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Sally Beauty Holdings, Inc. - Quarter Report: 2020 March (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: MARCH 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 May 1, 2020, there were 112,870,685 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

27

Item 3. Quantitative And Qualitative Disclosures About Market Risk

34

Item 4. Controls And Procedures

34

 

 

PART II — OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

35

Item 1A. Risk Factors

35

Item 2. Unregistered Sales Of Equity Securities And Use Of Proceeds

37

Item 6. Exhibits

38

 

 


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.

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, 2019 and in this Report, 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 March 31, 2020 and September 30, 2019, the condensed consolidated statements of earnings, condensed consolidated statements of comprehensive income (loss) and the condensed statements of stockholders’ deficit for the three and six months ended March 31, 2020 and 2019, and the condensed consolidated statements of cash flows for the six months ended March 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)

 

 

 

March 31,

2020

 

 

September 30,

2019

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

364,414

 

 

$

71,495

 

Trade accounts receivable, net

 

 

42,802

 

 

 

43,136

 

Accounts receivable, other

 

 

44,531

 

 

 

61,403

 

Inventory

 

 

946,189

 

 

 

952,907

 

Other current assets

 

 

51,103

 

 

 

34,612

 

Total current assets

 

 

1,449,039

 

 

 

1,163,553

 

Property and equipment, net of accumulated depreciation of $680,238 at

   March 31, 2020 and $659,285 at September 30, 2019

 

 

320,220

 

 

 

319,628

 

Operating lease assets

 

 

544,471

 

 

 

 

Goodwill

 

 

529,037

 

 

 

530,786

 

Intangible assets, excluding goodwill, net of accumulated amortization of

   $59,495 at March 31, 2020 and $64,615 at September 30, 2019

 

 

58,893

 

 

 

62,051

 

Other assets

 

 

19,506

 

 

 

22,428

 

Total assets

 

$

2,921,166

 

 

$

2,098,446

 

Liabilities and Stockholders’ Deficit

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current maturities of long-term debt

 

$

395,671

 

 

$

1

 

Accounts payable

 

 

221,760

 

 

 

278,688

 

Accrued liabilities

 

 

145,920

 

 

 

169,054

 

Current operating lease liabilities

 

 

151,162

 

 

 

 

Income taxes payable

 

 

1,323

 

 

 

8,336

 

Total current liabilities

 

 

915,836

 

 

 

456,079

 

Long-term debt

 

 

1,550,195

 

 

 

1,594,542

 

Long-term operating lease liabilities

 

 

405,593

 

 

 

 

Other liabilities

 

 

18,310

 

 

 

27,757

 

Deferred income tax liabilities, net

 

 

84,427

 

 

 

80,391

 

Total liabilities

 

 

2,974,361

 

 

 

2,158,769

 

Stockholders’ deficit:

 

 

 

 

 

 

 

 

Common stock, $0.01 par value. Authorized 500,000 shares; 112,848 and

   116,986 shares issued and 112,264 and 116,725 shares outstanding at

   March 31, 2020 and September 30, 2019, respectively

 

 

1,123

 

 

 

1,167

 

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

 

 

 

 

 

 

Additional paid-in capital

 

 

 

 

 

 

Accumulated earnings

 

 

69,925

 

 

 

55,797

 

Accumulated other comprehensive loss, net of tax

 

 

(124,243

)

 

 

(117,287

)

Total stockholders’ deficit

 

 

(53,195

)

 

 

(60,323

)

Total liabilities and stockholders’ deficit

 

$

2,921,166

 

 

$

2,098,446

 

 

 

 

 

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

 

 

Six Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net sales

 

$

871,023

 

 

$

945,852

 

 

$

1,851,231

 

 

$

1,935,305

 

Cost of goods sold

 

 

441,266

 

 

 

477,528

 

 

 

946,626

 

 

 

986,275

 

Gross profit

 

 

429,757

 

 

 

468,324

 

 

 

904,605

 

 

 

949,030

 

Selling, general and administrative expenses

 

 

383,299

 

 

 

361,626

 

 

 

761,228

 

 

 

728,614

 

Restructuring

 

 

3,193

 

 

 

(5,814

)

 

 

5,725

 

 

 

(1,834

)

Operating earnings

 

 

43,265

 

 

 

112,512

 

 

 

137,652

 

 

 

222,250

 

Interest expense

 

 

21,644

 

 

 

23,821

 

 

 

43,185

 

 

 

48,310

 

Earnings before provision for income taxes

 

 

21,621

 

 

 

88,691

 

 

 

94,467

 

 

 

173,940

 

Provision for income taxes

 

 

8,253

 

 

 

22,966

 

 

 

27,884

 

 

 

42,488

 

Net earnings

 

$

13,368

 

 

$

65,725

 

 

$

66,583

 

 

$

131,452

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.12

 

 

$

0.55

 

 

$

0.58

 

 

$

1.10

 

Diluted

 

$

0.12

 

 

$

0.54

 

 

$

0.57

 

 

$

1.09

 

Weighted-average shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

114,823

 

 

 

120,077

 

 

 

115,478

 

 

 

120,033

 

Diluted

 

 

115,795

 

 

 

120,991

 

 

 

116,462

 

 

 

120,949

 

 

 

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 (Loss)

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net earnings

 

$

13,368

 

 

$

65,725

 

 

$

66,583

 

 

$

131,452

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(23,784

)

 

 

3,040

 

 

 

(8,823

)

 

 

(10,425

)

Interest rate caps, net of tax

 

 

(80

)

 

 

(2,140

)

 

 

29

 

 

 

(4,970

)

Foreign exchange contracts, net of tax

 

 

2,038

 

 

 

242

 

 

 

1,838

 

 

 

(168

)

Other comprehensive income (loss), net of tax

 

 

(21,826

)

 

 

1,142

 

 

 

(6,956

)

 

 

(15,563

)

Total comprehensive income (loss)

 

$

(8,458

)

 

$

66,867

 

 

$

59,627

 

 

$

115,889

 

 

 

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

8


SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Six Months Ended March 31,

 

 

 

2020

 

 

2019

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

 

Net earnings

 

$

66,583

 

 

$

131,452

 

Adjustments to reconcile net earnings to net cash provided by operating

   activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

53,997

 

 

 

53,275

 

Share-based compensation expense

 

 

6,532

 

 

 

5,871

 

Amortization of deferred financing costs

 

 

1,767

 

 

 

1,979

 

Gain on early extinguishment of debt

 

 

(357

)

 

 

(473

)

Gain on disposal of equipment and other property

 

 

(18

)

 

 

(6,548

)

Deferred income taxes

 

 

5,547

 

 

 

8,530

 

Changes in (exclusive of effects of acquisitions):

 

 

 

 

 

 

 

 

Trade accounts receivable

 

 

158

 

 

 

5,950

 

Accounts receivable, other

 

 

19,199

 

 

 

(7,554

)

Inventory

 

 

1,365

 

 

 

(14,213

)

Other current assets

 

 

(17,692

)

 

 

2,754

 

Other assets

 

 

575

 

 

 

(1,293

)

Accounts payable and accrued liabilities

 

 

(55,679

)

 

 

(69,704

)

Income taxes payable

 

 

(7,199

)

 

 

4,150

 

Other liabilities

 

 

1,353

 

 

 

(4,066

)

Net cash provided by operating activities

 

 

76,131

 

 

 

110,110

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

 

Payments for property and equipment

 

 

(71,983

)

 

 

(46,398

)

Proceeds from sale of property and equipment

 

 

23

 

 

 

12,010

 

Acquisitions, net of cash acquired

 

 

(1,944

)

 

 

(2,848

)

Net cash used by investing activities

 

 

(73,904

)

 

 

(37,236

)

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of long-term debt

 

 

787,500

 

 

 

242,504

 

Repayments of long-term debt

 

 

(437,385

)

 

 

(304,157

)

Payments for common stock repurchased

 

 

(61,357

)

 

 

 

Proceeds from exercises of stock options

 

 

2,771

 

 

 

1,721

 

Net cash (used) provided by financing activities

 

 

291,529

 

 

 

(59,932

)

Effect of foreign exchange rate changes on cash and cash equivalents

 

 

(837

)

 

 

(460

)

Net increase in cash and cash equivalents

 

 

292,919

 

 

 

12,482

 

Cash and cash equivalents, beginning of period

 

 

71,495

 

 

 

77,295

 

Cash and cash equivalents, end of period

 

$

364,414

 

 

$

89,777

 

Supplemental Cash Flow Information:

 

 

 

 

 

 

 

 

Interest paid

 

$

41,366

 

 

$

48,378

 

Income taxes paid

 

$

45,521

 

 

$

37,518

 

Capital expenditures incurred but not paid

 

$

5,090

 

 

$

3,763

 

 

 

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

 

 

 


 

9


SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders’ Deficit

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Other

 

 

Total

 

 

Common Stock

Paid-in

 

 

Accumulated

 

 

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 stock options

 

206

 

 

 

2

 

 

 

2,764

 

 

 

 

 

 

 

 

 

2,766

 

Balance at December 31, 2019

 

116,165

 

 

$

1,162

 

 

$

 

 

$

103,454

 

 

$

(102,417

)

 

$

2,199

 

Net earnings

 

 

 

 

 

 

 

 

 

 

13,368

 

 

 

 

 

 

13,368

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

(21,826

)

 

 

(21,826

)

Repurchases and cancellations of

   common stock

 

(3,936

)

 

 

(39

)

 

 

(3,064

)

 

 

(46,897

)

 

 

 

 

 

(50,000

)

Share-based compensation

 

 

 

 

 

 

 

3,059

 

 

 

 

 

 

 

 

 

3,059

 

Stock issued for stock options

 

35

 

 

 

 

 

 

5

 

 

 

 

 

 

 

 

 

5

 

Balance at March 31, 2020

 

112,264

 

 

$

1,123

 

 

$

 

 

$

69,925

 

 

$

(124,243

)

 

$

(53,195

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

Total

 

 

Common Stock

 

Paid-in

 

 

 

 

Accumulated

 

 

 

 

Comprehensive

 

 

 

 

Stockholders’

 

 

Shares

 

 

 

 

Amount

 

 

 

 

Capital

 

 

 

 

Deficit

 

 

 

 

Loss

 

 

 

 

Deficit

 

Balance at September 30, 2018

 

119,926

 

 

 

 

$

1,199

 

 

 

 

$

 

 

 

 

$

(179,764

)

 

 

 

$

(89,991

)

 

 

 

$

(268,556

)

Net earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

65,727

 

 

 

 

 

 

 

 

 

 

65,727

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(16,705

)

 

 

 

 

(16,705

)

Share-based compensation

 

 

 

 

 

 

 

 

 

 

 

3,354

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,354

 

Stock issued for stock options

 

115

 

 

 

 

 

1

 

 

 

 

 

1,448

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,449

 

Balance at December 31, 2018

 

120,041

 

 

 

 

$

1,200

 

 

 

 

$

4,802

 

 

 

 

$

(114,037

)

 

 

 

$

(106,696

)

 

 

 

$

(214,731

)

Net earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

65,725

 

 

 

 

 

 

 

 

 

 

65,725

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,142

 

 

 

 

 

1,142

 

Share-based compensation

 

 

 

 

 

 

 

 

 

 

 

2,517

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,517

 

Stock issued for stock options

 

66

 

 

 

 

 

1

 

 

 

 

 

271

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

272

 

Balance at March 31, 2019

 

120,107

 

 

 

 

$

1,201

 

 

 

 

$

7,590

 

 

 

 

$

(48,312

)

 

 

 

$

(105,554

)

 

 

 

$

(145,075

)

 

 

 

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, 2019. 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 March 31, 2020, and September 30, 2019, our consolidated results of operations, consolidated comprehensive income (loss), and consolidated statements of stockholders’ deficit for the three and six months ended March 31, 2020 and 2019, and our consolidated cash flows for the six months ended March 31, 2020 and 2019.

