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,DECEMBER 31, 2022
-OR-
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File No. 1-33145
SALLY BEAUTY HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware |
| 36-2257936 |
(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
|
|
|
3001 Colorado Boulevard |
|
|
Denton, Texas |
| 76210 |
(Address of principal executive offices) |
| (Zip Code) |
(940) 898-7500
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report): N/A
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Common Stock, $0.01 par valueSBHThe New York Stock Exchange
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☒ |
| Accelerated filer | ☐ | Non-accelerated filer | ☐ |
Smaller reporting company | ☐ |
| Emerging growth company | ☐ |
|
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of July 29, 2022,January 27, 2023, there were 107,016,939107,328,599 shares of the issuer’s common stock outstanding.
TABLE OF CONTENTS
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8 | |
9 | |
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Item 2. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations |
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Item 3. Quantitative And Qualitative Disclosures About Market Risk | 22 |
22 | |
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23 | |
23 | |
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, 2021,2022, 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.
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, 2022 |
|
| September 30, 2021 |
|
| December 31, 2022 |
|
| September 30, 2022 |
| ||||
|
| (Unaudited) |
|
|
|
|
|
| (Unaudited) |
|
|
|
|
| ||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 101,318 |
|
| $ | 400,959 |
|
| $ | 99,071 |
|
| $ | 70,558 |
|
Trade accounts receivable, net |
|
| 31,462 |
|
|
| 32,623 |
|
|
| 32,671 |
|
|
| 34,102 |
|
Accounts receivable, other |
|
| 35,911 |
|
|
| 33,958 |
|
|
| 42,741 |
|
|
| 38,175 |
|
Inventory |
|
| 1,014,622 |
|
|
| 871,349 |
|
|
| 986,878 |
|
|
| 936,374 |
|
Other current assets |
|
| 59,806 |
|
|
| 44,686 |
|
|
| 57,840 |
|
|
| 53,192 |
|
Total current assets |
|
| 1,243,119 |
|
|
| 1,383,575 |
|
|
| 1,219,201 |
|
|
| 1,132,401 |
|
Property and equipment, net of accumulated depreciation of $808,298 at June 30, 2022, and $767,403 at September 30, 2021 |
|
| 289,814 |
|
|
| 307,377 |
| ||||||||
Property and equipment, net of accumulated depreciation of $849,202 at December 31, 2022, and $820,811 at September 30, 2022 |
|
| 288,732 |
|
|
| 297,876 |
| ||||||||
Operating lease assets |
|
| 549,493 |
|
|
| 537,673 |
|
|
| 542,806 |
|
|
| 532,177 |
|
Goodwill |
|
| 533,147 |
|
|
| 541,209 |
|
|
| 532,514 |
|
|
| 526,066 |
|
Intangible assets, excluding goodwill, net of accumulated amortization of $40,336 at June 30, 2022, and $38,957 at September 30, 2021 |
|
| 50,386 |
|
|
| 55,532 |
| ||||||||
Intangible assets, excluding goodwill, net of accumulated amortization of $28,820 at December 31, 2022, and $26,794 at September 30, 2022 |
|
| 50,963 |
|
|
| 50,315 |
| ||||||||
Other assets |
|
| 19,907 |
|
|
| 21,766 |
|
|
| 34,330 |
|
|
| 38,032 |
|
Total assets |
| $ | 2,685,866 |
|
| $ | 2,847,132 |
|
| $ | 2,668,546 |
|
| $ | 2,576,867 |
|
Liabilities and Stockholders’ Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt |
| $ | 167,169 |
|
| $ | 194 |
|
| $ | 65,171 |
|
| $ | 68,658 |
|
Accounts payable |
|
| 279,359 |
|
|
| 291,632 |
|
|
| 296,170 |
|
|
| 275,717 |
|
Accrued liabilities |
|
| 165,996 |
|
|
| 206,155 |
|
|
| 142,785 |
|
|
| 161,065 |
|
Current operating lease liabilities |
|
| 159,452 |
|
|
| 156,234 |
|
|
| 156,168 |
|
|
| 157,734 |
|
Income taxes payable |
|
| 2,985 |
|
|
| 10,666 |
|
|
| 16,972 |
|
|
| 4,740 |
|
Total current liabilities |
|
| 774,961 |
|
|
| 664,881 |
|
|
| 677,266 |
|
|
| 667,914 |
|
Long-term debt |
|
| 1,083,924 |
|
|
| 1,382,530 |
|
|
| 1,082,175 |
|
|
| 1,083,043 |
|
Long-term operating lease liabilities |
|
| 421,072 |
|
|
| 404,147 |
|
|
| 427,168 |
|
|
| 424,762 |
|
Other liabilities |
|
| 16,781 |
|
|
| 29,056 |
|
|
| 22,748 |
|
|
| 22,427 |
|
Deferred income tax liabilities, net |
|
| 93,257 |
|
|
| 85,777 |
|
|
| 85,891 |
|
|
| 85,085 |
|
Total liabilities |
|
| 2,389,995 |
|
|
| 2,566,391 |
|
|
| 2,295,248 |
|
|
| 2,283,231 |
|
Stockholders’ equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value. Authorized 500,000 shares; 107,017 and 113,138 shares issued and 106,963 and 112,913 shares outstanding at June 30, 2022, and September 30, 2021, respectively |
|
| 1,070 |
|
|
| 1,129 |
| ||||||||
Preferred stock, $0.01 par value. Authorized 50,000 shares; NaN issued |
|
| — |
|
|
| — |
| ||||||||
Common stock, $0.01 par value. Authorized 500,000 shares; 107,291 and 107,024 shares issued and 107,284 and 106,970 shares outstanding at December 31, 2022, and September 30, 2022, respectively |
|
| 1,073 |
|
|
| 1,070 |
| ||||||||
Preferred stock, $0.01 par value. Authorized 50,000 shares; none issued |
|
| — |
|
|
| — |
| ||||||||
Additional paid-in capital |
|
| 2,339 |
|
|
| 17,286 |
|
|
| 8,329 |
|
|
| 4,241 |
|
Accumulated earnings |
|
| 418,832 |
|
|
| 356,967 |
|
|
| 490,509 |
|
|
| 440,172 |
|
Accumulated other comprehensive loss, net of tax |
|
| (126,370 | ) |
|
| (94,641 | ) |
|
| (126,613 | ) |
|
| (151,847 | ) |
Total stockholders’ equity |
|
| 295,871 |
|
|
| 280,741 |
|
|
| 373,298 |
|
|
| 293,636 |
|
Total liabilities and stockholders’ equity |
| $ | 2,685,866 |
|
| $ | 2,847,132 |
|
| $ | 2,668,546 |
|
| $ | 2,576,867 |
|
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 |
|
| Nine Months Ended |
|
| Three Months Ended |
| |||||||||||||||
|
| June 30, |
|
| June 30, |
|
| December 31, |
| |||||||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||||
Net sales |
| $ | 961,467 |
|
| $ | 1,022,387 |
|
| $ | 2,853,105 |
|
| $ | 2,884,737 |
|
| $ | 957,055 |
|
| $ | 980,251 |
|
Cost of goods sold |
|
| 471,259 |
|
|
| 507,981 |
|
|
| 1,397,436 |
|
|
| 1,432,378 |
|
|
| 468,481 |
|
|
| 480,122 |
|
Gross profit |
|
| 490,208 |
|
|
| 514,406 |
|
|
| 1,455,669 |
|
|
| 1,452,359 |
|
|
| 488,574 |
|
|
| 500,129 |
|
Selling, general and administrative expenses |
|
| 390,961 |
|
|
| 386,481 |
|
|
| 1,156,082 |
|
|
| 1,143,738 |
|
|
| 391,580 |
|
|
| 386,250 |
|
Restructuring |
|
| 44 |
|
|
| 508 |
|
|
| 1,143 |
|
|
| 1,371 |
|
|
| 10,406 |
|
|
| 1,099 |
|
Operating earnings |
|
| 99,203 |
|
|
| 127,417 |
|
|
| 298,444 |
|
|
| 307,250 |
|
|
| 86,588 |
|
|
| 112,780 |
|
Interest expense |
|
| 35,977 |
|
|
| 23,452 |
|
|
| 76,113 |
|
|
| 73,313 |
|
|
| 17,923 |
|
|
| 20,241 |
|
Earnings before provision for income taxes |
|
| 63,226 |
|
|
| 103,965 |
|
|
| 222,331 |
|
|
| 233,937 |
|
|
| 68,665 |
|
|
| 92,539 |
|
Provision for income taxes |
|
| 16,659 |
|
|
| 27,759 |
|
|
| 60,117 |
|
|
| 62,228 |
|
|
| 18,328 |
|
|
| 23,701 |
|
Net earnings |
| $ | 46,567 |
|
| $ | 76,206 |
|
| $ | 162,214 |
|
| $ | 171,709 |
|
| $ | 50,337 |
|
| $ | 68,838 |
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.44 |
|
| $ | 0.68 |
|
| $ | 1.48 |
|
| $ | 1.52 |
|
| $ | 0.47 |
|
| $ | 0.61 |
|
Diluted |
| $ | 0.43 |
|
| $ | 0.66 |
|
| $ | 1.46 |
|
| $ | 1.50 |
|
| $ | 0.46 |
|
| $ | 0.60 |
|
Weighted-average shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 106,940 |
|
|
| 112,739 |
|
|
| 109,238 |
|
|
| 112,605 |
|
|
| 107,140 |
|
|
| 111,995 |
|
Diluted |
|
| 108,526 |
|
|
| 114,927 |
|
|
| 110,907 |
|
|
| 114,274 |
|
|
| 109,460 |
|
|
| 113,968 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(In thousands)
(Unaudited)
|
| Three Months Ended |
|
| Nine Months Ended |
|
| Three Months Ended |
| |||||||||||||||
|
| June 30, |
|
| June 30, |
|
| December 31, |
| |||||||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||||
Net earnings |
| $ | 46,567 |
|
| $ | 76,206 |
|
| $ | 162,214 |
|
| $ | 171,709 |
|
| $ | 50,337 |
|
| $ | 68,838 |
|
Other comprehensive (loss) income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Other comprehensive income (loss): |
|
|
|
|
|
|
|
| ||||||||||||||||
Foreign currency translation adjustments |
|
| (27,384 | ) |
|
| 6,617 |
|
|
| (34,645 | ) |
|
| 23,734 |
|
|
| 25,941 |
|
|
| (4,509 | ) |
Interest rate caps, net of tax |
|
| 2,050 |
|
|
| 471 |
|
|
| 2,328 |
|
|
| 646 |
|
|
| 203 |
|
|
| 278 |
|
Foreign exchange contracts, net of tax |
|
| 432 |
|
|
| (191 | ) |
|
| 588 |
|
|
| (1,211 | ) |
|
| (910 | ) |
|
| 480 |
|
Other comprehensive (loss) income, net of tax |
|
| (24,902 | ) |
|
| 6,897 |
|
|
| (31,729 | ) |
|
| 23,169 |
| ||||||||
Other comprehensive income (loss), net of tax |
|
| 25,234 |
|
|
| (3,751 | ) | ||||||||||||||||
Total comprehensive income |
| $ | 21,665 |
|
| $ | 83,103 |
|
| $ | 130,485 |
|
| $ | 194,878 |
|
| $ | 75,571 |
|
| $ | 65,087 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders’ Equity
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
| ||
|
|
|
|
|
|
|
|
| Additional |
|
|
|
|
|
| Other |
|
| Total |
|
|
|
|
|
|
|
|
| Additional |
|
|
|
|
|
| Other |
|
| Total |
| ||||||
| Common Stock | Paid-in |
|
| Accumulated |
|
| Comprehensive |
|
| Stockholders’ |
| Common Stock | Paid-in |
|
| Accumulated |
|
| Comprehensive |
|
| Stockholders’ |
| ||||||||||||||||||||||
| Shares |
|
| Amount |
|
| Capital |
|
| Earnings |
|
| Loss |
|
| Equity |
| Shares |
|
| Amount |
|
| Capital |
