Sally Beauty Holdings, Inc. - Quarter Report: 2022 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, 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 April 29, 2022, there were 107,000,985 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	15
Item 3. Quantitative And Qualitative Disclosures About Market Risk	21
Item 4. Controls And Procedures	22

PART II — OTHER INFORMATION

Item 1. Legal Proceedings	23
Item 1A. Risk Factors	23
Item 2.Unregistered Sales Of Equity Securities And Use Of Proceeds	23
Item 6. Exhibits	24

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

cautionary notice regarding forward-looking statements

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

Readers are cautioned not to place undue reliance on forward-looking statements as such statements speak only as of the date they were made and involve risks and uncertainties that could cause actual events or results to differ materially from the events or results described in the forward-looking statements. The most important factors which could cause our actual results to differ from our forward-looking statements are set forth in our description of risk factors in Item 1A contained in our Annual Report on Form 10-K for the fiscal year ended September 30, 2021, 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.

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except par value data)

	March 31, 2022			September 30, 2021
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	227,413		$	400,959
Trade accounts receivable, net		28,615			32,623
Accounts receivable, other		32,100			33,958
Inventory		962,563			871,349
Other current assets		50,990			44,686
Total current assets		1,301,681			1,383,575
Property and equipment, net of accumulated depreciation of $800,715 at March 31, 2022, and $767,403 at September 30, 2021		287,855			307,377
Operating lease assets		540,801			537,673
Goodwill		539,682			541,209
Intangible assets, excluding goodwill, net of accumulated amortization of $40,528 at March 31, 2022, and $38,957 at September 30, 2021		52,994			55,532
Other assets		19,990			21,766
Total assets	$	2,743,003		$	2,847,132
Liabilities and Stockholders’ Equity
Current liabilities:
Current maturities of long-term debt	$	182		$	194
Accounts payable		240,594			291,632
Accrued liabilities		170,540			206,155
Current operating lease liabilities		160,549			156,234
Income taxes payable		2,404			10,666
Total current liabilities		574,269			664,881
Long-term debt		1,381,385			1,382,530
Long-term operating lease liabilities		406,658			404,147
Other liabilities		16,547			29,056
Deferred income tax liabilities, net		92,278			85,777
Total liabilities		2,471,137			2,566,391
Stockholders’ equity:
Common stock, $0.01 par value. Authorized 500,000 shares; 107,003 and 113,138 shares issued and 106,930 and 112,913 shares outstanding at March 31, 2022, and September 30, 2021, respectively		1,069			1,129
Preferred stock, $0.01 par value. Authorized 50,000 shares; none issued		—			—
Additional paid-in capital		—			17,286
Accumulated earnings		372,265			356,967
Accumulated other comprehensive loss, net of tax		(101,468	)		(94,641	)
Total stockholders’ equity		271,866			280,741
Total liabilities and stockholders’ equity	$	2,743,003		$	2,847,132

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

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,
	2022		2021		2022		2021
Net sales	$	911,387	$	926,328	$	1,891,638	$	1,862,350
Cost of goods sold		446,055		459,099		926,177		924,397
Gross profit		465,332		467,229		965,461		937,953
Selling, general and administrative expenses		378,871		391,087		765,121		757,257
Restructuring		—		631		1,099		863
Operating earnings		86,461		75,511		199,241		179,833
Interest expense		19,896		23,883		40,137		49,861
Earnings before provision for income taxes		66,565		51,628		159,104		129,972
Provision for income taxes		19,757		13,316		43,458		34,469
Net earnings	$	46,808	$	38,312	$	115,646	$	95,503
Earnings per share:
Basic	$	0.43	$	0.34	$	1.05	$	0.85
Diluted	$	0.42	$	0.34	$	1.03	$	0.84
Weighted-average shares:
Basic		108,743		112,603		110,387		112,538
Diluted		110,540		114,342		112,207		114,028

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

SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(In thousands)

(Unaudited)

	Three Months Ended						Six Months Ended
	March 31,						March 31,
	2022			2021			2022			2021
Net earnings	$	46,808		$	38,312		$	115,646		$	95,503
Other comprehensive (loss) income:
Foreign currency translation adjustments		(2,752	)		(7,890	)		(7,261	)		17,117
Interest rate caps, net of tax		-			-			278			175
Foreign exchange contracts, net of tax		(324	)		574			156			(1,020	)
Other comprehensive (loss) income, net of tax		(3,076	)		(7,316	)		(6,827	)		16,272
Total comprehensive income	$	43,732		$	30,996		$	108,819		$	111,775

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

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, 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
Net earnings		—			—			—			46,808			—			46,808
Other comprehensive loss		—			—			—			—			(3,076	)		(3,076	)
Share-based compensation		—			—			2,032			—			—			2,032
Stock issued for equity awards		111			1			423			—			—			424
Employee withholding taxes paid related to net share settlement		(1	)		—			(15	)		—			—			(15	)
Repurchases and cancellations of common stock		(3,157	)		(32	)		(2,440	)		(52,856	)		—			(55,328	)
Balance at March 31, 2022		106,930		$	1,069		$	—		$	372,265		$	(101,468	)	$	271,866

