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Sally Beauty Holdings, Inc. - Quarter Report: 2022 December (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

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

 

FOR THE QUARTERLY PERIOD ENDED: DECEMBER 31, 2022

-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 January 27, 2023, there were 107,328,599 shares of the issuer’s common stock outstanding.

 

 

 

 


 

TABLE OF CONTENTS

 

 

Page

PART I — FINANCIAL INFORMATION

 

 

 

Item 1. Financial Statements

4

 

 

Condensed Consolidated Balance Sheets

4

Condensed Consolidated Statements of Earnings

5

Condensed Consolidated Statements of Comprehensive Income

6

Condensed Consolidated Statements of Stockholders’ Equity

7

Condensed Consolidated Statements of Cash Flows

8

Notes to Condensed Consolidated Financial Statements

9

 

 

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

16

Item 3. Quantitative And Qualitative Disclosures About Market Risk

22

Item 4. Controls And Procedures

22

 

 

PART II — OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

23

Item 1A. Risk Factors

23

Item 6. Exhibits

24

 

 


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, 2022, 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


 

PART I — FINANCIAL INFORMATION

Item 1.  Financial Statements.

SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except par value data)

 

 

 

 

December 31,

2022

 

 

September 30,

2022

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

99,071

 

 

$

70,558

 

Trade accounts receivable, net

 

 

32,671

 

 

 

34,102

 

Accounts receivable, other

 

 

42,741

 

 

 

38,175

 

Inventory

 

 

986,878

 

 

 

936,374

 

Other current assets

 

 

57,840

 

 

 

53,192

 

Total current assets

 

 

1,219,201

 

 

 

1,132,401

 

Property and equipment, net of accumulated depreciation of $849,202 at

   December 31, 2022, and $820,811 at September 30, 2022

 

 

288,732

 

 

 

297,876

 

Operating lease assets

 

 

542,806

 

 

 

532,177

 

Goodwill

 

 

532,514

 

 

 

526,066

 

Intangible assets, excluding goodwill, net of accumulated amortization of

   $28,820 at December 31, 2022, and $26,794 at September 30, 2022

 

 

50,963

 

 

 

50,315

 

Other assets

 

 

34,330

 

 

 

38,032

 

Total assets

 

$

2,668,546

 

 

$

2,576,867

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current maturities of long-term debt

 

$

65,171

 

 

$

68,658

 

Accounts payable

 

 

296,170

 

 

 

275,717

 

Accrued liabilities

 

 

142,785

 

 

 

161,065

 

Current operating lease liabilities

 

 

156,168

 

 

 

157,734

 

Income taxes payable

 

 

16,972

 

 

 

4,740

 

Total current liabilities

 

 

677,266

 

 

 

667,914

 

Long-term debt

 

 

1,082,175

 

 

 

1,083,043

 

Long-term operating lease liabilities

 

 

427,168

 

 

 

424,762

 

Other liabilities

 

 

22,748

 

 

 

22,427

 

Deferred income tax liabilities, net

 

 

85,891

 

 

 

85,085

 

Total liabilities

 

 

2,295,248

 

 

 

2,283,231

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock, $0.01 par value. Authorized 500,000 shares; 107,291 and

   107,024 shares issued and 107,284 and 106,970 shares outstanding at

   December 31, 2022, and September 30, 2022, respectively

 

 

1,073

 

 

 

1,070

 

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

 

 

 

 

 

 

Additional paid-in capital

 

 

8,329

 

 

 

4,241

 

Accumulated earnings

 

 

490,509

 

 

 

440,172

 

Accumulated other comprehensive loss, net of tax

 

 

(126,613

)

 

 

(151,847

)

Total stockholders’ equity

 

 

373,298

 

 

 

293,636

 

Total liabilities and stockholders’ equity

 

$

2,668,546

 

 

$

2,576,867

 

 

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

 

4


 

SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Earnings

(In thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2022

 

 

2021

 

Net sales

 

$

957,055

 

 

$

980,251

 

Cost of goods sold

 

 

468,481

 

 

 

480,122

 

Gross profit

 

 

488,574

 

 

 

500,129

 

Selling, general and administrative expenses

 

 

391,580

 

 

 

386,250

 

Restructuring

 

 

10,406

 

 

 

1,099

 

Operating earnings

 

 

86,588

 

 

 

112,780

 

Interest expense

 

 

17,923

 

 

 

20,241

 

Earnings before provision for income taxes

 

 

68,665

 

 

 

92,539

 

Provision for income taxes

 

 

18,328

 

 

 

23,701

 

Net earnings

 

$

50,337

 

 

$

68,838

 

Earnings per share:

 

 

 

 

 

 

 

 

Basic

 

$

0.47

 

 

$

0.61

 

Diluted

 

$

0.46

 

 

$

0.60

 

Weighted-average shares:

 

 

 

 

 

 

 

 

Basic

 

 

107,140

 

 

 

111,995

 

Diluted

 

 

109,460

 

 

 

113,968

 

 

 

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

5


SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2022

 

 

2021

 

Net earnings

 

$

50,337

 

 

$

68,838

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

25,941

 

 

 

(4,509

)

Interest rate caps, net of tax

 

 

203

 

 

 

278

 

Foreign exchange contracts, net of tax

 

 

(910

)

 

 

480

 

Other comprehensive income (loss), net of tax

 

 

25,234

 

 

 

(3,751

)

Total comprehensive income

 

$

75,571

 

 

$

65,087

 

 

 

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

6


SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders’ Equity

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Other

 

 

Total

 

 

Common Stock

Paid-in

 

 

Accumulated

 

 

Comprehensive

 

 

Stockholders’

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Loss

 

 

Equity

 

Balance at September 30, 2022

 

106,970

 

 

$

1,070

 

 

$

4,241

 

 

$

440,172

 

 

$

(151,847

)

 

$

293,636

 

Net earnings

 

 

 

 

 

 

 

 

 

 

50,337

 

 

 

 

 

 

50,337

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

25,234

 

 

 

25,234

 

Share-based compensation

 

 

 

 

 

 

 

5,135

 

 

 

 

 

 

 

 

 

5,135

 

Stock issued for equity awards

 

404

 

 

 

4

 

 

 

78

 

 

 

 

 

 

 

 

 

82

 

Employee withholding taxes paid

   related to net share settlement

 

(90

)

 

 

(1

)

 

 

(1,125

)