|
| Earnings |
|
| Loss |
|
| Equity |
| ||||||||||||
Balance at September 30, 2021 |
| 112,913 |
|
| $ | 1,129 |
|
| $ | 17,286 |
|
| $ | 356,967 |
|
| $ | (94,641 | ) |
| $ | 280,741 |
| |||||||||||||||||||||||
Balance at September 30, 2022 |
| 106,970 |
|
| $ | 1,070 |
|
| $ | 4,241 |
|
| $ | 440,172 |
|
| $ | (151,847 | ) |
| $ | 293,636 |
| |||||||||||||||||||||||
Net earnings |
| — |
|
|
| — |
|
|
| — |
|
|
| 68,838 |
|
|
| — |
|
|
| 68,838 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 50,337 |
|
|
| — |
|
|
| 50,337 |
|
Other comprehensive loss |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3,751 | ) |
|
| (3,751 | ) | |||||||||||||||||||||||
Other comprehensive income |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 25,234 |
|
|
| 25,234 |
| |||||||||||||||||||||||
Share-based compensation |
| — |
|
|
| — |
|
|
| 3,958 |
|
|
| — |
|
|
| — |
|
|
| 3,958 |
|
| — |
|
|
| — |
|
|
| 5,135 |
|
|
| — |
|
|
| — |
|
|
| 5,135 |
|
Stock issued for equity awards |
| 795 |
|
|
| 8 |
|
|
| 7,364 |
|
|
| — |
|
|
| — |
|
|
| 7,372 |
|
| 404 |
|
|
| 4 |
|
|
| 78 |
|
|
| — |
|
|
| — |
|
|
| 82 |
|
Employee withholding taxes paid related to net share settlement |
| (56 | ) |
|
| (1 | ) |
|
| (1,136 | ) |
|
| — |
|
|
| — |
|
|
| (1,137 | ) |
| (90 | ) |
|
| (1 | ) |
|
| (1,125 | ) |
|
| — |
|
|
| — |
|
|
| (1,126 | ) |
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 equity awards |
| 35 |
|
|
| 1 |
|
|
| 253 |
|
|
| — |
|
|
| — |
|
|
| 254 |
| |||||||||||||||||||||||
Employee withholding taxes paid related to net share settlement |
| (2 | ) |
|
| — |
|
|
| (27 | ) |
|
| — |
|
|
| — |
|
|
| (27 | ) | |||||||||||||||||||||||
Balance at June 30, 2022 |
| 106,963 |
|
| $ | 1,070 |
|
| $ | 2,339 |
|
| $ | 418,832 |
|
| $ | (126,370 | ) |
| $ | 295,871 |
| |||||||||||||||||||||||
Balance at December 31, 2022 |
| 107,284 |
|
| $ | 1,073 |
|
| $ | 8,329 |
|
| $ | 490,509 |
|
| $ | (126,613 | ) |
| $ | 373,298 |
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
| |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
| Additional |
|
|
|
|
|
|
|
|
| Other |
|
|
| Total |
|
|
|
|
|
|
|
|
| Additional |
|
|
|
|
|
| Other |
|
| Total |
| ||||||||||
| Common Stock |
| Paid-in |
|
|
| Accumulated |
|
|
|
| Comprehensive |
|
|
| Stockholders’ |
| Common Stock | Paid-in |
|
| Accumulated |
|
| Comprehensive |
|
| Stockholders’ |
| |||||||||||||||||||||||||||
| Shares |
|
|
|
| Amount |
|
|
|
| Capital |
|
|
|
| Earnings |
|
|
| Loss |
|
|
| Equity |
| 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 |
| |||||||||||||||||||||||||||||||||||||
Balance at September 30, 2021 |
| 112,913 |
|
| $ | 1,129 |
|
| $ | 17,286 |
|
| $ | 356,967 |
|
| $ | (94,641 | ) |
| $ | 280,741 |
| |||||||||||||||||||||||||||||||||
Net earnings |
| — |
|
|
|
| — |
|
|
|
| — |
|
|
|
| 38,312 |
|
|
|
| — |
|
|
|
| 38,312 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 68,838 |
|
|
| — |
|
|
| 68,838 |
| |||||
Other comprehensive loss |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (7,316 | ) |
|
|
| (7,316 | ) |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3,751 | ) |
|
| (3,751 | ) | |||||||||
Share-based compensation |
| — |
|
|
| — |
|
|
| 2,648 |
|
|
| — |
|
|
| — |
|
|
| 2,648 |
|
| — |
|
|
| — |
|
|
| 3,958 |
|
|
| — |
|
|
| — |
|
|
| 3,958 |
| ||||||||||
Stock issued for equity awards |
| 141 |
|
|
|
| 2 |
|
|
|
| 2,321 |
|
|
|
| — |
|
|
|
| — |
|
|
|
| 2,323 |
|
| 795 |
|
|
| 8 |
|
|
| 7,364 |
|
|
| — |
|
|
| — |
|
|
| 7,372 |
| |||||
Balance at March 31, 2021 |
| 112,679 |
| $ | 1,127 |
| $ | 9,525 |
| $ | 212,612 |
| $ | (88,431 | ) |
| $ | 134,833 |
| |||||||||||||||||||||||||||||||||||||
Net loss |
| — |
|
|
|
| — |
|
|
|
| — |
|
|
|
| 76,206 |
|
|
|
| — |
|
|
|
| 76,206 |
| ||||||||||||||||||||||||||||
Other comprehensive income |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 6,897 |
|
|
| 6,897 |
| |||||||||||||||||||||||||||||||||
Share-based compensation |
| — |
|
|
| — |
|
|
| 2,617 |
|
|
| — |
|
|
| — |
|
|
| 2,617 |
| |||||||||||||||||||||||||||||||||
Stock issued for stock options |
| 101 |
|
|
|
| 1 |
|
|
|
| 1,716 |
|
|
|
| — |
|
|
|
| — |
|
|
|
| 1,717 |
| ||||||||||||||||||||||||||||
Balance at June 30, 2021 |
| 112,780 |
| $ | 1,128 |
| $ | 13,858 |
| $ | 288,818 |
| $ | (81,534 | ) |
| $ | 222,270 |
| |||||||||||||||||||||||||||||||||||||
Employee withholding taxes paid related to net share settlement |
| (56 | ) |
|
| (1 | ) |
|
| (1,136 | ) |
|
| — |
|
|
| — |
|
|
| (1,137 | ) | |||||||||||||||||||||||||||||||||
Repurchases and cancellations of common stock |
| (3,675 | ) |
|
| (36 | ) |
|
| (27,472 | ) |
|
| (47,492 | ) |
|
| — |
|
|
| (75,000 | ) | |||||||||||||||||||||||||||||||||
Balance at December 31, 2021 |
| 109,977 |
|
| $ | 1,100 |
|
| $ | — |
|
| $ | 378,313 |
|
| $ | (98,392 | ) |
| $ | 281,021 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
|
| Nine Months Ended June 30, |
|
| Three Months Ended December 31, |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
Cash Flows from Operating Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
| $ | 162,214 |
|
| $ | 171,709 |
|
| $ | 50,337 |
|
| $ | 68,838 |
|
Adjustments to reconcile net earnings to net cash provided by operating activities: |
|
|
|
|
|
|
|
| ||||||||
Adjustments to reconcile net earnings to net cash provided (used) by operating activities: |
|
|
|
|
|
|
|
| ||||||||
Depreciation and amortization |
|
| 73,361 |
|
|
| 78,090 |
|
|
| 25,285 |
|
|
| 24,421 |
|
Share-based compensation expense |
|
| 8,103 |
|
|
| 8,158 |
|
|
| 5,135 |
|
|
| 3,958 |
|
Amortization of deferred financing costs |
|
| 2,702 |
|
|
| 3,280 |
|
|
| 648 |
|
|
| 932 |
|
Loss on early extinguishment of debt |
|
| 16,439 |
|
|
| 2,449 |
| ||||||||
Impairment of long-lived assets, including operating lease assets |
|
| 2,103 |
|
|
| — |
| ||||||||
Loss on disposal of equipment and other property |
|
| 57 |
|
|
| 1,638 |
|
|
| 77 |
|
|
| 3 |
|
Deferred income taxes |
|
| 7,702 |
|
|
| (998 | ) |
|
| 889 |
|
|
| 1,867 |
|
Changes in (exclusive of effects of acquisitions): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable |
|
| 243 |
|
|
| (8,612 | ) |
|
| 2,270 |
|
|
| 2,841 |
|
Accounts receivable, other |
|
| (3,034 | ) |
|
| (10,363 | ) |
|
| (3,817 | ) |
|
| (1,724 | ) |
Inventory |
|
| (160,194 | ) |
|
| (108,317 | ) |
|
| (38,019 | ) |
|
| (137,326 | ) |
Other current assets |
|
| (15,577 | ) |
|
| (931 | ) |
|
| (4,018 | ) |
|
| (446 | ) |
Other assets |
|
| 3,547 |
|
|
| 1,578 |
|
|
| 4,074 |
|
|
| 1,371 |
|
Operating leases, net |
|
| 8,448 |
|
|
| (1,595 | ) |
|
| (10,392 | ) |
|
| 6,475 |
|
Accounts payable and accrued liabilities |
|
| (34,349 | ) |
|
| 78,250 |
|
|
| 7,606 |
|
|
| 16,729 |
|
Income taxes payable |
|
| (8,169 | ) |
|
| 6,372 |
|
|
| 12,460 |
|
|
| 18,166 |
|
Other liabilities |
|
| (12,266 | ) |
|
| (2,980 | ) |
|
| 313 |
|
|
| (11,790 | ) |
Net cash provided by operating activities |
|
| 49,227 |
|
|
| 217,728 |
| ||||||||
Net cash provided (used) by operating activities |
|
| 54,951 |
|
|
| (5,685 | ) | ||||||||
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments for property and equipment, net of proceeds |
|
| (67,234 | ) |
|
| (44,888 | ) |
|
| (25,007 | ) |
|
| (26,390 | ) |
Acquisitions, net of cash acquired |
|
| (665 | ) |
|
| (2,351 | ) |
|
| — |
|
|
| (319 | ) |
Net cash used by investing activities |
|
| (67,899 | ) |
|
| (47,239 | ) |
|
| (25,007 | ) |
|
| (26,709 | ) |
Cash Flows from Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt |
|
| 283,003 |
|
|
| — |
|
|
| 229,000 |
|
|
| — |
|
Repayments of long-term debt, including prepayment costs |
|
| (433,383 | ) |
|
| (418,986 | ) |
|
| (233,927 | ) |
|
| (1,421 | ) |
Debt issuance costs |
|
| — |
|
|
| (1,300 | ) | ||||||||
Payments for common stock repurchased |
|
| (130,328 | ) |
|
| — |
|
|
| — |
|
|
| (75,000 | ) |
Proceeds from equity awards |
|
| 8,050 |
|
|
| 4,039 |
|
|
| 60 |
|
|
| 7,372 |
|
Employee withholding taxes paid related to net share settlement of equity awards |
|
| (1,179 | ) |
|
| (249 | ) |
|
| (1,125 | ) |
|
| (1,136 | ) |
Net cash used by financing activities |
|
| (273,837 | ) |
|
| (416,496 | ) |
|
| (5,992 | ) |
|
| (70,185 | ) |
Effect of foreign exchange rate changes on cash and cash equivalents |
|
| (7,132 | ) |
|
| 2,173 |
|
|
| 4,561 |
|
|
| (240 | ) |
Net decrease in cash and cash equivalents |
|
| (299,641 | ) |
|
| (243,834 | ) | ||||||||
Net increase (decrease) in cash and cash equivalents |
|
| 28,513 |
|
|
| (102,819 | ) | ||||||||
Cash and cash equivalents, beginning of period |
|
| 400,959 |
|
|
| 514,151 |
|
|
| 70,558 |
|
|
| 400,959 |
|
Cash and cash equivalents, end of period |
| $ | 101,318 |
|
| $ | 270,317 |
|
| $ | 99,071 |
|
| $ | 298,140 |
|
Supplemental Cash Flow Information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid |
| $ | 75,660 |
|
| $ | 86,293 |
|
| $ | 26,758 |
|
| $ | 35,034 |
|
Income taxes paid |
| $ | 73,862 |
|
| $ | 53,764 |
|
| $ | 3,081 |
|
| $ | 3,978 |
|
Capital expenditures incurred but not paid |
| $ | 7,682 |
|
| $ | 2,098 |
|
| $ | 5,542 |
|
| $ | 3,594 |
|
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 distributors of professional beauty supplies in the U.S. based on store count, operating under 2 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 salon professionals.