Our operating results for the three months ended March 31, 2020, may not be indicative of the results that may be expected for the full fiscal year ending September 30, 2020, because of the novel coronavirus ("COVID-19") pandemic. As a result of COVID-19, we temporarily shut down virtually all global customer-facing store operations. Due to the uncertainty over the duration and severity of the economic and operational impacts of COVID-19, this material adverse impact may continue for the remainder of our fiscal 2020 year and beyond.

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. See Note 3 for more information about the adoption of the new lease accounting standard. 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; however, for the current period the provision for income taxes has been determined on the basis of year to date results, as COVID-19 related closures impacted our ability to reasonably forecast full year results by jurisdiction.

3.   Accounting Changes and Recent Accounting Pronouncements

Accounting Change

In February 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (“ASU No. 2016-02”), which requires most operating leases to be reported on the balance sheet as a right-of-use asset and a lease liability. On October 1, 2019, we adopted ASU No. 2016-02 using a modified retrospective transition method without restating comparative periods. We have elected the package of practical expedients permitted within the transition guidance under the new standard relating to the identification, classification and initial direct costs of leases commencing before the effective date of Topic 842. In addition, we have elected to not recognize a right-of-use asset or lease obligation for short-term leases with an initial term of 12 months or less.

Additionally, the adoption of ASU No. 2016-02, as amended, resulted in the recognition of an operating lease asset of $513.9 million and an operating lease liability of $523.5 million.  Existing straight-line rent liability, prepaid rent and accrued rent were reclassified from certain other assets and liabilities into the operating lease asset. Furthermore, the cumulative effect of the adoption of ASU No. 2016-02 resulted in a $0.4 million adjustment to accumulated earnings resulting from the impairment of certain operating lease assets. The impact on our condensed consolidated results of operations or condensed consolidated cash flows was not material.

See Note 8 for additional information in connection with ASU No. 2016-02.

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 updated 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.

 

11


 

4.   Revenue Recognition

Substantially all of our revenue is derived through the sale of merchandise through 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, 2019

 

 

 

 

 

$

12,866

 

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

 

 

9,003

 

Revenue recognized from beginning liability

 

 

(8,491

)

March 31, 2020

 

 

 

 

 

$

13,378

 

Private Label Credit Card - In September 2019, we signed a multi-year agreement with a third-party bank to launch a private label credit card (the “Program”). As of March 31, 2020, Program operations had not yet commenced.  

See Note 13 for additional information regarding the disaggregation of our sales revenue.

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

 

March 31,

2020

 

 

September 30,

2019

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

Other current assets

 

Level 2

 

$

3,043

 

 

$

 

Interest rate caps

 

Other assets

 

Level 2

 

 

145

 

 

 

344

 

Total assets

 

 

 

 

 

$

3,188

 

 

$

344

 

 

Other fair value disclosures

 

 

 

 

March 31, 2020

 

 

September 30, 2019

 

 

 

Fair Value Hierarchy Level

 

Carrying Value

 

 

Fair Value

 

 

Carrying Value

 

 

Fair Value

 

Long-term debt, excluding capital leases

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior notes

 

Level 1

 

$

877,380

 

 

$

731,418

 

 

$

885,296

 

 

$

898,814

 

Term loan B

 

Level 2

 

 

685,788

 

 

 

601,101

 

 

 

724,000

 

 

 

709,830

 

Total long-term debt

 

 

 

$

1,563,168

 

 

$

1,332,519

 

 

$

1,609,296

 

 

$

1,608,644

 

 

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

6.   Stockholder’s Equity (Deficit)

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

March 31,

 

 

Six Months Ended

March 31,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Number of shares repurchased

 

 

3,936

 

 

 

 

 

 

4,702

 

 

 

 

Total cost of share repurchased

 

$

50,000

 

 

$

 

 

$

61,357

 

 

$

 

12


 

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, 2019

 

$

(113,932

)

 

$

(3,201

)

 

$

(154

)

 

$

(117,287

)

Other comprehensive loss before

    reclassification, net of tax

 

 

(8,823

)

 

 

(209

)

 

 

(399

)

 

 

(9,431

)

Reclassification to net earnings, net of tax

 

 

 

 

 

238

 

 

 

2,237

 

 

 

2,475

 

Balance at March 31, 2020

 

$

(122,755

)

 

$

(3,172

)

 

$

1,684

 

 

$

(124,243

)

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

7.   Weighted-Average Shares

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

 

 

 

Three Months Ended

March 31,

 

 

Six Months Ended

March 31,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Weighted-average basic shares

 

 

114,823

 

 

 

120,077

 

 

 

115,478

 

 

 

120,033

 

Dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock option and stock award programs

 

 

972

 

 

 

914

 

 

 

984

 

 

 

916

 

Weighted-average diluted shares

 

 

115,795

 

 

 

120,991

 

 

 

116,462

 

 

 

120,949

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Anti-dilutive options excluded from our computation of diluted shares

 

 

5,076

 

 

 

5,183

 

 

 

5,076

 

 

 

5,183

 

 

8.   Leases

Substantially all of our leases are operating leases and relate primarily to retail stores and warehousing properties with lease terms of five to ten years. Some of our leases include options to extend the agreement by a certain number of years, typically five years. At the lease commencement date, an operating lease liability and related operating lease asset are recognized and include the extended terms to the extent we are reasonably certain that we will exercise the option.

The operating lease liabilities are calculated using the present value of lease payments. The discount rate used is either the rate implicit in the lease, when known, or our estimated incremental borrowing rate. Our incremental borrowing rate for a lease is the rate of interest we would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. Because we do not generally borrow on a collateralized basis, we derive an appropriate incremental borrowing rate using the interest rate we pay on our non-collateralized borrowings, adjusted for the amount of the lease payments, the lease term and the effect of designating specific collateral with a value equal to the unpaid lease payments for that lease. We apply the incremental borrowing rate on a portfolio basis given the impact of applying it on a lease by lease basis would be immaterial.

Operating lease assets are valued based on the initial operating lease liabilities plus any prepaid rent and direct costs from executing the leases, reduced by tenant improvement allowances and any rent abatement. Operating lease assets are tested for impairment in the same manner as our long-lived assets.

13


 

Our operating and finance leases consisted of the following (in thousands):

 

 

Balance Sheet Classification

 

March 31, 2020

 

Assets:

 

 

 

 

 

 

Operating lease

 

Operating lease assets

 

$

544,471

 

Finance lease

 

Property and equipment, net

 

 

2,866

 

Total lease assets

 

 

 

$

547,337

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

Current:

 

 

 

 

 

 

Operating lease

 

Current operating lease liabilities

 

$

151,162

 

Finance lease

 

Current maturities of long-term debt

 

 

171

 

 

 

 

 

 

 

 

Long-term:

 

 

 

 

 

 

Operating lease

 

Long-term operating lease liabilities

 

 

405,593

 

Finance lease

 

Long-term debt

 

 

672

 

Total lease liabilities

 

 

 

$

557,598

 

Our lease costs, net of immaterial sublease income, consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

Statement of Earnings Classification

 

Three Months Ended

March 31, 2020

 

 

Six Months Ended

March 31, 2020

 

Operating lease costs (a)

 

Cost of goods sold and

    selling, general and administrative expenses (b)

 

$

49,342

 

 

$

94,687

 

Finance lease costs:

 

 

 

 

 

 

 

 

 

 

Amortization of leased assets

 

Selling, general and administrative expenses

 

 

75

 

 

 

150

 

Interest on lease liabilities

 

Interest expense

 

 

11

 

 

 

22

 

Variable lease costs (c)

 

Selling, general and administrative expenses

 

 

14,694

 

 

 

28,964

 

Total lease costs

 

 

 

$

64,122

 

 

$

123,823

 

 

 

(a)

Includes costs related to short-term leases, which are immaterial.

 

(b)

Certain supply chain-related amounts are included in cost of goods sold.

 

(c)

Includes common area maintenance, real estate taxes and insurance related to leases.

As of March 31, 2020, the approximate future lease payments under our leases are as follows (in thousands):

Fiscal Year

 

 

Operating leases

 

 

Finance leases

 

Remainder of 2020

 

 

$

91,911

 

 

$

171

 

 

2021

 

 

 

157,568

 

 

 

168

 

 

2022

 

 

 

116,804

 

 

 

168

 

 

2023

 

 

 

81,479

 

 

 

168

 

 

2024

 

 

 

53,297

 

 

 

168

 

Thereafter

 

 

 

93,793

 

 

 

 

Total undiscounted lease payments

 

 

 

594,852

 

 

 

843

 

Less: imputed interest

 

 

 

38,097

 

 

 

 

Present value of lease liabilities

 

 

$

556,755

 

 

$

843

 

The table above does not include operating leases we have entered into of approximately $13.4 million that have not commenced, primarily related to future retail stores.

14


 

As of September 30, 2019, our future minimum lease payments under non-cancelable operating leases as reported under the previous accounting standard were as follows (in thousands):

Fiscal Year

 

 

 

 

2020

 

$

174,578

 

2021

 

 

136,900

 

2022

 

 

95,918

 

2023

 

 

61,944

 

2024

 

 

33,803

 

Thereafter

 

 

40,545

 

 

 

$

543,688

 

Other lease information is as follows (dollars in thousands):

 

 

 

 

 

 

 

Six Months Ended

March 31, 2020

 

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

 

Operating cash flows – operating leases

 

$

96,734

 

Operating cash flows – finance leases

 

 

22

 

Financing cash flows – finance leases

 

 

2

 

 

 

 

 

 

Supplemental non-cash information on lease liabilities:

 

 

 

 

Lease assets obtained in exchange for new operating lease liabilities

 

$

128,536

 

Lease assets obtained in exchange for new finance lease liabilities

 

 

4

 

 

 

 

 

 

 

 

March 31, 2020

 

Weighted-average remaining lease term (in years):

 

 

 

 

Operating leases

 

 

4.7

 

Finance leases

 

 

4.3

 

Weighted-average discount rate:

 

 

 

 

Operating leases

 

 

4.3

%

Finance leases

 

 

5.0

%

 

9. Goodwill and Intangible Assets

During the three months ended March 31, 2020, we completed our annual assessment for impairment of goodwill and other intangible assets. Additionally, due to COVID-19, we performed an additional assessment for impairment of goodwill and other intangibles as of March 31, 2020, which updated our assumptions around the growth, timing and discount rate applied to future cash flows in connection with our business restart. Due to the uncertainty around COVID-19, our projected future cash flows may differ materially from actual results.  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 March 31, 2020 and 2019, amortization expense related to other intangible assets was $2.2 million and $2.9 million, respectively, and, for the six months ended March 31, 2020 and 2019, amortization expense was $4.6 million and $5.7 million, respectively.

