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Sally Beauty Holdings, Inc. - Quarter Report: 2023 June (Form 10-Q)

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: JUNE 30, 2023

-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 class

Trading Symbol

Name of each exchange on which registered

Common Stock, $0.01 par value

SBH

The 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 July 28, 2023, there were 107,769,553 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

17

Item 3. Quantitative And Qualitative Disclosures About Market Risk

24

Item 4. Controls And Procedures

24

 

PART II — OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

25

Item 1A. Risk Factors

25

Item 6. Exhibits

26

 

 

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)

 

 

 

June 30,
2023

 

 

September 30,
2022

 

 

 

(Unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

74,337

 

 

$

70,558

 

Trade accounts receivable, net

 

 

32,888

 

 

 

34,102

 

Accounts receivable, other

 

 

44,870

 

 

 

38,175

 

Inventory

 

 

996,404

 

 

 

936,374

 

Other current assets

 

 

50,897

 

 

 

53,192

 

Total current assets

 

 

1,199,396

 

 

 

1,132,401

 

Property and equipment, net of accumulated depreciation of $864,429 at
   June 30, 2023, and $
820,811 at September 30, 2022

 

 

281,181

 

 

 

297,876

 

Operating lease assets

 

 

569,103

 

 

 

532,177

 

Goodwill

 

 

535,282

 

 

 

526,066

 

Intangible assets, excluding goodwill, net of accumulated amortization of
   $
30,378 at June 30, 2023, and $26,794 at September 30, 2022

 

 

49,927

 

 

 

50,315

 

Other assets

 

 

40,516

 

 

 

38,032

 

Total assets

 

$

2,675,405

 

 

$

2,576,867

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Current maturities of long-term debt

 

$

20,176

 

 

$

68,658

 

Accounts payable

 

 

243,976

 

 

 

275,717

 

Accrued liabilities

 

 

140,391

 

 

 

161,065

 

Current operating lease liabilities

 

 

154,749

 

 

 

157,734

 

Income taxes payable

 

 

6,345

 

 

 

4,740

 

Total current liabilities

 

 

565,637

 

 

 

667,914

 

Long-term debt

 

 

1,064,908

 

 

 

1,083,043

 

Long-term operating lease liabilities

 

 

450,656

 

 

 

424,762

 

Other liabilities

 

 

22,431

 

 

 

22,427

 

Deferred income tax liabilities, net

 

 

84,061

 

 

 

85,085

 

Total liabilities

 

 

2,187,693

 

 

 

2,283,231

 

Stockholders’ equity:

 

 

 

 

 

 

Common stock, $0.01 par value. Authorized 500,000 shares; 107,564 and
   
107,024 shares issued and 107,564 and 106,970 shares outstanding at
   June 30, 2023, and September 30, 2022, respectively

 

 

1,076

 

 

 

1,070

 

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

 

 

 

 

 

 

Additional paid-in capital

 

 

17,421

 

 

 

4,241

 

Accumulated earnings

 

 

582,191

 

 

 

440,172

 

Accumulated other comprehensive loss, net of tax

 

 

(112,976

)

 

 

(151,847

)

Total stockholders’ equity

 

 

487,712

 

 

 

293,636

 

Total liabilities and stockholders’ equity

 

$

2,675,405

 

 

$

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

 

 

Nine Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Net sales

 

$

931,008

 

 

$

961,467

 

 

$

2,806,775

 

 

$

2,853,105

 

Cost of goods sold

 

 

456,303

 

 

 

471,259

 

 

 

1,375,157

 

 

 

1,397,436

 

Gross profit

 

 

474,705

 

 

 

490,208

 

 

 

1,431,618

 

 

 

1,455,669

 

Selling, general and administrative expenses

 

 

384,183

 

 

 

390,961

 

 

 

1,165,420

 

 

 

1,156,082

 

Restructuring

 

 

397

 

 

 

44

 

 

 

18,077

 

 

 

1,143

 

Operating earnings

 

 

90,125

 

 

 

99,203

 

 

 

248,121

 

 

 

298,444

 

Interest expense

 

 

18,654

 

 

 

35,977

 

 

 

53,262

 

 

 

76,113

 

Earnings before provision for income taxes

 

 

71,471

 

 

 

63,226

 

 

 

194,859

 

 

 

222,331

 

Provision for income taxes

 

 

20,650

 

 

 

16,659

 

 

 

52,840

 

 

 

60,117

 

Net earnings

 

$

50,821

 

 

$

46,567

 

 

$

142,019

 

 

$

162,214

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.47

 

 

$

0.44

 

 

$

1.32

 

 

$

1.48

 

Diluted

 

$

0.46

 

 

$

0.43

 

 

$

1.30

 

 

$

1.46

 

Weighted-average shares:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

107,560

 

 

 

106,940

 

 

 

107,383

 

 

 

109,238

 

Diluted

 

 

109,668

 

 

 

108,526

 

 

 

109,519

 

 

 

110,907

 

 

 

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

 

 

Nine Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Net earnings

 

$

50,821

 

 

$

46,567

 

 

$

142,019

 

 

$

162,214

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

4,576

 

 

 

(27,384

)

 

 

39,962

 

 

 

(34,645

)

Interest rate swap, net of tax

 

 

2,806

 

 

 

 

 

 

2,806

 

 

 

 

Interest rate caps, net of tax

 

 

 

 

 

2,050

 

 

 

(1,960

)

 

 

2,328

 

Foreign exchange contracts, net of tax

 

 

(10

)

 

 

432

 

 

 

(1,937

)

 

 

588

 

Other comprehensive income (loss), net of tax

 

 

7,372

 

 

 

(24,902

)

 

 

38,871

 

 

 

(31,729

)

Total comprehensive income

 

$

58,193

 

 

$

21,665

 

 

$

180,890

 

 

$

130,485

 

 

 

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

 

Net earnings

 

 

 

 

 

 

 

 

 

 

40,861

 

 

 

 

 

 

40,861

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

6,265

 

 

 

6,265

 

Share-based compensation

 

 

 

 

 

 

 

3,838

 

 

 

 

 

 

 

 

 

3,838

 

Stock issued for equity awards

 

266

 

 

 

3

 

 

 

1,638

 

 

 

 

 

 

 

 

 

1,641

 

Employee withholding taxes paid
   related to net share settlement

 

(1

)

 

 

 

 

 

(15

)

 

 

 

 

 

 

 

 

(15

)

Balance at March 31, 2023

 

107,549

 

 

$

1,076

 

 

$

13,790

 

 

$

531,370

 

 

$

(120,348

)

 

$

425,888

 

Net earnings

 

 

 

 

 

 

 

 

 

 

50,821

 

 

 

 

 

 

50,821

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

7,372

 

 

 

7,372

 

Share-based compensation

 

 

 