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, 2021.2022. 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,December 31, 2022, and September 30, 2021,2022, and our consolidated results of operations, consolidated comprehensive income, consolidated cash flows and consolidated statements of stockholders’ equity for the three and nine months ended June 30, 2022 and 2021, and our consolidated cash flows for the nine months ended June 30,December 31, 2022 and 2021.
Principles of Consolidation
The unaudited condensed consolidated interim financial statements include all accounts of Sally Beauty Holdings, Inc. and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. All amounts are in U.S. Dollars.
Accounting Policies
We adhere to the same accounting policies in the preparation of our condensed consolidated interim financial statements as we do in the preparation of our full year consolidated financial statements. As permitted under GAAP, interim accounting for certain expenses, including income taxes, is based on full-year assumptions. For interim financial reporting purposes, income taxes are recorded based upon our estimated annual effective income tax.
Use of Estimates
In order to present our financial statements in conformity with GAAP, we are required to make certain estimates and assumptions that impact our interim financial statements and supplementary disclosures. These estimates may use forecasted financial information based on reasonable information available, however are subject to change in the future. 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 fiscal years 2022 and 2021 were adversely impacted by the COVID-19 pandemic and its effects on the global economy. Given the uncertainty around the continued effects of the COVID-19 pandemic and macro-environment, we cannot reasonably predict the effect they will have on future periods. If once again we become materially and adversely impacted, we may have to consider adjustments to our operations, inventory, liquidity, capital expenditures and accounting estimates and reserves.
2. Revenue Recognition
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, |
|
|
|
|
|
| Three Months Ended December 31, |
| ||||||||||
|
|
|
|
|
| 2022 |
|
| 2021 |
|
|
|
|
|
| 2022 |
|
| 2021 |
| ||||
Beginning Balance |
|
|
|
|
| $ | 16,744 |
|
| $ | 13,947 |
|
|
|
|
|
| $ | 13,460 |
|
| $ | 16,744 |
|
Loyalty points and gift cards issued but not redeemed, net of estimated breakage | Loyalty points and gift cards issued but not redeemed, net of estimated breakage |
|
| 5,195 |
|
|
| 11,950 |
| Loyalty points and gift cards issued but not redeemed, net of estimated breakage |
|
| 6,291 |
|
|
| 5,842 |
| ||||||
Revenue recognized from beginning liability | Revenue recognized from beginning liability |
|
| (8,132 | ) |
|
| (9,391 | ) | Revenue recognized from beginning liability |
|
| (4,489 | ) |
|
| (3,509 | ) | ||||||
Ending Balance |
|
|
|
|
| $ | 13,807 |
|
| $ | 16,506 |
|
|
|
|
|
| $ | 15,262 |
|
| $ | 19,077 |
|
See Note 10, Segment Reporting, for additional information regarding the disaggregation of our sales revenue.
3.
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 three-levelfair value hierarchy, defined in ASC Topic 820, Fair Value Measurement, as amended, we categorizecategorized our financial assets and liabilities as follows:follow:
(in thousands) |
| Classification |
| Fair Value Hierarchy Level |
| June 30, 2022 |
|
| September 30, 2021 |
|
| Classification |
| Fair Value Hierarchy Level |
| December 31, 2022 |
|
| September 30, 2022 |
| ||||
Financial Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
| Other current assets |
| Level 2 |
| $ | 547 |
|
| $ | — |
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-designated cash flow hedges |
| Other current assets |
| Level 2 |
| $ | 4,463 |
|
| $ | 294 |
| ||||||||||||
Interest rate caps |
| Other assets |
| Level 2 |
|
| 2,029 |
|
|
| 35 |
|
| Other current assets |
| Level 2 |
|
| 3,627 |
|
|
| 3,860 |
|
Total assets |
|
|
|
|
| $ | 2,576 |
|
| $ | 35 |
|
|
|
|
|
| $ | 8,090 |
|
| $ | 4,154 |
|
. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
| Accrued liabilities |
| Level 2 |
| $ | 315 |
|
| $ | — |
|
|
|
|
|
|
|
|
|
|
|
|
|
Designated cash flow hedges |
| Accrued liabilities |
| Level 2 |
| $ | 1,930 |
|
| $ | — |
| ||||||||||||
Non-designated cash flow hedges |
| Accrued liabilities |
| Level 2 |
|
| 4,045 |
|
|
| 79 |
| ||||||||||||
Total liabilities |
|
|
|
|
| $ | 5,975 |
|
| $ | 79 |
|
Financial instruments not measured atThe fair value for interest rate caps and foreign exchange contracts were measured using widely accepted valuation techniques, such as discounted cash flow analyses and observable inputs, such as market interest rates and foreign exchange rates.
Other fair value disclosures
The carrying amounts of cash equivalents, trade and other accounts receivable and accounts payable and borrowing under our ABL facility approximate their respective fair values due to the short-term nature of these financial instruments.Carrying amounts and the related estimated fair value of our long-term debt, excluding capital lease obligations and debt issuance costs, are as follows:
|
|
|
| June 30, 2022 |
|
| September 30, 2021 |
|
|
|
| December 31, 2022 |
|
| September 30, 2022 |
| ||||||||||||||||||||
(in thousands) |
| Fair Value Hierarchy Level |
| Carrying Value |
|
| Fair Value |
|
| Carrying Value |
|
| Fair Value |
|
| Fair Value Hierarchy Level |
| Carrying Value |
|
| Fair Value |
|
| Carrying Value |
|
| Fair Value |
| ||||||||
Long-term debt, excluding capital leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior notes |
| Level 1 |
| $ | 679,961 |
|
| $ | 638,313 |
|
| $ | 979,961 |
|
| $ | 1,019,635 |
|
| Level 1 |
| $ | 679,961 |
|
| $ | 652,763 |
|
| $ | 679,961 |
|
| $ | 639,163 |
|
Term loan B |
| Level 2 |
|
| 408,875 |
|
|
| 403,764 |
|
|
| 413,000 |
|
|
| 411,451 |
|
| Level 2 |
|
| 406,125 |
|
|
| 403,587 |
|
|
| 407,500 |
|
|
| 398,331 |
|
Total long-term debt |
|
|
| $ | 1,088,836 |
|
| $ | 1,042,077 |
|
| $ | 1,392,961 |
|
| $ | 1,431,086 |
|
|
|
| $ | 1,086,086 |
|
| $ | 1,056,350 |
|
| $ | 1,087,461 |
|
| $ | 1,037,494 |
|
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 Term Loanterm loan B was measured using quoted market prices for similar debt securities in active markets or widely accepted valuation techniques, such as discounted cash flow analyses, using observable inputs, such as market interest rates.
4. | Stockholders’ Equity |
4. Stockholders’ Equity
Share Repurchases
In August 2017, our Board of Directors (“Board”) approved a share repurchase program authorizing the Companyus 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 June 30,December 31, 2022, we had authorization of approximately $595.8 million of additional potential share repurchases remaining under our share repurchase program.
Information related to For the three months ended December 31, 2022, we did not repurchase shares under our share repurchase program. For the three months ended December 31, 2021, we repurchased 3.7 million shares repurchased and subsequently retired were as follows (in thousands):of common stock at a total cost of $75.0 million.
|
| Three Months Ended June 30, |
|
| Nine Months Ended June 30, |
|
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
|
| ||||
Number of shares repurchased |
|
| — |
|
|
| — |
|
|
| 6,832 |
|
|
| — |
|
|
Total cost of share repurchased |
| $ | — |
|
| $ | — |
|
| $ | 130,328 |
|
| $ | — |
|
|
Accumulated Other Comprehensive LossIncome (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 |
|
| (34,645 | ) |
|
| 1,073 |
|
|
| 400 |
|
|
| (33,172 | ) |
|
Reclassification to net earnings, net of tax |
|
| — |
|
|
| 1,255 |
|
|
| 188 |
|
|
| 1,443 |
|
|
Balance at June 30, 2022 |
| $ | (126,799 | ) |
| $ | 243 |
|
| $ | 186 |
|
| $ | (126,370 | ) |
|
|
| Foreign Currency Translation Adjustments |
|
| Interest Rate Caps |
|
| Foreign Exchange Contracts |
|
| Total |
|
| ||||
Balance at September 30, 2022 |
| $ | (153,128 | ) |
| $ | 1,960 |
|
| $ | (679 | ) |
| $ | (151,847 | ) |
|
Other comprehensive income (loss) before reclassification, net of tax |
|
| 25,941 |
|
|
| 155 |
|
|
| (608 | ) |
|
| 25,488 |
|
|
Reclassification to net earnings, net of tax |
|
| — |
|
|
| 48 |
|
|
| (302 | ) |
|
| (254 | ) |
|
Balance at December 31, 2022 |
| $ | (127,187 | ) |
| $ | 2,163 |
|
| $ | (1,589 | ) |
| $ | (126,613 | ) |
|
The tax impact for the changes in other comprehensive loss and the reclassifications to net earnings was not material.