During the six months ended March 31, 2020, we recorded approximately $1.4 million in other intangible assets related to immaterial asset acquisitions. Additionally, goodwill was negatively impacted by approximately $1.7 million from changes in foreign currency exchange rates during the six months ended March 31, 2020.


15


 

10.   Short-term Borrowings and Long-term Debt

During the three months ended March 31, 2020, we preemptively drew on our ABL facility as a result of COVID-19. At March 31, 2020, we had $395.5 million outstanding and $85.8 million available for borrowing under our ABL facility, including the Canadian sub-facility. Our ABL facility matures on July 6, 2022.

During the three months ended December 31, 2019, we paid down $14.8 million aggregate principal amount of our term loan B fixed tranche at a weighted-average price of 97.875% of face value, excluding accrued interest. Additionally, during the three months ended March 31, 2020, we paid down $22.0 million aggregate principal amount of our term loan B fixed tranche at a weighted-average price of 99.0% of face value, excluding accrued interest. In connection with the debt repayment, for the six months ended March 31, 2020, we recognized a $0.4 million gain on the extinguishment of debt, including a gain of approximately $0.4 million from the discount paid under the face value and the write-off of $0.1 million in unamortized deferred financing costs.

During the three months ended March, 31, 2020, we paid down $7.9 million aggregate principal amount of our senior notes due 2025 at a weighted-average price of 98.7% of face value, excluding accrued interest.

See Note 16 for further information related to the recent issuance of debt and modification of our ABL facility that occurred subsequent to March 31, 2020.  

Covenants

The agreements governing our ABL facility, term loan B and the senior notes due 2023 and 2025 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 and customary events of default, including customary cross-default and/or cross-acceleration provisions. As of March 31, 2020, we were in compliance with all debt covenants and all the net assets of our consolidated subsidiaries were unrestricted from transfer.

11.    Derivative Instruments and Hedging Activities

During the six months ended March 31, 2020, we did not purchase or hold any derivative instruments for trading or speculative purposes. See Note 5 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 March 31, 2020, the notional amount we held through these forwards, based upon exchange rates at March 31, 2020, was as follows (in thousands):

Notional Currency

 

Notional Amount

 

Mexican Peso

 

$

12,653

 

Canadian Dollar

 

 

4,766

 

Total

 

$

17,419

 

 

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. Based on March 31, 2020, valuations and exchange rates, we expect to reclassify gains of approximately $2.1 million into cost of goods sold over the next 12 months.

During the three months ended March 31, 2020, we de-designated certain foreign currency forwards as it became probable that the forecasted transaction would not occur as a result of the recent coronavirus pandemic. As a result, we reclassified $1.3 million in gains from AOCL into selling, general and administration expenses. These contracts expire ratably through June 30, 2020.

Other than the amounts reclassified due to de-designation, the effects of our foreign currency forwards on our condensed consolidated statements of earnings were not material for the six months ended March 31, 2020.

16


 

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 $0.9 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 six months ended March 31, 2020.

12.    Income Tax

The effective tax rates were 38.2% and 25.9%, for the three months ended March 31, 2020 and 2019, respectively. The increase in the effective tax rate was primarily driven by the establishment of a valuation allowance in a foreign subsidiary and increased foreign losses, as compared to the prior period, the tax benefit of which cannot be recognized. The effective tax rates were 29.5% and 24.4%, for the six months ended March 31, 2020 and 2019, respectively. The increase in the effective tax rate was primarily driven by the establishment of a valuation allowance in a foreign subsidiary and increased foreign losses, as compared to the prior period, the tax benefit of which cannot be recognized. Additionally, for the six months ended March 31, 2019, the provision for income taxes included an income tax benefit due to an adjustment to our previously recorded transition tax on unrepatriated foreign earnings as a result of the Tax Cuts and Jobs Act.

 

Three Months Ended

 

 

Six Months Ended

 

 

March 31,

 

 

March 31,

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

U.S. federal statutory income tax rate

 

21.0

%

 

 

21.0

%

 

 

21.0

%

 

 

21.0

%

State income taxes, net of federal tax benefit

 

4.4

 

 

 

3.3

 

 

 

3.6

 

 

 

3.4

 

Effect of foreign operations

 

0.1

 

 

 

(0.1

)

 

 

0.9

 

 

 

0.1

 

Foreign valuation allowances

 

15.9

 

 

 

(0.1

)

 

 

3.9

 

 

 

0.4

 

Deemed repatriation tax

 

0.0

 

 

 

0.0

 

 

 

0.0

 

 

 

(1.7

)

Other, net

 

(3.2

)

 

 

1.8

 

 

 

0.1

 

 

 

1.2

 

Effective tax rate

 

38.2

%

 

 

25.9

%

 

 

29.5

%

 

 

24.4

%

In response to the global pandemic related to COVID-19, President Donald Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) on March 27, 2020. The CARES Act provides numerous tax provisions and other stimulus measures, including temporary changes regarding the prior and future utilization of net operating losses, temporary changes to the prior and future limitations on interest deductions, technical corrections from prior tax legislation for tax depreciation of certain qualified improvement property, temporary suspension of certain payment requirements for the employer portion of social security taxes, and the creation of certain refundable employee retention credits. We are currently evaluating the CARES Act, but there was not a material impact on our income tax expense for the three months ended March 31, 2020. We will continue to monitor legislative developments related to COVID-19 and will record the associated income tax impacts in the periods that guidance is finalized or when we are able to reasonably estimate an impact.

 

17


 

13.   Business Segments

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

 

 

 

Three Months Ended

March 31,

 

 

Six Months Ended

March 31,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sally Beauty Supply ("SBS")

 

$

519,509

 

 

$

565,604

 

 

$

1,088,657

 

 

$

1,146,213

 

Beauty Systems Group ("BSG")

 

 

351,514

 

 

 

380,248

 

 

 

762,574

 

 

 

789,092

 

Total

 

$

871,023

 

 

$

945,852

 

 

$

1,851,231

 

 

$

1,935,305

 

Earnings before provision for income taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment operating earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBS

 

$

56,373

 

 

$

86,715

 

 

$

130,598

 

 

$

176,706

 

BSG

 

 

41,039

 

 

 

56,518

 

 

 

103,473

 

 

 

118,849

 

Segment operating earnings

 

 

97,412

 

 

 

143,233

 

 

 

234,071

 

 

 

295,555

 

Unallocated expenses

 

 

50,954

 

 

 

36,535

 

 

 

90,694

 

 

 

75,139

 

Restructuring

 

 

3,193

 

 

 

(5,814

)

 

 

5,725

 

 

 

(1,834

)

Consolidated operating earnings

 

 

43,265

 

 

 

112,512

 

 

 

137,652

 

 

 

222,250

 

Interest expense

 

 

21,644

 

 

 

23,821

 

 

 

43,185

 

 

 

48,310

 

Earnings before provision for income taxes

 

$

21,621

 

 

$

88,691

 

 

$

94,467

 

 

$

173,940

 

 

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

Disaggregation of net sales by segment

 

 

Three Months Ended

March 31,

 

 

Six Months Ended

March 31,

 

SBS

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Hair color

 

 

32.8

%

 

 

29.1

%

 

 

31.9

%

 

 

28.3

%

Hair care

 

 

19.5

%

 

 

20.5

%

 

 

19.7

%

 

 

20.2

%

Skin and nail care

 

 

12.8

%

 

 

14.6

%

 

 

13.5

%

 

 

14.8

%

Styling tools

 

 

12.7

%

 

 

13.6

%

 

 

13.4

%

 

 

14.7

%

Salon supplies and accessories

 

 

7.6

%

 

 

7.5

%

 

 

7.2

%

 

 

7.3

%

Multicultural products

 

 

6.1

%

 

 

7.0

%

 

 

5.7

%

 

 

6.7

%

Other beauty items

 

 

8.5

%

 

 

7.7

%

 

 

8.6

%

 

 

8.0

%

Total

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

 

 

Three Months Ended

March 31,

 

 

Six Months Ended

March 31,

 

BSG

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Hair color

 

 

40.1

%

 

 

40.3

%

 

 

38.8

%

 

 

39.1

%

Hair care

 

 

35.1

%

 

 

34.2

%

 

 

34.8

%

 

 

33.8

%

Skin and nail care

 

 

8.2

%

 

 

8.2

%

 

 

8.2

%

 

 

8.2

%

Styling tools

 

 

6.2

%

 

 

3.2

%

 

 

6.5

%

 

 

3.6

%

Other beauty items

 

 

3.0

%

 

 

6.6

%

 

 

2.8

%

 

 

6.1

%

Promotional items

 

 

7.4

%

 

 

7.5

%

 

 

8.9

%

 

 

9.2

%

Total

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

The following tables disaggregate our segment revenue by sales channels:

 

 

Three Months Ended

March 31,

 

 

Six Months Ended

March 31,

 

SBS

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Company-operated stores

 

 

94.9

%

 

 

96.7

%

 

 

95.4

%

 

 

96.7

%

E-commerce

 

 

4.9

%

 

 

3.0

%

 

 

4.4

%

 

 

3.0

%

Franchise stores

 

 

0.2

%

 

 

0.3

%

 

 

0.2

%

 

 

0.3

%

Total

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

18


 

 

 

 

Three Months Ended

March 31,

 

 

Six Months Ended

March 31,

 

BSG

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Company-operated stores

 

 

70.4

%

 

 

70.4

%

 

 

69.8

%

 

 

69.7

%

Distributor sales consultants

 

 

16.6

%

 

 

17.3

%

 

 

17.3

%

 

 

18.1

%

Franchise stores

 

 

7.1

%

 

 

7.3

%

 

 

7.2

%

 

 

7.5

%

E-commerce

 

 

5.9

%

 

 

5.0

%

 

 

5.7

%

 

 

4.7

%

Total

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

14.   Parent, Issuers, Guarantor and Non-Guarantor Condensed Consolidating Financial Statements

Certain 100% wholly owned domestic subsidiaries (“guarantor subsidiaries”), as defined in our credit agreements, of Sally Beauty serve as guarantors to the ABL facility, term loan B and senior notes due 2023 and 2025. The guarantees related to these debt instruments are full and unconditional, joint and several and have certain restrictions on the ability to pay restricted payments to Sally Beauty Holdings, Inc. (“parent”). Certain other subsidiaries, including our foreign subsidiaries, do not serve as guarantors (“non-guarantor subsidiaries”).

