UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

FOR THE QUARTERLY PERIOD ENDED: DECEMBER 31, 20172022

-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: (940) 898-7500code)

(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 registrantregistrant: (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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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

(Do not check if a 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.)Act).  Yes      No 

As of February 2, 2018,January 27, 2023, there were 125,102,746107,328,599 shares of the issuer’s common stock outstanding.

 

 

 

 


TABLE OF CONTENTS

 

 

Page

PART I — FINANCIAL INFORMATION

 

 

 

Item 1. Financial Statements

4

Condensed Consolidated Balance Sheets

4

Condensed Consolidated Statements of Earnings

5

Condensed Consolidated Statements of Comprehensive Income

6

Condensed Consolidated Statements of Stockholders’ Equity

7

Condensed Consolidated Statements of Cash Flows

8

Notes to Condensed Consolidated Financial Statements

9

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

2616

Item 3. Quantitative And Qualitative Disclosures About Market Risk

3322

Item 4. Controls And Procedures

3322

 

 

PART II — OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

3423

Item 1a.1A. Risk Factors

3423

Item 2. Unregistered Sales Of Equity Securities And Use Of Proceeds6. Exhibits

34

Item 3. Defaults Upon Senior Securities

34

Item 4. Mine Safety Disclosures

34

Item 5. Other Information

34

Item 6. Exhibits

3524

 

 



2


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

cautionary notice regarding forward-looking statements

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

Readers are cautioned not to place undue reliance on forward-looking statements as such statements speak only as of the date they were made. Any forward-looking statementsmade 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 including, but not limited to, risks and uncertainties related to:

anticipating and effectively responding to changesare set forth in consumer and professional stylist preferences and buying trendsour description of risk factors in a timely manner;

Item 1A contained in our Annual Report on Form 10-K for the success of our strategic initiatives, including our store refresh program and increased marketing efforts, to enhancefiscal year ended September 30, 2022, which should be read in conjunction with the customer experience, attract new customers, drive brand awareness and improve customer loyalty;

our ability to efficiently manage and control our costs and the success of our cost control plans, including our recently implemented restructuring plans;

our ability to implement our restructuring plans in various jurisdictions;

our ability to manage the effects of our cost-reduction plans on our employees and other operations costs;

charges related to the restructuring plans;

possible changes in the size and components of the expected costs and charges associated with the restructuring plans;

our ability to realize the anticipated cost savings from the restructuring plans within the anticipated time frame, if at all;

the highly competitive nature of, and the increasing consolidationforward-looking statements in this report. Forward-looking statements speak only as of the beauty products distribution industry;

the timingdate they are made, and acceptance of new product introductions;

shifts in the mix of products sold duringwe do not undertake any period;

potential fluctuation in our same store sales and quarterly financial performance;

our dependence upon manufacturers who may be unwilling or unableobligation to continue to supply products to us;

our dependence upon manufacturers who have developed or could develop their own distribution businesses which compete directly with ours;

the possibility of material interruptions in the supply of products by our third‑party manufacturers or distributors or increases in the prices of the products we purchase from our third‑party manufacturers or distributors;

products sold by us being found to be defective in labeling or content;

compliance with current laws and regulations or becoming subject to additional or more stringent laws and regulations;

the success of our e-commerce businesses;

diversion of professional products sold by Beauty Systems Group to mass retailers or other unauthorized resellers;

the operational and financial performance of our Armstrong McCall, L.P. franchise‑based business, which we refer to as Armstrong McCall;

successfully identifying acquisition candidates and successfully completing desirable acquisitions;

integrating acquired businesses;

the success of our initiatives to expand into new geographies;

the success of our existing stores, and our ability to increase sales at existing stores;

opening and operating new stores profitably;

the volume of traffic to our stores;

the impact of the general economic conditions upon our business;

the challenges of conducting business outside the United States;

the impact of Britain’s decision to leave the European Union and related or other disruptive events in the United Kingdom, the European Union or other geographies in which we conduct business;

rising labor and rental costs;

protecting our intellectual property rights, particularly our trademarks;

3


the risk that our products may infringe on the intellectual property rights of others;

successfully updating and integrating our information technology systems;

disruption in our information technology systems;

a significant data security breach, including misappropriation of our customers’, employees’ or suppliers’ confidential information, and the potential costs related thereto;

the negative impact on our reputation and loss of confidence of our customers, suppliers and others arising from a significant data security breach;

the costs and diversion of management’s attention required to investigate and remediate a data security breach and to continuously upgrade our information technology security systems to address evolving cyber-security threats;

the ultimate determination of the extent or scope of the potential liabilities relating to our past orupdate any future data security incidents;forward-looking statement.