 

 

 

 

3,550

 

 

 

 

 

 

 

 

 

3,550

 

Stock issued for equity awards

 

15

 

 

 

 

 

 

81

 

 

 

 

 

 

 

 

 

81

 

Balance at June 30, 2023

 

107,564

 

 

$

1,076

 

 

$

17,421

 

 

$

582,191

 

 

$

(112,976

)

 

$

487,712

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Net earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

46,567

 

 

 

 

 

 

 

 

46,567

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(24,902

)

 

 

 

(24,902

)

Share-based compensation

 

 

 

 

 

 

 

 

 

2,113

 

 

 

 

 

 

 

 

 

 

 

 

2,113

 

Stock issued for stock options

 

35

 

 

 

 

1

 

 

 

 

253

 

 

 

 

 

 

 

 

 

 

 

 

254

 

Repurchases and cancellations of
   common stock

 

(2

)

 

 

 

 

 

 

 

(27

)

 

 

 

 

 

 

 

 

 

 

 

(27

)

Balance at June 30, 2022

 

106,963

 

 

 

$

1,070

 

 

 

$

2,339

 

 

 

$

418,832

 

 

 

$

(126,370

)

 

 

$

295,871

 

 

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)

 

 

 

Nine Months Ended June 30,

 

 

 

2023

 

 

2022

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

Net earnings

 

$

142,019

 

 

$

162,214

 

Adjustments to reconcile net earnings to net cash provided (used)
    by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

75,773

 

 

 

73,361

 

Share-based compensation expense

 

 

12,523

 

 

 

8,103

 

Amortization of deferred financing costs

 

 

1,998

 

 

 

2,702

 

Loss on early extinguishment of debt

 

 

601

 

 

 

16,439

 

Impairment of long-lived assets, including operating lease assets

 

 

2,070

 

 

 

 

Loss on disposal of equipment and other property

 

 

3

 

 

 

57

 

Deferred income taxes

 

 

(1,168

)

 

 

7,702

 

Changes in (exclusive of effects of acquisitions):

 

 

 

 

 

 

Trade accounts receivable

 

 

2,364

 

 

 

243

 

Accounts receivable, other

 

 

(5,307

)

 

 

(3,034

)

Inventory

 

 

(37,310

)

 

 

(160,194

)

Other current assets

 

 

3,323

 

 

 

(15,577

)

Other assets

 

 

286

 

 

 

3,547

 

Operating leases, net

 

 

(14,762

)

 

 

8,448

 

Accounts payable and accrued liabilities

 

 

(51,581

)

 

 

(34,349

)

Income taxes payable

 

 

1,959

 

 

 

(8,169

)

Other liabilities

 

 

(20

)

 

 

(12,266

)

Net cash provided by operating activities

 

 

132,771

 

 

 

49,227

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

Payments for property and equipment, net of proceeds

 

 

(63,796

)

 

 

(67,234

)

Acquisitions, net of cash acquired

 

 

 

 

 

(665

)

Net cash used by investing activities

 

 

(63,796

)

 

 

(67,899

)

Cash Flows from Financing Activities:

 

 

 

 

 

 

Proceeds from issuance of long-term debt

 

 

1,069,000

 

 

 

283,003

 

Repayments of long-term debt

 

 

(1,133,134

)

 

 

(433,383

)

Debt issuance costs

 

 

(4,788

)

 

 

 

Proceeds from equity awards

 

 

1,804

 

 

 

8,050

 

Payments for common stock repurchased

 

 

 

 

 

(130,328

)

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

 

 

(1,141

)

 

 

(1,179

)

Net cash used by financing activities

 

 

(68,259

)

 

 

(273,837

)

Effect of foreign exchange rate changes on cash and cash equivalents

 

 

3,063

 

 

 

(7,132

)

Net increase (decrease) in cash and cash equivalents

 

 

3,779

 

 

 

(299,641

)

Cash and cash equivalents, beginning of period

 

 

70,558

 

 

 

400,959

 

Cash and cash equivalents, end of period

 

$

74,337

 

 

$

101,318

 

Supplemental Cash Flow Information:

 

 

 

 

 

 

Interest paid

 

$

63,455

 

 

$

75,660

 

Income taxes paid

 

$

52,123

 

 

$

73,862

 

Capital expenditures incurred but not paid

 

$

6,319

 

 

$

7,682

 

 

 

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 June 30, 2023, and September 30, 2022, our consolidated results of operations, consolidated comprehensive income and consolidated statements of stockholders’ equity for the three and nine months ended June 30, 2023 and 2022, and our consolidated cash flows for the for the nine months ended June 30, 2023 and 2022.

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.

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):

 

 

 

 

 

 

Nine Months Ended June 30,

 

 

 

 

 

 

 

2023

 

 

2022

 

Beginning Balance

 

 

 

 

 

$

13,460

 

 

$

16,745

 

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

 

 

12,438

 

 

 

5,195

 

Revenue recognized from beginning liability

 

 

(11,669

)

 

 

(8,132

)

Ending Balance

 

 

 

 

 

$

14,229

 

 

$

13,808

 

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

 

9


 

 

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

 

June 30,
2023

 

 

September 30,
2022

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

 

 

 

 

 

 

 

 

 

Non-designated cash flow hedges

 

Other current assets

 

Level 2

 

$

232

 

 

$

294

 

Interest rate swap

 

Other assets/other current assets

 

Level 2

 

 

3,443

 

 

 

 

Interest rate caps

 

Other current assets

 

Level 2

 

 

 

 

 

3,860

 

Total assets

 

 

 

 

 

$

3,675

 

 

$

4,154

 

.

 

 

 

 

 

 

 

 

 

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

 

 

 

 

 

 

 

 

 

Designated cash flow hedges

 

Accrued liabilities

 

Level 2

 

$

1,624

 

 

$

 

Non-designated cash flow hedges

 

Accrued liabilities

 

Level 2

 

 

1,733

 

 

 

79

 

Total liabilities

 

 

 

 

 

$

3,357

 

 

$

79

 

The fair value of each asset and liability 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.

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 finance lease obligations, debt issuance costs and original issue discounts, are as follows:

 

 

 

 

June 30, 2023

 

 

September 30, 2022

 

(in thousands)

 

Fair Value Hierarchy Level

 

Carrying Value

 

 

Fair Value

 

 

Carrying Value

 

 

Fair Value

 

Long-term debt, excluding finance lease obligations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior notes

 

Level 1

 

$

679,961

 

 

$

668,062

 

 

$

679,961

 

 

$

639,163

 

Term loan B due 2030

 

Level 2

 

 

399,000

 

 

 

398,501

 

 

 

 

 

 

 

Term loan B due 2024

 

Level 2

 

 

 

 

 

 

 

 

407,500

 

 

 

398,331

 

Total long-term debt

 

 

 

$

1,078,961

 

 

$

1,066,563

 

 

$

1,087,461

 

 

$

1,037,494

 

 

The fair values of our term loans were 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.