The following condensed consolidating financial information represents financial information for (i) parent, (ii) Sally Holdings LLC and Sally Capital Inc., (iii) the guarantor subsidiaries; (iv) the non-guarantor subsidiaries, (v) elimination entries necessary for consolidation purposes, and (vi) Sally Beauty on a consolidated basis.  


19


 

 

Condensed Consolidating Balance Sheet

March 31, 2020

(In thousands)

 

 

 

Parent

 

 

Sally

Holdings LLC

and Sally

Capital Inc.

 

 

Guarantor

Subsidiaries

 

 

Non-

Guarantor

Subsidiaries

 

 

Consolidating

Eliminations

 

 

Sally Beauty

Holdings,

Inc. and

Subsidiaries

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

 

$

10

 

 

$

335,827

 

 

$

28,577

 

 

$

 

 

$

364,414

 

Trade and other accounts receivable, net

 

 

 

 

 

 

 

 

52,788

 

 

 

34,545

 

 

 

 

 

 

87,333

 

Due from affiliates

 

 

 

 

 

 

 

 

2,638,162

 

 

 

 

 

 

(2,638,162

)

 

 

 

Inventory

 

 

 

 

 

 

 

 

710,623

 

 

 

235,566

 

 

 

 

 

 

946,189

 

Other current assets

 

 

15,311

 

 

 

270

 

 

 

23,119

 

 

 

12,403

 

 

 

 

 

 

51,103

 

Property and equipment, net

 

 

8

 

 

 

 

 

 

264,739

 

 

 

55,473

 

 

 

 

 

 

320,220

 

Operating lease assets

 

 

 

 

 

 

 

 

401,374

 

 

 

143,097

 

 

 

 

 

 

544,471

 

Investment in subsidiaries

 

 

1,685,104

 

 

 

4,469,936

 

 

 

376,173

 

 

 

 

 

 

(6,531,213

)

 

 

 

Goodwill and other intangible assets, net

 

 

 

 

 

 

 

 

450,484

 

 

 

137,446

 

 

 

 

 

 

587,930

 

Other assets

 

 

1,446

 

 

 

3,092

 

 

 

3,098

 

 

 

11,870

 

 

 

 

 

 

19,506

 

Total assets

 

$

1,701,869

 

 

$

4,473,308

 

 

$

5,256,387

 

 

$

658,977

 

 

$

(9,169,375

)

 

$

2,921,166

 

Liabilities and Stockholders’ Equity (Deficit)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

23

 

 

$

 

 

$

180,078

 

 

$

41,659

 

 

$

 

 

$

221,760

 

Due to affiliates

 

 

1,748,579

 

 

 

823,032

 

 

 

 

 

 

66,551

 

 

 

(2,638,162

)

 

 

 

Accrued liabilities

 

 

160

 

 

 

18,151

 

 

 

100,226

 

 

 

27,383

 

 

 

 

 

 

145,920

 

Income taxes payable

 

 

 

 

 

2,161

 

 

 

 

 

 

(838

)

 

 

 

 

 

1,323

 

Long-term debt

 

 

 

 

 

1,945,023

 

 

 

4

 

 

 

839

 

 

 

 

 

 

1,945,866

 

Long-term operating lease liabilities

 

 

 

 

 

 

 

 

413,824

 

 

 

142,931

 

 

 

 

 

 

556,755

 

Other liabilities

 

 

6,441

 

 

 

 

 

 

11,840

 

 

 

29

 

 

 

 

 

 

18,310

 

Deferred income tax liabilities, net

 

 

(139

)

 

 

(163

)

 

 

80,479

 

 

 

4,250

 

 

 

 

 

 

84,427

 

Total liabilities

 

 

1,755,064

 

 

 

2,788,204

 

 

 

786,451

 

 

 

282,804

 

 

 

(2,638,162

)

 

 

2,974,361

 

Total stockholders’ equity (deficit)

 

 

(53,195

)

 

 

1,685,104

 

 

 

4,469,936

 

 

 

376,173

 

 

 

(6,531,213

)

 

 

(53,195

)

Total liabilities and stockholders’ equity (deficit)

 

$

1,701,869

 

 

$

4,473,308

 

 

$

5,256,387

 

 

$

658,977

 

 

$

(9,169,375

)

 

$

2,921,166

 

20


 

Condensed Consolidating Balance Sheet

September 30, 2019

(In thousands)

 

 

 

Parent

 

 

Sally

Holdings LLC

and Sally

Capital Inc.

 

 

Guarantor

Subsidiaries

 

 

Non-

Guarantor

Subsidiaries

 

 

Consolidating

Eliminations

 

 

Sally Beauty

Holdings,

Inc. and

Subsidiaries

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

 

$

10

 

 

$

41,009

 

 

$

30,476

 

 

$

 

 

$

71,495

 

Trade and other accounts receivable, net

 

 

 

 

 

 

 

 

65,746

 

 

 

38,793

 

 

 

 

 

 

104,539

 

Due from affiliates

 

 

 

 

 

 

 

 

2,878,072

 

 

 

 

 

 

(2,878,072

)

 

 

 

Inventory

 

 

 

 

 

 

 

 

722,830

 

 

 

230,077

 

 

 

 

 

 

952,907

 

Other current assets

 

 

1,436

 

 

 

132

 

 

 

22,480

 

 

 

10,564

 

 

 

 

 

 

34,612

 

Property and equipment, net

 

 

6

 

 

 

 

 

 

258,132

 

 

 

61,490

 

 

 

 

 

 

319,628

 

Investment in subsidiaries

 

 

1,621,843

 

 

 

4,374,334

 

 

 

385,629

 

 

 

 

 

 

(6,381,806

)

 

 

 

Goodwill and other intangible assets, net

 

 

 

 

 

 

 

 

452,645

 

 

 

140,192

 

 

 

 

 

 

592,837

 

Other assets

 

 

1,446

 

 

 

3,499

 

 

 

(581

)

 

 

18,064

 

 

 

 

 

 

22,428

 

Total assets

 

$

1,624,731

 

 

$

4,377,975

 

 

$

4,825,962

 

 

$

529,656

 

 

$

(9,259,878

)

 

$

2,098,446

 

Liabilities and Stockholders’ Equity (Deficit)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

48

 

 

$

 

 

$

235,940

 

 

$

42,700

 

 

$

 

 

$

278,688

 

Due to affiliates

 

 

1,672,322

 

 

 

1,142,324

 

 

 

 

 

 

63,426

 

 

 

(2,878,072

)

 

 

 

Accrued liabilities

 

 

188

 

 

 

17,937

 

 

 

121,375

 

 

 

29,554

 

 

 

 

 

 

169,054

 

Income taxes payable

 

 

6,055

 

 

 

2,161

 

 

 

1

 

 

 

119

 

 

 

 

 

 

8,336

 

Long-term debt

 

 

 

 

 

1,593,710

 

 

 

1

 

 

 

832

 

 

 

 

 

 

1,594,543

 

Other liabilities

 

 

6,441

 

 

 

 

 

 

17,639

 

 

 

3,677

 

 

 

 

 

 

27,757

 

Deferred income tax liabilities, net

 

 

 

 

 

 

 

 

76,672

 

 

 

3,719

 

 

 

 

 

 

80,391

 

Total liabilities

 

 

1,685,054

 

 

 

2,756,132

 

 

 

451,628

 

 

 

144,027

 

 

 

(2,878,072

)

 

 

2,158,769

 

Total stockholders’ equity (deficit)

 

 

(60,323

)

 

 

1,621,843

 

 

 

4,374,334

 

 

 

385,629

 

 

 

(6,381,806

)

 

 

(60,323

)

Total liabilities and stockholders’ equity (deficit)

 

$

1,624,731

 

 

$

4,377,975

 

 

$

4,825,962

 

 

$

529,656

 

 

$

(9,259,878

)

 

$

2,098,446

 

 

21


 

Condensed Consolidating Statement of Earnings and Comprehensive Income

Three Months Ended March 31, 2020

(In thousands)

 

 

 

Parent

 

 

Sally

Holdings LLC

and Sally

Capital Inc.

 

 

Guarantor

Subsidiaries

 

 

Non-

Guarantor

Subsidiaries

 

 

Consolidating

Eliminations

 

 

Sally Beauty

Holdings, Inc.

and Subsidiaries

 

Net sales

 

$

 

 

$

 

 

$

713,872

 

 

$

157,151

 

 

$

 

 

$

871,023

 

Related party sales

 

 

 

 

 

 

 

 

382

 

 

 

 

 

 

(382

)

 

 

 

Cost of goods sold

 

 

 

 

 

 

 

 

355,373

 

 

 

86,275

 

 

 

(382

)

 

 

441,266

 

Gross profit

 

 

 

 

 

 

 

 

358,881

 

 

 

70,876

 

 

 

 

 

 

429,757

 

Selling, general and administrative expenses

 

 

2,758

 

 

 

179

 

 

 

306,197

 

 

 

74,165

 

 

 

 

 

 

383,299

 

Restructuring

 

 

 

 

 

 

 

 

3,193

 

 

 

 

 

 

 

 

 

3,193

 

Operating earnings (loss)

 

 

(2,758

)

 

 

(179

)

 

 

49,491

 

 

 

(3,289

)

 

 

 

 

 

43,265

 

Interest expense (income)

 

 

 

 

 

21,652

 

 

 

3

 

 

 

(11

)

 

 

 

 

 

21,644

 

Earnings (loss) before provision for income taxes

 

 

(2,758

)

 

 

(21,831

)

 

 

49,488

 

 

 

(3,278

)

 

 

 

 

 

21,621

 

Provision (benefit) for income taxes

 

 

(708

)

 

 

(5,604

)

 

 

11,502

 

 

 

3,063

 

 

 

 

 

 

8,253

 

Equity in earnings (loss) of subsidiaries, net of tax

 

 

15,418

 

 

 

31,645

 

 

 

(6,341

)

 

 

 

 

 

(40,722

)

 

 

 

Net earnings (loss)

 

 

13,368

 

 

 

15,418

 

 

 

31,645

 

 

 

(6,341

)

 

 

(40,722

)

 

 

13,368

 

Other comprehensive income, net of tax

 

 

 

 

 

(80

)

 

 

 

 

 

(21,746

)

 

 

 

 

 

(21,826

)

Total comprehensive income (loss)

 

$

13,368

 

 

$

15,338

 

 

$

31,645

 

 

$

(28,087

)

 

$

(40,722

)

 

$

(8,458

)

 

22


 

Condensed Consolidating Statement of Earnings and Comprehensive Income

Three Months Ended March 31, 2019

(In thousands)

 

 

 

Parent

 

 

Sally

Holdings LLC

and Sally

Capital Inc.