5. Weighted-Average Shares
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, |
|
| Three Months Ended December 31, |
| ||||||||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||||
Weighted-average basic shares |
|
| 106,940 |
|
|
| 112,739 |
|
|
| 109,238 |
|
|
| 112,605 |
|
|
| 107,140 |
|
|
| 111,995 |
|
Dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option and stock award programs |
|
| 1,586 |
|
|
| 2,188 |
|
|
| 1,669 |
|
|
| 1,669 |
|
|
| 2,320 |
|
|
| 1,973 |
|
Weighted-average diluted shares |
|
| 108,526 |
|
|
| 114,927 |
|
|
| 110,907 |
|
|
| 114,274 |
|
|
| 109,460 |
|
|
| 113,968 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive options excluded from our computation of diluted shares |
|
| 2,406 |
|
|
| 2,188 |
|
|
| 2,385 |
|
|
| 1,670 |
|
|
| 2,123 |
|
|
| 2,775 |
|
6. | Goodwill and Intangible Assets |
6. Goodwill and Intangible Assets
During our second fiscal quarter, we completed our annual assessment for impairment of goodwill and indefinite-lived intangible assets. For goodwill, we used a qualitative analysis and our actual and forecasted results are exceeding the estimates from the last quantitative test. Additionally, Wwee considered potential triggering events and determined there were none for the three months ended June 30,December 31, 2022. NaNNo material impairment losses were recognized in the current or prior periods presented in connection with our goodwill and other intangible assets.
|
| Three Months Ended June 30, |
|
| Nine Months Ended June 30, |
| ||||||||||
(in thousands) |
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
Intangible assets amortization expense |
| $ | 977 |
|
| $ | 1,648 |
|
| $ | 3,047 |
|
| $ | 4,956 |
|
|
| Three Months Ended December 31, |
| |||||
(in thousands) |
| 2022 |
|
| 2021 |
| ||
Intangible assets amortization expense |
| $ | 1,008 |
|
| $ | 1,071 |
|
Additionally, during the ninethree months ended June 30,December 31, 2022, the decreaseschanges in goodwill and other intangibles were primarily from the effects of foreign currency exchange rates of $8.3$6.4 million and $2.2$1.7 million, respectively. During the three months ended December 31, 2021, the changes in goodwill were primarily from the effects of foreign currency exchange rates of $0.9 million.
7. | Accrued Liabilities |
7. Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
|
| June 30, 2022 |
|
| September 30, 2021 |
|
| December 31, 2022 |
|
| September 30, 2022 |
| ||||
Compensation and benefits |
| $ | 67,664 |
|
| $ | 73,344 |
|
| $ | 46,027 |
|
| $ | 58,693 |
|
Deferred revenue |
|
| 16,216 |
|
|
| 18,543 |
|
|
| 20,384 |
|
|
| 18,810 |
|
Rental obligations |
|
| 11,187 |
|
|
| 10,501 |
|
|
| 14,353 |
|
|
| 10,701 |
|
Insurance reserves |
|
| 6,098 |
|
|
| 5,934 |
|
|
| 6,104 |
|
|
| 5,742 |
|
Property and other taxes |
|
| 4,266 |
|
|
| 4,161 |
| ||||||||
Interest payable |
|
| 3,722 |
|
|
| 24,101 |
|
|
| 3,865 |
|
|
| 13,445 |
|
Property and other taxes |
|
| 2,497 |
|
|
| 3,853 |
| ||||||||
Operating accruals and other |
|
| 58,612 |
|
|
| 69,879 |
|
|
| 47,786 |
|
|
| 49,513 |
|
Total accrued liabilities |
| $ | 165,996 |
|
| $ | 206,155 |
|
| $ | 142,785 |
|
| $ | 161,065 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.
| Short-term Borrowings and Long-term Debt |
At June 30,December 31, 2022, our ABL facility had $167.0$65.0 million in outstanding borrowings and $314.2$417.7 million available for borrowing, including the Canadian sub-facility, subject to the conditions contained therein.
9. Derivative Instruments and Hedging Activities
9. | Derivative Instruments and Hedging Activities |
During the ninethree months ended June 30,December 31, 2022, we did 0tnot 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,December 31, 2022, we held forwards, which expire ratably through September 30, 2022,2023, with a notional amount, based upon exchange rates at June 30,December 31, 2022, as follows (in thousands):
Notional Currency |
| Notional Amount |
|
| Notional Amount |
| ||
Mexican Peso |
| $ | 6,478 |
|
| $ | 17,629 |
|
Euro |
|
| 4,084 |
|
|
| 11,549 |
|
Canadian Dollar |
|
| 2,619 |
|
|
| 8,921 |
|
Total |
| $ | 13,181 |
|
| $ | 38,099 |
|
Quarterly, the changes in fair value related to thethese 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 ninethree months ended June 30,December 31, 2022 and 2021, we recognized a lossgain of $0.2$0.3 million and a gainloss of $0.1$0.3 million, respectively. The effects of our foreign currency forwards were not material for the three months ended June 30, 2022 and 2021. Based on June 30,December 31, 2022, valuations and exchange rates, we expect to reclassify gainslosses of approximately $1.6 million into cost of goods sold over the next 12 months.
Interest Rate Caps
In July 2017, we purchased 2two 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 ninethree months ended June 30,December 31, 2022 and 2021, we recognized expense of $1.3$0.1 million and $0.8$0.4 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 June 30, 2022 and 2021. Over the next 12 months, we expect to reclassify gains of
approximately $0.7$2.6 million into interest expense, which represents estimated interest rate settlements less the original value of the expiring caplets.
Non-Designated Derivative Instruments
We also use foreign exchange contracts to mitigate our exposure to exchange rate changes in connection with certain intercompany balances not permanently invested. At December 31, 2022, we held forwards, which expire on various dates in the first month of both the second and third fiscal quarters of fiscal year 2023, with a notional amount, based upon exchange rates at December 31, 2022, as follows (in thousands):
Notional Currency |
| Notional Amount |
| |
British Pound |
| $ | 87,321 |
|
Canadian Dollar |
|
| 56,329 |
|
Euro |
|
| 56,269 |
|
Mexican Peso |
|
| 23,865 |
|
Total |
| $ | 223,784 |
|
We record changes in fair value and realized gains or losses related to these foreign currency forwards into selling, general and administrative expenses. For the three months ended December 31, 2022 and 2021, the effects of these foreign exchange contracts on our condensed consolidated financial statements were gains of $0.4 million in both years.
10. Segment Reporting
10. | Segment Reporting |
Segment data for the three and nine months ended June 30,December 31, 2022 and 2021, is as follows (in thousands):
|
| Three Months Ended June 30, |
|
| Nine Months Ended June 30, |
|
| Three Months Ended December 31, |
| |||||||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||||
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sally Beauty Supply ("SBS") |
| $ | 551,725 |
|
| $ | 602,681 |
|
| $ | 1,639,040 |
|
| $ | 1,693,015 |
|
| $ | 549,472 |
|
| $ | 561,530 |
|
Beauty Systems Group ("BSG") |
|
| 409,742 |
|
|
| 419,706 |
|
|
| 1,214,065 |
|
|
| 1,191,722 |
|
|
| 407,583 |
|
|
| 418,721 |
|
Total |
| $ | 961,467 |
|
| $ | 1,022,387 |
|
| $ | 2,853,105 |
|
| $ | 2,884,737 |
|
| $ | 957,055 |
|
| $ | 980,251 |
|
Earnings before provision for income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBS |
| $ | 88,792 |
|
| $ | 116,784 |
|
| $ | 270,355 |
|
| $ | 311,975 |
|
| $ | 99,174 |
|
| $ | 100,623 |
|
BSG |
|
| 56,067 |
|
|
| 55,265 |
|
|
| 160,621 |
|
|
| 151,680 |
|
|
| 49,647 |
|
|
| 58,546 |
|
Segment operating earnings |
|
| 144,859 |
|
|
| 172,049 |
|
|
| 430,976 |
|
|
| 463,655 |
|
|
| 148,821 |
|
|
| 159,169 |
|
Unallocated expenses |
|
| 45,612 |
|
|
| 44,124 |
|
|
| 131,389 |
|
|
| 155,034 |
|
|
| 51,827 |
|
|
| 45,290 |
|
Restructuring |
|
| 44 |
|
|
| 508 |
|
|
| 1,143 |
|
|
| 1,371 |
|
|
| 10,406 |
|
|
| 1,099 |
|
Consolidated operating earnings |
|
| 99,203 |
|
|
| 127,417 |
|
|
| 298,444 |
|
|
| 307,250 |
|
|
| 86,588 |
|
|
| 112,780 |
|
Interest expense |
|
| 35,977 |
|
|
| 23,452 |
|
|
| 76,113 |
|
|
| 73,313 |
|
|
| 17,923 |
|
|
| 20,241 |
|
Earnings before provision for income taxes |
| $ | 63,226 |
|
| $ | 103,965 |
|
| $ | 222,331 |
|
| $ | 233,937 |
|
| $ | 68,665 |
|
| $ | 92,539 |
|
Sales between segments, which are eliminated in consolidation, were not material during the three and nine months ended June 30,December 31, 2022 and 2021.