our ability to attract and retain highly skilled management and other personnel;

severe weather, natural disasters or acts of violence or terrorism;

the preparedness of our accounting and other management systems to meet financial reporting and other requirements and the upgrade of our existing financial reporting system;

being a holding company, with no operations of our own, and depending on our subsidiaries for our liquidity needs;

our ability to execute and implement our share repurchase program;

our substantial indebtedness;

the possibility that we may incur substantial additional debt, including secured debt, in the future;

restrictions and limitations in the agreements and instruments governing our debt;

generating the significant amount of cash needed to service all of our debt and refinancing all or a portion of our indebtedness or obtaining additional financing;

changes in interest rates increasing the cost of servicing or refinancing our debt; and

the costs and effects of litigation.

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. We assume no obligation to publicly update or revise any forward-looking statements.

 


4


WHERE YOU CAN FIND MORE INFORMATION

Our quarterly financial results and other important information are available by calling our Investor Relations Department at (940) 297-3877.

We maintain a website at www.sallybeautyholdings.com where investors and other interested parties may obtain, free of charge, press releases and other information as well as gain access to our periodic filings with the Securities and Exchange Commission (“SEC”). The information contained on this website should not be considered to be a part of this or any other report filed with or furnished to the SEC.

5


PART I — FINANCIALFINANCIAL INFORMATION

Item 1.  Financial Statements.

The following consolidated balance sheets as of December 31, 2017 and September 30, 2017, and the consolidated statements of earnings, consolidated statements of comprehensive income and consolidated statements of cash flows for the three months ended December 31, 2017 and 2016 are those of Sally Beauty Holdings, Inc. and its subsidiaries.

6


SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except par value data)

 

 

December 31,

2017

 

 

September 30,

2017

 

 

December 31,

2022

 

 

September 30,

2022

 

 

(Unaudited)

 

 

 

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

79,312

 

 

$

63,759

 

 

$

99,071

 

 

$

70,558

 

Trade accounts receivable, net

 

 

49,580

 

 

 

46,986

 

 

 

32,671

 

 

 

34,102

 

Accounts receivable, other

 

 

47,378

 

 

 

45,255

 

 

 

42,741

 

 

 

38,175

 

Inventory

 

 

941,146

 

 

 

930,855

 

 

 

986,878

 

 

 

936,374

 

Other current assets

 

 

46,259

 

 

 

55,223

 

 

 

57,840

 

 

 

53,192

 

Total current assets

 

 

1,163,675

 

 

 

1,142,078

 

 

 

1,219,201

 

 

 

1,132,401

 

Property and equipment, net of accumulated depreciation of $563,001 at

December 31, 2017 and $546,061 at September 30, 2017

 

 

306,421

 

 

 

313,717

 

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

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

 

 

288,732

 

 

 

297,876

 

Operating lease assets

 

 

542,806

 

 

 

532,177

 

Goodwill

 

 

544,418

 

 

 

537,791

 

 

 

532,514

 

 

 

526,066

 

Intangible assets, excluding goodwill, net of accumulated amortization of

$124,818 at December 31, 2017 and $121,550 at September 30, 2017

 

 

77,740

 

 

 

80,305

 

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

 

 

21,067

 

 

 

25,116

 

 

 

34,330

 

 

 

38,032

 

Total assets

 

$

2,113,321

 

 

$

2,099,007

 

 

$

2,668,546

 

 

$

2,576,867

 

Liabilities and Stockholders’ Deficit

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current maturities of long-term debt

 

$

104,900

 

 

$

96,082

 

 

$

65,171

 

 

$

68,658

 

Accounts payable

 

 

306,270

 

 

 

307,752

 

 

 

296,170

 

 

 

275,717

 

Accrued liabilities

 

 

166,501

 

 

 

166,527

 

 

 

142,785

 

 

 

161,065

 

Current operating lease liabilities

 

 

156,168

 

 

 

157,734

 

Income taxes payable

 

 

12,331

 

 

 

2,233

 

 

 

16,972

 

 

 

4,740

 

Total current liabilities

 

 

590,002

 

 

 

572,594

 

 

 

677,266

 

 

 

667,914

 

Long-term debt

 

 

1,771,299

 

 

 

1,771,853

 