 

 

Guarantor

Subsidiaries

 

 

Non-

Guarantor

Subsidiaries

 

 

Consolidating

Eliminations

 

 

Sally Beauty

Holdings, Inc.

and Subsidiaries

 

Net sales

 

$

 

 

$

 

 

$

769,284

 

 

$

176,568

 

 

$

 

 

$

945,852

 

Related party sales

 

 

 

 

 

 

 

 

480

 

 

 

 

 

 

(480

)

 

 

 

Cost of goods sold

 

 

 

 

 

 

 

 

383,147

 

 

 

94,861

 

 

 

(480

)

 

 

477,528

 

Gross profit

 

 

 

 

 

 

 

 

386,617

 

 

 

81,707

 

 

 

 

 

 

468,324

 

Selling, general and administrative expenses

 

 

3,084

 

 

 

198

 

 

 

281,404

 

 

 

76,940

 

 

 

 

 

 

361,626

 

Restructuring

 

 

 

 

 

 

 

 

(5,814

)

 

 

 

 

 

 

 

 

(5,814

)

Operating earnings (loss)

 

 

(3,084

)

 

 

(198

)

 

 

111,027

 

 

 

4,767

 

 

 

 

 

 

112,512

 

Interest expense (income)

 

 

 

 

 

23,871

 

 

 

(1

)

 

 

(49

)

 

 

 

 

 

23,821

 

Earnings (loss) before provision for income taxes

 

 

(3,084

)

 

 

(24,069

)

 

 

111,028

 

 

 

4,816

 

 

 

 

 

 

88,691

 

Provision (benefit) for income taxes

 

 

(791

)

 

 

(6,179

)

 

 

28,795

 

 

 

1,141

 

 

 

 

 

 

 

22,966

 

Equity in earnings of subsidiaries, net of tax

 

 

68,018

 

 

 

85,908

 

 

 

3,675

 

 

 

 

 

 

(157,601

)

 

 

 

Net earnings

 

 

65,725

 

 

 

68,018

 

 

 

85,908

 

 

 

3,675

 

 

 

(157,601

)

 

 

65,725

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

(2,140

)

 

 

 

 

 

3,282

 

 

 

 

 

 

 

1,142

 

Total comprehensive income (loss)

 

$

65,725

 

 

$

65,878

 

 

$

85,908

 

 

$

6,957

 

 

$

(157,601

)

 

$

66,867

 

23


 

Condensed Consolidating Statement of Cash Flows

Six Months Ended March 31, 2020

(In thousands)

 

 

 

Parent

 

 

Sally

Holdings LLC

and Sally

Capital Inc.

 

 

Guarantor

Subsidiaries

 

 

Non-

Guarantor

Subsidiaries

 

 

Consolidating

Eliminations

 

 

Sally Beauty

Holdings, Inc.

and Subsidiaries

 

Net cash (used) provided by operating activities

 

$

(17,666

)

 

$

(30,822

)

 

$

122,299

 

 

$

2,320

 

 

$

 

 

$

76,131

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payments for property and equipment

 

 

(5

)

 

 

 

 

 

(65,724

)

 

 

(6,254

)

 

 

 

 

 

(71,983

)

Proceeds from sale of property and equipment

 

 

 

 

 

 

 

 

23

 

 

 

 

 

 

 

 

 

23

 

Acquisitions, net of cash acquired

 

 

 

 

 

 

 

 

(1,691

)

 

 

(253

)

 

 

 

 

 

(1,944

)

Due from affiliates

 

 

 

 

 

 

 

 

239,910

 

 

 

 

 

 

(239,910

)

 

 

 

Net cash (used) provided by investing activities

 

 

(5

)

 

 

 

 

 

172,518

 

 

 

(6,507

)

 

 

(239,910

)

 

 

(73,904

)

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from issuance of long-term debt

 

 

 

 

 

787,500

 

 

 

 

 

 

 

 

 

 

 

 

787,500

 

Repayments of long-term debt

 

 

 

 

 

(437,386

)

 

 

1

 

 

 

 

 

 

 

 

 

(437,385

)

Repurchases of common stock

 

 

(61,357

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(61,357

)

Proceeds from exercises of stock options

 

 

2,771

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,771

 

Due to affiliates

 

 

76,257

 

 

 

(319,292

)

 

 

 

 

 

3,125

 

 

 

239,910

 

 

 

 

Net cash provided by financing activities

 

 

17,671

 

 

 

30,822

 

 

 

1

 

 

 

3,125

 

 

 

239,910

 

 

 

291,529

 

Effect of foreign exchange rate changes on cash and

   cash equivalents

 

 

 

 

 

 

 

 

 

 

 

(837

)

 

 

 

 

 

(837

)

Net increase (decrease) in cash and cash equivalents

 

 

 

 

 

 

 

 

294,818

 

 

 

(1,899

)

 

 

 

 

 

292,919

 

Cash and cash equivalents, beginning of period

 

 

 

 

 

10

 

 

 

41,009

 

 

 

30,476

 

 

 

 

 

 

71,495

 

Cash and cash equivalents, end of period

 

$

 

 

$

10

 

 

$

335,827

 

 

$

28,577

 

 

$

 

 

$

364,414

 

 

24


 

Condensed Consolidating Statement of Cash Flows

Six Months Ended March 31, 2019

(In thousands)

 

 

 

Parent

 

 

Sally

Holdings LLC

and Sally

Capital Inc.

 

 

Guarantor

Subsidiaries

 

 

Non-

Guarantor

Subsidiaries

 

 

Consolidating

Eliminations

 

 

Sally Beauty

Holdings, Inc.

and Subsidiaries

 

Net cash (used) provided by operating activities

 

$

1,262

 

 

$

(32,639

)

 

$

144,685

 

 

$

(3,198

)

 

$

 

 

$

110,110

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payments for property and equipment

 

 

 

 

 

 

 

 

(41,559

)

 

 

(4,839

)

 

 

 

 

 

(46,398

)

Proceeds from sale of property and equipment

 

 

 

 

 

 

 

 

12,007

 

 

 

3

 

 

 

 

 

 

12,010

 

Acquisitions, net of cash acquired

 

 

 

 

 

 

 

 

(2,008

)

 

 

(840

)

 

 

 

 

 

(2,848

)

Due from affiliates

 

 

 

 

 

 

 

 

(92,458

)

 

 

 

 

 

92,458

 

 

 

 

Net cash used by investing activities

 

 

 

 

 

 

 

 

(124,018

)

 

 

(5,676

)

 

 

92,458

 

 

 

(37,236

)

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from issuance of long-term debt

 

 

 

 

 

242,500

 

 

 

4

 

 

 

 

 

 

 

 

 

242,504

 

Repayments of long-term debt

 

 

 

 

 

(304,154

)

 

 

(2

)

 

 

(1

)

 

 

 

 

 

(304,157

)

Repurchases of common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from exercises of stock options

 

 

1,721

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,721

 

Due to affiliates

 

 

(2,983

)

 

 

94,293

 

 

 

 

 

 

1,148

 

 

 

(92,458

)

 

 

 

Net cash (used) provided by financing activities

 

 

(1,262

)

 

 

32,639

 

 

 

2

 

 

 

1,147

 

 

 

(92,458

)

 

 

(59,932

)

Effect of foreign exchange rate changes on cash and

   cash equivalents

 

 

 

 

 

 

 

 

 

 

 

(460

)

 

 

 

 

 

(460

)

Net increase (decrease) in cash and cash equivalents

 

 

 

 

 

 

 

 

20,669

 

 

 

(8,187

)

 

 

 

 

 

12,482

 

Cash and cash equivalents, beginning of period

 

 

 

 

 

10

 

 

 

29,050

 

 

 

48,235

 

 

 

 

 

 

77,295

 

Cash and cash equivalents, end of period

 

$

 

 

$

10

 

 

$

49,719

 

 

$

40,048

 

 

$

 

 

$

89,777

 

 


25


 

15.   Restructuring

 

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

 

 

Three Months Ended

March 31,

 

 

Six Months Ended

March 31,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Project Surge

 

$

107

 

 

$

 

 

$

1,360

 

 

$

 

Transformation Plan

 

 

3,086

 

 

 

(5,814

)

 

 

4,365

 

 

 

(1,834

)

Total expense (gain)

 

$

3,193

 

 

$

(5,814

)

 

$

5,725

 

 

$

(1,834

)

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 will be 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,

2019

 

 

Expenses

 

 

Expenses Paid or Otherwise Settled

 

 

Adjustments

 

 

Liability at

March 31,

2020

 

Workforce reductions

 

$

 

 

$

998

 

 

$

998

 

 

$

 

 

$

 

Other

 

 

 

 

 

362

 

 

 

362

 

 

 

 

 

 

 

Total

 

$

 

 

$

1,360

 

 

$

1,360

 

 

$

 

 

$

 

Expenses incurred during the six months ended March 31, 2020, represent costs incurred by SBS of $1.3 million and corporate of $0.1 million.

Transformation Plan

We previously disclosed a Transformation Plan focused 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.

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,

2019

 

 

Expenses

 

 

Expenses Paid or Otherwise Settled

 

 

Adjustments

 

 

Liability at

March 31,

2020

 

Workforce reductions

 

$

654

 

 

$

2,022

 

 

$

1,959

 

 

$

 

 

$

717

 

Consulting

 

 

204

 

 

 

1,426

 

 

 

1,630

 

 

 

 

 

 

 

Other

 

 

70

 

 

 

917

 

 

 

987

 

 

 

 

 

 

 

Total

 

$

928

 

 

$

4,365

 

 

$

4,576

 

 

$

 

 

$

717

 

Expenses incurred during the six months ended March 31, 2020, represent costs incurred by corporate of $2.4 million, SBS of $1.3 million and BSG of $0.7 million.

16. Subsequent Events

On April 15, 2020, we entered into an amendment to our ABL facility to, among other things, increase the revolving commitment thereunder from $500.0 million to $600.0 million, establish a FILO (first-in, last-out) tranche of indebtedness in the amount of $20.0 million, increase pricing on the revolving loans and modify certain covenant and reporting terms. The ABL Facility will continue to be secured by a first-priority lien in and upon the accounts and inventory (and the proceeds thereof) of the Company and its guarantor subsidiaries.  The ABL Facility will be secured by a second-priority lien in and upon the remaining assets of the Company and its guarantor subsidiaries. The ABL facility will mature on July 6, 2022.