												Accumulated
							Additional					Other			Total
	Common Stock						Paid-in			Accumulated		Comprehensive			Stockholders’
	Shares			Amount			Capital			Earnings		Loss			Equity
Balance at September 30, 2020		112,405		$	1,124		$	1,913		$	117,109	$	(104,703	)	$	15,443
Net earnings		—			—			—			57,191		—			57,191
Other comprehensive income		—			—			—			—		23,588			23,588
Share-based compensation		—			—			2,893			—		—			2,893
Stock issued for equity awards		158			2			(2	)		—		—			—
Employee withholding taxes paid related to net share settlement		(25	)		(1	)		(248	)		—		—			(249	)
Balance at December 31, 2020		112,538		$	1,125		$	4,556		$	174,300	$	(81,115	)	$	98,866
Net earnings		—			—			—			38,312		—			38,312
Other comprehensive loss		—			—			—			—		(7,316	)		(7,316	)
Share-based compensation		—			—			2,648			—		—			2,648
Stock issued for equity awards		141			2			2,321			—		—			2,323
Balance at March 31, 2021		112,679		$	1,127		$	9,525		$	212,612	$	(88,431	)	$	134,833

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

SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Six Months Ended March 31,
	2022			2021
Cash Flows from Operating Activities:
Net earnings	$	115,646		$	95,503
Adjustments to reconcile net earnings to net cash (used) provided by operating activities:
Depreciation and amortization		48,471			52,945
Share-based compensation expense		5,990			5,541
Amortization of deferred financing costs		1,865			2,326
Loss on early extinguishment of debt		—			1,390
Loss on disposal of equipment and other property		80			1,741
Deferred income taxes		6,507			(365	)
Changes in (exclusive of effects of acquisitions):
Trade accounts receivable		3,800			(3,437	)
Accounts receivable, other		2,108			(5,544	)
Inventory		(95,468	)		(127,324	)
Other current assets		(6,273	)		3,588
Other assets		1,979			(4,307	)
Operating leases, net		3,657			(2,420	)
Accounts payable and accrued liabilities		(70,217	)		101,331
Income taxes payable		(8,393	)		13,447
Other liabilities		(12,525	)		(2,859	)
Net cash (used) provided by operating activities		(2,773	)		131,556
Cash Flows from Investing Activities:
Payments for property and equipment, net of proceeds		(44,109	)		(27,095	)
Acquisitions, net of cash acquired		(318	)		(2,245	)
Net cash used by investing activities		(44,427	)		(29,340	)
Cash Flows from Financing Activities:
Repayments of long-term debt		(2,841	)		(213,271	)
Payments for common stock repurchased		(130,328	)		—
Proceeds from equity awards		7,796			2,322
Employee withholding taxes paid related to net share settlement of equity awards		(1,151	)		(249	)
Net cash used by financing activities		(126,524	)		(211,198	)
Effect of foreign exchange rate changes on cash and cash equivalents		178			3,152
Net decrease in cash and cash equivalents		(173,546	)		(105,830	)
Cash and cash equivalents, beginning of period		400,959			514,151
Cash and cash equivalents, end of period	$	227,413		$	408,321
Supplemental Cash Flow Information:
Interest paid	$	37,809		$	46,445
Income taxes paid	$	56,701		$	20,791
Capital expenditures incurred but not paid	$	3,205		$	3,255

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

Sally Beauty Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Significant Accounting Policies

Business Operations

Sally Beauty Holdings is an international specialty retailer and distributor of professional beauty supplies with operations in North America, South America and Europe. We are one of the largest distributers of professional beauty supplies in the U.S. based on store count, operating under two segments, Sally Beauty Supply (“SBS”) and Beauty Systems Group (“BSG”). Our operations consist of company-operated stores, franchise stores and several e-commerce platforms. Within BSG, we also have one of the largest networks of distributor sales consultants (“DSCs”) for professional beauty products in North America, who sell directly to salons and salon professionals. SBS targets retail consumers, salons and salon professionals, while BSG targets salons and salons professionals.

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 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, 2021. 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, 2022 and September 30, 2021, and our consolidated results of operations, consolidated comprehensive income, consolidated statements of stockholders’ equity for the three and six months ended March 31, 2022 and 2021 and our consolidated cash flows for the for the six months ended March 31, 2022 and 2021.

Principles of Consolidation

The 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. Additionally, unknown future impacts of COVID-19 may impact those estimates and assumptions as well. 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.