 

 

 

 

 

 

 

 

(1,126

)

Balance at December 31, 2022

 

107,284

 

 

$

1,073

 

 

$

8,329

 

 

$

490,509

 

 

$

(126,613

)

 

$

373,298

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Other

 

 

Total

 

 

Common Stock

Paid-in

 

 

Accumulated

 

 

Comprehensive

 

 

Stockholders’

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Loss

 

 

Equity

 

Balance at September 30, 2021

 

112,913

 

 

$

1,129

 

 

$

17,286

 

 

$

356,967

 

 

$

(94,641

)

 

$

280,741

 

Net earnings

 

 

 

 

 

 

 

 

 

 

68,838

 

 

 

 

 

 

68,838

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,751

)

 

 

(3,751

)

Share-based compensation

 

 

 

 

 

 

 

3,958

 

 

 

 

 

 

 

 

 

3,958

 

Stock issued for equity awards

 

795

 

 

 

8

 

 

 

7,364

 

 

 

 

 

 

 

 

 

7,372

 

Employee withholding taxes paid

   related to net share settlement

 

(56

)

 

 

(1

)

 

 

(1,136

)

 

 

 

 

 

 

 

 

(1,137

)

Repurchases and cancellations of

   common stock

 

(3,675

)

 

 

(36

)

 

 

(27,472

)

 

 

(47,492

)

 

 

 

 

 

(75,000

)

Balance at December 31, 2021

 

109,977

 

 

$

1,100

 

 

$

 

 

$

378,313

 

 

$

(98,392

)

 

$

281,021

 

 

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

7


SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Three Months Ended December 31,

 

 

 

2022

 

 

2021

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

 

Net earnings

 

$

50,337

 

 

$

68,838

 

Adjustments to reconcile net earnings to net cash provided (used)

    by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

25,285

 

 

 

24,421

 

Share-based compensation expense

 

 

5,135

 

 

 

3,958

 

Amortization of deferred financing costs

 

 

648

 

 

 

932

 

Impairment of long-lived assets, including operating lease assets

 

 

2,103

 

 

 

 

Loss on disposal of equipment and other property

 

 

77

 

 

 

3

 

Deferred income taxes

 

 

889

 

 

 

1,867

 

Changes in (exclusive of effects of acquisitions):

 

 

 

 

 

 

 

 

Trade accounts receivable

 

 

2,270

 

 

 

2,841

 

Accounts receivable, other

 

 

(3,817

)

 

 

(1,724

)

Inventory

 

 

(38,019

)

 

 

(137,326

)

Other current assets

 

 

(4,018

)

 

 

(446

)

Other assets

 

 

4,074

 

 

 

1,371

 

Operating leases, net

 

 

(10,392

)

 

 

6,475

 

Accounts payable and accrued liabilities

 

 

7,606

 

 

 

16,729

 

Income taxes payable

 

 

12,460

 

 

 

18,166

 

Other liabilities

 

 

313

 

 

 

(11,790

)

Net cash provided (used) by operating activities

 

 

54,951

 

 

 

(5,685

)

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

 

Payments for property and equipment, net of proceeds

 

 

(25,007

)

 

 

(26,390

)

Acquisitions, net of cash acquired

 

 

 

 

 

(319

)

Net cash used by investing activities

 

 

(25,007

)

 

 

(26,709

)

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of long-term debt

 

 

229,000

 

 

 

 

Repayments of long-term debt, including prepayment costs

 

 

(233,927

)

 

 

(1,421

)

Payments for common stock repurchased

 

 

 

 

 

(75,000

)

Proceeds from equity awards

 

 

60

 

 

 

7,372

 

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

 

 

(1,125

)

 

 

(1,136

)

Net cash used by financing activities

 

 

(5,992

)

 

 

(70,185

)

Effect of foreign exchange rate changes on cash and cash equivalents

 

 

4,561

 

 

 

(240

)

Net increase (decrease) in cash and cash equivalents

 

 

28,513

 

 

 

(102,819

)

Cash and cash equivalents, beginning of period

 

 

70,558

 

 

 

400,959

 

Cash and cash equivalents, end of period

 

$

99,071

 

 

$

298,140

 

Supplemental Cash Flow Information:

 

 

 

 

 

 

 

 

Interest paid

 

$

26,758

 

 

$

35,034

 

Income taxes paid

 

$

3,081

 

 

$

3,978

 

Capital expenditures incurred but not paid

 

$

5,542

 

 

$

3,594

 

 

 

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

 

 

 


 

8


 

Sally Beauty Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1.

Significant Accounting Policies

Basis of Presentation

The unaudited condensed consolidated interim financial statements of Sally Beauty Holdings, Inc. and its subsidiaries 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 included herein are adequate for the interim period presented. 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, 2022. In the opinion of management, these unaudited condensed consolidated interim financial statements reflect all adjustments that are of a normal recurring nature and which are necessary to present fairly our consolidated financial position as of December 31, 2022, and September 30, 2022, and our consolidated results of operations, consolidated comprehensive income, consolidated cash flows and consolidated statements of stockholders’ equity for the three months ended December 31, 2022 and 2021.

Principles of Consolidation

The unaudited condensed consolidated interim financial statements include all accounts of Sally Beauty Holdings, Inc. and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. All amounts are in U.S. Dollars.

Accounting Policies

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

Use of Estimates

In order to present our financial statements in conformity with GAAP, we are required to make certain estimates and assumptions that impact our interim financial statements and supplementary disclosures. These estimates may use forecasted financial information based on reasonable information available, however are subject to change in the future. Significant estimates and assumptions are part of our accounting for sales allowances, deferred revenue, valuation of inventory, amortization and depreciation, intangibles and goodwill, and other reserves. We believe these estimates and assumptions are reasonable; however, they are based on management’s current knowledge of events and actions, and changes in facts and circumstances may result in revised estimates and impact actual results.


9


 

 

2.

Revenue Recognition

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

Changes to our contract liabilities, which are included in accrued liabilities in our condensed consolidated balance sheets, for the periods were as follows (in thousands):

 

 

 

 

 

 

Three Months Ended December 31,

 

 

 

 

 

 

 

2022

 

 

2021

 

Beginning Balance

 

 

 

 

 

$

13,460

 

 

$

16,744

 

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

 

 

6,291

 

 

 

5,842

 

Revenue recognized from beginning liability

 

 

(4,489

)

 

 

(3,509

)

Ending Balance

 

 

 

 

 

$

15,262

 

 

$

19,077

 

See Note 10, Segment Reporting, for additional information regarding the disaggregation of our sales revenue.