10


 

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 our share repurchase program to September 30, 2025. As of June 30, 2023, we had approximately $595.8 million of additional share repurchase authorizations remaining under our share repurchase program. For the three and nine months ended June 30, 2023, and for the three months ended June 30, 2022, we did not repurchase shares under our share repurchase program. For the nine months ended June 30, 2022, we repurchased 6.8 million shares of our common stock at a total cost of $130.3 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

 

 

Interest Rate Swap

 

 

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

 

 

39,962

 

 

 

817

 

 

 

3,289

 

 

 

(2,552

)

 

 

41,516

 

 

Reclassification to net earnings, net of tax

 

 

 

 

 

(2,777

)

 

 

(483

)

 

 

615

 

 

 

(2,645

)

 

Balance at June 30, 2023

 

$

(113,166

)

 

$

 

 

$

2,806

 

 

$

(2,616

)

 

$

(112,976

)

 

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
June 30,

 

 

Nine Months Ended
June 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Weighted-average basic shares

 

 

107,560

 

 

 

106,940

 

 

 

107,383

 

 

 

109,238

 

Dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

Stock option and stock award programs

 

 

2,108

 

 

 

1,586

 

 

 

2,136

 

 

 

1,669

 

Weighted-average diluted shares

 

 

109,668

 

 

 

108,526

 

 

 

109,519

 

 

 

110,907

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Anti-dilutive options excluded from our computation of diluted shares

 

 

1,896

 

 

 

2,406

 

 

 

1,896

 

 

 

2,385

 

 

6. Goodwill and Intangible Assets

During the three months ended March 31, 2023, we completed our annual assessments for impairment of goodwill and indefinite-lived intangible assets. For our goodwill testing, we performed a qualitative analysis and determined that there was no indication of impairment requiring further quantitative testing. No material impairment losses were recognized in the current or prior periods presented in connection with our goodwill and intangible assets.

 

 

 

Three Months Ended
June 30,

 

 

Nine Months Ended
June 30,

 

(in thousands)

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Intangible assets amortization expense

 

$

807

 

 

$

977

 

 

$

2,682

 

 

$

3,047

 

 

Additionally, during the nine months ended June 30, 2023, the changes in goodwill and other intangibles included effects of foreign currency exchange rates of $9.2 million and $2.3 million, respectively.

11


 

7. Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

 

 

June 30,
2023

 

 

September 30,
2022

 

Compensation and benefits

 

$

53,918

 

 

$

58,693

 

Deferred revenue

 

 

18,693

 

 

 

18,810

 

Rental obligations

 

 

12,819

 

 

 

10,701

 

Insurance reserves

 

 

6,977

 

 

 

5,742

 

Property and other taxes

 

 

2,417

 

 

 

4,161

 

Interest payable

 

 

3,830

 

 

 

13,445

 

Operating accruals and other

 

 

41,737

 

 

 

49,513

 

Total accrued liabilities

 

$

140,391

 

 

$

161,065

 

 

 

 

 

 

 

 

 

8. Short-term Borrowings and Long-term Debt

At June 30, 2023, our ABL facility had $16.0 million in outstanding borrowings and $466.7 million available for borrowing, including the Canadian sub-facility, subject to borrowing base limitation, as reduced by outstanding letters of credit. During the three months ended June 30, 2023, we entered into a fourth amendment to our ABL facility which updated the benchmark base interest rate on our borrowings from the London Interbank Offered Rate ("LIBOR") to the Term Secured Overnight Financing Rate ("Term SOFR") as of April 19, 2023. We utilized the practical expedient, provided by ASC Topic 848, Reference Rate Reform, allowing the transaction to be considered an event that does not require a contract remeasurement to occur on the modification date or a reassessment of any previous accounting determination.

On February 28, 2023, we announced that our wholly-owned subsidiaries, Sally Holdings LLC (“Sally Holdings”) and Sally Capital, Inc. (“Sally Capital” and, together with Sally Holdings, the “Borrowers”), and certain of our other direct and indirect subsidiaries entered into a credit agreement with Bank of America, N.A., as Administrative Agent and Collateral Agent, and the lenders and other parties thereto providing for a term loan B facility (“TLB 2030”) in an aggregate principal amount equal to $400.0 million, the net proceeds of which were used to repay an existing term loan B facility (“TLB 2024”). The TLB 2030 will bear interest at a floating rate equal to, at the Borrowers option, either the Adjusted Term SOFR Rate from time to time in effect plus 2.50% or an adjusted base rate plus 1.50%, payable quarterly on March 31, June 30, September 30 and December 31 of each year. The TLB 2030 matures on the earlier of (i) February 28, 2030 and (ii) the date that is 91 days prior to the stated maturity of our Senior Unsecured Notes due 2025 (the “2025 Senior Notes”) unless all amounts exceeding $200.0 million of the 2025 Senior Notes are refinanced or repaid according to certain conditions (the “Maturity Date”). The principal of the TLB 2030 is repayable in quarterly installments equal to 0.25% of the original principal amount of the TLB 2030, with a final installment equal to the entire remaining outstanding principal amount due on the Maturity Date. The TLB 2030 was issued at a discount of 0.75%, and we incurred $4.7 million in issuance costs; both of which are being amortized using the effective interest method.

The TLB 2030 is secured by a first-priority lien in and upon substantially all of the assets of the Company and its domestic subsidiaries other than the accounts, inventory (and the proceeds thereof) and other assets that secure Sally Holdings’ existing ABL facility on a first-priority basis (the “ABL Priority Collateral”). Additionally, the TLB 2030 is secured by a second-priority lien in and upon the ABL Priority Collateral. The TLB 2030 does not contain any financial maintenance covenants and is subject to a covenant package that is substantially consistent with the covenant package governing the 2025 Senior Notes. The TLB 2030 is subject to customary asset sale mandatory prepayment provisions and excess cash flow mandatory prepayment provisions. The TLB 2030 is subject to a prepayment premium of 1.0% of the principal amount thereof upon any refinancing or amendment thereof that results in a reduced effective yield (subject to certain exceptions) within six months following the closing. Thereafter, the TLB 2030 may be prepaid without penalty or premium, other than customary breakage costs for prepayments that are made prior to the last date of an interest period.

The repayment of our TLB 2024, in the aggregate outstanding principal amount of $406.1 million, was made pursuant to the terms of the credit agreement underlying our TLB 2024, at par plus interest accrued but unpaid up to, though not including, the repayment date. In connection with the repayment, we recognized a loss on the extinguishment of debt of $0.6 million within interest expense, which included the write-off of unamortized discount and deferred financing costs of $0.2 million and $0.4 million, respectively.