Impact of COVID-19

Our operating results for the three and six months ended March 31, 2022, were adversely impacted by the COVID-19 pandemic and its continuing effects on the economy, including inflationary pressures, continued supply chain disruptions, increased freight costs, labor shortages and increased labor costs. Given the uncertainty around the continuing effects of the COVID-19 pandemic and its economic impact we cannot reasonably predict the effect they will have on future periods. If we become materially and adversely impacted, we may have to consider adjustments to our strategic plans, inventory, liquidity, operational and capital expenditure plans.

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 balance sheets, for the periods were as follows (in thousands):

	Six Months Ended March 31,
	2022			2021
Beginning Balance	$	16,744		$	13,947
Loyalty points and gift cards issued but not redeemed, net of estimated breakage		6,214			7,998
Revenue recognized from beginning liability		(6,316	)		(6,729	)
Ending Balance	$	16,642		$	15,216

See Note 9, Segment Reporting, for additional information regarding the disaggregation of our sales revenue.

3. Fair Value Measurements

Financial instruments measured 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, 2022		September 30, 2021
Financial Assets:
Foreign exchange contracts	Other current assets	Level 2	$	329	$	—
Interest rate caps	Other assets	Level 2		133		35
Total assets			$	462	$	35
.
Financial Liabilities:
Foreign exchange contracts	Accrued liabilities	Level 2	$	612	$	—

Financial instruments not measured at fair value

Carrying amounts and the related estimated fair value of our long-term debt, excluding capital lease obligations and debt issuance costs, are as follows:

		March 31, 2022				September 30, 2021
(in thousands)	Fair Value Hierarchy Level	Carrying Value		Fair Value		Carrying Value		Fair Value
Long-term debt, excluding capital leases
Senior notes	Level 1	$	979,961	$	1,000,636	$	979,961	$	1,019,635
Term loan B	Level 2		410,250		405,122		413,000		411,451
Total long-term debt		$	1,390,211	$	1,405,758	$	1,392,961	$	1,431,086

The table above excludes amounts, if any, related to our ABL facility as the balance approximates fair value due to the short-term nature of our borrowings. The fair value of the senior notes was measured using unadjusted quoted market prices. The fair value of other long-term debt 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 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. In July 2021, our Board of Directors approved a term extension of the share repurchase program for the four-year period ending September 30, 2025. As of March 31, 2022, we had authorization of approximately $595.8 million of additional potential share repurchases remaining under our share repurchase program.

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

	Three Months Ended March 31,				Six Months Ended March 31,
	2022		2021		2022		2021
Number of shares repurchased		3,157		—		6,832		—
Total cost of share repurchased	$	55,328	$	—	$	130,328	$	—

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, 2021	$	(92,154	)	$	(2,085	)	$	(402	)	$	(94,641	)
Other comprehensive loss before reclassification, net of tax		(7,261	)		(114	)		(212	)		(7,587	)
Reclassification to net earnings, net of tax		—			392			368			760
Balance at March 31, 2022	$	(99,415	)	$	(1,807	)	$	(246	)	$	(101,468	)

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 March 31,				Six Months Ended March 31,
	2022		2021		2022		2021
Weighted-average basic shares		108,743		112,603		110,387		112,538
Dilutive securities:
Stock option and stock award programs		1,797		1,739		1,820		1,490
Weighted-average diluted shares		110,540		114,342		112,207		114,028

Anti-dilutive options excluded from our computation of diluted shares		2,534		4,197		2,169		4,222

6. Goodwill and Intangible Assets

During the three months ended March 31, 2022, we completed our annual assessment for impairment of goodwill and other intangible assets. For goodwill, we used a qualitative analysis and our actual and forecasted results are exceeding the estimates from the last quantitative test. No material impairment losses were recognized in the current or prior periods presented in connection with our goodwill and other intangible assets.

Three Months Ended

March 31,

Six Months Ended

March 31,

(in thousands)

2022

2021

2022

2021

Intangible assets amortization expense

999

1,609

2,070

3,307

Additionally, during the six months ended March 31, 2022, the decrease in goodwill was primarily from the effects of foreign currency exchange rates of $1.5 million.

7. Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

	March 31, 2022		September 30, 2021
Compensation and benefits	$	55,300	$	73,344
Interest payable		24,103		24,101
Deferred revenue		18,410		18,543
Rental obligations		10,754		10,501
Insurance reserves		5,962		5,934
Property and other taxes		2,293		3,853
Operating accruals and other		53,718		69,879
Total accrued liabilities	$	170,540	$	206,155

8. Derivative Instruments and Hedging Activities

During the six months ended March 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 inventory purchases in U.S. dollars by our foreign subsidiaries. At March 31, 2022, we held forwards, which expire ratably through September 30, 2022, with a notional amount, based upon exchange rates at March 31, 2022, as follows (in thousands):

Notional Currency	Notional Amount
Mexican Peso	$	13,013
Euro		8,551
Canadian Dollar		5,804
Total	$	27,368