3.

Fair Value Measurements

We measure on a recurring basis and disclose the fair value of our financial instruments under the provisions of ASC Topic 820, Fair Value Measurement, as amended (“ASC 820”). We define “fair value” as the price that would be received to sell an asset or paid to transfer a liability (i.e., the exit price) in an orderly transaction between market participants at the measurement date. ASC 820 establishes a three-level hierarchy for measuring fair value and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. This valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability on the measurement date.

The three levels of that hierarchy are defined as follows:

Level 1 - Quoted prices are available in active markets for identical assets or liabilities;

Level 2 - Pricing inputs are other than quoted prices in active markets, included in Level 1, that are either directly or indirectly observable; and

Level 3 - Unobservable pricing inputs in which little or no market activity exists, therefore requiring an entity to develop its own model with estimates and assumptions.

Financial instruments measured at fair value on recurring basis

Consistent with the fair value hierarchy, we categorized our financial assets and liabilities as follow:

(in thousands)

 

Classification

 

Fair Value Hierarchy Level

 

December 31,

2022

 

 

September 30,

2022

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

 

 

 

 

 

 

 

 

 

 

 

Non-designated cash flow hedges

 

Other current assets

 

Level 2

 

$

4,463

 

 

$

294

 

Interest rate caps

 

Other current assets

 

Level 2

 

 

3,627

 

 

 

3,860

 

Total assets

 

 

 

 

 

$

8,090

 

 

$

4,154

 

.

 

 

 

 

 

 

 

 

 

 

 

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

 

 

 

 

 

 

 

 

 

 

 

Designated cash flow hedges

 

Accrued liabilities

 

Level 2

 

$

1,930

 

 

$

 

Non-designated cash flow hedges

 

Accrued liabilities

 

Level 2

 

 

4,045

 

 

 

79

 

Total liabilities

 

 

 

 

 

$

5,975

 

 

$

79

 

The fair value for interest rate caps and foreign exchange contracts were measured using widely accepted valuation techniques, such as discounted cash flow analyses and observable inputs, such as market interest rates and foreign exchange rates.

10


 

Other fair value disclosures

The carrying amounts of cash equivalents, trade and other accounts receivable and accounts payable and borrowing under our ABL facility approximate their respective fair values due to the short-term nature of these financial instruments. Carrying amounts and the related estimated fair value of our long-term debt, excluding capital lease obligations and debt issuance costs, are as follows:

 

 

 

 

December 31, 2022

 

 

September 30, 2022

 

(in thousands)

 

Fair Value Hierarchy Level

 

Carrying Value

 

 

Fair Value

 

 

Carrying Value

 

 

Fair Value

 

Long-term debt, excluding capital leases

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior notes

 

Level 1

 

$

679,961

 

 

$

652,763

 

 

$

679,961

 

 

$

639,163

 

Term loan B

 

Level 2

 

 

406,125

 

 

 

403,587

 

 

 

407,500

 

 

 

398,331

 

Total long-term debt

 

 

 

$

1,086,086

 

 

$

1,056,350

 

 

$

1,087,461

 

 

$

1,037,494

 

 

The fair value of term loan B was measured using quoted market prices for similar debt securities in active markets or widely accepted valuation techniques, such as discounted cash flow analyses, using observable inputs, such as market interest rates.

4.

Stockholders’ Equity

Share Repurchases

In August 2017, our Board of Directors (“Board”) approved a share repurchase program authorizing us to repurchase up to $1.0 billion of its common stock, subject to certain limitations governed by our debt agreements. In July 2021, our Board approved a term extension of the share repurchase program for the four-year period ending September 30, 2025. As of December 31, 2022, we had authorization of approximately $595.8 million of additional potential share repurchases remaining under our share repurchase program. For the three months ended December 31, 2022, we did not repurchase shares under our share repurchase program. For the three months ended December 31, 2021, we repurchased 3.7 million shares of common stock at a total cost of $75.0 million.

Accumulated Other Comprehensive Income (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, 2022

 

$

(153,128

)

 

$

1,960

 

 

$

(679

)

 

$

(151,847

)

 

Other comprehensive income (loss) before

    reclassification, net of tax

 

 

25,941

 

 

 

155

 

 

 

(608

)

 

 

25,488

 

 

Reclassification to net earnings, net of tax

 

 

 

 

 

48

 

 

 

(302

)

 

 

(254

)

 

Balance at December 31, 2022

 

$

(127,187

)

 

$

2,163

 

 

$

(1,589

)

 

$

(126,613

)

 

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

5.

Weighted-Average Shares

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

 

 

Three Months Ended

December 31,

 

 

 

2022

 

 

2021

 

Weighted-average basic shares

 

 

107,140

 

 

 

111,995

 

Dilutive securities:

 

 

 

 

 

 

 

 

Stock option and stock award programs

 

 

2,320

 

 

 

1,973

 

Weighted-average diluted shares

 

 

109,460

 

 

 

113,968

 

 

 

 

 

 

 

 

 

 

Anti-dilutive options excluded from our computation of diluted shares

 

 

2,123

 

 

 

2,775

 

 

6.

Goodwill and Intangible Assets

We considered potential triggering events and determined there were none for the three months ended December 31, 2022. No material impairment losses were recognized in the current or prior periods presented in connection with our goodwill and other intangible assets.

 

11


 

 

 

 

Three Months Ended

December 31,

 

(in thousands)

 

2022

 

 

2021

 

Intangible assets amortization expense

 

$

1,008

 

 

$

1,071

 

 

Additionally, during the three months ended December 31, 2022, the changes in goodwill and other intangibles were primarily from the effects of foreign currency exchange rates of $6.4 million and $1.7 million, respectively. During the three months ended December 31, 2021, the changes in goodwill were primarily from the effects of foreign currency exchange rates of $0.9 million.

7.

Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

 

 

December 31,

2022

 

 

September 30,

2022

 

Compensation and benefits

 

$

46,027

 

 

$

58,693

 

Deferred revenue

 

 

20,384

 

 

 

18,810

 

Rental obligations

 

 

14,353

 

 

 

10,701

 

Insurance reserves

 

 

6,104

 

 

 

5,742

 

Property and other taxes

 

 

4,266

 

 

 

4,161

 

Interest payable

 

 

3,865

 

 

 

13,445

 

Operating accruals and other

 

 

47,786

 

 

 

49,513

 

Total accrued liabilities

 

$

142,785

 

 

$

161,065

 

 

 

 

 

 

 

 

 

 

 

8.