 

 

1,082,175

 

 

 

1,083,043

 

Long-term operating lease liabilities

 

 

427,168

 

 

 

424,762

 

Other liabilities

 

 

31,147

 

 

 

20,140

 

 

 

22,748

 

 

 

22,427

 

Deferred income tax liabilities, net

 

 

63,508

 

 

 

98,036

 

 

 

85,891

 

 

 

85,085

 

Total liabilities

 

 

2,455,956

 

 

 

2,462,623

 

 

 

2,295,248

 

 

 

2,283,231

 

Stockholders’ deficit:

 

 

 

 

 

 

 

 

Common stock, $0.01 par value. Authorized 500,000 shares; 126,166 and

129,710 shares issued and 125,799 and 129,585 shares outstanding at

December 31, 2017 and September 30, 2017, respectively

 

 

1,258

 

 

 

1,296

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

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

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

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

 

 

1,073

 

 

 

1,070

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Additional paid-in capital

 

 

 

 

 

 

 

 

8,329

 

 

 

4,241

 

Accumulated deficit

 

 

(260,999

)

 

 

(283,076

)

Accumulated earnings

 

 

490,509

 

 

 

440,172

 

Accumulated other comprehensive loss, net of tax

 

 

(82,894

)

 

 

(81,836

)

 

 

(126,613

)

 

 

(151,847

)

Total stockholders’ deficit

 

 

(342,635

)

 

 

(363,616

)

Total liabilities and stockholders’ deficit

 

$

2,113,321

 

 

$

2,099,007

 

Total stockholders’ equity

 

 

373,298

 

 

 

293,636

 

Total liabilities and stockholders’ equity

 

$

2,668,546

 

 

$

2,576,867

 

 

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

 


7


SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Earnings

(In thousands, except per share data)

(Unaudited)

 

 

Three Months Ended

 

 

Three Months Ended

 

 

December 31,

 

 

December 31,

 

 

2017

 

 

2016

 

 

2022

 

 

2021

 

Net sales

 

$

994,964

 

 

$

999,609

 

 

$

957,055

 

 

$

980,251

 

Cost of goods sold

 

 

508,335

 

 

 

507,901

 

 

 

468,481

 

 

 

480,122

 

Gross profit

 

 

486,629

 

 

 

491,708

 

 

 

488,574

 

 

 

500,129

 

Selling, general and administrative expenses

 

 

371,286

 

 

 

374,251

 

 

 

391,580

 

 

 

386,250

 

Restructuring charges

 

 

5,210

 

 

 

 

Restructuring

 

 

10,406

 

 

 

1,099

 

Operating earnings

 

 

110,133

 

 

 

117,457

 

 

 

86,588

 

 

 

112,780

 

Interest expense

 

 

24,016

 

 

 

26,799

 

 

 

17,923

 

 

 

20,241

 

Earnings before provision for income taxes

 

 

86,117

 

 

 

90,658

 

 

 

68,665

 

 

 

92,539

 

Provision for income taxes

 

 

2,853

 

 

 

34,832

 

 

 

18,328

 

 

 

23,701

 

Net earnings

 

$

83,264

 

 

$

55,826

 

 

$

50,337

 

 

$

68,838

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.65

 

 

$

0.39

 

 

$

0.47

 

 

$

0.61

 

Diluted

 

$

0.65

 

 

$

0.39

 

 

$

0.46

 

 

$

0.60

 

Weighted average shares:

 

 

 

 

 

 

 

 

Weighted-average shares:

 

 

 

 

 

 

 

 

Basic

 

 

127,784

 

 

 

143,631

 

 

 

107,140

 

 

 

111,995

 

Diluted

 

 

128,645

 

 

 

144,860

 

 

 

109,460

 

 

 

113,968

 

 

 

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

85


SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(In thousands)

(Unaudited)

 

 

Three Months Ended

 

 

Three Months Ended

 

 

December 31,

 

 

December 31,

 

 

2017

 

 

2016

 

 

2022

 

 

2021

 

Net earnings

 

$

83,264

 

 

$

55,826

 

 

$

50,337

 

 

$

68,838

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments, net of tax

 

 

(255

)

 

 

(18,668

)

Interest rate caps:

 

 

 

 

 

 

 

 

Changes in fair value

 

 

(1,130

)

 

 

 

Income taxes related to changes in fair value

 

 

327

 

 

 

 

Foreign currency translation adjustments

 

 

25,941

 

 

 

(4,509

)