 

12


 

 

9. Derivative Instruments and Hedging Activities

During the nine months ended June 30, 2023, 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 June 30, 2023, we held forwards, which expire ratably through September 30, 2023, with a notional amount, based upon exchange rates at June 30, 2023, as follows (in thousands):

Notional Currency

 

Notional Amount

 

Mexican Peso

 

$

6,639

 

Euro

 

 

4,007

 

Canadian Dollar

 

 

3,064

 

Total

 

$

13,710

 

 

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 June 30, 2023 and 2022, we recognized a loss of $0.7 million and a gain of $0.2 million, respectively. For the nine months ended June 30, 2023 and 2022, we recognized losses of $0.6 million and $0.2 million, respectively. Based on June 30, 2023, valuations and exchange rates, we expect to reclassify losses of approximately $3.1 million out of AOCL and 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 TLB 2024. The interest rate caps were comprised of individual caplets that were expiring ratably through June 30, 2023, and were designated as cash flow hedges. Accordingly, the changes in fair value of the interest rate caps were recorded quarterly, net of income tax, and included in AOCL.

During the three months ended March 31, 2023, we early settled both interest rate caps due to the forecasted transactions being hedged no longer occurring as a result of the repayment of our TLB 2024. In connection with the early settlement, we received approximately $2.7 million, which represented the fair value at the time of settlement. Furthermore, we released the remaining AOCL balances related to the interest rate caps into interest expense. The effects of our interest rate caps on our condensed consolidated statements of earnings were not material for the three months ended June 30, 2022. For the nine months ended June 30, 2023 and 2022, we recognized income of $2.8 million and expense of $1.3 million, respectively, into interest expense on our condensed consolidated statements of earnings related to the caps.

Interest Rate Swap

In April 2023, we entered into a three-year interest rate swap with an initial notional amount of $200 million (the “interest rate swap”) to mitigate the exposure to higher interest rates in connection with our TLB 2030. The interest rate swap involves fixed monthly payments at the contract rate of 3.705%, and in return, we will receive a floating interest payment based on the 1-month Adjusted Term SOFR Rate. The interest rate swap will mature in April 2026 and is designated as a cash flow hedge. Changes in the fair value of the interest rate swap are recorded quarterly, net of income tax, and included in AOCL.

For the three and nine months ended June 30, 2023, we recognized income of $0.5 million into interest expense on our condensed consolidated statements of earnings related to the interest rate swap. At June 30, 2023, we expect to reclassify gains of approximately $3.0 million out of AOCL and into interest expense over the next 12 months.

 

13


 

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 June 30, 2023, we held forwards, which settle on various dates in the first month of the next two fiscal quarters, with a notional amount, based upon exchange rates at June 30, 2023, as follows (in thousands):

Notional Currency

 

Notional Amount

 

British Pound

 

$

47,105

 

Canadian Dollar

 

 

22,104

 

Euro

 

 

17,984

 

Mexican Peso

 

 

28,220

 

Total

 

$

115,413

 

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 June 30, 2023 and 2022, the effects of these foreign exchange contracts on our condensed consolidated financial statements were losses of $1.5 million and $5.0 million, respectively. For the nine months ended June 30, 2023 and 2022, the effects of these foreign exchange contracts on our condensed consolidated financial statements were losses of $2.6 million and $4.9 million, respectively.

 

10. Segment Reporting

Segment data for the three and nine months ended June 30, 2023 and 2022, is as follows (in thousands):

 

 

Three Months Ended
June 30,

 

 

Nine Months Ended
June 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

Sally Beauty Supply ("SBS")

 

$

534,932

 

 

$

551,725

 

 

$

1,614,650

 

 

$

1,639,040

 

Beauty Systems Group ("BSG")

 

 

396,076

 

 

 

409,742

 

 

 

1,192,125

 

 

 

1,214,065

 

Total

 

$

931,008

 

 

$

961,467

 

 

$

2,806,775

 

 

$

2,853,105

 

Earnings before provision for income taxes:

 

 

 

 

 

 

 

 

 

 

 

 

Segment operating earnings:

 

 

 

 

 

 

 

 

 

 

 

 

SBS

 

$

88,684

 

 

$

88,792

 

 

$

279,992

 

 

$

270,355

 

BSG

 

 

48,696

 

 

 

56,067

 

 

 

135,603

 

 

 

160,621

 

Segment operating earnings

 

 

137,380

 

 

 

144,859

 

 

 

415,595

 

 

 

430,976

 

Unallocated expenses

 

 

46,858

 

 

 

45,612

 

 

 

149,397

 

 

 

131,389

 

Restructuring

 

 

397

 

 

 

44

 

 

 

18,077

 

 

 

1,143

 

Consolidated operating earnings

 

 

90,125

 

 

 

99,203

 

 

 

248,121

 

 

 

298,444

 

Interest expense

 

 

18,654

 

 

 

35,977

 

 

 

53,262

 

 

 

76,113

 

Earnings before provision for income taxes

 

$

71,471

 

 

$

63,226

 

 

$

194,859

 

 

$

222,331

 

 

Sales between segments, which are eliminated in consolidation, were not material during the three and nine months ended June 30, 2023 and 2022.

 

14


 

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
June 30,

 

 

Nine Months Ended
June 30,

 

SBS

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Hair color

 

 

40.5

%

 

 

38.3

%

 

 

39.6

%

 

 

37.7

%

Hair care

 

 

23.8

%

 

 

23.5

%

 

 

23.8

%

 

 

23.8

%

Styling tools and supplies

 

 

17.2

%

 

 

18.8

%

 

 

18.2

%

 

 

19.4

%

Nail

 

 

10.1

%

 

 

11.3

%

 

 

10.1

%

 

 

10.8

%

Skin and cosmetics

 

 

7.9

%

 

 

7.6

%

 

 

7.6

%

 

 

7.6

%

Other beauty items

 

 

0.5

%

 

 

0.5

%

 

 

0.7

%

 

 

0.7

%

Total

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

 

 

Three Months Ended
June 30,

 

 

Nine Months Ended
June 30,

 

BSG

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Hair care

 

 

40.8

%

 

 

42.6

%

 

 

42.2

%

 

 

43.1

%

Hair color

 

 

41.6

%

 

 

39.7

%

 

 

40.1

%

 

 

39.2

%

Styling tools and supplies

 

 

10.6

%

 

 

11.0

%

 

 

10.7

%

 

 

11.2

%

Skin and cosmetics

 

 

4.0

%

 

 

3.8

%

 

 

4.1

%

 

 

3.9

%

Nail

 

 

2.7

%

 

 

2.5

%

 

 

2.7

%

 

 

2.3

%

Other beauty items

 

 

0.3

%

 

 

0.4

%

 

 