Short-term Borrowings and Long-term Debt

At December 31, 2022, our ABL facility had $65.0 million in outstanding borrowings and $417.7 million available for borrowing, including the Canadian sub-facility, subject to the conditions contained therein.

9.

Derivative Instruments and Hedging Activities

During the three months ended December 31, 2022, we did not purchase or hold any derivative instruments for trading or speculative purposes. See Note 3, Fair Value Measurements, for the classification and fair value of our derivative instruments.

Designated Cash Flow Hedges

Foreign Currency Forwards

We regularly enter into foreign currency forwards to mitigate our exposure to exchange rate changes on forecasted inventory purchases in U.S. dollars by our foreign subsidiaries. At December 31, 2022, we held forwards, which expire ratably through September 30, 2023, with a notional amount, based upon exchange rates at December 31, 2022, as follows (in thousands):

Notional Currency

 

Notional Amount

 

Mexican Peso

 

$

17,629

 

Euro

 

 

11,549

 

Canadian Dollar

 

 

8,921

 

Total

 

$

38,099

 

 

Quarterly, the changes in fair value related to these foreign currency forwards are recorded into AOCL. As the forwards are exercised, the realized value is recognized into cost of goods sold, based on inventory turns, in our condensed consolidated statements of earnings. For the three months ended December 31, 2022 and 2021, we recognized a gain of $0.3 million and a loss of $0.3 million, respectively. Based on December 31, 2022, valuations and exchange rates, we expect to reclassify losses of approximately $1.6 million into cost of goods sold over the next 12 months.

Interest Rate Caps

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

For the three months ended December 31, 2022 and 2021, we recognized expense of $0.1 million and $0.4 million, respectively, into interest expense on our condensed consolidated statements of earnings. Over the next 12 months, we expect to reclassify gains of

12


 

approximately $2.6 million into interest expense, which represents estimated interest rate settlements less the original value of the expiring caplets.

Non-Designated Derivative Instruments

We also use foreign exchange contracts to mitigate our exposure to exchange rate changes in connection with certain intercompany balances not permanently invested. At December 31, 2022, we held forwards, which expire on various dates in the first month of both the second and third fiscal quarters of fiscal year 2023, with a notional amount, based upon exchange rates at December 31, 2022, as follows (in thousands):

Notional Currency

 

Notional Amount

 

British Pound

 

$

87,321

 

Canadian Dollar

 

 

56,329

 

Euro

 

 

56,269

 

Mexican Peso

 

 

23,865

 

Total

 

$

223,784

 

We record changes in fair value and realized gains or losses related to these foreign currency forwards into selling, general and administrative expenses. For the three months ended December 31, 2022 and 2021, the effects of these foreign exchange contracts on our condensed consolidated financial statements were gains of $0.4 million in both years.

10.

Segment Reporting

Segment data for the three months ended December 31, 2022 and 2021, is as follows (in thousands):

 

 

 

Three Months Ended

December 31,

 

 

 

2022

 

 

2021

 

Net sales:

 

 

 

 

 

 

 

 

Sally Beauty Supply ("SBS")

 

$

549,472

 

 

$

561,530

 

Beauty Systems Group ("BSG")

 

 

407,583

 

 

 

418,721

 

Total

 

$

957,055

 

 

$

980,251

 

Earnings before provision for income taxes:

 

 

 

 

 

 

 

 

Segment operating earnings:

 

 

 

 

 

 

 

 

SBS

 

$

99,174

 

 

$

100,623

 

BSG

 

 

49,647

 

 

 

58,546

 

Segment operating earnings

 

 

148,821

 

 

 

159,169

 

Unallocated expenses

 

 

51,827

 

 

 

45,290

 

Restructuring

 

 

10,406

 

 

 

1,099

 

Consolidated operating earnings

 

 

86,588

 

 

 

112,780

 

Interest expense

 

 

17,923

 

 

 

20,241

 

Earnings before provision

   for income taxes

 

$

68,665

 

 

$

92,539

 

 

Sales between segments, which are eliminated in consolidation, were not material during the three months ended December 31, 2022 and 2021.

Disaggregation of net sales by segment  

The following tables disaggregate our segment revenues by merchandise category. We have reclassified certain prior year amounts within BSG to conform to current year presentation.

 

 

Three Months Ended

December 31,

 

SBS

 

2022

 

 

2021

 

Hair color

 

 

38.7

%

 

 

36.8

%

Hair care

 

 

23.4

%

 

 

23.8

%

Styling tools and supplies

 

 

19.5

%

 

 

20.2

%

Nail

 

 

10.3

%

 

 

10.4

%

Skin and cosmetics

 

 

7.4

%

 

 

7.9

%

Other beauty items

 

 

0.7

%

 

 

0.9

%

Total

 

 

100.0

%

 

 

100.0

%

 

13


 

 

 

 

Three Months Ended

December 31,

 

BSG

 

2022

 

 

2021

 

Hair care

 

 

43.5

%

 

 

43.5

%

Hair color

 

 

38.3

%

 

 

38.4

%

Styling tools and supplies

 

 

10.8

%

 

 

11.4

%

Skin and cosmetics

 

 

4.4

%

 

 

4.4

%

Nail

 

 

2.7

%

 

 

2.0

%

Other beauty items

 

 

0.3

%

 

 

0.3

%

Total

 

 

100.0

%

 

 

100.0

%

The following tables disaggregate our segment revenue by sales channels:

 

 

Three Months Ended

December 31,

 

SBS

 

2022

 

 

2021

 

Company-operated stores

 

 

93.6

%

 

 

94.2

%

E-commerce

 

 

6.4

%

 

 

5.8

%

Total

 

 

100.0

%

 

 

100.0

%

 

 

 

Three Months Ended

December 31,

 

BSG

 

2022

 

 

2021

 

Company-operated stores

 

 

66.3

%

 

 

67.5

%

E-commerce

 

 

13.6

%

 

 

11.7

%

Distributor sales consultants

 

 

12.6

%

 

 

13.6

%

Franchise stores

 

 

7.5

%

 

 

7.2

%

Total

 

 

100.0

%

 

 

100.0

%

 

11.