Interest rate caps, net of tax

 

 

203

 

 

 

278

 

Foreign exchange contracts, net of tax

 

 

(910

)

 

 

480

 

Other comprehensive income (loss), net of tax

 

 

(1,058

)

 

 

(18,668

)

 

 

25,234

 

 

 

(3,751

)

Total comprehensive income

 

$

82,206

 

 

$

37,158

 

 

$

75,571

 

 

$

65,087

 

 

 

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

96


SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders’ Equity

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Other

 

 

Total

 

 

Common Stock

Paid-in

 

 

Accumulated

 

 

Comprehensive

 

 

Stockholders’

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Loss

 

 

Equity

 

Balance at September 30, 2022

 

106,970

 

 

$

1,070

 

 

$

4,241

 

 

$

440,172

 

 

$

(151,847

)

 

$

293,636

 

Net earnings

 

 

 

 

 

 

 

 

 

 

50,337

 

 

 

 

 

 

50,337

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

25,234

 

 

 

25,234

 

Share-based compensation

 

 

 

 

 

 

 

5,135

 

 

 

 

 

 

 

 

 

5,135

 

Stock issued for equity awards

 

404

 

 

 

4

 

 

 

78

 

 

 

 

 

 

 

 

 

82

 

Employee withholding taxes paid

   related to net share settlement

 

(90

)

 

 

(1

)

 

 

(1,125

)

 

 

 

 

 

 

 

 

(1,126

)

Balance at December 31, 2022

 

107,284

 

 

$

1,073

 

 

$

8,329

 

 

$

490,509

 

 

$

(126,613

)

 

$

373,298

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Other

 

 

Total

 

 

Common Stock

Paid-in

 

 

Accumulated

 

 

Comprehensive

 

 

Stockholders’

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Loss

 

 

Equity

 

Balance at September 30, 2021

 

112,913

 

 

$

1,129

 

 

$

17,286

 

 

$

356,967

 

 

$

(94,641

)

 

$

280,741

 

Net earnings

 

 

 

 

 

 

 

 

 

 

68,838

 

 

 

 

 

 

68,838

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,751

)

 

 

(3,751

)

Share-based compensation

 

 

 

 

 

 

 

3,958

 

 

 

 

 

 

 

 

 

3,958

 

Stock issued for equity awards

 

795

 

 

 

8

 

 

 

7,364

 

 

 

 

 

 

 

 

 

7,372

 

Employee withholding taxes paid

   related to net share settlement

 

(56

)

 

 

(1

)

 

 

(1,136

)

 

 

 

 

 

 

 

 

(1,137

)

Repurchases and cancellations of

   common stock

 

(3,675

)

 

 

(36

)

 

 

(27,472

)

 

 

(47,492

)

 

 

 

 

 

(75,000

)

Balance at December 31, 2021

 

109,977

 

 

$

1,100

 

 

$

 

 

$

378,313

 

 

$

(98,392

)

 

$

281,021

 

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

7


SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

Three Months Ended December 31,

 

 

Three Months Ended December 31,

 

 

2017

 

 

2016

 

 

2022

 

 

2021

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

83,264

 

 

$

55,826

 

 

$

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

 

 

27,090

 

 

 

26,839

 

 

 

25,285

 

 

 

24,421

 

Share-based compensation expense

 

 

3,111

 

 

 

3,814

 

 

 

5,135

 

 

 

3,958

 

Amortization of deferred financing costs

 

 

921

 

 

 

789

 

 

 

648

 

 

 

932

 

Impairment of long-lived assets, including operating lease assets

 

 

2,103

 

 

 

 

Loss on disposal of equipment and other property

 

 

77

 

 

 

3

 

Deferred income taxes

 

 

(31,350

)

 

 

3,000

 

 

 

889

 

 

 

1,867

 

Changes in (exclusive of effects of acquisitions):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade accounts receivable

 

 

(2,427

)

 

 

2,181

 

 

 

2,270

 

 

 

2,841

 

Accounts receivable, other

 

 

(2,008

)

 

 

1,727

 

 

 

(3,817

)

 

 

(1,724

)

Inventory

 

 

(8,055

)

 

 

(9,358

)

 

 

(38,019

)

 

 

(137,326

)

Other current assets

 

 

9,105

 

 

 

12,255

 

 

 

(4,018

)

 

 

(446

)

Other assets

 

 

(290

)

 

 

(592

)

 

 

4,074

 

 

 

1,371

 

