:  February 4, 2021

 

 

 

 

 

 

 

 

By:

 

/s/ Marlo M. Cormier

 

 

 

Marlo M. Cormier

 

 

 

Senior Vice President, Chief Financial Officer

and Chief Accounting Officer

 

 

 

For the Registrant and as its Principal Financial Officer

 

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