Disaggregation of net sales by segment
The following tables disaggregate our segment revenues by merchandise category. We have reclassified certain prior year amounts within BSG to conform to current year presentation.
|
| Three Months Ended June 30, |
|
| Nine Months Ended June 30, |
|
| Three Months Ended December 31, |
| |||||||||||||||
SBS |
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||||
Hair color |
|
| 38.3 | % |
|
| 36.4 | % |
|
| 37.7 | % |
|
| 36.1 | % |
|
| 38.7 | % |
|
| 36.8 | % |
Hair care |
|
| 23.5 | % |
|
| 22.1 | % |
|
| 23.8 | % |
|
| 21.6 | % |
|
| 23.4 | % |
|
| 23.8 | % |
Styling tools and supplies |
|
| 18.8 | % |
|
| 21.3 | % |
|
| 19.4 | % |
|
| 22.4 | % |
|
| 19.5 | % |
|
| 20.2 | % |
Nail |
|
| 11.3 | % |
|
| 10.9 | % |
|
| 10.8 | % |
|
| 10.8 | % |
|
| 10.3 | % |
|
| 10.4 | % |
Skin and cosmetics |
|
| 7.6 | % |
|
| 8.5 | % |
|
| 7.6 | % |
|
| 8.4 | % |
|
| 7.4 | % |
|
| 7.9 | % |
Other beauty items |
|
| 0.5 | % |
|
| 0.8 | % |
|
| 0.7 | % |
|
| 0.7 | % |
|
| 0.7 | % |
|
| 0.9 | % |
Total |
|
| 100.0 | % |
|
| 100.0 | % |
|
| 100.0 | % |
|
| 100.0 | % |
|
| 100.0 | % |
|
| 100.0 | % |
|
| Three Months Ended June 30, |
|
| Nine Months Ended June 30, |
|
| Three Months Ended December 31, |
| |||||||||||||||
BSG |
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||||
Hair care |
|
| 43.5 | % |
|
| 43.5 | % | ||||||||||||||||
Hair color |
|
| 42.3 | % |
|
| 44.3 | % |
|
| 42.4 | % |
|
| 42.4 | % |
|
| 38.3 | % |
|
| 38.4 | % |
Hair care |
|
| 40.0 | % |
|
| 37.2 | % |
|
| 39.9 | % |
|
| 38.4 | % | ||||||||
Styling tools and supplies |
|
| 11.4 | % |
|
| 11.6 | % |
|
| 11.2 | % |
|
| 11.7 | % |
|
| 10.8 | % |
|
| 11.4 | % |
Skin and cosmetics |
|
| 3.4 | % |
|
| 3.7 | % |
|
| 3.9 | % |
|
| 4.1 | % |
|
| 4.4 | % |
|
| 4.4 | % |
Nail |
|
| 2.5 | % |
|
| 2.7 | % |
|
| 2.3 | % |
|
| 2.9 | % |
|
| 2.7 | % |
|
| 2.0 | % |
Other beauty items |
|
| 0.4 | % |
|
| 0.5 | % |
|
| 0.3 | % |
|
| 0.5 | % |
|
| 0.3 | % |
|
| 0.3 | % |
Total |
|
| 100.0 | % |
|
| 100.0 | % |
|
| 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, |
|
| Three Months Ended December 31, |
| |||||||||||||||
SBS |
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||||
Company-operated stores |
|
| 94.0 | % |
|
| 94.2 | % |
|
| 94.0 | % |
|
| 93.7 | % |
|
| 93.6 | % |
|
| 94.2 | % |
E-commerce |
|
| 6.0 | % |
|
| 5.7 | % |
|
| 6.0 | % |
|
| 6.2 | % |
|
| 6.4 | % |
|
| 5.8 | % |
Franchise stores |
|
| 0.0 | % |
|
| 0.1 | % |
|
| 0.0 | % |
|
| 0.1 | % | ||||||||
Total |
|
| 100.0 | % |
|
| 100.0 | % |
|
| 100.0 | % |
|
| 100.0 | % |
|
| 100.0 | % |
|
| 100.0 | % |
|
| Three Months Ended June 30, |
|
| Nine Months Ended June 30, |
|
| Three Months Ended December 31, |
| |||||||||||||||
BSG |
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||||
Company-operated stores |
|
| 66.6 | % |
|
| 69.2 | % |
|
| 66.9 | % |
|
| 69.7 | % |
|
| 66.3 | % |
|
| 67.5 | % |
E-commerce |
|
| 13.6 | % |
|
| 11.7 | % | ||||||||||||||||
Distributor sales consultants |
|
| 13.9 | % |
|
| 14.1 | % |
|
| 13.9 | % |
|
| 14.0 | % |
|
| 12.6 | % |
|
| 13.6 | % |
E-commerce |
|
| 11.6 | % |
|
| 8.8 | % |
|
| 11.8 | % |
|
| 8.8 | % | ||||||||
Franchise stores |
|
| 7.9 | % |
|
| 7.9 | % |
|
| 7.4 | % |
|
| 7.5 | % |
|
| 7.5 | % |
|
| 7.2 | % |
Total |
|
| 100.0 | % |
|
| 100.0 | % |
|
| 100.0 | % |
|
| 100.0 | % |
|
| 100.0 | % |
|
| 100.0 | % |
11. | Restructuring |
Restructuring expenses, included in Cost of Goods Sold (“COGS”) and Restructuring for the three months ended December 31, 2022 and 2021 are as follows (in thousands):
|
| Three Months Ended December 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Included in COGS |
|
|
|
|
|
|
|
|
Distribution Center Consolidation and Store Optimization Plan |
| $ | (2,680 | ) | (a) | $ | — |
|
|
|
|
|
|
|
|
|
|
Included in Restructuring |
|
|
|
|
|
|
|
|
Distribution Center Consolidation and Store Optimization Plan |
| $ | 10,406 |
| (b) | $ | — |
|
Transformation Plan |
|
| — |
|
|
| 1,099 |
|
Total in Restructuring |
|
| 10,406 |
|
|
| 1,099 |
|
Total Restructuring Expenses |
| $ | 7,726 |
|
| $ | 1,099 |
|
(a) | Amounts included within COGS are related to adjustments to our expected obsolescence reserve related to the Plan (as defined below). |
(b) | Amounts included within Restructuring (SG&A) are related to stores and distribution centers closed during the quarter in accordance with the Plan (as defined below). |
Distribution Center Consolidation and Store Optimization Plan
In the fourth quarter of fiscal year 2022, our Board approved the Distribution Center Consolidation and Store Optimization Plan authorizing the closure of 330 SBS stores and 35 BSG stores, and the closure of two BSG distribution centers in Clackamas, Oregon and Pottsville, Pennsylvania (“the Plan”).
During the three months ended December 31, 2022, we completed the closure of the two BSG distributions centers. We believe that consolidating the operation of these two distribution centers into our larger distribution centers will increase product availability, shorten delivery times and reduce overall costs.
As of December 31, 2022, we have closed 327 SBS stores and 14 BSG stores as part of the Plan.
Stores identified for early closure were part of a strategic evaluation which included a market analysis of certain locations where we believe we will be able to recapture demand at other nearby store locations and improve overall profitability. By optimizing our store base, we are further focusing on our customers’ shopping experience and our product offerings.
The Plan will continue to be executed throughout fiscal year 2023 and into the first half of fiscal year 2024, and therefore it may include future charges related to store closures such as exit costs, lease negotiation penalties, termination benefits and adjustments to estimates.
The liability related to the Plan, which is included in accrued liabilities on our consolidated balance sheets, is as follows:
(in thousands) |
| Liability at September 30, 2022 |
|
| SBS Expense |
|
| BSG Expense |
|
| Cash Payments |
|
| Non-Cash Amounts |
|
| Liability at December 31, 2022 |
| ||||||
Closing costs - leases (a) |
| $ | — |
|
| $ | 4,738 |
|
| $ | 132 |
|
| $ | — |
|
| $ | (868 | ) |
| $ | 4,002 |
|
Closing costs - payroll expenses (b) |
|
| — |
|
|
| 988 |
|
|
| 961 |
|
|
| — |
|
|
| — |
|
|
| 1,949 |
|
Impairment - property and equipment (c) |
|
| — |
|
|
| 1,069 |
|
|
| 610 |
|
|
| — |
|
|
| (1,679 | ) |
|
| — |
|
Inventory transfer costs |
|
| — |
|
|
| 1,128 |
|
|
| 204 |
|
|
| (294 | ) |
|
| — |
|
|
| 1,038 |
|
Impairment - operating lease assets (c) |
|
| — |
|
|
| 345 |
|
|
| 83 |
|
|
| — |
|
|
| (428 | ) |
|
| — |
|
Other |
|
| 1,291 |
|
|
| 102 |
|
|
| 46 |
|
|
| (1,351 | ) |
|
| — |
|
|
| 88 |
|
Total |
| $ | 1,291 |
|
| $ | 8,370 |
|
| $ | 2,036 |
|
| $ | (1,645 | ) |
| $ | (2,975 | ) |
| $ | 7,077 |
|
(a) | Lease-related closing costs include contract terminations costs as well as other rental obligations associated with closing stores. |
(b) | Payroll-related closing costs include one-time termination benefits related to the closure of our distribution centers as well as other payroll expenses associated with closing stores. |
(c) | Remaining carrying value for the long-lived assets, including operating lease assets, were not material and approximate their fair value. |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This section discusses management’s view of the financial condition, results of operations and cash flows of Sally Beauty. This section should be read in conjunction with the information contained in our Annual Report on Form 10-K for the fiscal year ended September 30, 2021.2022, including the Risk Factors sections therein, and information contained elsewhere in this Quarterly Report, including the condensed consolidated interim financial statements and notes to those financial statements.
Executive Overview
For fiscal 2023, we are focusing on three key strategic initiatives to drive growth and profitability:
• | Enhancing our customer centricity; | |
• | Growing high margin owned brands at Sally Beauty and amplifying innovation; and |
Increasing the efficiency of our operations and optimizing our capabilities.
We believe focusing in these areas will position our company for future growth and further enhance our ability to meet our customers where they are.
Enhancing our customer centricity
During the quarter, BSG launched a new strategic partnership with Salon HQ. Salon HQ is a customizable digital storefront platform that gives stylists the ability to curate a product selection from thousands of BSG merchandise choices and enables their clients to purchase directly from their shops without the stylists having to finance and carry inventory. In addition, SBS has identified the locations for its initial Studio by Sally pilot stores that we expect to open this fiscal year. The Studio by Sally pilot store program will have a digital-first focus, from digital check-in to digital education throughout the store and beyond, including personalized appointments at our in-store salons with licensed stylists who will train and educate consumers on how to color their own hair and achieve their desired results. We believe that we will be able to expand the Studio by Sally concept to 100 locations throughout the U.S. over the next three to four fiscal years if successful.
Growing high margin owned brands at Sally Beauty and amplifying innovation
We believe growing our SBS owned-brands, through innovation and marketing, will provide improved margins, strengthen our long-term relationships with existing customers and help attract new customers. During the quarter, we invested more into marketing of our owned-brands and launched the first phase of our new owned-branded hair repair product line – bondbar. These initiatives delivered an increase in our owned-brands sales penetration, resulting in increased SBS profit margins.
Furthermore, we look forward to providing salons and stylists with new innovations from our BSG vendors as they are launched over the next two fiscal quarters.
Increasing the efficiency of our operations and optimizing our capabilities
In the thirdfourth quarter of fiscal year 2022, we delivered solid gross margin growthannounced our plan to close 330 SBS stores, 35 BSG stores and two BSG distribution centers. Based on our strategic evaluation, we believe that we will able to recapture demand of closed stores in both segments compared to the same period last year. Additionally duringother nearby store locations and improve overall profitability. During the quarter, we repaidcompleted the entire $300 million dollar balanceclosure of our two BSG distributions centers and the majority of our planned store closures. Additionally, we re-optimized our store supply chain network based on our 8.75% Senior Notesnew store fleet. As of December 31, 2022, we have closed 327 SBS stores and continued to invest14 BSG stores as part of the Plan and are currently meeting our sales recapture expectations.
See Note 11, Restructuring, in Item 1 of this quarterly report for growth through many of our initiatives, despite volatile market conditions and its impactmore information on our topline performance. With a healthy balance sheet, a strong operating infrastructure and the loyalty of our core customers, we believe we are well positioned to continue navigating the macro-environment and remain focused on our four strategic pillars: leveraging our digital platform, driving loyalty and personalization, delivering product innovation and optimizing our supply chain.Plan.