Quarterly, the changes in fair value related to the 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 six months ended March 31, 2022 and 2021, we recognized a loss of $0.4 million and a gain of $0.4 million, respectively. The effects of our foreign currency forwards were not material for the three months ended March 31, 2022 and 2021. Based on March 31, 2022 valuations and exchange rates, we expect to reclassify losses of approximately $0.1 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 six months ended March 31, 2022 and 2021, we recognized expense of $0.4 million and $0.2 million, respectively, into interest expense on our condensed consolidated statements of earnings. The effects of our interest rate caps on our condensed consolidated statements of earnings were not material for the three months ended March 31, 2022 and 2021. Over the next 12 months, we expect to reclassify approximately $1.9 million into interest expense, which represents the original value of the expiring caplets.

9. Segment Reporting

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

	Three Months Ended March 31,				Six Months Ended March 31,
	2022		2021		2022		2021
Net sales:
Sally Beauty Supply ("SBS")	$	525,785	$	542,664	$	1,087,315	$	1,090,334
Beauty Systems Group ("BSG")		385,602		383,664		804,323		772,016
Total	$	911,387	$	926,328	$	1,891,638	$	1,862,350
Earnings before provision for income taxes:
Segment operating earnings:
SBS	$	80,940	$	100,063	$	181,563	$	195,191
BSG		46,008		47,843		104,554		96,415
Segment operating earnings		126,948		147,906		286,117		291,606
Unallocated expenses		40,487		71,764		85,777		110,910
Restructuring		—		631		1,099		863
Consolidated operating earnings		86,461		75,511		199,241		179,833
Interest expense		19,896		23,883		40,137		49,861
Earnings before provision for income taxes	$	66,565	$	51,628	$	159,104	$	129,972

Sales between segments, which are eliminated in consolidation, were not material during the three and six months ended March 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 to conform to current year presentation.

	Three Months Ended March 31,						Six Months Ended March 31,
SBS	2022			2021			2022			2021
Hair color		38.1	%		35.8	%		37.4	%		35.9	%
Hair care		24.1	%		21.7	%		24.0	%		21.4	%
Styling tools and supplies		19.2	%		22.8	%		19.7	%		22.9	%
Nail		10.6	%		10.7	%		10.5	%		10.8	%
Skin and cosmetics		7.4	%		8.3	%		7.7	%		8.3	%
Other beauty items		0.6	%		0.7	%		0.7	%		0.7	%
Total		100.0	%		100.0	%		100.0	%		100.0	%

	Three Months Ended March 31,						Six Months Ended March 31,
BSG	2022			2021			2022			2021
Hair color		42.7	%		42.6	%		42.4	%		41.4	%
Hair care		39.9	%		38.8	%		39.9	%		39.0	%
Styling tools and supplies		11.2	%		11.2	%		11.3	%		11.8	%
Skin and cosmetics		3.5	%		4.0	%		4.0	%		4.3	%
Nail		2.3	%		2.9	%		2.1	%		3.1	%
Other beauty items		0.4	%		0.5	%		0.3	%		0.4	%
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	2022			2021			2022			2021
Company-operated stores		93.7	%		93.0	%		94.0	%		93.5	%
E-commerce		6.3	%		6.9	%		6.0	%		6.5	%
Franchise stores		0.0	%		0.1	%		0.0	%		0.0	%
Total		100.0	%		100.0	%		100.0	%		100.0	%

	Three Months Ended March 31,						Six Months Ended March 31,
BSG	2022			2021			2022			2021
Company-operated stores		66.6	%		70.2	%		67.1	%		69.9	%
Distributor sales consultants		14.0	%		13.7	%		13.8	%		14.0	%
E-commerce		12.4	%		9.1	%		12.0	%		8.8	%
Franchise stores		7.0	%		7.0	%		7.1	%		7.3	%
Total		100.0	%		100.0	%		100.0	%		100.0	%

10. Subsequent Event

On April 29, 2022, we announced that our wholly-owned subsidiaries, Sally Holdings LLC (“Holdings”) and Sally Capital Inc. (together with Holdings, the “Issuers”), issued a notice of redemption (the “Redemption Notice”), to redeem on May 31, 2022, the entire $300.00 million aggregate principal amount of the 8.750% Senior Secured Second Lien Notes due 2025 (“Notes”) which remain outstanding. The redemption is being made pursuant to the terms of the Indenture dated April 24, 2020, at a redemption price equal to 104.375% of the principal amount of the Notes plus accrued but unpaid interest to, but not including, the redemption date.

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

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, 2021.

Executive Overview

Our results in the second quarter of 2022 delivered a solid financial performance with increases in gross margin, net earnings and diluted earnings per share, compared to the same period last year. We achieved all of this despite the ongoing macro-environment challenges surrounding the COVID-19 Omicron variant, supply chain, and inflationary pressures, which have impacted customer behavior and purchasing power. However, by continuing to focus on our four strategic pillars; leveraging our digital platform, driving loyalty and personalization, delivering product innovation and optimizing our supply chain, we believe we are well-positioned to navigate these macro headwinds and continue to drive growth in both of our businesses, retail and professional.