On April 24, 2020, we completed a private an offering of $300.0 million aggregate principal amount of senior secured second lien notes due 2025 (the “Notes”) and received $295.5 million in net proceeds from the Notes offering. The Notes will bear interest at a rate of 8.75% and were issued at par. The Notes are guaranteed on a senior secured basis by the guarantors who have guaranteed obligations under our senior secured credit facilities and our existing notes. We intend to use the net proceeds for working capital and general corporate purposes.

26


 

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, 2019, including the Risk Factors section, and information contained elsewhere in this Quarterly Report, including the condensed consolidated interim financial statements and notes to those financial statements and the Risk Factors contained in Section 1A. 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.

Highlights for the Three Months Ended March 31, 2020:

 

During the three months ended March 31, 2020, as a result of the COVID-19 pandemic, we temporarily shut down virtually all global customer-facing store operations. As such, our results of operations for the three months ended March 31, 2020, were significantly impacted;

 

Consolidated net sales for the three months ended March 31, 2020, decreased $74.8 million, or 7.9%, to $871.0 million, compared to the three months ended March 31, 2019;

 

Our global e-commerce sales increased 28.2% compared to the three months ended March 31, 2019;

 

Consolidated same store sales decreased 7.1% for the three months ended March 31, 2020. SBS same store sales decreased 7.0% and BSG same store sales decreased 7.4%;

 

Consolidated gross profit for the three months ended March 31, 2020, decreased $38.6 million, or 8.2%, to $429.8 million compared to the three months ended March 31, 2019. Gross margin decreased 20 basis points to 49.3% for the three months ended March 31, 2020, compared to the three months ended March 31, 2019;

 

Consolidated operating earnings for the three months ended March 31, 2020, decreased $69.2 million, or 61.5%, to $43.3 million compared to the three months ended March 31, 2019. Operating margin decreased 690 basis points to 5.0% for the three months ended March 31, 2020, compared to the three months ended March 31, 2019;

 

Consolidated net earnings decreased $52.4 million, or 79.7%, to $13.4 million for the three months ended March 31, 2020, compared to the three months ended March 31, 2019. As a percentage of net sales, net earnings decreased 540 basis points to 1.5% for the three months ended March 31, 2020, compared to the three months ended March 31, 2019;

 

Diluted earnings per share for the three months ended March 31, 2020, were $0.12, compared to $0.54 for the three months ended March 31, 2019;

 

Cash provided by operations was $13.8 million for the three months ended March 31, 2020, compared to $59.9 million for the three months ended March 31, 2019. In addition, as a result of COVID-19, we preemptively drew on our ABL facility, subsequently modified our ABL facility and issued additional senior notes; and

 

Prior to COVID-19, we repurchased and retired approximately 3.9 million shares of our common stock under the 2017 Share Repurchase Program at an aggregate cost of $50.0 million and paid down $22.0 million and $7.9 million aggregate principal of our term loan B fixed rate tranche and senior notes due 2025, respectively.

 

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

Our results of operations for the three months ended March 31, 2020, were significantly impacted by the effects of COVID-19.  Prior to the widening effects of the COVID-19 pandemic in the United States which commenced in early March, we delivered strong same store sales growth in both of our Sally Beauty and Beauty Systems Group segments, showing signs of success in certain elements of our previously announced transformation plans. Consolidated same store sales decreased by 7.1% for the entire second quarter, as a result of the COVID-19 pandemic leading to the shutdown of customer-facing operations in virtually all stores globally in the middle of March.  Prior to March 12th, the COVID-19 inflection date for the Company, same store sales had been up 4.7%.

As part of these temporary closures, we also announced that we would temporarily idle several distribution centers and temporarily furlough elements of our headquarters staff, in advance of a network restart. Furthermore, our Chief Executive Officer and Board of Directors have reduced their pay by 50% for the duration of the COVID-19 crisis and other senior leaders will also have significant reductions in salary for the same time period.

During the three months ended March 31, 2020, prior to COVID, we made solid progress against our transformation plans as we played to win by focusing on hair color and hair care, improved our retail fundamentals, advanced our digital commerce capabilities and drove costs out of the business. We completed the nationwide roll out of our new point-of-sale system in BSG and are continuing

27


 

the roll out in SBS, which will allow our store associates to better serve our customers. In early March, as a result of COVID-19, we reprioritized our transformation plans to accelerate key digital and supply chain initiatives, pivoted to cash management and expense reduction, and paused efforts such as our national brand relaunch, our work against a new merchandising system implementation and the start-up of the new North Texas distribution node. Additionally due to the evolving COVID-19 pandemic and the related business uncertainty, we are deferring non-digital capital investments and aggressively attacking our short-term cost structure.  

In support of our operations and out of an abundance of caution, we also preemptively drew on our ABL facility and have $395.5 million outstanding as of March 31, 2020. Furthermore, on April 15, 2020, we amended our ABL facility to increase the revolving commitment thereunder from $500.0 million to $600.0 million, establish a FILO (first-in, last-out) tranche of indebtedness in the amount of $20.0 million, increase pricing on the revolving loans and modify certain covenant and reporting terms.  To further strengthen our liquidity, on April 24, we closed on $300.0 million of 8.75% senior secured second-lien notes due 2025.  

On April 18, 2020, we began the measured process of re-opening our stores to the public. For the week of May 4, 2020, we have re-opened approximately 1,500 stores globally. Store re-openings are triggered by local regulation, the adoption of the Company’s new COVID-19 related safety protocols, as well as the recall from furlough of sufficient store staff.

While the effects of the COVID-19 pandemic and related responses largely impacted the last month of our fiscal 2020 second quarter, we expect the pandemic to have a material impact on the entirety of our fiscal 2020 third quarter results of operations, cash flows and financial position.  Furthermore, due to the uncertainty over the duration and severity of the economic and operational impacts of COVID-19, this material adverse impact may continue for the remainder of our fiscal 2020 year and beyond.

28


 

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

March 31,

 

 

Six Months Ended

March 31,

 

 

 

2020

 

 

2019

 

 

Increase (Decrease)

 

 

2020

 

 

2019

 

 

Increase (Decrease)

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBS

 

$

519,509

 

 

$

565,604

 

 

$

(46,095

)

 

 

(8.1

)%

 

$

1,088,657

 

 

$

1,146,213

 

 

$

(57,556

)

 

 

(5.0

)%

BSG

 

 

351,514

 

 

 

380,248

 

 

 

(28,734

)

 

 

(7.6

)%

 

 

762,574

 

 

 

789,092

 

 

 

(26,518

)

 

 

(3.4

)%

Consolidated

 

$

871,023

 

 

$

945,852

 

 

$

(74,829

)

 

 

(7.9

)%

 

$

1,851,231

 

 

$

1,935,305

 

 

$

(84,074

)

 

 

(4.3

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBS

 

$

289,067

 

 

$

314,729

 

 

$

(25,662

)

 

 

(8.2

)%

 

$

598,057

 

 

$

631,959

 

 

$

(33,902

)

 

 

(5.4

)%

BSG

 

 

140,690

 

 

 

153,595

 

 

 

(12,905

)

 

 

(8.4

)%

 

 

306,548

 

 

 

317,071

 

 

 

(10,523

)

 

 

(3.3

)%

Consolidated

 

$

429,757

 

 

$

468,324

 

 

$

(38,567

)

 

 

(8.2

)%

 

$

904,605

 

 

$

949,030

 

 

$

(44,425

)

 

 

(4.7

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment gross margin:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBS

 

 

55.6

%

 

 

55.6

%

 

 

 

bps

 

 

 

54.9

%

 

 

55.1

%

 

(20)

 

 

bps

 

BSG

 

 

40.0

%

 

 

40.4

%

 

(40)

 

 

bps

 

 

 

40.2

%

 

 

40.2

%

 

 

 

bps

 

Consolidated

 

 

49.3

%

 

 

49.5

%

 

(20)

 

 

bps

 

 

 

48.9

%

 

 

49.0

%

 

(10)

 

 

bps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment operating earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBS

 

$

56,373

 

 

$

86,715

 

 

$

(30,342

)

 

 

(35.0

)%

 

$

130,598

 

 

$

176,706

 

 

$

(46,108

)

 

 

(26.1

)%

BSG

 

 

41,039

 

 

 

56,518

 

 

 

(15,479

)

 

 

(27.4

)%

 

 

103,473

 

 

 

118,849

 

 

 

(15,376

)

 

 

(12.9

)%

Segment operating earnings

 

 

97,412

 

 

 

143,233

 

 

 

(45,821

)

 

 

(32.0

)%

 

 

234,071

 

 

 

295,555

 

 

 

(61,484

)

 

 

(20.8

)%

Unallocated expenses and restructuring (a)

 

 

54,147

 

 

 

30,721

 

 

 

23,426

 

 

 

76.3

%

 

 

96,419

 

 

 

73,305

 

 

 

23,114

 

 

 

31.5

%

Consolidated operating earnings

 

 

43,265

 

 

 

112,512

 

 

 

(69,247

)

 

 

(61.5

)%

 

 

137,652

 

 

 

222,250

 

 

 

(84,598

)

 

 

(38.1

)%

Interest expense

 

 

21,644

 

 

 

23,821

 

 

 

(2,177

)

 

 

(9.1

)%

 

 

43,185

 

 

 

48,310

 

 

 

(5,125

)

 

 

(10.6

)%

Earnings before provision for income taxes

 

 

21,621

 

 

 

88,691

 

 

 

(67,070

)

 

 

(75.6

)%

 

 

94,467

 

 

 

173,940

 

 

 

(79,473

)

 

 

(45.7

)%

Provision for income taxes

 

 

8,253

 

 

 

22,966

 

 

 

(14,713

)

 

 

(64.1

)%

 

 

27,884

 

 

 

42,488

 

 

 

(14,604

)

 

 

(34.4

)%

Net earnings

 

$

13,368

 

 

$

65,725

 

 

$

(52,357

)

 

 

(79.7

)%

 

$

66,583

 

 

$

131,452

 

 

$

(64,869

)

 

 

(49.3

)%

 

 

.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,701

 

 

 

3,718

 

 

 

(17

)

 

 

(0.5

)%

BSG

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,374

 

 

 

1,388

 

 

 

(14

)

 

 

(1.0

)%

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,075

 

 

 

5,106

 

 

 

(31

)

 

 

(0.6

)%

Same store sales growth (decline) (b):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBS

 

 

(7.0

)%

 

 

(0.3

)%

 

(670)

 

 

bps

 

 

 

(4.0

)%

 

 

0.2

%

 

(420)

 

 

bps

 

BSG

 

 

(7.4

)%

 

 

(0.9

)%

 

(650)

 

 

bps

 

 

 

(3.0

)%

 

 

(0.7

)%

 

(230)

 

 

bps

 

Consolidated

 

 

(7.1

)%

 

 

(0.5

)%

 

(660)

 

 

bps

 

 

 

(3.6

)%

 

 

(0.1

)%

 

(350)

 

 

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 15 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.