Financial Summary for the Three Months Ended June 30,December 31, 2022
| • | Consolidated net sales for the three months ended |
| • | Consolidated comparable sales |
| • | Consolidated gross profit for the three months ended |
| • | Consolidated operating earnings for the three months ended |
| • | For the three months ended |
| • | For the three months ended |
| • | Cash provided by operations was |
|
|
Trends Impacting Our Business
Global inflationary pressures continue to impactinfluence consumer spendingand stylist behavior andalong with the cost for products and services. Moreover, there is still volatilityIn the U.S. and Canada, we are seeing our SBS customers color their hair less frequently and reduce the size of their basket when they shop with us, while at BSG we are seeing stylists purchasing closer to the time they use products. Additionally, inflationary pressures have impacted wages, especially among retail and hourly employees, as we have experienced an increase in the global supply chain, while freight carriers are faced with higher fuel prices.our labor costs in order to attract and retain associates. During the current quarter, and fiscal year, these headwinds have resulted in lower traffic and conversion in our business and increases in certain operating costs, including inbound freight and delivery expenses. Additionally, due to general labor shortages in the U.S. during the year, especially among retail and hourly employees, we have experienced an increase in our compensation costs in order to attract and retain associates.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 and supply chain disruptions.inflation.
InFurthermore, in a measure to curb inflation, the U.S. Federal Reserve has continued to increaseincreased the federal funds effective rate. In turn, these increases have raised the cost of debt borrowings. We currently have approximately $575.9$471.1 million in variable rate debt with $408.9outstanding, of which $406.1 million is hedged with interest rate caps to help mitigate the impact of raising rates. Future increases in the federal funds effective rate could have a material adverse impact to our cost of debt,borrowing, including any future changes in our debt structure.
Impact of COVID-19 on Our Business
DuringWhile we have seen signs of stabilization from the fiscal year, we experienced disruptions to our business as a resultimpacts of the COVID-19 pandemic and we continue to take certain actions in order to protect our customers and associates. In particular, our store operations continue to face challenges and disruptions related to COVID-19 surges and spikes in infection levels. While the situation has shown signs of stabilization,virus, we cannot reasonably predict the effects of new variants or expect improving trends to continue. Therefore, our future performance may partially depend on impacts of COVID-19, such as decreased customer in-store traffic, temporary store closures, and continued labor and supply chain disruptions.
Refer to Item 1A. “Risk Factors” in our Form 10-K for the fiscal year ended September 30, 2021,2022, for further discussion on the risks and uncertainties created by COVID-19.
Comparable Sales
The Company’s initiative to invest in our digital platforms support our omni-channel strategies to provide customers an enhanced shopping experience. As such, weWe 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.
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, |
|
| Three Months Ended December 31, |
| |||||||||||||||||||||||||||||||||||||||
|
| 2022 |
|
| 2021 |
|
| Increase (Decrease) |
|
| 2022 |
|
| 2021 |
|
| Increase (Decrease) |
|
| 2022 |
|
| 2021 |
|
| Increase (Decrease) |
| |||||||||||||||||||||
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBS |
| $ | 551,725 |
|
| $ | 602,681 |
|
| $ | (50,956 | ) |
|
| (8.5 | )% |
| $ | 1,639,040 |
|
| $ | 1,693,015 |
|
| $ | (53,975 | ) |
|
| (3.2 | )% |
| $ | 549,472 |
|
| $ | 561,530 |
|
| $ | (12,058 | ) |
|
| (2.1 | )% |
BSG |
|
| 409,742 |
|
|
| 419,706 |
|
|
| (9,964 | ) |
|
| (2.4 | )% |
|
| 1,214,065 |
|
|
| 1,191,722 |
|
|
| 22,343 |
|
|
| 1.9 | % |
|
| 407,583 |
|
|
| 418,721 |
|
|
| (11,138 | ) |
|
| (2.7 | )% |
Consolidated |
| $ | 961,467 |
|
| $ | 1,022,387 |
|
| $ | (60,920 | ) |
|
| (6.0 | )% |
| $ | 2,853,105 |
|
| $ | 2,884,737 |
|
| $ | (31,632 | ) |
|
| (1.1 | )% |
| $ | 957,055 |
|
| $ | 980,251 |
|
| $ | (23,196 | ) |
|
| (2.4 | )% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBS |
| $ | 322,815 |
|
| $ | 349,167 |
|
| $ | (26,352 | ) |
|
| (7.5 | )% |
| $ | 960,249 |
|
| $ | 982,139 |
|
| $ | (21,890 | ) |
|
| (2.2 | )% |
| $ | 323,475 |
|
| $ | 328,172 |
|
| $ | (4,697 | ) |
|
| (1.4 | )% |
BSG |
|
| 167,393 |
|
|
| 165,239 |
|
|
| 2,154 |
|
|
| 1.3 | % |
|
| 495,420 |
|
|
| 470,220 |
|
|
| 25,200 |
|
|
| 5.4 | % |
|
| 165,099 |
|
|
| 171,957 |
|
|
| (6,858 | ) |
|
| (4.0 | )% |
Consolidated |
| $ | 490,208 |
|
| $ | 514,406 |
|
| $ | (24,198 | ) |
|
| (4.7 | )% |
| $ | 1,455,669 |
|
| $ | 1,452,359 |
|
| $ | 3,310 |
|
|
| 0.2 | % |
| $ | 488,574 |
|
| $ | 500,129 |
|
| $ | (11,555 | ) |
|
| (2.3 | )% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment gross margin: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBS |
|
| 58.5 | % |
|
| 57.9 | % |
| 60 |
|
| bps |
|
|
| 58.6 | % |
|
| 58.0 | % |
| 60 |
|
| bps |
|
|
| 58.9 | % |
|
| 58.4 | % |
| 50 |
|
| bps |
| ||||||
BSG |
|
| 40.9 | % |
|
| 39.4 | % |
| 150 |
|
| bps |
|
|
| 40.8 | % |
|
| 39.5 | % |
| 130 |
|
| bps |
|
|
| 40.5 | % |
|
| 41.1 | % |
| (60) |
|
| bps |
| ||||||
Consolidated |
|
| 51.0 | % |
|
| 50.3 | % |
| 70 |
|
| bps |
|
|
| 51.0 | % |
|
| 50.3 | % |
| 70 |
|
| bps |
|
|
| 51.0 | % |
|
| 51.0 | % |
| — |
|
| bps |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBS |
| $ | 88,792 |
|
| $ | 116,784 |
|
| $ | (27,992 | ) |
|
| (24.0 | )% |
| $ | 270,355 |
|
| $ | 311,975 |
|
| $ | (41,620 | ) |
|
| (13.3 | )% |
| $ | 99,174 |
|
| $ | 100,623 |
|
| $ | (1,449 | ) |
|
| (1.4 | )% |
BSG |
|
| 56,067 |
|
|
| 55,265 |
|
|
| 802 |
|
|
| 1.5 | % |
|
| 160,621 |
|
|
| 151,680 |
|
|
| 8,941 |
|
|
| 5.9 | % |
|
| 49,647 |
|
|
| 58,546 |
|
|
| (8,899 | ) |
|
| (15.2 | )% |
Segment operating earnings |
|
| 144,859 |
|
|
| 172,049 |
|
|
| (27,190 | ) |
|
| (15.8 | )% |
|
| 430,976 |
|
|
| 463,655 |
|
|
| (32,679 | ) |
|
| (7.0 | )% |
|
| 148,821 |
|
|
| 159,169 |
|
|
| (10,348 | ) |
|
| (6.5 | )% |
Unallocated expenses and restructuring (a) |
|
| 45,656 |
|
|
| 44,632 |
|
|
| 1,024 |
|
|
| 2.3 | % |
|
| 132,532 |
|
|
| 156,405 |
|
|
| (23,873 | ) |
|
| (15.3 | )% |
|
| 62,233 |
|
|
| 46,389 |
|
|
| 15,844 |
|
|
| 34.2 | % |
Consolidated operating earnings |
|
| 99,203 |
|
|
| 127,417 |
|
|
| (28,214 | ) |
|
| (22.1 | )% |
|
| 298,444 |
|
|
| 307,250 |
|
|
| (8,806 | ) |
|
| (2.9 | )% |
|
| 86,588 |
|
|
| 112,780 |
|
|
| (26,192 | ) |
|
| (23.2 | )% |
Interest expense |
|
| 35,977 |
|
|
| 23,452 |
|
|
| 12,525 |
|
|
| 53.4 | % |
|
| 76,113 |
|
|
| 73,313 |
|
|
| 2,800 |
|
|
| 3.8 | % |
|
| 17,923 |
|
|
| 20,241 |
|
|
| (2,318 | ) |
|
| (11.5 | )% |
Earnings before provision for income taxes |
|
| 63,226 |
|
|
| 103,965 |
|
|
| (40,739 | ) |
|
| (39.2 | )% |
|
| 222,331 |
|
|
| 233,937 |
|
|
| (11,606 | ) |
|
| (5.0 | )% |
|
| 68,665 |
|
|
| 92,539 |
|
|
| (23,874 | ) |
|
| (25.8 | )% |
Provision for income taxes |
|
| 16,659 |
|
|
| 27,759 |
|
|
| (11,100 | ) |
|
| (40.0 | )% |
|
| 60,117 |
|
|
| 62,228 |
|
|
| (2,111 | ) |
|
| (3.4 | )% |
|
| 18,328 |
|
|
| 23,701 |
|
|
| (5,373 | ) |
|
| (22.7 | )% |
Net earnings |
| $ | 46,567 |
|
| $ | 76,206 |
|
| $ | (29,639 | ) |
|
| (38.9 | )% |
| $ | 162,214 |
|
| $ | 171,709 |
|
| $ | (9,495 | ) |
|
| (5.5 | )% |
| $ | 50,337 |
|
| $ | 68,838 |
|
| $ | (18,501 | ) |
|
| (26.9 | )% |
|
| . |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
|
|
|
|
|
| . |
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|
|
| ||
Number of stores at end-of-period (including franchises): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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| |||||||||||||||||||||||
Number of stores at end-of-period (including franchises) (b): | Number of stores at end-of-period (including franchises) (b): |
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||
SBS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 3,468 |
|
|
| 3,611 |
|
|
| (143 | ) |
|
| (4.0 | )% |
|
| 3,146 |
|
|
| 3,529 |
|
|
| (383 | ) |
|
|
|
|
BSG |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 1,361 |
|
|
| 1,367 |
|
|
| (6 | ) |
|
| (0.4 | )% |
|
| 1,352 |
|
|
| 1,364 |
|
|
| (12 | ) |
|
|
|
|
Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 4,829 |
|
|
| 4,978 |
|
|
| (149 | ) |
|
| (3.0 | )% |
|
| 4,498 |
|
|
| 4,893 |
|
|
| (395 | ) |
|
|
|
|
Comparable sales growth (decline) (b): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Comparable sales growth (decline): | Comparable sales growth (decline): |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||
SBS |
|
| (5.0 | )% |
|
| 43.1 | % |
| (4,810) |
|
| bps |
|
|
| (0.5 | )% |
|
| 11.8 | % |
| (1,235) |
|
| bps |
|
|
| 3.0 | % |
|
| 4.4 | % |
| (140) |
|
| bps |
| ||||||
BSG |
|
| (1.6 | )% |
|
| 43.0 | % |
| (4,460) |
|
| bps |
|
|
| 2.6 | % |
|
| 12.0 | % |
| (941) |
|
| bps |
|
|
| (1.5 | )% |
|
| 8.6 | % |
| (1,010) |
|
| bps |
| ||||||
Consolidated |
|
| (3.6 | )% |
|
| 43.1 | % |
| (4,670) |
|
| bps |
|
|
| 0.8 | % |
|
| 11.9 | % |
| (1,110) |
|
| bps |
|
|
| 1.1 | % |
|
| 6.1 | % |
| (500) |
|
| bps |
|
(a) | Unallocated expenses consist of corporate and shared costs and are included in selling, general and administrative expenses in our condensed consolidated statements of earnings. |
(b) | Our |
Results of Operations
The Three Months Ended June 30,December 31, 2022, compared to the Three Months Ended June 30,December 31, 2021
Net Sales
SBS. The decrease in net sales for SBS was primarily driven by the following (in thousands):
Comparable sales |
| $ | (28,522 | ) |
| $ | 15,954 |
|
Sales outside comparable sales (a) |
|
| (10,568 | ) |
|
| (16,220 | ) |
Foreign currency exchange |
|
| (11,866 | ) |
|
| (11,792 | ) |
Total |
| $ | (50,956 | ) |
| $ | (12,058 | ) |
| (a) | Includes stores opened for less than 14 months, net of stores closures, including stores closed under the Plan |
The decrease in SBS’s net sales was driven by lower comparable sales, the negative impact from foreign exchange rates and the impact of store closures in the prior twelve months, including stores closed stores.under the Plan, partially offset by an increase in our comparable sales. SBS’s comparable sales decreaseincrease was driven by fewer transactions as a result of lower store traffic, while thegrowth in average ticket, was relatively unchanged, resultingprimarily from lower average unit volumeinflationary impacts and pricing leverage, and partially offset by higher average unit retail prices, led by our color and care categories.fewer transactions.