0.2

%

 

 

0.3

%

Total

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

The following tables disaggregate our segment revenue by sales channels:

 

 

Three Months Ended
June 30,

 

 

Nine Months Ended
June 30,

 

SBS

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Company-operated stores

 

 

94.1

%

 

 

94.0

%

 

 

93.8

%

 

 

94.0

%

E-commerce

 

 

5.9

%

 

 

6.0

%

 

 

6.2

%

 

 

6.0

%

Total

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

 

 

Three Months Ended
June 30,

 

 

Nine Months Ended
June 30,

 

BSG

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Company-operated stores

 

 

67.6

%

 

 

66.6

%

 

 

67.2

%

 

 

66.9

%

E-commerce

 

 

13.0

%

 

 

11.6

%

 

 

13.4

%

 

 

11.8

%

Distributor sales consultants

 

 

11.6

%

 

 

13.9

%

 

 

11.9

%

 

 

13.9

%

Franchise stores

 

 

7.8

%

 

 

7.9

%

 

 

7.5

%

 

 

7.4

%

Total

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

 

15


 

 

11. Restructuring

Restructuring expenses, included in Cost of Goods Sold (“COGS”) and Restructuring for the three and nine months ended June 30, 2023 and 2022, are as follows (in thousands):

 

 

Three Months Ended
June 30,

 

 

Nine Months Ended
June 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Included in COGS (a)

 

 

 

 

 

 

 

 

 

 

 

 

Distribution Center Consolidation and Store Optimization Plan

 

$

(746

)

 

$

 

 

$

(5,788

)

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Included in Restructuring (b)

 

 

 

 

 

 

 

 

 

 

 

 

Distribution Center Consolidation and Store Optimization Plan

 

$

397

 

 

$

 

 

$

18,077

 

 

$

 

Transformation Plan

 

 

 

 

 

44

 

 

 

 

 

 

1,143

 

Total in Restructuring

 

 

397

 

 

 

44

 

 

 

18,077

 

 

 

1,143

 

Total Restructuring Expenses

 

$

(349

)

 

$

44

 

 

$

12,289

 

 

$

1,143

 

(a)
Amounts included in COGS relate to adjustments to our expected obsolescence reserve related to the Plan (as defined below).
(b)
Amounts included within Restructuring for the current year relate to stores and distribution centers closed during the period 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 (“the 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.

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. 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.

As of June 30, 2023, we have closed 329 SBS stores and 32 BSG stores as part of the Plan and closed the two BSG distribution centers. 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 accounts payable and 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
June 30,
2023

 

Closing costs - leases (a)

 

$

 

 

$

7,613

 

 

$

1,381

 

 

$

(8,251

)

 

$

(693

)

 

$

50

 

Closing costs - payroll expenses (b)

 

 

 

 

 

1,648

 

 

 

1,191

 

 

 

(2,597

)

 

 

 

 

 

242

 

Impairment - property and equipment (c)

 

 

 

 

 

1,276

 

 

 

213

 

 

 

 

 

 

(1,489

)

 

 

 

Inventory transfer costs

 

 

 

 

 

1,156

 

 

 

364

 

 

 

(1,520

)

 

 

 

 

 

 

Impairment - operating lease assets (c)

 

 

 

 

 

350

 

 

 

244

 

 

 

 

 

 

(594

)

 

 

 

Other closure costs (d)

 

 

1,291

 

 

 

2,803

 

 

 

(162

)

 

 

(3,883

)

 

 

 

 

 

49

 

Total

 

$

1,291

 

 

$

14,846

 

 

$

3,231

 

 

$

(16,251

)

 

$

(2,776

)

 

$

341

 

(a)
Lease-related closing costs include contract terminations costs, repairs, maintenance, and 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.
(d)
Other closure costs predominantly consist of exit costs associated with shutting down of operations at various locations.

16


 

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

This section discusses management’s view of the financial condition, results of operations and cash flows of Sally Beauty for the periods covered by this Quarterly Report. 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 fiscal year, SBS launched its first Studio by Sally pilot store in Denton, Texas and is expected to open additional pilot stores in our next fiscal quarter. Our Studio by Sally pilot store program has a digital-first focus, from digital check-in to digital education throughout the store and beyond, including personalized appointments at our in-store salons where licensed stylists will train and educate customers, empowering them to personally achieve their desired results. If the pilot stores are successful, we project 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 years.

At the end of the quarter, we announced the launch of Happy Beauty Co., a unique new retail store concept that brings to market an engaging beauty experience at a value offering. Happy Beauty Co. offers quality beauty at great prices in an accessible, fun and expressive environment. All of the merchandise is priced under $10 with product offerings encompassing four key categories: Cosmetics & Facial Care, Bath & Body, Nails and Hair, featuring both third-party brands and the Company’s owned brands. The initial pilot store was opened in the Dallas/Ft. Worth market in late June.

Furthermore, earlier this fiscal year, BSG launched a new strategic partnership with Salon HQ to help its professional stylist customers grow their business. The platform 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. As our pilot of Salon HQ enters its next phase of maturation, we made the strategic decision to brand the platform as “Cosmo Prof Direct.” During the quarter, we expanded the platform to an additional seven states, ending the quarter with more than 1,700 digital storefronts spread over nine states. Our stylists are embracing this new tool and gaining a deeper understanding of how they can leverage this resource to profitably grow their business.

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 fiscal year, we have invested more into marketing of our owned brands and launched our new owned branded vegan product line – bondbar – that’s SLS/SLES-free, paraben-free, phthalate-free and cruelty-free. These initiatives have helped deliver an increase in our owned brands sales penetration, resulting in increased SBS profit margins.

For BSG, vendors have launched new and exciting product lines during the fiscal year, including new bright hues from Paul Mitchell, greys and silver tones from Matrix, and a continued focus on blonding, which is a consistent traffic driver. During the quarter, we saw strong performance from new product launches, including Amika, Wella’s Ultimate Repair, and Danger Jones, as well as expanded distribution with Color Wow.

Increasing the efficiency of our operations and optimizing our capabilities

At the end of fiscal year 2022, we announced our plan to optimize our store base and distribution network to improve overall profitability by closing 330 SBS stores, 35 BSG stores and two BSG distribution centers. During the first half of our fiscal year, we completed the majority of our planned closures. Additionally, we have further optimized our store supply chain network based on our new store fleet. As of June 30, 2023, we have closed 329 SBS stores and 32 BSG stores and the two BSG distribution centers as part of the Plan, while meeting our sales recapture expectations.

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

 

17


 

Earlier this fiscal year, we started testing a new shipping frequency from our distribution centers to a limited population of SBS and BSG stores by leveraging investments within our supply chain systems. We believe we will be able to improve labor productivity, reduce our freight costs and lower our carbon emissions, while maintaining healthy in-stock levels. We have seen positive results from the test and will be expanding to the remaining SBS and BSG store fleet throughout the U.S. and Canada.