Restructuring

Restructuring expenses, included in Cost of Goods Sold (“COGS”) and Restructuring for the three months ended December 31, 2022 and 2021 are as follows (in thousands):

 

 

Three Months Ended

December 31,

 

 

 

2022

 

 

2021

 

Included in COGS

 

 

 

 

 

 

 

 

Distribution Center Consolidation

   and Store Optimization Plan

 

$

(2,680

)

(a)

$

 

 

 

 

 

 

 

 

 

 

Included in Restructuring

 

 

 

 

 

 

 

 

Distribution Center Consolidation

   and Store Optimization Plan

 

$

10,406

 

(b)

$

 

Transformation Plan

 

 

 

 

 

1,099

 

Total in Restructuring

 

 

10,406

 

 

 

1,099

 

Total Restructuring Expenses

 

$

7,726

 

 

$

1,099

 

 

(a)

Amounts included within COGS are related to adjustments to our expected obsolescence reserve related to the Plan (as defined below).

 

(b)

Amounts included within Restructuring (SG&A) are related to stores and distribution centers closed during the quarter in accordance with the Plan (as defined below).

 

Distribution Center Consolidation and Store Optimization Plan

In the fourth quarter of fiscal year 2022, our Board approved the Distribution Center Consolidation and Store Optimization Plan authorizing the closure of 330 SBS stores and 35 BSG stores, and the closure of two BSG distribution centers in Clackamas, Oregon and Pottsville, Pennsylvania (“the Plan”).

During the three months ended December 31, 2022, we completed the closure of the two BSG distributions centers. We believe that consolidating the operation of these two distribution centers into our larger distribution centers will increase product availability, shorten delivery times and reduce overall costs.

14


 

As of December 31, 2022, we have closed 327 SBS stores and 14 BSG stores as part of the Plan.

Stores identified for early closure were part of a strategic evaluation which included a market analysis of certain locations where we believe we will be able to recapture demand at other nearby store locations and improve overall profitability. By optimizing our store base, we are further focusing on our customers’ shopping experience and our product offerings.

The Plan will continue to be executed throughout fiscal year 2023 and into the first half of fiscal year 2024, and therefore it may include future charges related to store closures such as exit costs, lease negotiation penalties, termination benefits and adjustments to estimates.

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

(in thousands)

 

Liability at

September 30,

2022

 

 

SBS Expense

 

 

BSG Expense

 

 

Cash Payments

 

 

Non-Cash Amounts

 

 

Liability at

December 31,

2022

 

Closing costs - leases (a)

 

$

 

 

$

4,738

 

 

$

132

 

 

$

 

 

$

(868

)

 

$

4,002

 

Closing costs - payroll expenses (b)

 

 

 

 

 

988

 

 

 

961

 

 

 

 

 

 

 

 

 

1,949

 

Impairment - property and equipment (c)

 

 

 

 

 

1,069

 

 

 

610

 

 

 

 

 

 

(1,679

)

 

 

 

Inventory transfer costs

 

 

 

 

 

1,128

 

 

 

204

 

 

 

(294

)

 

 

 

 

 

1,038

 

Impairment - operating lease assets (c)

 

 

 

 

 

345

 

 

 

83

 

 

 

 

 

 

(428

)

 

 

 

Other

 

 

1,291

 

 

 

102

 

 

 

46

 

 

 

(1,351

)

 

 

 

 

 

88

 

Total

 

$

1,291

 

 

$

8,370

 

 

$

2,036

 

 

$

(1,645

)

 

$

(2,975

)

 

$

7,077

 

 

(a)

Lease-related closing costs include contract terminations costs as well as other rental obligations associated with closing stores.

 

(b)

Payroll-related closing costs include one-time termination benefits related to the closure of our distribution centers as well as other payroll expenses associated with closing stores.

 

(c)

Remaining carrying value for the long-lived assets, including operating lease assets, were not material and approximate their fair value.

15


 

 

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, 2022, including the Risk Factors sections therein, and information contained elsewhere in this Quarterly Report, including the condensed consolidated interim financial statements and notes to those financial statements.

Executive Overview

For fiscal 2023, we are focusing on three key strategic initiatives to drive growth and profitability:

 

Enhancing our customer centricity;

 

Growing high margin owned brands at Sally Beauty and amplifying innovation; and

 

 

Increasing the efficiency of our operations and optimizing our capabilities.

We believe focusing in these areas will position our company for future growth and further enhance our ability to meet our customers where they are.

Enhancing our customer centricity

During the quarter, BSG launched a new strategic partnership with Salon HQ. Salon HQ is a customizable digital storefront platform that gives stylists the ability to curate a product selection from thousands of BSG merchandise choices and enables their clients to purchase directly from their shops without the stylists having to finance and carry inventory. In addition, SBS has identified the locations for its initial Studio by Sally pilot stores that we expect to open this fiscal year. The Studio by Sally pilot store program will have a digital-first focus, from digital check-in to digital education throughout the store and beyond, including personalized appointments at our in-store salons with licensed stylists who will train and educate consumers on how to color their own hair and achieve their desired results. We believe that we will be able to expand the Studio by Sally concept to 100 locations throughout the U.S. over the next three to four fiscal years if successful.

Growing high margin owned brands at Sally Beauty and amplifying innovation

We believe growing our SBS owned-brands, through innovation and marketing, will provide improved margins, strengthen our long-term relationships with existing customers and help attract new customers. During the quarter, we invested more into marketing of our owned-brands and launched the first phase of our new owned-branded hair repair product line – bondbar. These initiatives delivered an increase in our owned-brands sales penetration, resulting in increased SBS profit margins.

 

Furthermore, we look forward to providing salons and stylists with new innovations from our BSG vendors as they are launched over the next two fiscal quarters.

Increasing the efficiency of our operations and optimizing our capabilities

In the fourth quarter of fiscal year 2022, we announced our plan to close 330 SBS stores, 35 BSG stores and two BSG distribution centers. Based on our strategic evaluation, we believe that we will able to recapture demand of closed stores in other nearby store locations and improve overall profitability. During the quarter, we completed the closure of our two BSG distributions centers and the majority of our planned store closures. Additionally, we re-optimized our store supply chain network based on our new store fleet. As of December 31, 2022, we have closed 327 SBS stores and 14 BSG stores as part of the Plan and are currently meeting our sales recapture expectations.