Operating leases, net

 

 

(10,392

)

 

 

6,475

 

Accounts payable and accrued liabilities

 

 

3,764

 

 

 

(19,375

)

 

 

7,606

 

 

 

16,729

 

Income taxes payable

 

 

10,069

 

 

 

13,151

 

 

 

12,460

 

 

 

18,166

 

Other liabilities

 

 

11,010

 

 

 

(463

)

 

 

313

 

 

 

(11,790

)

Net cash provided by operating activities

 

 

104,204

 

 

 

89,794

 

Net cash provided (used) by operating activities

 

 

54,951

 

 

 

(5,685

)

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payments for property and equipment, net

 

 

(22,499

)

 

 

(28,008

)

Payments for property and equipment, net of proceeds

 

 

(25,007

)

 

 

(26,390

)

Acquisitions, net of cash acquired

 

 

(9,175

)

 

 

 

 

 

 

 

 

(319

)

Net cash used by investing activities

 

 

(31,674

)

 

 

(28,008

)

 

 

(25,007

)

 

 

(26,709

)

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from issuance of long-term debt

 

 

126,505

 

 

 

58,500

 

 

 

229,000

 

 

 

 

Repayments of long-term debt

 

 

(119,067

)

 

 

(58,674

)

Repayments of long-term debt, including prepayment costs

 

 

(233,927

)

 

 

(1,421

)

Payments for common stock repurchased

 

 

(64,612

)

 

 

(67,183

)

 

 

 

 

 

(75,000

)

Proceeds from exercises of stock options

 

 

275

 

 

 

14,280

 

Proceeds from equity awards

 

 

60

 

 

 

7,372

 

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

 

 

(1,125

)

 

 

(1,136

)

Net cash used by financing activities

 

 

(56,899

)

 

 

(53,077

)

 

 

(5,992

)

 

 

(70,185

)

Effect of foreign exchange rate changes on cash and cash equivalents

 

 

(78

)

 

 

(921

)

 

 

4,561

 

 

 

(240

)

Net increase in cash and cash equivalents

 

 

15,553

 

 

 

7,788

 

Net increase (decrease) in cash and cash equivalents

 

 

28,513

 

 

 

(102,819

)

Cash and cash equivalents, beginning of period

 

 

63,759

 

 

 

86,622

 

 

 

70,558

 

 

 

400,959

 

Cash and cash equivalents, end of period

 

$

79,312

 

 

$

94,410

 

 

$

99,071

 

 

$

298,140

 

Supplemental Cash Flow Information:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest paid

 

$

36,331

 

 

$

51,451

 

 

$

26,758

 

 

$

35,034

 

Income taxes paid

 

$

3,607

 

 

$

3,882

 

 

$

3,081

 

 

$

3,978

 

Capital expenditures incurred but not paid

 

$

2,486

 

 

$

1,672

 

 

$

5,542

 

 

$

3,594

 

 

 

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

 

 

10




Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Condensed Consolidated Financial Statements

(Unaudited)

1.

Significant Accounting Policies

1.   Description of Business and Basis of Presentation

DescriptionThe unaudited condensed consolidated interim financial statements of Business

Sally Beauty Holdings, Inc. and its consolidated subsidiaries (“Sally Beauty” or “the Company” or “we”) sell professional beauty supplies through its Sally Beauty Supply (“SBS”) retail stores located in the U.S., Puerto Rico, Canada, Mexico, the United Kingdom, Ireland, Belgium, France, Germany, the Netherlands, Spain, Chile and Peru. Additionally, we distribute professional beauty products to salons and salon professionals through our Beauty Systems Group (“BSG”) store operations and a commissioned direct sales force that calls on salons primarily in the U.S. and Canada, and to franchises in the southern and southwestern regions of the U.S. and in Mexico through the operations of its subsidiary Armstrong McCall. A significant number of our products are also available through a number of SBS and BSG-operated websites. Certain beauty products sold by BSG and Armstrong McCall are sold under exclusive territory agreements with the third-party manufacturers.

Basis of Presentation

The accompanying condensed consolidated interim financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and pursuant to the rules and regulations of the SEC. CertainAccordingly, 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 madeincluded herein are adequate to makefor the information not misleading.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, 2017. All significant intercompany accounts and transactions have been eliminated in consolidation.2022. In the opinion of management, these unaudited condensed consolidated interim financial statements reflect all adjustments that are of a normal recurring nature and which are necessary to present fairly our consolidated financial position as of December 31, 20172022, and September 30, 2017,2022, and our consolidated results of operations, consolidated comprehensive income, and consolidated cash flows and consolidated statements of stockholders’ equity for the three months ended December 31, 20172022 and 2016.2021.