Financial Summary for the Three Months Ended June 30, 2023

Consolidated net sales for the three months ended June 30, 2023, decreased $30.5 million, or 3.2%, to $931.0 million, compared to the three months ended June 30, 2022. Consolidated net sales included a net positive impact from changes in foreign currency exchange rates of $1.9 million;
Consolidated comparable sales increased 0.6% for the three months ended June 30, 2023;
Consolidated gross profit for the three months ended June 30, 2023, decreased $15.5 million, or 3.2%, to $474.7 million, compared to the three months ended June 30, 2022. Consolidated gross margin was unchanged at 51.0% for the three months ended June 30, 2023, compared to the three months ended June 30, 2022;
Consolidated operating earnings for the three months ended June 30, 2023, decreased $9.1 million, or 9.2%, to $90.1 million, compared to the three months ended June 30, 2022. Operating margin decreased 60 bps to 9.7% for the three months ended June 30, 2023, compared to the three months ended June 30, 2022;
For the three months ended June 30, 2023, our consolidated net earnings increased $4.3 million, or 9.1%, to $50.8 million, compared to the three months ended June 30, 2022;
For the three months ended June 30, 2023, our diluted earnings per share was $0.46 compared to $0.43 for the three months ended June 30, 2022; and
Cash provided by operations was $53.1 million for the three months ended June 30, 2023, compared to $52.0 million for the three months ended June 30, 2022.

Trends Impacting Our Business

Global inflationary pressures continued to influence consumer and stylist shopping behavior along with the cost for products and services. In the U.S. and Canada, we are seeing our SBS retail customers color their hair less frequently and reduced the size of their basket when they shop with us, while at BSG we are seeing a continuation of stylist demand trends we’ve seen over the last several quarters. These inflationary pressures have also 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 year, 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.

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.

 

18


 

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 June 30,

 

 

Nine Months Ended June 30,

 

 

 

2023

 

 

2022

 

 

Increase (Decrease)

 

 

2023

 

 

2022

 

 

Increase (Decrease)

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBS

 

$

534,932

 

 

$

551,725

 

 

$

(16,793

)

 

 

(3.0

)%

 

$

1,614,650

 

 

$

1,639,040

 

 

$

(24,390

)

 

 

(1.5

)%

BSG

 

 

396,076

 

 

 

409,742

 

 

 

(13,666

)

 

 

(3.3

)%

 

 

1,192,125

 

 

 

1,214,065

 

 

 

(21,940

)

 

 

(1.8

)%

Consolidated

 

$

931,008

 

 

$

961,467

 

 

$

(30,459

)

 

 

(3.2

)%

 

$

2,806,775

 

 

$

2,853,105

 

 

$

(46,330

)

 

 

(1.6

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBS

 

$

314,474

 

 

$

322,815

 

 

$

(8,341

)

 

 

(2.6

)%

 

$

955,066

 

 

$

960,249

 

 

$

(5,183

)

 

 

(0.5

)%

BSG

 

 

160,231

 

 

 

167,393

 

 

 

(7,162

)

 

 

(4.3

)%

 

 

476,553

 

 

 

495,420

 

 

 

(18,867

)

 

 

(3.8

)%

Consolidated

 

$

474,705

 

 

$

490,208

 

 

$

(15,503

)

 

 

(3.2

)%

 

$

1,431,619

 

 

$

1,455,669

 

 

$

(24,050

)

 

 

(1.7

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment gross margin:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBS

 

 

58.8

%

 

 

58.5

%

 

30

 

 

 bps

 

 

 

59.2

%

 

 

58.6

%

 

60

 

 

 bps

 

BSG

 

 

40.5

%

 

 

40.9

%

 

(40)

 

 

 bps

 

 

 

40.0

%

 

 

40.8

%

 

(80)

 

 

 bps

 

Consolidated

 

 

51.0

%

 

 

51.0

%

 

 

 

 bps

 

 

 

51.0

%

 

 

51.0

%

 

 

 

 bps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment operating earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBS

 

$

88,684

 

 

$

88,792

 

 

$

(108

)

 

 

(0.1

)%

 

$

279,992

 

 

$

270,355

 

 

$

9,637

 

 

 

3.6

%

BSG

 

 

48,696

 

 

 

56,067

 

 

 

(7,371

)

 

 

(13.1

)%

 

 

135,603

 

 

 

160,621

 

 

 

(25,018

)

 

 

(15.6

)%

Segment operating earnings

 

 

137,380

 

 

 

144,859

 

 

 

(7,479

)

 

 

(5.2

)%

 

 

415,595

 

 

 

430,976

 

 

 

(15,381

)

 

 

(3.6

)%

Unallocated expenses and restructuring (a)

 

 

47,255

 

 

 

45,656

 

 

 

1,599

 

 

 

3.5

%

 

 

167,474

 

 

 

132,532

 

 

 

34,942

 

 

 

26.4

%

Consolidated operating earnings

 

 

90,125

 

 

 

99,203

 

 

 

(9,078

)

 

 

(9.2

)%

 

 

248,121

 

 

 

298,444

 

 

 

(50,323

)

 

 

(16.9

)%

Interest expense

 

 

18,654

 

 

 

35,977

 

 

 

(17,323

)

 

 

(48.2

)%

 

 

53,262

 

 

 

76,113

 

 

 

(22,851

)

 

 

(30.0

)%

Earnings before provision for income taxes

 

 

71,471

 

 

 

63,226

 

 

 

8,245

 

 

 

13.0

%

 

 

194,859

 

 

 

222,331

 

 

 

(27,472

)

 

 

(12.4

)%

Provision for income taxes

 

 

20,650

 

 

 

16,659

 

 

 

3,991

 

 

 

24.0

%

 

 

52,840

 

 

 

60,117

 

 

 

(7,277

)

 

 

(12.1

)%

Net earnings

 

$

50,821

 

 

$

46,567

 

 

$

4,254

 

 

 

9.1

%

 

$

142,019

 

 

$

162,214

 

 

$

(20,195

)

 

 

(12.4

)%

 

 

.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,141

 

 

 

3,468

 

 

 

(327

)

 

 

(9.4

)%

BSG

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,336

 

 

 

1,361

 

 

 

(25

)

 

 

(1.8

)%

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,477

 

 

 

4,829

 

 

 

(352

)

 

 

(7.3

)%

Comparable sales growth (decline):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBS

 

 

3.0

%

 

 

(5.0

)%

 

800

 

 

 bps

 

 

 

5.0

%

 

 

(0.5

)%

 

550

 

 

 bps

 

BSG

 

 

(2.4

)%

 

 

(1.6

)%

 

(80)

 

 

 bps

 

 

 

(0.9

)%

 

 

2.6

%

 

(350)

 

 

 bps

 

Consolidated

 

 

0.6

%

 

 

(3.6

)%

 

420

 

 

 bps

 

 

 

2.4

%

 

 

0.8

%

 

160

 

 

 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 June 30, 2023, store count was impacted by store closure in connection with the Plan. See Note 11, Restructuring, in Item 1 of this quarterly report for more information on the Plan.