BSG. The decrease in net sales for BSG was primarily driven by the following (in thousands):
Comparable sales |
| $ | (6,597 | ) |
| $ | (6,109 | ) |
Sales outside comparable sales (a) |
|
| (2,185 | ) |
|
| (2,396 | ) |
Foreign currency exchange |
|
| (1,182 | ) |
|
| (2,633 | ) |
Total |
| $ | (9,964 | ) |
| $ | (11,138 | ) |
| (a) | Includes stores opened for less than 14 months, net of stores closures, including from the Plan |
The decrease in BSG’s net sales was primarily due to lower comparable sales, the impact of closed stores and the negative impact from the Canadian foreign exchange rate. BSG’s comparable sales was driven byfaced headwinds from elevated demand in the prior year from the easing of COVID-19 restrictions and the impacts of the current economic environment which resulted in fewer transactions, as a result of lower store traffic,but was partially offset by an increasegrowth in average ticket, resulting from higher average unit retail prices, led by color, care and styling tools categories, partially offset by lower unit volume.ticket.
Gross Profit
SBS. SBS’s gross profit decreased for the three months ended June 30,December 31, 2022, as a result of a decrease inlower net sales, partially offset by a higher gross margin. SBS’s gross margin increased primarilygrew as a result of an improvement in pricing leverage partially offset by higher distribution and freight costs.increased penetration of our owned-brand products.
BSG. BSG’s gross profit increaseddecreased for the three months ended June 30,December 31, 2022, as a result of lower net sales and a lower gross margin. BSG’s gross margin decline was driven by lower product margin resulting from an improvement in pricing leverage,unfavorable sales channel mix between stores and lower-margin Regis e-commerce sales, partially offset by higher distribution and freight costs.adjustments to our expected obsolescence reserve related to the Plan.
Selling, General and Administrative Expenses
SBS. SBS’s selling, general and administrative expenses increased $1.6decreased $3.2 million, or 0.7%1.4%, for the three months ended June 30, 2022. The increase was driven by higher compensationDecember 31, 2022 and compensation-related expenses of $5.4 million, resulting from higher wages within general labor markets, and higher information technology expenses of $1.2 million, partially offset by theincluded a favorable impact offrom foreign exchange rates of $4.6 million.As a percentage of SBS net sales, SG&A for the three months ended December 31, 2022 was 40.8% compared to 40.5% for the three months ended December 31, 2021. The increase as a percentage of sales was driven by deleveraging as a result of lower net sales.
BSG. BSG’s selling, general and administrative expenses increased $1.4$2.0 million, or 1.2%1.8%, for the three months ended June 30,December 31, 2022. As a percentage of BSG net sales, SG&A for the three months ended December 31, 2022 was 28.3% compared to 27.1% for the three months ended December 31, 2021. The increase as a percentage of sales was driven primarily by higher delivery expense of $1.3 milliondeleveraging as a result of increased fuel priceslower net sales as well as increases in labor and personnel costs and depreciation expenses.
Unallocated. Unallocated selling, general and administrative expenses, which represent certain corporate costs that have not been charged to our reporting segments, increased $1.5$6.5 million, or 3.4%14.4%, for the three months ended June 30,December 31, 2022, primarily due to higherincreased labor and personnel costs of $4.6 million and information technology expense.expense of $2.9 million.
Restructuring
For the three months ended December 31, 2022, we incurred $10.4 million in restructuring charges related to our Distribution Center Consolidation and Store Optimization Plan. For the three months ended December 31, 2021, restructuring charges in connection with our previously communicated Transformation Plan were immaterial. See Note 11, Restructuring, in Item 1 of this quarterly report for more information on the Plan.
Interest Expense
The increasedecrease in interest expense is primarily due to the interest savings from the repayment of our 8.75% Senior Notes which resulted in a loss from debt extinguishment of $16.4 million from an early call premium of $13.1 million and the write-off of unamortized debt issuance costs of $3.3 million in the current quarter. This increase wasdue 2025 during fiscal year 2022, partially offset by thehigher interest savings of $2.3 millionexpense on our variable rate debt resulting from the repaymentincrease in borrowing rates and outstanding amounts under our ABL facility. See Note 9, Derivatives, in Item 1 of the 8.75% Senior Notes. See “Liquidity and Capital Resources” belowthis quarterly report for additional information.more information on our interest rate caps used to help mitigate raising interest rates.
Provision for Income Taxes
The effective tax rates were 26.3%26.7% and 26.7%25.6%, for the three months ended June 30,December 31, 2022, and 2021, respectively.
The Nine Months Ended June 30, 2022, compared to the Nine Months Ended June 30, 2021
Net Sales
SBS. The decrease in net sales for SBS was primarily driven by the following (in thousands):
Comparable sales |
| $ | (7,818 | ) |
Sales outside comparable sales (a) |
|
| (29,027 | ) |
Foreign currency exchange |
|
| (17,130 | ) |
Total |
| $ | (53,975 | ) |
|
|
The decrease in SBS’s net sales was driven by the impact of store closures, the negative impact of foreign exchange rates and lower comparable sales. SBS’s comparable sales were lower due to fewer transactions, impacted by lower traffic, and a lower average ticket, resulting from lower average unit volume, partially offset by higher average unit retail prices, led by our color and care categories.
BSG. The increase in net sales for BSGthe effective tax rate was primarily driven bydue to the following (in thousands):
Comparable sales |
| $ | 29,797 |
|
Sales outside comparable sales (a) |
|
| (7,468 | ) |
Foreign currency exchange |
|
| 14 |
|
Total |
| $ | 22,343 |
|
|
|
The increase in BSG’s net sales was driven by higher comparable sales, partially offset by thetax impact of closed stores. BSG’s comparable sales increaseshare-based compensation which was driven by a higher average ticket, resulting from higher average unit retail prices, led by color, care and styling toolscategories, partially offset by lower average unit volume.
Gross Profit
SBS. SBS’s gross profit decreased fordetrimental in the nine months ended June 30, 2022, driven by a decrease in sales, partially offset by a higher gross margin. SBS’s gross margin increase was driven by improvement of pricing leverage and fewer 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, resulting from the closing of certain international operationscurrent year quarter, but beneficial in the prior year due to COVID-19.
BSG. BSG’s gross profit increased for the nine months ended June 30, 2022, driven by an increase in sales and a higher gross margin. BSG’s gross margin increase was driven by improvement of pricing leverage and fewer write-downs of personal-protective equipment during the current year, partially offset by higher distribution and freight costs.
Selling, General and Administrative Expenses
SBS. SBS’s selling, general and administrative expenses increased $19.7 million, or 2.9%, for the nine months ended June 30, 2022. The increase was driven by higher compensation and compensation-related expenses of $17.5 million, as a result of higher wages within general labor markets and store re-openings in certain international markets, and the unfavorable impact from foreign exchange rates of $7.1 million. These headwinds were partially offset by lower delivery expenses of $2.9 million, as a result of lower e-commerce sales, and lower facility costs of $2.2 million, as a result of operating fewer stores.
BSG. BSG’s selling, general and administrative expenses increased $16.3 million, or 5.1%, for the nine months ended June 30, 2022. The increase was driven by higher delivery expense of $3.8 million, depreciation and amortization of $3.5 million, advertising expense of $2.1 million, credit card fees of $1.4 million, utility expenses of $1.0 million and compensation and compensation-related expenses of $0.9 million.
Unallocated. Unallocated selling, general and administrative expenses, which represent certain corporate costs that have not been charged to our reporting segments, decreased $23.6 million, or 15.3%, for the nine months ended June 30, 2022, as a result of lower COVID-19 expenses of $26.4 million, including the impact of $31.2 million in donation expense in the prior year, partially offset by higher information technology expense of $3.4 million.
Interest Expense
The increase in interest expense is primarily due to the repayment of our 8.75% Senior Notes, which resulted in a loss from debt extinguishment of $16.4 million during the nine months ended June 30, 2022, compared to loss from debt extinguishment of $4.3 million related to our repayment of our senior notes due 2023 and our term loan B fixed tranche during the prior period. This was partially offset by the interest savings in connection with these repayments for $10.2 million during the fiscal year. See “Liquidity and Capital Resources” below for additional information.
Provision for Income Taxes
The effective tax rates were 27.0% and 26.6%, for the nine months ended June 30, 2022 and 2021, respectively.quarter.
Liquidity and Capital Resources
Overview
Our capital structure contains a mixprincipal sources of debtliquidity are from cash and equity,cash equivalents, cash from operations and aour ABL facility. A substantial portion of our liquidity needs arise from our outstanding indebtedness and from funding the costs of our operations, working capital, capital expenditures, debt repaymentinterest and principal payment. Additionally, under our share repurchases. repurchase program, see below for more details, we will repurchase shares of our common stock on the open market to return value to our shareholders. At December 31, 2022, we had $440.8 million in our liquidity pool, which includes $417.7 million available for borrowings under our ABL facility and cash and cash equivalents of $99.1 million.