Highlights for the Three Months Ended March 31, 2022

•

Consolidated net sales for the three months ended March 31, 2022, decreased $14.9 million, or 1.6%, to $911.4 million, compared to the three months ended March 31, 2021;

•

Consolidated comparable sales increased 0.2% for the three months ended March 31, 2022, compared to the three months ended March 31, 2021;

•

Consolidated gross profit for the three months ended March 31, 2022, decreased $1.9 million, or 0.4%, to $465.3 million, compared to the three months ended March 31, 2021. Gross margin increased 70 basis points to 51.1% for the three months ended March 31, 2022, compared to the three months ended March 31, 2021;

•

Consolidated operating earnings for the three months ended March 31, 2022, increased $11.0 million, or 14.5%, to $86.5 million, compared to the three months ended March 31, 2021. Operating margin increased 130 bps to 9.5% for the three months ended March 31, 2022, compared to the three months ended March 31, 2021;

•

For the three months ended March 31, 2022, our consolidated net earnings increased $8.5 million, or 22.2%, to $46.8 million, compared to the three months ended March 31, 2021;

•

For the three months ended March 31, 2022, our diluted earnings per share was $0.42 compared to $0.34 for the three months ended March 31, 2021; and

•

Cash provided by operations was $2.8 million for the three months ended March 31, 2022, compared to cash provided by operations of $92.6 million for the three months ended March 31, 2021.

Impact of COVID-19 on Our Business

Throughout the current quarter and year we continued to experience disruptions to our business as a result of the COVID-19 pandemic and continued to take certain actions in order to protect our customers and associates. In particular, our store operations were disrupted by the Omicron variant due to employee illnesses primarily in December and January and we continued to incur additional costs associated with testing and vaccinations, disinfectant cleanings in connection with positive cases in stores and support centers, and the write-down of obsolete personal-protective equipment inventory.

Due to general labor shortages in the U.S., especially among retail and hourly employees, we have also experienced staffing shortages at our U.S. stores and an increase in our compensation costs in order to attract and retain associates. While the situation has been improving, we cannot reasonably predict the effects of new variants or expect these positive trends to continue. Therefore, our future performance may partially depend on impacts of COVID-19 such as decreased customer in-store traffic, new waves of infection, labor and supply chain disruptions, developing variants, changes in guidance from international and domestic authorities, and availability and timing of vaccines.

Refer to Item 1A. “Risk Factors” in our Form 10-K for the fiscal year ended September 30, 2021, for further discussion on the risks and uncertainties created by COVID-19.

Global Supply Chain and Inflationary Impact

There continues to be volatility in the global supply chain as shipment delays continue to impact ports, inflationary pressures are exacerbated by global political instability, and consumer demand continues to evolve as a lingering effect from the COVID-19 pandemic. In the current quarter we continued to experience elevated distribution costs as these shifts in demand and supply have led to longer lead times and delays, and carriers are faced with increased costs associated with capacity imbalances between ports as well as overall prolonged transportation challenges. Moreover, the war in Ukraine has created additional uncertainty in the global markets, which have seen a rise in fuel prices, and is another factor impacting distribution costs. Due to these events, we have seen an increase in our inbound freight costs and extended inventory in transit times. Inflationary pressures also impacted customer behavior which resulted in lower traffic and conversion in the current quarter.

Comparable Sales

We have recently launched many digital initiatives to support our omni-channel strategies to provide customers an enhanced shopping experience. As such, 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, our 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.

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,
	2022			2021			Increase (Decrease)						2022			2021			Increase (Decrease)
Net sales:
SBS	$	525,785		$	542,664		$	(16,879	)		(3.1	)%	$	1,087,315		$	1,090,334		$	(3,019	)		(0.3	)%
BSG		385,602			383,664			1,938			0.5	%		804,323			772,016			32,307			4.2	%
Consolidated	$	911,387		$	926,328		$	(14,941	)		(1.6	)%	$	1,891,638		$	1,862,350		$	29,288			1.6	%

Gross profit:
SBS	$	309,262		$	317,161		$	(7,899	)		(2.5	)%	$	637,434		$	632,973		$	4,461			0.7	%
BSG		156,070			150,068			6,002			4.0	%		328,027			304,980			23,047			7.6	%
Consolidated	$	465,332		$	467,229		$	(1,897	)		(0.4	)%	$	965,461		$	937,953		$	27,508			2.9	%

Segment gross margin:
SBS		58.8	%		58.4	%	40			bps				58.6	%		58.1	%	50			bps
BSG		40.5	%		39.1	%	140			bps				40.8	%		39.5	%	130			bps
Consolidated		51.1	%		50.4	%	70			bps				51.0	%		50.4	%	60			bps