See Note 11, Restructuring, in Item 1 of this quarterly report for more information on the Plan.

 

Financial Summary for the Three Months Ended December 31, 2022

 

Consolidated net sales for the three months ended December 31, 2022, decreased $23.2 million, or 2.4%, to $957.1 million, compared to the three months ended December 31, 2021. Consolidated net sales included a negative impact from changes in foreign currency exchange rates of $14.4 million;

 

Consolidated comparable sales increased 1.1% for the three months ended December 31, 2022, compared to the three months ended December 31, 2021;

 

Consolidated gross profit for the three months ended December 31, 2022, decreased $11.6 million, or 2.3%, to $488.6 million, compared to the three months ended December 31, 2021. Gross margin was unchanged at 51.0% for the three months ended December 31, 2022, compared to the three months ended December 31, 2021;

16


 

 

Consolidated operating earnings for the three months ended December 31, 2022, decreased $26.2 million, or 23.2%, to $86.6 million, compared to the three months ended December 31, 2021. Operating margin decreased 250 bps to 9.0% for the three months ended December 31, 2022, compared to the three months ended December 31, 2021;

 

For the three months ended December 31, 2022, our consolidated net earnings decreased $18.5 million, or 26.9%, to $50.3 million, compared to the three months ended December 31, 2021;

 

For the three months ended December 31, 2022, our diluted earnings per share was $0.46 compared to $0.60 for the three months ended December 31, 2021; and

 

Cash provided by operations was $55.0 million for the three months ended December 31, 2022, compared to cash used by operations of $5.7 million for the three months ended December 31, 2021.

Trends Impacting Our Business

Global inflationary pressures continue to influence consumer and stylist behavior along with the cost for products and services. In the U.S. and Canada, we are seeing our SBS customers color their hair less frequently and reduce the size of their basket when they shop with us, while at BSG we are seeing stylists purchasing closer to the time they use products. Additionally, inflationary pressures have impacted wages, especially among retail and hourly employees, as we have experienced an increase in our labor costs in order to attract and retain associates. During the current quarter, these headwinds have resulted in lower traffic and conversion in our business and increases in certain operating costs. We continue to monitor these challenges and implement measures to help mitigate their impacts, including managing our inventory levels to reduce out-of-stock items, adjusting our promotional activities, optimizing our store base and expanding our partnerships with delivery service providers. Although these initiatives have helped mitigate ongoing macro-headwinds, we cannot reasonably predict the long-term effects of inflation.

Furthermore, in a measure to curb inflation, the U.S. Federal Reserve has increased the federal funds effective rate. In turn, these increases have raised the cost of debt borrowings. We currently have $471.1 million in variable rate debt outstanding, of which $406.1 million is hedged with interest rate caps to help mitigate the impact of raising rates. Future increases in the federal funds effective rate could have a material adverse impact to our cost of borrowing, including any future changes in our debt structure.

Impact of COVID-19 on Our Business

While we have seen signs of stabilization from the impacts of the COVID-19 virus, we cannot reasonably predict the effects of new variants or expect improving trends to continue. Therefore, our future performance may partially depend on impacts of COVID-19, such as decreased customer in-store traffic, temporary store closures, and labor and supply chain disruptions.

Refer to Item 1A. “Risk Factors” in our Form 10-K for the fiscal year ended September 30, 2022, for further discussion on the risks and uncertainties created by COVID-19.

Comparable Sales

We believe that comparable sales is an appropriate performance indicator to measure our sales growth compared to the prior period. Our comparable sales include sales from stores that have been operating for 14 months or longer as of the last day of a month and e-commerce revenue. Additionally, comparable sales include sales to franchisees and full service sales. Our comparable sales excludes the effect of changes in foreign exchange rates and sales from stores relocated until 14 months after the relocation. Revenue from acquisitions are excluded from our comparable sales calculation until 14 months after the acquisition. Our calculation of comparable sales might not be the same as other retailers as the calculation varies across the retail industry.


17


 

 

Overview

Key Operating Metrics

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

 

 

 

Three Months Ended

December 31,

 

 

 

2022

 

 

2021

 

 

Increase (Decrease)

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBS

 

$

549,472

 

 

$

561,530

 

 

$

(12,058

)

 

 

(2.1

)%

BSG

 

 

407,583

 

 

 

418,721

 

 

 

(11,138

)

 

 

(2.7

)%

Consolidated

 

$

957,055

 

 

$

980,251

 

 

$

(23,196

)

 

 

(2.4

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBS

 

$

323,475

 

 

$

328,172

 

 

$

(4,697

)

 

 

(1.4

)%

BSG

 

 

165,099

 

 

 

171,957

 

 

 

(6,858

)

 

 

(4.0

)%

Consolidated

 

$

488,574

 

 

$

500,129

 

 

$

(11,555

)

 

 

(2.3

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment gross margin:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBS

 

 

58.9

%

 

 

58.4

%

 

50

 

 

bps

 

BSG

 

 

40.5

%

 

 

41.1

%

 

(60)

 

 

bps

 

Consolidated

 

 

51.0

%

 

 

51.0

%

 

 

 

bps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment operating earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBS

 

$

99,174

 

 

$

100,623

 

 

$

(1,449

)

 

 

(1.4

)%

BSG

 

 

49,647

 

 

 

58,546

 

 

 

(8,899

)

 

 

(15.2

)%

Segment operating earnings

 

 

148,821

 

 

 

159,169

 

 

 

(10,348

)

 

 

(6.5

)%

Unallocated expenses and restructuring (a)

 

 

62,233

 

 

 

46,389

 

 

 

15,844

 

 

 

34.2

%

Consolidated operating earnings

 

 

86,588

 

 

 

112,780

 

 

 

(26,192

)

 

 

(23.2

)%

Interest expense

 

 

17,923

 

 

 

20,241

 

 

 

(2,318

)

 

 

(11.5

)%

Earnings before provision for income taxes

 

 

68,665

 

 

 

92,539

 

 

 

(23,874

)

 

 

(25.8

)%

Provision for income taxes

 

 

18,328

 

 

 

23,701

 

 

 

(5,373

)

 

 

(22.7

)%

Net earnings

 

$

50,337

 

 

$

68,838

 

 

$

(18,501

)

 

 

(26.9

)%

 

 

.