Working capital (current assets less current liabilities) decreased $250.5increased $77.4 million, to $468.2$541.9 million at June 30,December 31, 2022, compared to $718.7$464.5 million at September 30, 2021.2022. This decreaseincrease was driven by the repayment of our 8.75% Senior Notes through the use of excess cash and additional borrowing on our ABL facility. Additionally, cash was further reduced by stock repurchases during the fiscal year. The decrease to working capital was partially offset by higher inventory as a result of the balances, resulting from inflationary cost increases on our purchases and additional inventory relating to BSG's distribution partnership with Regis to service their salons account.
At June 30, 2022,the impact of foreign exchange rates of $12.7 million, and an increase in cash and cash equivalents were $101.3 million. equivalents.
We anticipate that existing cash balances (excluding certain amounts permanently invested in connection with foreign operations), cash expected to be generated by operations, and funds available under our ABL facility will be sufficient to fund our working capital requirements, potential acquisitions, anticipatedand capital expenditures, including information technology upgrades and store remodels, and debt repaymentsexpenditure requirements over the next twelve months. We have continued
Cash Flows
|
| Three Months Ended December 31, |
| |||||
(in thousands) |
| 2022 |
|
| 2021 |
| ||
Net cash provided (used) by operating activities |
|
| 54,951 |
|
|
| (5,685 | ) |
Net cash used by investing activities |
|
| (25,007 | ) |
|
| (26,709 | ) |
Net cash used by financing activities |
|
| (5,992 | ) |
|
| (70,185 | ) |
Net Cash Provided (Used) by Operating Activities
The change in net cash provided by operating activities for the three months ended December 31, 2022, compared to focusthe net cash used by operating activities three months ended December 31, 2021, was driven by the timing of inventory purchases, primarily from the impact of global supply chain issues in the prior year. Additionally, it was driven by the timing of income taxes and a decrease in net sales.
Net Cash Used by Investing Activities
The decrease in net cash used by investing activities for the three months ended December 31, 2022, compared to the three months ended December 31, 2021, was driven by fewer capital expenditures related to store improvements and information technology.
Net Cash Used by Financing Activities
The decrease in net cash used by financing activities for the three months ended December 31, 2022, compared to the three months ended December 31, 2021, was a result of share repurchases in the prior year and lower cash proceeds from employees exercising equity awards.
Debt and Guarantor Financial Information
At December 31, 2022, we had $1,151.1 million in debt, not including capital leases, unamortized debt issuance costs and debt discounts, in the aggregate, of $3.7 million. Our debt consists of $680.0 million in 5.625% Senior Notes due 2025 (“2025 Senior Notes”) outstanding, $406.1 million remaining on reducing our debt levelsterm loan and shares$65.0 million in outstanding through repurchases, while also being proactive in maintainingborrowings under our financial flexibility.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, interest payments due on our indebtedness, paying down other debt and share repurchases. During the nine months ended June 30, 2022, the weighted average interest rate on our borrowings under the ABL facility was 2.9%. As of June 30, 2022, we had $167.0 million outstanding and $314.2 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 ninethree months ended June 30,December 31, 2022, we repurchased 6.8 million shares ofthe weighted average interest rate on our common stock for $130.3 million with existing cash balances. As of June 30, 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 ourthe 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 Provided by Operating Activities
Net cash provided by operating activities during the nine months ended June 30, 2022, decreased $168.5 million to $49.2 million, compared to the nine months ended June 30, 2021. This decreasefacility was driven by the reduction in our accrued liabilities, primarily due to the timing of personal-protective equipment donations and a lower bonus accrual, as well as higher inventory purchases compared to the nine months ended June 30, 2021.
Net Cash Used by Investing Activities
Net cash used by investing activities during the nine months ended June 30, 2022, increased $20.7 million to $67.9 million, compared to the nine months ended June 30, 2021. This was driven by additional investments in technology and store leasehold improvements.
Net Cash Used by Financing Activities
Net cash used by financing activities for the nine months ended June 30, 2022, decreased $142.7 million to $273.8 million, as a result of lower net debt repayments during the fiscal year, compared to prior fiscal year, partially offset by share repurchases during the nine months ended June 30, 2022.
Debt and Guarantor Financial Information
At June 30, 2022, we had $1,255.8 million in debt, not including capital leases, unamortized debt issuance costs and debt discounts, in the aggregate, of $4.7 million. Our debt consisted of $680.0 million in senior notes outstanding, $408.9 million remaining on our term loan and $167.0 million in outstanding borrowings under our ABL facility. During the fiscal year, we called and redeemed our 8.75%
Senior Notes, at a redemption price equal to 104.375% of the principal amount, through a combination of excess cash and borrowings under our ABL facility.5.2%.
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%Our 2025 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 June 30,December 31, 2022, and September 30, 2021 (in thousands):2022:
|
| June 30, 2022 |
|
| September 30, 2021 |
| ||||||||||
(in thousands) |
| December 31, 2022 |
|
| September 30, 2022 |
| ||||||||||
Inventory |
| $ | 790,561 |
|
| $ | 662,802 |
|
| $ | 742,642 |
|
| $ | 714,477 |
|
Intercompany receivable |
| $ | — |
|
| $ | 67,337 |
|
| $ | 394 |
|
| $ | — |
|
Current assets |
| $ | 920,021 |
|
| $ | 1,069,266 |
|
| $ | 882,858 |
|
| $ | 827,155 |
|
Total assets |
| $ | 2,061,778 |
|
| $ | 2,198,990 |
|
| $ | 2,032,279 |
|
| $ | 1,982,982 |
|
Current liabilities |
| $ | 550,883 |
|
| $ | 549,415 |
| ||||||||
Intercompany payable |
| $ | 15,168 |
|
| $ | — |
|
| $ | — |
|
| $ | 4,431 |
|
Current liabilities |
| $ | 653,989 |
|
| $ | 422,137 |
| ||||||||
Total liabilities |
| $ | 2,178,657 |
|
| $ | 2,343,946 |
|
| $ | 2,084,606 |
|
| $ | 2,085,169 |
|
The following table presents the summarized statement of incomeearnings information for ninethe Issuers and the Guarantors for three months ended June 30,December 31, 2022 (in thousands):
Net sales |
|
|
| $ | 2,317,150 |
|
|
|
| $ | 775,768 |
|
Gross profit |
|
|
| $ | 1,193,543 |
|
|
|
| $ | 399,794 |
|
Earnings before provision for income taxes |
|
|
| $ | 184,505 |
|
|
|
| $ | 52,383 |
|
Net Earnings |
|
|
| $ | 137,808 |
|
|
|
| $ | 38,413 |
|
Share Repurchase Programs
Under our current share repurchase program, we may from time-to-time repurchase our common stock on the open market. During the three months ended December 31, 2022, no shares were repurchased in connection with our share repurchase program. During three months ended December 31, 2021, we repurchased 3.7 million shares of our common stock for $75.0 million under our share repurchase program. See Note 5, Stockholders’ Equity, for more information about our share repurchase program.
Contractual Obligations
There have been no material changes outside the ordinary course of our business in any of our contractual obligations since September 30, 2021, except for the repayment of our 8.75% Senior Notes and the additional ABL borrowings. In connection with these events, our contractual obligations contained in our Annual Report on Form 10-K for the fiscal year ended September 30, 2021, should be adjusted as follows (in thousands):2022.
|
| Payments Due by Period |
| |||||||||||||||||
|
| Less than 1 year |
|
| 1-3 years |
|
| 3 - 5 years |
|
| More than 5 years |
|
| Total |
| |||||
Long-term debt obligations, including interest |
| $ | 122,186 |
|
| $ | (20,540 | ) |
| $ | (339,375 | ) |
| $ | — |
|
| $ | (237,729 | ) |
Off-Balance Sheet Financing Arrangements
At June 30,December 31, 2022 and September 30, 2021,2022, 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, 2021.2022.
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, 2021.2022. See our disclosures about market risks contained in Item 7A. “Quantitative and Qualitative Disclosures about Market Risk” in Part II of our Annual Report on Form 10-K for the fiscal year ended September 30, 2021.2022.
Item 4. Controls and Procedures
Controls Evaluation and Related CEO and CFO Certifications. Our management, with the participation of our principal executive officer (“CEO”) and principal financial officer (“CFO”), conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30,December 31, 2022. The controls evaluation was conducted by our Disclosure Committee, comprised of senior representatives from our finance, accounting, internal audit, and legal departments under the supervision of our CEO and CFO.
Certifications of our CEO and our CFO, which are required in accordance with Rule 13a-14 of the Exchange Act, are attached as exhibits to this Quarterly Report. This “Controls and Procedures” section includes the information concerning the controls evaluation referred to in the certifications and it should be read in conjunction with the certifications for a more complete understanding of the topics presented.
Limitations on the Effectiveness of Controls. We do not expect that our disclosure controls and procedures will prevent all errors and all fraud. A system of controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the system are met. Because of the limitations in all such systems, no evaluation can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Furthermore, the design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how unlikely. Because of these inherent limitations in a cost-effective system of controls and procedures, misstatements or omissions due to error or fraud may occur and not be detected.
Scope of the Controls Evaluation. The evaluation of our disclosure controls and procedures included a review of their objectives and design, our implementation of the controls and procedures and the effect of the controls and procedures on the information generated for use in this Quarterly Report. In the course of the evaluation, we sought to identify whether we had any data errors, control problems or acts of fraud and to confirm that appropriate corrective action, including process improvements, was being undertaken if needed. This type of evaluation is performed on a quarterly basis so that conclusions concerning the effectiveness of our disclosure controls and procedures can be reported in our Quarterly Reports on Form 10-Q and our Annual Reports on Form 10-K. Many of the components of our disclosure controls and procedures are also evaluated by our internal audit department, by our legal department and by personnel in our finance organization. The overall goals of these various evaluation activities are to monitor our disclosure controls and procedures on an ongoing basis and to maintain them as dynamic systems that change as conditions warrant.
Conclusions regarding Disclosure Controls. Based on the required evaluation of our disclosure controls and procedures, our CEO and CFO have concluded that, as of June 30,December 31, 2022, we maintain disclosure controls and procedures that are effective in providing reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting. During our most recent fiscal quarter, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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, 2021,2022, 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.
Item 6. Exhibits
Exhibit No. |
| Description |
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3.1 |
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3.2 |
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22 |
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31.1 |
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31.2 |
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32.1 |
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32.2 |
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101 |
| The following financial information from our Quarterly Report on Form 10-Q for the fiscal quarter ended |
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104 |
| The cover page from our Quarterly Report on Form 10-Q for the fiscal quarter ended |
* 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.
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| SALLY BEAUTY HOLDINGS, INC. |
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| (Registrant) |
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Date: |
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| By: |
| /s/ Marlo M. Cormier |
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| Marlo M. Cormier |
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| Senior Vice President, Chief Financial Officer |
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| For the Registrant and as its Principal Financial Officer |
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