Principles of Consolidation

The unaudited condensed consolidated interim financial statements included hereininclude all accounts of Sally Beauty Holdings, Inc. and its subsidiaries. All intercompany accounts and transactions have been prepared on a going concern basis of accounting. Each quarter, management evaluates, based on relevant conditions and events, our ability to continue as a going concern for at least one year from the date our financial statementseliminated in consolidation. All amounts are issued. Based on management’s assessment, we have concluded that substantial doubt about our ability to continue as a going concern does not exist as of the date the condensed consolidated interim financial statements included herein were issued.in U.S. Dollars.

Certain amounts for the prior fiscal periods have been reclassified to conform to the current fiscal period presentation, in connection with the retroactive adoption of two new accounting pronouncements in the current interim period. Please see Note 3 below for additional information.

2.   Significant Accounting Policies

We adhere to the same accounting policies in the preparation of our condensed consolidated interim consolidated financial statements as we do in the preparation of our full-yearfull 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 rates.tax.

3.   Accounting Changes and Recent Accounting Pronouncements

Accounting ChangesUse of Estimates

In November 2015,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 Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classificationfuture. Significant estimates and assumptions are part of Deferred Income Taxes, which requires thatour accounting for sales allowances, deferred tax assets,revenue, valuation of inventory, amortization and depreciation, intangibles and goodwill, and other reserves. We believe these estimates and assumptions are reasonable; however, they are based on management’s current knowledge of events and actions, and changes in facts and circumstances may result in revised estimates and impact actual results.



2.

Revenue Recognition

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

Changes to our contract liabilities, be reported as noncurrent in a classified balance sheet. We adopted the new standard retrospectively effective October 1, 2017. Accordingly, the adoption of ASU No. 2015-17 resulted in a decrease in current deferred income tax assets of $28.4 million, a decrease in current deferred income tax liabilities,which are included in accrued liabilities of $2.0 million, a net increase in noncurrent deferred income tax assets, included in other assets, of $4.3 million and a net decrease in noncurrent deferred income tax liabilities of $22.1 million in our condensed consolidated balance sheetsheets, for the periods were as follows (in thousands):

 

 

 

 

 

 

Three Months Ended December 31,

 

 

 

 

 

 

 

2022

 

 

2021

 

Beginning Balance

 

 

 

 

 

$

13,460

 

 

$

16,744

 

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

 

 

6,291

 

 

 

5,842

 

Revenue recognized from beginning liability

 

 

(4,489

)

 

 

(3,509

)

Ending Balance

 

 

 

 

 

$

15,262

 

 

$

19,077

 

See Note 10, Segment Reporting, for additional information regarding the disaggregation of September 30, 2017.

In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which amended several aspects of how share-based compensation is recorded and reported on the financial statements. For example, the new guidance will require that all the income tax effect related to share-based payments be recorded in income tax expense. We adopted these amendments effective October 1, 2017. In connection with this accounting change, we have elected to recognize share-based

11


Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

compensation award forfeitures when they occur. Prior to the change, we recognized forfeitures based on the estimated number of awards expected to vest. As allowed, we elected to adopt retrospectively the amendment requiring that excess tax benefits (shortfalls) be reported in cash flows from operating activities in our consolidated statements of cash flows. The adoption of the amendments contained in ASU No. 2016-09 did not have a material impact on our consolidated financial statements.sales revenue.

Recent Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which will supersede Accounting Standards Codification (“ASC”) Topic 605, Revenue Recognition. A core principle of the new guidance is that an entity should measure revenue in connection with its sale of goods and services to a customer based on the consideration to which the entity expects to be entitled in exchange for each of those goods and services. The new standard must be adopted using either the retrospective or cumulative effect transition method. For public companies, this amendment is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. We have not yet selected a transition method. We have not yet adopted this accounting pronouncement and we do not believe, based on our assessment, that adoption will have a material effect on our consolidated results of operations and consolidated financial position. We are currently assessing the disclosure requirements contained in the new standard and anticipate being compliant with the additional disclosures about our revenue recognition practices required by the new standard.