 

19


 

Results of Operations

The Three Months Ended June 30, 2023, compared to the Three Months Ended June 30, 2022

Net Sales

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

Comparable sales

 

$

15,529

 

Sales outside comparable sales (a)

 

 

(35,960

)

Foreign currency exchange

 

 

3,638

 

Total

 

$

(16,793

)

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

The increase in SBS’s comparable sales was a result of a growth in our average unit retail, primarily from inflationary impacts and pricing leverage. Comparable sales were also positively impacted by recapturing approximately half of the sales from stores closed in connection with the Plan.

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

Comparable sales

 

$

(9,698

)

Sales outside comparable sales (a)

 

 

(2,264

)

Foreign currency exchange

 

 

(1,704

)

Total

 

$

(13,666

)

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

BSG’s comparable sales faced headwinds from the from the continuation of stylist demand trends seen over the last several quarters, which resulted in fewer units per transaction, partially offset by an increase in our average unit retail.

Gross Profit

SBS. SBS’s gross profit decreased for the three months ended June 30, 2023, as a result of a decrease in 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 June 30, 2023, as a result of a decrease in 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, and a shift in some distribution center costs from selling, general and administrative expenses into gross margin.

Selling, General and Administrative Expenses

SBS. SBS’s selling, general and administrative expenses decreased $8.2 million, or 3.5%, for the three months ended June 30, 2023, and included an unfavorable impact from foreign exchange rates of $1.4 million. As a percentage of SBS net sales, selling, general and administrative expense for the three months ended June 30, 2023, was 42.2% compared to 42.4% for the three months ended June 30, 2022. The decrease was due to cost savings resulting from the Plan as well as lower advertising expenses, partially offset by higher labor and accrued bonus expenses.

BSG. BSG’s selling, general and administrative expenses increased $0.2 million, or 0.2%, for the three months ended June 30, 2023. As a percentage of BSG net sales, selling, general and administrative expense for the three months ended June 30, 2023, was 28.2% compared to 27.2% for the three months ended June 30, 2022. The increase as a percentage of sales was driven primarily by higher labor and accrued bonus expenses, partially offset by a shift in some distribution center costs from selling, general and administrative expenses into gross margin.

Unallocated. Unallocated selling, general and administrative expenses, which represent certain corporate costs that have not been charged to our reporting segments, increased $1.2 million, or 2.7%, for the three months ended June 30, 2023, primarily due to higher labor and accrued bonus expenses and information technology expense. These increases were partially offset by prudent cost control and the lapping of disposal costs for obsolete personal-protective equipment inventory in the prior year.

Interest Expense

The decrease in interest expense is primarily due to the lapping of debt extinguishment costs in the prior year related to the repayment of our 8.75% Senior Notes due 2025 and from fewer debt borrowings outstanding, partially offset by higher interest rates on our variable rate debt. Additionally, our interest rate swap has helped mitigate some of the additional interest costs resulting from higher interest rates.

20


 

Provision for Income Taxes

The effective tax rates were 28.9% and 26.3%, for the three months ended June 30, 2023, and 2022, respectively. The increase in the effective tax rate was primarily due to additional taxes and interest for the one-time transition tax on unrepatriated foreign earnings ("Repatriation Tax") related to the fiscal year ended September 30, 2018, which is currently under IRS audit.

The Nine Months Ended June 30, 2023, compared to the Nine Months Ended June 30, 2022

Net Sales

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

Comparable sales

 

$

75,351

 

Sales outside comparable sales (a)

 

 

(86,636

)

Foreign currency exchange

 

 

(13,105

)

Total

 

$

(24,390

)

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

SBS’s comparable sales increase was driven by a growth in our average unit retail, primarily from inflationary impacts and pricing leverage and the lapping of Omicron and supply chain challenges. Comparable sales were also positively impacted by recapturing approximately half of the sales from stores closed in connection with the Plan.

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

Comparable sales

 

$

(11,038

)

Sales outside comparable sales (a)

 

 

(4,489

)

Foreign currency exchange

 

 

(6,413

)

Total

 

$

(21,940

)

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

BSG’s comparable sales faced headwinds from elevated demand in the prior year from the easing of COVID-19 restrictions and the continuation of stylist demand trends seen over the last several quarters, which resulted in fewer transactions and units per transaction, partially offset by an increase in our average unit retail.

Gross Profit

SBS. SBS’s gross profit decreased for the nine months ended June 30, 2023, as a result of fewer net sales, partially offset by a higher gross margin. SBS’s gross margin grew as a result of pricing leverage, increased penetration of our owned brand products and adjustments to our expected obsolescence reserve related to the Plan.

BSG. BSG’s gross profit decreased for the nine months ended June 30, 2023, as a result of fewer 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, and a shift in some distribution center costs from selling, general and administrative expenses into gross margin, 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 $14.8 million, or 2.1%, for the nine months ended June 30, 2023, and included a favorable impact from foreign exchange rates of $5.4 million. As a percentage of SBS net sales, selling, general and administrative expense for the nine months ended June 30, 2023, was 41.8% compared to 42.1% for the nine months ended June 30, 2022. The decrease as a percentage of sales was primarily driven by cost savings from the closure of stores in connection with the Plan and lower advertising expenses, partially offset by higher labor and accrued bonus expenses.

BSG. BSG’s selling, general and administrative expenses increased $6.2 million, or 1.8%, for the nine months ended June 30, 2023, and included a favorable impact from foreign exchange rates of $2.2 million. As a percentage of BSG net sales, selling, general and administrative expense for the nine months ended June 30, 2023, was 28.6% compared to 27.6% for the nine months ended June 30, 2022. The increase was primarily driven by higher labor and accrued bonus expenses, partially offset by a shift in some distribution center costs from selling, general and administrative expense into gross margin.

Unallocated. Unallocated selling, general and administrative expenses, which represent certain corporate costs that have not been charged to our reporting segments, increased $18.0 million, or 13.7%, for the nine months ended June 30, 2023, primarily due to higher labor and accrued bonus expenses and information technology expenses. These increases were partially offset by prudent cost control and the lapping of disposal costs for obsolete personal-protective equipment inventory.

21


 

Restructuring

For the nine months ended June 30, 2023, we incurred $18.1 million in restructuring charges related to the Plan. For the nine months ended June 30, 2022, restructuring charges in connection with our prior transformation plan were immaterial. See Note 11, Restructuring, in Item 1 of this quarterly report for more information on the Plan.