29


 

 

Results of Operations

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

Net Sales

Consolidated. Consolidated net sales include a negative impact from changes in foreign currency exchange rates of $3.1 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

 

$

(37,244

)

Sales outside same store sales

 

 

(5,853

)

Foreign currency exchange

 

 

(2,998

)

Total

 

$

(46,095

)

SBS experienced lower unit volume (which was caused by the impact of COVID-19, lower customer traffic and the reduction in company-operated stores during the last 12 months). These headwinds were partially offset by an increase in average unit prices, resulting from targeted price increases, a change in product mix to higher-priced products, increased e-commerce sales and a promotional efficiency effort.  

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

Same store sales

 

$

(19,495

)

Sales outside same store sales

 

 

(9,106

)

Foreign currency exchange

 

 

(133

)

Total

 

$

(28,734

)

BSG experienced lower unit volume primarily as a result of the temporary closure of all of our customer-facing store operations in the U.S. and Canada due to the effects of COVID-19. The negative impact of the temporary closures were partially offset by an increase in average unit prices resulting primarily from the introduction of certain third-party brands with higher average unit prices in the preceding 12 months and increased e-commerce sales.

Gross Profit

Consolidated. Consolidated gross profit decreased for the three months ended March 31, 2020, primarily due to lower net sales in both segments and a lower gross margin in BSG.

SBS. SBS’s gross profit decreased for the three months ended March 31, 2020, as a result of a lower net sales.  SBS gross margin was unchanged for the three months ended March 31, 2020, compared to the three months ended March 31, 2019.

BSG. BSG’s gross profit decreased for the three months ended March 31, 2020, primarily as a result of a lower net sales and a lower gross margin. BSG’s gross margin decreased primarily as a result of the timing of promotional activity.

Selling, General and Administrative Expenses

Consolidated. Consolidated selling, general and administrative expenses increased primarily as a result of costs associated with disaster payments and furloughed employees in response to COVID-19, higher advertising expenses and increased shipping costs resulting from increased e-commerce volume. These increases were partially offset by lower compensation and compensation-related expenses and an employee retention payroll tax credit provided by the CARES Act. Consolidated selling, general and administrative expenses, as a percentage of net sales, increased 580 basis points to 44.0% for the three months ended March 31, 2020. This deleveraging was driven by lost sales as a result of the impact of COVID-19.

SBS. SBS’s selling, general and administrative expenses increased $4.7 million, or 2.1%, for the three months ended March 31, 2020. This increase was primary due to higher advertising expense of $5.2 million, increased shipping costs of $2.4 million and increased rent expense of $1.5 million. These increases were partially offset by lower compensation and compensation-related expenses of $3.3 million, including a lower anticipated annual incentive bonuses and lower sales bonuses, and the positive impact from changes in foreign currency exchange rates of $1.3 million.

BSG. BSG’s selling, general and administrative expenses increased $2.6 million, or 2.7%, for the three months ended March 31, 2020, primarily as a result of higher advertising expenses of $1.2 million and increased shipping costs of $0.8 million.

Unallocated. Unallocated selling, general and administrative expenses, which represent certain corporate costs that have not been charged to our reporting segments, increased $14.4 million, or 39.5%, for the three months ended March 31, 2020, primarily from

30


 

costs associated with disaster payments and furloughed employees in response to COVID-19, partially offset by an employee retention payroll tax credit provided by the CARES Act.

Restructuring

For the three months ended March 31, 2020, we incurred restructuring charges of $3.2 million primarily in connection with the Transformation Plan. For the three months ended March 31, 2019, we recognized income of $5.8 million in connection with the supply chain modernization plan, which included a $6.6 million gain from selling our secondary headquarters and fulfillment center in Denton, Texas. See Note 15 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 decrease in interest expense is primarily from lower outstanding principal balances on our term loan B and our senior notes. See “Liquidity and Capital Resources” below for additional information.

Provision for Income Taxes

The effective tax rates were 38.2% and 25.9%, for the three months ended March 31, 2020, and 2019, respectively. The increase in the effective tax rate was primarily driven by the establishment of a valuation allowance in a foreign subsidiary and increased foreign losses, as compared to the prior period, which cannot be tax benefitted.

The Six Months Ended March 31, 2020, compared to the Six Months Ended March 31, 2019

Net Sales

Consolidated. Consolidated net sales include a negative impact from changes in foreign currency exchange rates of $4.1 million, or 0.2% of consolidated net sales.

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

Same store sales

 

$

(43,154

)

Sales outside same store sales

 

 

(10,341

)

Foreign currency exchange

 

 

(4,061

)

Total

 

$

(57,556

)

SBS experienced lower unit volume caused by lower customer traffic, the reduction in company-operated stores during the last 12 months and the temporary closure of all of our customer-facing store operations in the U.S. and Canada due to the effects of COVID-19. The segment also experienced a lapped non-recurring benefit from the prior year. These headwinds were partially offset by an increase in average unit prices, resulting from targeted price increases, a change in product mix to higher-priced products, increased e-commerce sales and a promotional efficiency effort, partially offset by implementation related technology disruptions in the first fiscal quarter which led to incorrect POS pricing, elevated promotional discounts and higher loyalty program redemptions.  

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

Same store sales

 

$

(16,080

)

Sales outside same store sales

 

 

(10,356

)

Foreign currency exchange

 

 

(82

)

Total

 

$

(26,518

)

BSG experienced lower unit volume primarily as a result of the temporary closure of all of our customer-facing store operations in the U.S. and Canada due to the effects of COVID-19.  The negative effects of these temporary closures were partially offset by an increase in average unit prices resulting primarily from the introduction of certain third-party brands with higher average unit prices in the preceding 12 months and increased e-commerce sales.

Gross Profit

Consolidated. Consolidated gross profit decreased for the six months ended March 31, 2020, primarily due to lower net sales in both segments and a lower gross margin in SBS.

SBS. SBS’s gross profit decreased for the six months ended March 31, 2020, primarily as a result of a lower net sales and a lower gross margin. SBS’s gross margin decreased primarily as a result of the implementation related technology disruptions and non-recurring benefits that we lapped from the prior year, partially offset by continued promotional efficiencies and targeted price increases.

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BSG. BSG’s gross profit decreased for the six months ended March 31, 2020, primarily as a result of lower sales. BSG’s gross margin remained flat for the six months ended March 31, 2020, compared to the six months ended March 31, 2019.

Selling, General and Administrative Expenses

Consolidated. Consolidated selling, general and administrative expenses increased primarily as a result of higher compensation and compensation-related expenses, SBS advertising expenses and legal costs. Consolidated selling, general and administrative expenses, as a percentage of net sales, increased 350 basis points to 41.1% for the six months ended March 31, 2020. This deleveraging was driven by lost sales as a result of the impact of COVID-19.

SBS. SBS’s selling, general and administrative expenses increased $12.2 million, or 2.7%, for the six months ended March 31, 2020. This increase reflects higher advertising expense of $6.7 million, increased shipping costs of $4.3 million and higher compensation and compensation-related expenses.

BSG. BSG’s selling, general and administrative expenses increased $4.9 million, or 2.4%, for the six months ended March 31, 2020, primarily as a result of higher advertising expense of $1.1 million, increased shipping costs of $1.1 million and higher depreciation expense of $0.8 million.

Unallocated. Unallocated selling, general and administrative expenses, which represent certain corporate costs that have not been charged to our reporting segments, increased $15.6 million, or 20.7%, for the six months ended March 31, 2020, primarily from costs associated with disaster payments and furloughed employees in response to COVID-19 and higher professional fees of $3.3 million, partially offset by an employee retention payroll tax credit provided by the CARES Act.

Restructuring

For the six months ended March 31, 2020, we incurred restructuring charges of $5.7 million in connection with Project Surge and the Transformation Plan. For the six months ended March 31, 2019, we recognized income of $1.8 million in connection with the supply chain modernization plan, which included a $6.6 million gain from selling our secondary headquarters and fulfillment center in Denton, Texas, and the 2018 Restructuring Plan. See Note 15 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 decrease in interest expense is primarily from lower outstanding principal balances on our term loan B and our senior notes. See “Liquidity and Capital Resources” below for additional information.

Provision for Income Taxes

The effective tax rates were 29.5% and 24.4%, for the six months ended March 31, 2020, and 2019, respectively. The increase in the effective tax rate was primarily driven by the establishment of a valuation allowance in a foreign subsidiary and increased foreign losses, as compared to the prior period, which cannot be tax benefitted. Additionally, for the six months ended March 31, 2019, the provision for income taxes included an income tax benefit due to an adjustment to our previously recorded transition tax on unrepatriated foreign earnings as a result of the Tax Cuts and Jobs Act.

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) decreased $174.3 million, to $533.2 million at March 31, 2020, compared to $707.5 million at September 30, 2019, resulting primarily from the impact of the adoption of the new lease standard.

At March 31, 2020, cash and cash equivalents were $364.4 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, finance 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. As mentioned above, we have reduced our capital investments, idled several distribution centers, temporarily furloughed elements of the headquarter and field staff and implemented reductions in salary for senior leaders for the duration of the COVID-19 crisis, including 50% reduction in the Chief Executive Officer’s pay.

We utilize our ABL facility for the issuance of letters of credit, for 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 quarter we drew on the revolver to fund share repurchase and debt

32


 

paydown activity. During the six months ended March 31, 2020, the weighted-average interest rate on our borrowings under the ABL facility was 3.1%. During late March, in support of our operations and out of an abundance of caution, we preemptively drew on our ABL facility as a result of COVID-19. The amounts drawn are generally paid down with cash provided by our operating activities. As of March 31, 2020, we had $85.8 million available for borrowings under our ABL facility, subject to borrowing base limitations, as reduced by outstanding letters of credit.

Subsequent to the end of the second fiscal quarter, we entered into an amendment to our ABL facility to, among other things, increase the revolving commitment thereunder from $500.0 million to $600.0 million, establish a FILO (first-in, last-out) tranche of indebtedness in the amount of $20.0 million, increase pricing on the revolving loans and modify certain covenant and reporting terms.   We also issued $300.0 million of 8.75% senior secured second-lien notes due 2025 in a private offering in reliance upon an exemption from the registration requirements of the Securities Act of 1933, as amended.  See Note 16, Subsequent Events, for more information.

Share Repurchase Programs

During the six months ended March 31, 2020, we repurchased and subsequently retired approximately 3.9 million shares of our common stock at an aggregate cost of $50.0 million. We funded these share repurchases with existing cash balances, cash from operations and borrowings under the ABL facility. As of March 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. The primary uses of cash have been for share repurchases, capital expenditures, repayments and servicing of long-term debt and acquisitions.

Net Cash Provided by Operating Activities

Net cash provided by operating activities during the six months ended March 31, 2020, decreased $34.0 million to $76.1 million, compared to the six months ended March 31, 2019, mainly due to lower net earnings, partially offset by the timing of our vendor receivables and higher inventory purchases in the prior year resulting from the correction of supply chain issues created by certain vendors and the launch of new product lines.