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

SBS

 

 

3,146

 

 

 

3,529

 

 

 

(383

)

 

 

 

 

BSG

 

 

1,352

 

 

 

1,364

 

 

 

(12

)

 

 

 

 

Consolidated

 

 

4,498

 

 

 

4,893

 

 

 

(395

)

 

 

 

 

Comparable sales growth (decline):

 

 

 

 

 

 

 

 

 

 

 

 

 

SBS

 

 

3.0

%

 

 

4.4

%

 

(140)

 

 

bps

 

BSG

 

 

(1.5

)%

 

 

8.6

%

 

(1,010)

 

 

bps

 

Consolidated

 

 

1.1

%

 

 

6.1

%

 

(500)

 

 

bps

 

 

 

 

(a)

Unallocated expenses consist of corporate and shared costs and are included in selling, general and administrative expenses in our condensed consolidated statements of earnings.

 

(b)

Our December 31, 2022 store count was impacted by the closure of 327 SBS store and 14 BSG store from the Plan. See Note 11, Restructuring, in Item 1 of this quarterly report for more information on the Plan.


18


 

 

Results of Operations

The Three Months Ended December 31, 2022, compared to the Three Months Ended December 31, 2021

Net Sales

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

Comparable sales

 

$

15,954

 

Sales outside comparable sales (a)

 

 

(16,220

)

Foreign currency exchange

 

 

(11,792

)

Total

 

$

(12,058

)

 

(a)

Includes stores opened for less than 14 months, net of stores closures, including stores closed under the Plan

The decrease in SBS’s net sales was driven by the negative impact from foreign exchange rates and the impact of store closures in the prior twelve months, including stores closed under the Plan, partially offset by an increase in our comparable sales. SBS’s comparable sales increase was driven by a growth in average ticket, primarily from inflationary impacts and pricing leverage, and partially offset by fewer transactions.

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

Comparable sales

 

$

(6,109

)

Sales outside comparable sales (a)

 

 

(2,396

)

Foreign currency exchange

 

 

(2,633

)

Total

 

$

(11,138

)

 

(a)

Includes stores opened for less than 14 months, net of stores closures, including from the Plan

The decrease in BSG’s net sales was primarily due to lower comparable sales, the impact of closed stores and the negative impact from the Canadian foreign exchange rate. BSG’s comparable sales faced headwinds from elevated demand in the prior year from the easing of COVID-19 restrictions and the impacts of the current economic environment which resulted in fewer transactions, but was partially offset by growth in average ticket.

Gross Profit

SBS. SBS’s gross profit decreased for the three months ended December 31, 2022, as a result of lower net sales, partially offset by a higher gross margin. SBS’s gross margin grew as a result of pricing leverage and increased penetration of our owned-brand products.

BSG. BSG’s gross profit decreased for the three months ended December 31, 2022, as a result of lower net sales and a lower gross margin. BSG’s gross margin decline was driven by lower product margin resulting from an unfavorable sales channel mix between stores and lower-margin Regis e-commerce sales, partially offset by adjustments to our expected obsolescence reserve related to the Plan.  

Selling, General and Administrative Expenses

SBS. SBS’s selling, general and administrative expenses decreased $3.2 million, or 1.4%, for the three months ended December 31, 2022 and included a favorable impact from foreign exchange rates of $4.6 million. As a percentage of SBS net sales, SG&A for the three months ended December 31, 2022 was 40.8% compared to 40.5% for the three months ended December 31, 2021. The increase as a percentage of sales was driven by deleveraging as a result of lower net sales.

BSG. BSG’s selling, general and administrative expenses increased $2.0 million, or 1.8%, for the three months ended December 31, 2022. As a percentage of BSG net sales, SG&A for the three months ended December 31, 2022 was 28.3% compared to 27.1% for the three months ended December 31, 2021. The increase as a percentage of sales was driven primarily by deleveraging as a result of lower net sales as well as increases in labor and personnel costs and depreciation expenses.

Unallocated. Unallocated selling, general and administrative expenses, which represent certain corporate costs that have not been charged to our reporting segments, increased $6.5 million, or 14.4%, for the three months ended December 31, 2022, primarily due to increased labor and personnel costs of $4.6 million and information technology expense of $2.9 million.

Restructuring

For the three months ended December 31, 2022, we incurred $10.4 million in restructuring charges related to our Distribution Center Consolidation and Store Optimization Plan. For the three months ended December 31, 2021, restructuring charges in connection with our previously communicated Transformation Plan were immaterial. See Note 11, Restructuring, in Item 1 of this quarterly report for more information on the Plan.

19


 

Interest Expense

The decrease in interest expense is due to the interest savings from the repayment of our 8.75% Senior Notes due 2025 during fiscal year 2022, partially offset by higher interest expense on our variable rate debt resulting from the increase in borrowing rates and outstanding amounts under our ABL facility. See Note 9, Derivatives, in Item 1 of this quarterly report for more information on our interest rate caps used to help mitigate raising interest rates.

Provision for Income Taxes

The effective tax rates were 26.7% and 25.6%, for the three months ended December 31, 2022, and 2021, respectively. The increase in the effective tax rate was primarily due to the tax impact of share-based compensation which was detrimental in the current year quarter, but beneficial in the prior year quarter.

Liquidity and Capital Resources

Overview

Our principal sources of liquidity are from cash and cash equivalents, cash from operations and our ABL facility. A substantial portion of our liquidity needs arise from funding the costs of our operations, working capital, capital expenditures, debt interest and principal payment. Additionally, under our share repurchase program, see below for more details, we will repurchase shares of our common stock on the open market to return value to our shareholders. At December 31, 2022, we had $440.8 million in our liquidity pool, which includes $417.7 million available for borrowings under our ABL facility and cash and cash equivalents of $99.1 million.

Working capital (current assets less current liabilities) increased $77.4 million, to $541.9 million at December 31, 2022, compared to $464.5 million at September 30, 2022. This increase was driven by higher inventory balances, resulting from inflationary cost increases and the impact of foreign exchange rates of $12.7 million, and an increase in cash and cash equivalents.  

We anticipate that existing cash balances (excluding certain amounts permanently invested in connection with foreign operations), cash expected to be generated by operations, and funds available under our ABL facility will be sufficient to fund our working capital and capital expenditure requirements over the next twelve months.