Interest Expense

The decrease in interest expense was primarily due to the lapping of debt extinguishment costs related to the repayment of our 8.75% Senior Notes due 2025 in fiscal year 2022, partially offset by higher interest rates on our variable rate debt and an increase in our average borrowings outstanding under our ABL facility. Additionally, our interest rate derivatives have helped mitigate some of the impacts from higher interest rates on a portion of our variable rate debt.

Provision for Income Taxes

The effective tax rates were 27.1% and 27.0% for the nine months ended June 30, 2023 and 2022, respectively. The increase in the effective tax rate was primarily due to Repatriation Tax related to the fiscal year ended September 30, 2018, which is currently under IRS audit, offset by greater losses in the prior year quarter for which a tax benefit could not be recognized.

Liquidity and Capital Resources

Overview

Our principal sources of liquidity are cash from operations, cash and cash equivalents and borrowings under 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 from time-to-time repurchase shares of our common stock on the open market to return value to our shareholders. At June 30, 2023, we had $541.0 million in our liquidity pool, which includes $466.7 million available for borrowing under our ABL facility and cash and cash equivalents of $74.3 million.

Our working capital (current assets less current liabilities) increased $169.3 million, to $633.8 million at June 30, 2023, compared to $464.5 million at September 30, 2022. The increase was driven by higher inventory balances, resulting from inflationary vendor cost increases and $24.6 million from foreign exchange rates, partially offset by optimization efforts to improve inventory stocking levels. The increase was further driven by fewer outstanding borrowings under our ABL facility, a reduction in our accounts payable, due to the timing of payments and impacts of optimization efforts around inventory purchases, and by fewer accrued liabilities, due to the timing of interest and payroll payments, partially offset by an increase in accrued bonuses.

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

 

 

Nine Months Ended June 30,

 

(in thousands)

 

2023

 

 

2022

 

Net cash provided by operating activities

 

$

132,771

 

 

$

49,227

 

Net cash used by investing activities

 

 

(63,796

)

 

 

(67,899

)

Net cash used by financing activities

 

 

(68,259

)

 

 

(273,837

)

Net Cash Provided by Operating Activities

The increase in cash provided by operating activities was driven by the timing of inventory purchases, primarily from the impact of global supply chain issues in the prior year, partially offset by fewer net sales for the current year.

Net Cash Used by Investing Activities

The decrease in cash used by investing activities was driven by fewer capital expenditures related to store improvements and information technology.

Net Cash Used by Financing Activities

The decrease in cash used by financing activities was primarily due to no shares repurchased in the current year under our share repurchases program and from fewer net debt repayments in the current year.

 

22


 

Debt and Guarantor Financial Information

During the fiscal year, we entered into a seven-year term loan facility agreement in the aggregate principal amount of $400.0 million and used the proceeds to subsequently repay our previously existing term loan facility. See Note 8, Short-term Borrowings and Long-term Debt, in Item 1 of this quarterly report for more information.

At June 30, 2023, we had $1,095.0 million in outstanding debt, not including finance lease obligations, unamortized debt issuance costs and debt discounts, in the aggregate, of $9.9 million. Our debt consists of $680.0 million in 2025 Senior Notes outstanding, $399.0 million remaining on our term loan and $16.0 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 drawn on our ABL facility are generally paid down with cash provided by our operating activities. During the nine months ended June 30, 2023, the weighted average interest rate on our borrowings under the ABL facility was 5.9%.

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 of our subsidiaries to make certain 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 June 30, 2023, and September 30, 2022:

(in thousands)

 

June 30, 2023

 

 

September 30, 2022

 

Inventory

 

$

745,529

 

 

$

714,477

 

Intercompany receivable

 

$

3,472

 

 

$

 

Current assets

 

$

860,569

 

 

$

827,155

 

Total assets

 

$

2,023,626

 

 

$

1,982,982

 

Current liabilities

 

$

451,441

 

 

$

549,415

 

Intercompany payable

 

$

 

 

$

4,431

 

Total liabilities

 

$

1,986,455

 

 

$

2,085,169

 

The following table presents the summarized statement of earnings information for the Issuers and the Guarantors for nine months ended June 30, 2023 (in thousands):

Net sales

 

 

 

$

2,273,943

 

Gross profit

 

 

 

$

1,172,601

 

Earnings before provision for income taxes

 

 

 

$

159,018

 

Net Earnings

 

 

 

$

117,519

 

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 nine months ended June 30, 2023, no shares were repurchased in connection with our share repurchase program. During the nine months ended June 30, 2022, we repurchased 6.8 million shares of our common stock for $130.3 million under our share repurchase program. See Note 4, Stockholders’ Equity, for more information about our share repurchase program.

Contractual Obligations

Other than our debt, as discussed above, there have been no material changes outside the ordinary course of our business to our contractual obligations since September 30, 2022.

Off-Balance Sheet Financing Arrangements

At June 30, 2023, 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.

23


 

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. 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.

Since September 30, 2022, there have been changes to our debt structure, including amending debt terms to replace LIBOR with SOFR, and with our derivative instruments used to help mitigate the interest rate risks associated with variable-rate debt. See Note 8, Short-term Borrowings and Long-term Debt, and Note 9, Derivative Instruments and Hedging Activities, in Item 1 of this quarterly report for more information on these changes.

At June 30, 2023, we had $415.0 million in outstanding floating interest rate debt, with $200 million of SOFR denominated interest hedged under an interest rate swap agreement. As of June 30, 2023, a 1.0 percentage point interest rate increase would negatively impact our annual interest expense and cash flows by $2.2 million.

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 June 30, 2023. 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 June 30, 2023, 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.

24


 

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.

 

25


 

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

 

 

 

10.1

 

Credit Agreement, dated as of February 28, 2023, by and among Sally Holdings LLC, Sally Capital, Inc., Bank of America, N.A., as Administrative Agent and Collateral Agent, and the lenders and other parties, which is incorporated herein by reference from Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on March 1, 2023

 

 

 

10.2

 

Amendment No. 4 dated April 19, 2023, to Credit Agreement dated July 6, 2017, among the Borrowers, the Parent Guarantors, the Administrative Agent, the Syndication Agent, the Documentation Agent, and the Lenders party thereto (as such terms are defined therein)*

 

 

 

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 June 30, 2023, 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 June 30, 2023, formatted in iXBRL (contained in Exhibit 101).

* Included herewith

 

26


 

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: August 3, 2023

 

 

 

 

 

 

 

 

By:

 

/s/ Marlo M. Cormier

 

 

 

Marlo M. Cormier

 

 

 

Senior Vice President, Chief Financial Officer

 

 

 

For the Registrant and as its Principal Financial Officer

 

27