Net Cash Used by Investing Activities

Net cash used by investing activities during the six months ended March 31, 2020, increased $36.7 million to $73.9 million, compared to the six months ended March 31, 2019. This change was primarily a result of higher of capital expenditures, related to our investments in information technology, and the selling our secondary headquarters and fulfillment center in the prior year with no comparable sale in this year.

Net Cash Provided (Used) by Financing Activities

The change in financing activities cash flows was primarily a result of additional borrowings, out of an abundance of caution, under our ABL facility in connection with COVID-19 and the repurchase of $61.4 million of our common stock.

Long-Term Debt

At March 31, 2020, we had $1,958.7 million in debt, not including capital leases, unamortized debt issuance costs and debt discounts, in the aggregate, of $12.8 million. Our debt consisted of $877.4 million of senior notes outstanding, a term loan B with an outstanding principal balance of $685.8 million and $395.5 million of principal borrowings outstanding under our ABL facility.

See Note 10, Short-term Borrowings and Long-term Debt, and Note 16, Subsequent Events, for more information on our debt.

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

Contractual Obligations

There have been no material changes outside the ordinary course of our business in any of our contractual obligations since September 30, 2019.

Off-Balance Sheet Financing Arrangements

At March 31, 2020, and September 30, 2019, we had no off-balance sheet financing arrangements other than outstanding letters of credit related to inventory purchases and self-insurance programs.

Critical Accounting Estimates

There have been no material changes to our critical accounting estimates or assumptions since September 30, 2019.

33


 

Accounting Changes and Recent Accounting Pronouncements

See Note 3 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, 2019. 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, 2019.

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 March 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 March 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.

34


 

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, 2019, which could materially affect our business, financial condition or future results. Other than the risks set forth below, 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.

The recent novel coronavirus (COVID-19) global pandemic has had and is expected to continue to have an adverse effect on our business and results of operations.

In late 2019, COVID-19 was first detected in Wuhan, China. In March 2020, the World Health Organization declared COVID-19 a global pandemic, and governmental authorities around the world have implemented measures to reduce the spread of COVID-19. These measures have adversely affected workforces, customers, consumer sentiment, economies, and financial markets, and, along with decreased consumer spending, have led to an economic downturn in many of our markets. As a result of COVID-19, on March 23, 2020, we temporarily closed all U.S. and Canadian retail and wholesale store fronts to customers without a firm date on when we will reopen.  While we have begun opening certain of our stores, the cadence of reopening the North American fleet of stores is uncertain. Beginning in mid-March 2020, certain stores have transitioned to a contactless curbside service model, or to a ship-from-store mode as permitted by regulation or local order. Because we will require a smaller workforce to execute on the critical activities of our business during this time, we have furloughed most of our employees. We have provided furloughed employees in the U.S. and Canada with two weeks’ pay and medical benefits continuation through June 30, 2020. Due to the uncertainty of COVID-19, we will continue to assess the situation, including government-imposed restrictions, market by market.

We are unable to accurately predict the impact that COVID-19 will have on our operations going forward due to uncertainties which will be dictated by the length of time that such disruptions continue, which will, in turn, depend on the currently unknowable duration of the COVID-19 pandemic and the impact of governmental regulations that might be imposed in response to the pandemic. Numerous state and local jurisdictions have imposed, and others in the future may impose, shelter-in-place orders, quarantines, executive orders and similar government orders and restrictions for their residents to control the spread of COVID-19. Such orders or restrictions have resulted in temporary store closures, limitation of store hours, limitations on number of people in stores or in warehouses, requirements on sanitation and social distancing practices, work stoppages, slowdowns and delays, travel restrictions and cancellation of events, among other effects, thereby negatively impacting our operations. In addition, we expect to be impacted by the deterioration in the economic conditions in North America, which potentially could have an impact on discretionary consumer spending. Further, deteriorating economic conditions globally have created a challenging environment for financing, creating substantial uncertainty regarding the availability of credit. The combination of reduced consumer spending and volatile credit markets could adversely impact our liquidity. However, while it is premature to accurately predict the ultimate impact of these developments, we expect our financial results to be materially adversely impacted.

To the extent the COVID-19 pandemic adversely affects our business, liquidity and financial results, it may also have the effect of heightening many of the other risks described in this “Risk Factors” section and in the “Risk Factors” section of our Annual Report on Form 10-K, such as those relating to our high level of indebtedness, our need to generate sufficient cash flows to service our indebtedness, and our ability to comply with the covenants contained in the agreements that govern our indebtedness.

Our business has been and may continue to be materially and adversely affected by the spread of the novel coronavirus (COVID-19).

Many of our vendors either produce their products or source component parts of their products from areas affected by COVID-19. As a result, the business disruptions caused by the spread of COVID-19 may impact our ability to timely acquire the products we sell to

35


 

our customers and our business may be adversely affected. In addition, consumer fears about becoming ill with the disease may continue, which will adversely affect traffic to our and our customers’ stores. Consumer spending generally may also be negatively impacted by general macroeconomic conditions and consumer confidence, including the impacts of any recession, resulting from the COVID-19 pandemic. This may negatively impact sales in our stores, when reopened to the public, and our e-commerce channel and may cause our wholesale customers to purchase fewer products from us. The COVID-19 pandemic also has the potential to have a continued significant impact on our supply chain if the factories that manufacture our products, the distribution centers where we manage our inventory, or the operations of our logistics and other service providers are disrupted, temporarily closed or experience worker shortages. We may also see disruptions or delays in shipments and negative impacts to pricing of certain products.

We have taken decisive actions across our businesses to help protect employees, customers, and others in the communities we serve including in response to the increased impact from COVID-19. In addition to store closures, we are temporarily idling several distribution centers. Our online commerce business continues to be available to customers. While the COVID-19 pandemic is expected to be temporary and it is premature to accurately predict the ultimate impact of these developments, we expect our financial results to be materially adversely impacted. The disruption to the global economy and to our business, along with a sustained decline in our stock price, may lead to triggering events that may indicate that the carrying value of certain assets, including inventories, accounts receivables, long-lived assets, intangibles, and goodwill, may not be recoverable. The further spread of COVID-19, and the requirement to take action to limit the spread of the illness, has had, and may continue to have, a material adverse impact on global economic conditions, our business, liquidity, results of operations and financial condition, including on our potential to conduct financings on terms acceptable to us, if at all.

Changes in consumer behavior as a result of COVID-19 may materially and adversely affect our business.

Consumer behavior may fundamentally change as a result of COVID-19 in both the near and long term.  Traffic in retail stores, including our stores, may be materially and adversely affected with more consumers relying on ecommerce.  Consumer spending may also be negatively impacted by general macroeconomic conditions and consumer confidence, including the impacts of any recession, resulting from the COVID-19 pandemic.  All of this could materially and adversely impact sales at our retail stores. We have reprioritized our transformation plans to accelerate the roll-out of our digital programs in response to the temporary closure of our stores and potential changes in consumer behavior, however, there is no guarantee that we will be successful in growing our ecommerce sales.  Furthermore, we have expended and may continue to expend significant resources to strengthen our digital platforms.  In addition, we may also need to re-design our supply chain to focus more on ecommerce sales and fulfillment, which could result in capital expenditures, business disruption and lower margin sales.  

Health concerns arising from the outbreak of a health epidemic or pandemic may have an adverse effect on our business.

In addition to COVID-19, our business could be materially and adversely affected by the outbreak of a widespread epidemic or pandemic, including those arising from various strains of avian flu or swine flu, such as H1N1, particularly if located in regions from which we derive a significant amount of revenue or profit. The occurrence of such an outbreak or other adverse public health developments could materially disrupt our business and operations. Such events could also significantly impact our industry and cause a temporary closure of stores and fulfillment centers, which could severely disrupt our operations and have a material adverse effect on our business, financial condition and results of operations.

Furthermore, other viruses may be transmitted through human contact, and the risk of contracting viruses could cause employees or customers to avoid gathering in public places, which could adversely affect store traffic or the ability to adequately staff stores. We could also be adversely affected if government authorities impose mandatory closures, seek voluntary closures, impose restrictions on operations of stores, or restrict the import or export of inventory. Even if such measures are not implemented and a virus or other disease does not spread significantly, the perceived risk of infection or health risk may adversely affect our business and operating results.

A downturn in economic conditions and other external market factors could have a significant adverse effect on our business and our financial condition.

During economic downturns, including any potential impacts from COVID-19, fewer customers may shop in our stores and on our websites, and those who do shop may limit the amount of their purchases. This reduced demand may lead to lower sales and intensified competitive pressures, resulting in higher markdowns and/or increased marketing and promotional spending. Additionally, factors such as results differing from guidance, changes in sales and operating income in the peak seasons, changes in our market valuations, performance results for the general retail industry, announcements by us or our industry peers or changes in analysts’ recommendations may cause volatility in the price of our common stock and our shareholder returns.

36


 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

(c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers

Fiscal Period

 

Total Number of Shares Purchased

 

 

Average Price Paid per Share

 

 

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)

 

 

Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs

 

January 1 - January 31, 2020

 

 

-

 

 

$

-

 

 

 

-

 

 

$

776,120,613

 

February 1 - February 29, 2020

 

 

1,561,376

 

 

 

13.06

 

 

 

1,561,376

 

 

 

755,725,524

 

March 1 - March 31, 2020

 

 

2,374,537

 

 

 

12.47

 

 

 

2,374,537

 

 

 

726,120,621

 

Total this quarter

 

 

3,935,913

 

 

$

12.70

 

 

 

3,935,913

 

 

$

726,120,621

 

 

(1)          In August 2017, we announced that our Board of Directors had approved a share repurchase program authorizing us to repurchase up to $1.0 billion of our common stock over an approximate four-year period expiring on September 30, 2021 (the “2017 Share Repurchase Program”).  

 


37


 

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

 

 

 

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 Aaron E. Alt*

 

 

 

32.1

 

Section 1350 Certification of Christian A. Brickman*

 

 

 

32.2

 

Section 1350 Certification of Aaron E. Alt*

 

 

 

101

 

The following financial information from our Quarterly Report on Form 10-Q for the fiscal quarter ended March 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 (Loss); (iv) the Condensed Consolidated Statements of Cash Flows; (v) the Condensed Consolidated Statements of Stockholders’ Equity (Deficit); 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 March 31, 2020, formatted in Inline XBRL (contained in Exhibit 101).

 

* Included herewith

38


 

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:  May 7, 2020

 

 

 

 

 

 

 

 

By:

 

/s/ Aaron E. Alt

 

 

 

Aaron E. Alt

 

 

 

Senior Vice President, Chief Financial Officer

and President – Sally Beauty Supply

 

 

 

For the Registrant and as its Principal Financial Officer

 

39