In February 2016, the FASB issued ASU No. 2016-02, Leases, which will require most leases to be reported on the balance sheet as a right-of-use asset and a lease liability. Under the new guidance, the lease liability must be measured initially based on the present value of future lease payments, subject to certain conditions. The right-of-use asset must be measured initially based on the amount of the liability, plus certain initial direct costs. The new guidance further requires that leases be classified at inception as either (a) operating leases or (b) finance leases. For operating leases, periodic expense will generally be flat (straight-line) throughout the life of the lease. For finance leases, periodic expense will decline (similar to capital leases under prior rules) over the life of the lease. The new standard must be adopted using a modified retrospective transition method. For public companies, this standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. We have not yet adopted this accounting pronouncement. We have completed a preliminary assessment of the potential impact of adopting ASU No. 2016-02 on our consolidated financial statements. At December 31, 2017, adoption of ASU No. 2016-02 would have resulted in recognition of a right-of-use asset in the estimated amount of approximately $600.0 million and a lease liability for a similar amount in our consolidated balance sheet. We do not believe adoption of ASU No. 2016-02 will have a material impact on our earnings or cash flows. The amount of the right-of-use asset and the lease liability we ultimately recognize may materially differ from this preliminary estimate, including as a result of future organic growth in our business and potential acquisitions.

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities, which is intended to better align an entity’s risk management activities and its financial reporting for hedging relationships. ASU No. 2017-12 will change both the designation and measurement guidance for a qualifying hedging relationship and the presentation of the impact of the hedging relationship on the entity’s financial statements. In addition, ASU No. 2017-12 contains targeted improvements to ease the application of current guidance related to the assessment of hedge effectiveness and eliminates the requirement for an entity to separately measure and report hedge ineffectiveness. For public companies, these amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. We have not yet adopted the accounting pronouncement and do not believe, based on our preliminary assessment, that adoption will have a material effect on our consolidated financial statements.

4.   Fair Value Measurements

Our financial instruments consist of cash equivalents, if any, trade and other accounts receivable, accounts payable, derivative instruments, including foreign exchange contracts and interest rate caps, and debt. The carrying amounts of cash equivalents, if any, trade and other accounts receivable and accounts payable approximate their respective fair values due to the short-term nature of these financial instruments.

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.

12The three levels of that hierarchy are defined as follows:


Sally Beauty Holdings, Inc.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 Subsidiariesassumptions.

Condensed Notes to Consolidated Financial Statementsinstruments measured at fair value on recurring basis

(Unaudited)

Consistent with thisthe fair value hierarchy, we categorized our financial assets and liabilities as follows (in thousands):follow:

(in thousands)

 

Classification

 

Fair Value Hierarchy Level

 

December 31,

2022

 

 

September 30,

2022

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

 

 

 

 

 

 

 

 

 

 

 

Non-designated cash flow hedges

 

Other current assets

 

Level 2

 

$

4,463

 

 

$

294

 

Interest rate caps

 

Other current assets

 

Level 2

 

 

3,627

 

 

 

3,860

 

Total assets

 

 

 

 

 

$

8,090

 

 

$

4,154

 

.

 

 

 

 

 

 

 

 

 

 

 

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

 

 

 

 

 

 

 

 

 

 

 

Designated cash flow hedges

 

Accrued liabilities

 

Level 2

 

$

1,930

 

 

$

 

Non-designated cash flow hedges

 

Accrued liabilities

 

Level 2

 

 

4,045

 

 

 

79

 

Total liabilities

 

 

 

 

 

$

5,975

 

 

$

79

 

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


Other fair value disclosures

 

 

As of December 31, 2017

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

$

572

 

 

$

 

 

$

572

 

 

$

 

Interest rate caps

 

 

4,048

 

 

 

 

 

 

4,048

 

 

 

 

Total assets

 

$

4,620

 

 

$

 

 

$

4,620

 

 

$

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

$

1,893,765

 

 

$

946,300

 

 

$

947,465

 

 

$

 

Foreign exchange contracts

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

$

1,893,765

 

 

$

946,300

 

 

$

947,465

 

 

$

 

 

 

As of September 30, 2017

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

$

779

 

 

$

 

 

$

779

 

 

$

 

Interest rate caps

 

 

5,178

 

 

 

 

 

 

5,178

 

 

 

 

Total assets

 

$

5,957

 

 

$

 

 

$

5,957

 

 

$

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

$

1,919,930

 

 

$

973,750

 

 

$

946,180

 

 

$

 

Foreign exchange contracts

 

 

207

 

 

 

 

 

 

207

 

 

 

 

Total liabilities

 