Net earnings:
Segment operating earnings:
SBS	$	80,940		$	100,063		$	(19,123	)		(19.1	)%	$	181,563		$	195,191		$	(13,628	)		(7.0	)%
BSG		46,008			47,843			(1,835	)		(3.8	)%		104,554			96,415			8,139			8.4	%
Segment operating earnings		126,948			147,906			(20,958	)		(14.2	)%		286,117			291,606			(5,489	)		(1.9	)%
Unallocated expenses and restructuring^(a)		40,487			72,395			(31,908	)		(44.1	)%		86,876			111,773			(24,897	)		(22.3	)%
Consolidated operating earnings		86,461			75,511			10,950			14.5	%		199,241			179,833			19,408			10.8	%
Interest expense		19,896			23,883			(3,987	)		(16.7	)%		40,137			49,861			(9,724	)		(19.5	)%
Earnings before provision for income taxes		66,565			51,628			14,937			28.9	%		159,104			129,972			29,132			22.4	%
Provision for income taxes		19,757			13,316			6,441			48.4	%		43,458			34,469			8,989			26.1	%
Net earnings	$	46,808		$	38,312		$	8,496			22.2	%	$	115,646		$	95,503		$	20,143			21.1	%
	.
Number of stores at end-of-period (including franchises):
SBS														3,499			3,625			(126	)		(3.5	)%
BSG														1,363			1,379			(16	)		(1.2	)%
Consolidated														4,862			5,004			(142	)		(2.8	)%
Comparable sales growth (decline)^(b):
SBS		(0.5	)%		3.7	%	(420)			bps				2.0	%		(0.2	)%	220			bps
BSG		1.3	%		8.0	%	(670)			bps				4.9	%		0.2	%	470			bps
Consolidated		0.2	%		5.4	%	(520)			bps				3.2	%		(0.1	)%	330			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 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, our 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. Prior to fiscal year 2022, we reported Same Store Sales. For fiscal year 2022, we are reporting Comparable Sales, which includes sales to franchisees and full service sales. We have recast prior year amounts to conform to the change. See “Comparable Sales” discussion above for further information.

Results of Operations

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

Net Sales

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

Comparable sales	$	(2,580	)
Sales outside comparable sales ^(a)		(10,409	)
Foreign currency exchange		(3,890	)
Total	$	(16,879	)

(a)

Includes stores opened for less than 14 months, net of stores closures

The decrease in net sales was driven by lower unit volume, primarily due to operating fewer stores compared to the same period last year, lower traffic and conversion due to the impact of COVID-19, supply chain disruptions, the lapping of stimulus gains in the prior year, and inflationary pressures impacting consumer behavior, along with the negative impact of foreign exchange rates. This decrease was partially offset by an increase in average unit prices, led by our color and care categories.

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

Comparable sales	$	4,737
Sales outside comparable sales ^(a)		(2,741	)
Foreign currency exchange		(58	)
Total	$	1,938

(a)

Includes stores opened for less than 14 months, net of stores closures

The increase in net sales was driven by an increase in comparable sales, primarily due to an increase in average unit prices and from strong e-commerce growth. These increases were offset by a decrease in overall unit volume due to operating fewer stores compared to the same period last year.

Gross Profit

SBS. SBS’s gross profit decreased for the three months ended March 31, 2022, as a result of a decrease in net sales, partially offset by a higher gross margin. SBS’s gross margin increased primarily as a result of pricing leverage and a decrease in write-downs of obsolete personal-protective equipment, partially offset by higher distribution and freight costs and an unfavorable sales mix shift between the U.S. and international markets.

BSG. BSG’s gross profit increased for the three months ended March 31, 2022, driven by an improvement in pricing leverage and a decrease in write-downs of obsolete personal-protective equipment, partially offset by higher distribution and freight costs.

Selling, General and Administrative Expenses

SBS. SBS’s selling, general and administrative expenses increased $11.2 million, or 5.2%, for the three months ended March 31, 2022. The increase was driven primarily by higher compensation and compensation-related expenses of $8.9 million, driven by general economic inflationary conditions and to store re-openings in certain international markets, as well as higher store facility costs associated with those re-openings.

BSG. BSG’s selling, general and administrative expenses increased $7.8 million, or 7.7%, for the three months ended March 31, 2022. The increase was driven primarily by higher delivery expense of $1.9 million as a result of supply chain disruptions and the cost of fuel. Additionally, there were increases in depreciation expense of $1.0 million, credit card fees of $0.9 million and other increases in variable operating expenses.

Unallocated. Unallocated selling, general and administrative expenses, which represent certain corporate costs that have not been charged to our reporting segments, decreased $31.3 million, or 43.6%, for the three months ended March 31, 2022, primarily due to the recognition of $31.2 million donation expense related to personal-protective equipment inventory in the prior period.