Cash Flows

 

 

Three Months Ended December 31,

 

(in thousands)

 

2022

 

 

2021

 

Net cash provided (used) by operating activities

 

 

54,951

 

 

 

(5,685

)

Net cash used by investing activities

 

 

(25,007

)

 

 

(26,709

)

Net cash used by financing activities

 

 

(5,992

)

 

 

(70,185

)

Net Cash Provided (Used) by Operating Activities

The change in net cash provided by operating activities for the three months ended December 31, 2022, compared to the net cash used by operating activities three months ended December 31, 2021, was driven by the timing of inventory purchases, primarily from the impact of global supply chain issues in the prior year. Additionally, it was driven by the timing of income taxes and a decrease in net sales.  

Net Cash Used by Investing Activities

The decrease in net cash used by investing activities for the three months ended December 31, 2022, compared to the three months ended December 31, 2021, was driven by fewer capital expenditures related to store improvements and information technology.

Net Cash Used by Financing Activities

The decrease in net cash used by financing activities for the three months ended December 31, 2022, compared to the three months ended December 31, 2021, was a result of share repurchases in the prior year and lower cash proceeds from employees exercising equity awards.  

Debt and Guarantor Financial Information

At December 31, 2022, we had $1,151.1 million in debt, not including capital leases, unamortized debt issuance costs and debt discounts, in the aggregate, of $3.7 million. Our debt consists of $680.0 million in 5.625% Senior Notes due 2025 (“2025 Senior Notes”) outstanding, $406.1 million remaining on our term loan and $65.0 million in outstanding borrowings under our ABL facility.

We utilize our ABL facility for the issuance of letters of credit, certain working capital and liquidity needs, and to manage normal fluctuations in our operational cash flow. In that regard, we may from time to time draw funds under the ABL facility for general corporate purposes including funding of capital expenditures, acquisitions, paying down other debt and share repurchases. Amounts

20


 

drawn on our ABL facility are generally paid down with cash provided by our operating activities. During the three months ended December 31, 2022, the weighted average interest rate on our borrowings under the ABL facility was 5.2%.

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

Guarantor Financial Information

Our 2025 Senior Notes were issued by our wholly-owned subsidiaries, Sally Holdings LLC and Sally Capital Inc. (the “Issuers”). The notes are unsecured debt instruments guaranteed by us and certain of our wholly-owned domestic subsidiaries (together, the “Guarantors”) and have certain restrictions on the ability to pay restrictive payments to Sally Beauty. The guarantees are joint and several, and full and unconditional. Certain other subsidiaries, including our foreign subsidiaries, do not serve as guarantors.

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

The following table presents the summarized balance sheets information for the Issuers and the Guarantors as of December 31, 2022, and September 30, 2022:

(in thousands)

 

December 31, 2022

 

 

September 30, 2022

 

Inventory

 

$

742,642

 

 

$

714,477

 

Intercompany receivable

 

$

394

 

 

$

 

Current assets

 

$

882,858

 

 

$

827,155

 

Total assets

 

$

2,032,279

 

 

$

1,982,982

 

Current liabilities

 

$

550,883

 

 

$

549,415

 

Intercompany payable

 

$

 

 

$

4,431

 

Total liabilities

 

$

2,084,606

 

 

$

2,085,169

 

The following table presents the summarized statement of earnings information for the Issuers and the Guarantors for three months ended December 31, 2022 (in thousands):

Net sales

 

 

 

$

775,768

 

Gross profit

 

 

 

$

399,794

 

Earnings before provision for income taxes

 

 

 

$

52,383

 

Net Earnings

 

 

 

$

38,413

 

Share Repurchase Programs

Under our current share repurchase program, we may from time-to-time repurchase our common stock on the open market. During the three months ended December 31, 2022, no shares were repurchased in connection with our share repurchase program. During three months ended December 31, 2021, we repurchased 3.7 million shares of our common stock for $75.0 million under our share repurchase program. See Note 5, Stockholders’ Equity, for more information about our share repurchase program.

Contractual Obligations

There have been no material changes outside the ordinary course of our business in any of our contractual obligations since September 30, 2022.

Off-Balance Sheet Financing Arrangements

At December 31, 2022 and September 30, 2022, 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, 2022.

Recent Accounting Pronouncements

There have been no recent accounting pronouncements issued that will have a material impact to our business.


21


 

 

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, 2022. 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, 2022.

Item 4.  Controls and Procedures

Controls Evaluation and Related CEO and CFO Certifications.   Our management, with the participation of our principal executive officer (“CEO”) and principal financial officer (“CFO”), conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2022. The controls evaluation was conducted by our Disclosure Committee, comprised of senior representatives from our finance, accounting, internal audit, and legal departments under the supervision of our CEO and CFO.

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

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

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

Conclusions regarding Disclosure Controls.  Based on the required evaluation of our disclosure controls and procedures, our CEO and CFO have concluded that, as of December 31, 2022, 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.

22


 

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, 2022, which could materially affect our business, financial condition or future results. There have been no material changes from the risk factors disclosed in such Annual Report. The risks described in such Annual Report and herein are not the only risks facing our company.

23


 

 

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

 

 

 

22

 

List of Subsidiary Guarantors*

 

 

 

31.1

 

Rule 13a-14(a)/15d-14(a) Certification of Denise Paulonis*

 

 

 

31.2

 

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

 

 

 

32.1

 

Section 1350 Certification of Denise Paulonis*

 

 

 

32.2

 

Section 1350 Certification of Marlo M. Cormier*

 

 

 

101

 

The following financial information from our Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2022, formatted in iXBRL (Inline Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets; (ii) the Condensed Consolidated Statements of Earnings; (iii) the Condensed Consolidated Statements of Comprehensive Income; (iv) the Condensed Consolidated Statements of Stockholders’ Equity; (v) the Condensed Consolidated Statements of Cash Flows; and (vi) the Notes to Condensed Consolidated Financial Statements.

 

 

 

104

 

The cover page from our Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2022, formatted in Inline XBRL (contained in Exhibit 101).

 

* Included herewith

24


 

SIGNATURES

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

 

 

 

 

SALLY BEAUTY HOLDINGS, INC.

 

 

 

(Registrant)

 

 

 

 

Date:  February 2, 2023

 

 

 

 

 

 

 

 

By:

 

/s/ Marlo M. Cormier

 

 

 

Marlo M. Cormier

 

 

 

Senior Vice President, Chief Financial Officer

 

 

 

For the Registrant and as its Principal Financial Officer

 

25