Interest Expense

The decrease in interest expense is primarily due to the lower outstanding debt principal for the three months ended March 31, 2022, as a result of the pay-down of our senior notes due 2023 and our term loan B fixed tranche during fiscal year 2021. Additionally, we recognized $1.4 million of loss on debt extinguishment in connection with the pay-down of our term loan B fixed tranche in the prior period with no comparable amounts in the current period. See “Liquidity and Capital Resources” below for additional information.

Provision for Income Taxes

The effective tax rates were 29.7% and 25.8%, for the three months ended March 31, 2022, and 2021, respectively. The increase in the effective tax rate was primarily due to the impact of the write-off of deferred tax assets related to share-based compensation in connection with expired stock options.

The Six Months Ended March 31, 2022, compared to the Six Months Ended March 31, 2021

Net Sales

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

Comparable sales	$	20,704
Sales outside comparable sales ^(a)		(18,791	)
Foreign currency exchange		(4,932	)
Total	$	(3,019	)

(a)

Includes stores opened for less than 14 months, net of stores closures

The decrease in net sales was driven by lower unit volume, primarily due to operating fewer stores compared to the same period last year, and the negative impact of foreign exchange rates. This decrease was partially offset by an increase in comparable sales, reflecting stronger customer demand in the first fiscal quarter, and higher average unit prices, led by our color and care categories.

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

Comparable sales	$	36,394
Sales outside comparable sales ^(a)		(5,283	)
Foreign currency exchange		1,196
Total	$	32,307

(a)

Includes stores opened for less than 14 months, net of stores closures

Gross Profit

SBS. SBS’s gross profit increased for the six months ended March 31, 2022, as a result of a higher gross margin, primarily due to pricing leverage and a decrease in obsolete personal-protective equipment write-downs, partially offset by higher distribution and freight costs.

BSG. BSG’s gross profit increased for the six months ended March 31, 2022, driven by an increase in sales, and improvement of pricing leverage, coupled with a decrease in personal-protective equipment write-downs.

Selling, General and Administrative Expenses

SBS. SBS’s selling, general and administrative expenses increased $18.1 million, or 4.1%, for the six months ended March 31, 2022. The increase was driven primarily by higher compensation and compensation-related expenses of $18.6 million, as a result of general economic inflationary conditions and store re-openings in certain international markets.

BSG. BSG’s selling, general and administrative expenses increased $14.9 million, or 7.1%, for the six months ended March 31, 2022. The increase was driven primarily by an increase in delivery expense of $2.5 million, compensation and compensation-related expenses of $2.3 million, depreciation expense of $1.9 million, advertising expense of $1.6 million, technology expense of $1.1 million and other increases in variable operating expenses.

Unallocated. Unallocated selling, general and administrative expenses, which represent certain corporate costs that have not been charged to our reporting segments, decreased $25.1 million, or 22.7%, for the six months ended March 31, 2022, driven by the recognition of $31.2 million donation expense related to personal-protective equipment inventory in the prior period, partially offset by an increase in information technology expense of $2.7 million.

Restructuring

For the six months ended March 31, 2022, restructuring charges in connection with our previously communicated Transformation Plan increased $0.2 million, to $1.1 million for the current year.

Interest Expense

The decrease in interest expense is primarily due to the lower outstanding debt principal for the six months ended March 31, 2022, as a result of the pay-down of our senior notes due 2023 and our term loan B fixed tranche during fiscal year 2021. Additionally, we recognized $1.4 million of loss on debt extinguishment in connection with the pay-down of our term loan B fixed tranche in the prior period with no comparable amounts in the current period. See “Liquidity and Capital Resources” below for additional information.

Provision for Income Taxes

The effective tax rates were 27.3% and 26.5%, for the six months ended March 31, 2022 and 2021, respectively. The increase in the effective tax rate was primarily due to an increase in foreign losses, for which we do not receive a tax benefit, and the write-off of deferred tax assets related to share-based compensation in connection with expired stock option awards.

Liquidity and Capital Resources

Overview

We are highly leveraged and a substantial portion of our liquidity needs arise from debt service on our outstanding indebtedness and from funding the costs of our operations, working capital, capital expenditures, debt repayment and share repurchases. Working capital (current assets less current liabilities) increased $8.7 million, to $727.4 million at March 31, 2022, compared to $718.7 million at September 30, 2021, primarily from increased inventory as a result of restocking to normal levels of demand following prior year shipping delays, and our risk mitigation strategy to protect against potential, continued supply chain disruptions, and the reduction in accounts payable and accrued liabilities, due to the timing of payments. These increases were partially offset by a decrease in cash and cash equivalents.

At March 31, 2022, cash and cash equivalents were $227.4 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), cash expected to be generated by operations and funds available under our ABL facility will be sufficient to fund working capital requirements, potential acquisitions, anticipated capital expenditures, including information technology upgrades and store remodels, and debt repayments over the next twelve months. We have continued to focus on reducing our debt levels and shares outstanding through repurchases, while also being proactive in maintaining our financial flexibility.

We utilize our ABL facility for the issuance of letters of credit, certain working capital and liquidity needs, and to manage normal fluctuations in our operational cash flow. In that regard, we may from time to time draw funds under the ABL facility for general corporate purposes including funding of capital expenditures, acquisitions, interest payments due on our indebtedness, paying down other debt and share repurchases. During the six months ended March 31, 2022, we did not draw funds under our ABL facility. As of March 31, 2022, we had $481.1 million available for borrowings under our ABL facility, subject to borrowing base limitations, as reduced by outstanding letters of credit. Amounts drawn on our ABL facility are generally paid down with cash provided by our operating activities.

Share Repurchase Programs

During the six months ended March 31, 2022, we repurchased 6.8 million shares of our common stock for $130.3 million with existing cash balances. As of March 31, 2022, we had authorization of approximately $595.8 million of additional potential share repurchases remaining under our share repurchase program.

Cash Flows

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

Net Cash (Used) Provided by Operating Activities

The $134.3 million decrease in operating activities was driven by the reduction in accounts payable and accrued liabilities primarily due to the timing of payments, partially offset by lower inventory purchases compared to the six months ended March 31, 2021 and an increase in net earnings.

Net Cash Used by Investing Activities

Net cash used by investing activities during the six months ended March 31, 2022, increased $15.1 million to $44.4 million, compared to the six months ended March 31, 2021. This change was primarily a result of additional investments in information technology and store improvements.

Net Cash Used by Financing Activities

Net cash used by financing activities for the six months ended March 31, 2022, decreased $84.7 million to $126.5 million, as a result of the debt pay-down during the six months ended March 31, 2021 and an increase in stock options exercised, partially offset by share repurchases during the six months ended March 31, 2022.

Debt and Guarantor Financial Information

At March 31, 2022, we had $1,390.2 million in debt, not including capital leases, unamortized debt issuance costs and debt discounts, in the aggregate, of $8.6 million. Our debt consisted of $980.0 million of senior notes outstanding and a term loan with an outstanding principal balance of $410.3 million. As of March 31, 2022, there were no outstanding borrowings under our ABL facility.

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

Guarantor Financial Information

We currently have 5.625% Senior Notes due 2025 outstanding. These notes were issued by our wholly-owned subsidiaries, Sally Holdings LLC and Sally Capital Inc. (the “Issuers”), and registered with the Securities and Exchange Commission under a shelf registration statement.

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 March 31, 2022 and September 30, 2021 (in thousands):

	March 31, 2022		September 30, 2021
Inventory	$	735,272	$	662,802
Intercompany receivable	$	-	$	67,337
Current assets	$	976,855	$	1,069,266
Total assets	$	2,098,588	$	2,198,990
Intercompany payable	$	13,531	$	-
Current liabilities	$	331,459	$	422,137
Total liabilities	$	2,258,947	$	2,343,946

The following table presents the summarized statement of income information for six months ended March 31, 2022 (in thousands):

Net sales	$	1,532,316
Gross profit	$	787,970
Earnings before provision for income taxes	$	132,691
Net Earnings	$	98,176

Contractual Obligations

There have been no material changes outside the ordinary course of our business in any of our contractual obligations since September 30, 2021.

Off-Balance Sheet Financing Arrangements

At March 31, 2022, and September 30, 2021, 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, 2021.

Recent Accounting Pronouncements

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

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, 2021. 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, 2021.

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, 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 March 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.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

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, 2021, which could materially affect our business, financial condition or future results. There have been no material changes from the risk factors disclosed in such Annual Report. The risks described in such Annual Report and herein are not the only risks facing our company.

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

Fiscal Period	Total Number of Shares Purchased (1)		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)(2)		Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
January 1 - January 30, 2022		-	$	-		-	$	651,120,625
February 1 - February 28, 2022		2,234,514		17.68		2,234,514		611,606,688
March 1 - March 31, 2022		922,460		17.14		922,460		595,792,425
Total this quarter		3,156,974	$	17.53		3,156,974	$	595,792,425

(1)

The table above does not include 808 shares of the Company’s common stock surrendered by grantees during the quarter to satisfy tax withholding obligations due upon the vesting of equity-based awards under the Company’s share-based compensation plans.

(2)

In July 2021, we announced that our Board of Directors had approved a term extension our 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, 2025.

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 March 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 March 31, 2022, formatted in Inline XBRL (contained in Exhibit 101).

* Included herewith

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 5, 2022

	By:	/s/ Marlo M. Cormier
		Marlo M. Cormier
		Senior Vice President, Chief Financial Officer
		For the Registrant and as its Principal Financial Officer