$

1,920,137

 

 

$

973,750

 

 

$

946,387

 

 

$

 

Long-termThe 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, including current maturitiesexcluding capital lease obligations and borrowings under the asset-based senior secured loan facility (the “ABL facility”), if any, is carried in our consolidated financial statements at amortized cost of $1,895.0 million at December 31, 2017 and $1,887.4 million at September 30, 2017, less unamortized debt issuance costs, of $18.8 million at December 31, 2017 and $19.4 million at September 30, 2017. Our senior notes are valued for purposesas follows:

 

 

 

 

December 31, 2022

 

 

September 30, 2022

 

(in thousands)

 

Fair Value Hierarchy Level

 

Carrying Value

 

 

Fair Value

 

 

Carrying Value

 

 

Fair Value

 

Long-term debt, excluding capital leases

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior notes

 

Level 1

 

$

679,961

 

 

$

652,763

 

 

$

679,961

 

 

$

639,163

 

Term loan B

 

Level 2

 

 

406,125

 

 

 

403,587

 

 

 

407,500

 

 

 

398,331

 

Total long-term debt

 

 

 

$

1,086,086

 

 

$

1,056,350

 

 

$

1,087,461

 

 

$

1,037,494

 

The fair value of the disclosure above using unadjusted quoted market prices for such debt securities. Our term loan B is generally valued for purposes of the disclosure abovewas measured using quoted market prices for similar debt securities in active markets. Other long-term debt (consisting primarily of borrowings under the ABL facility, if any, and capital lease obligations) is generally valued for purposes of the disclosure above usingmarkets or widely accepted valuation techniques, such as discounted cash flow analyses, using observable inputs, such as market interest rates.

4.

Stockholders’ Equity

5.   Accumulated Stockholders’ DeficitShare Repurchases

In August 2017, we announced that our Board of Directors (“Board”) approved a share repurchase program authorizing the Companyus to repurchase up to $1.0 billion of its common stock, over an approximate four-year period expiring on September 30,subject to certain limitations governed by our debt agreements. In July 2021, (the “2017 Share Repurchase Program”) and terminated our similarBoard approved a term extension of the share repurchase program approved byfor the four-year period ending September 30, 2025. As of December 31, 2022, we had authorization of approximately $595.8 million of additional potential share repurchases remaining under our Board in 2014 (the “2014 Share Repurchase Program”). Duringshare repurchase program. For the three months ended December 31, 2017 and 2016,2022, we did not repurchase shares under our share repurchase program. For the three months ended December 31, 2021, we repurchased and subsequently retired approximately 3.8 million and 2.53.7 million shares of our common stock at an aggregatea total cost of $64.5 million and $67.0 million under the 2017 Share Repurchase Program and the 2014 Share Repurchase Program, respectively. We reduced common stock and additional paid-in capital, in the aggregate, by these amounts. However, as required by GAAP, to the extent that share repurchase amounts exceeded the balance of additional paid-in capital prior to our recording of such repurchases, we recorded the excess in accumulated deficit. We funded these share repurchases with cash from operations and borrowings under the ABL facility.$75.0 million.

Accumulated Other Comprehensive Income (Loss)

The change in accumulated other comprehensive loss (“AOCL”) was as follows (in thousands):

 

 

Foreign Currency Translation Adjustments

 

 

Interest Rate Caps

 

 

Total

 

Balance at September 30, 2017

 

$

(80,752

)

 

$

(1,084

)

 

$

(81,836

)

Other comprehensive loss before reclassification, net of tax

 

 

(255

)

 

 

(803

)

 

 

(1,058

)

Balance at December 31, 2017

 

$

(81,007

)

 

$

(1,887

)

 

$

(82,894

)

 

 

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

)

 

13


Sally Beauty Holdings, Inc.The tax impact for the changes in other comprehensive loss and Subsidiaries

Condensed Notesthe reclassifications to Consolidated Financial Statementsnet earnings was not material.

(Unaudited)

6.   Earnings Per Share

5.

Weighted-Average Shares

The following table sets forth the computationsreconciliation of basic and diluted earnings per shareweighted-average shares (in thousands, except per share data)thousands):

 

 

 

Three Months Ended

December 31,

 

 

 

2017

 

 

2016

 

Net earnings

 

$

83,264

 

 

$

55,826

 

Weighted average basic shares

 

 

127,784

 

 

 

143,631

 

Dilutive securities:

 

 

 

 

 

 

 

 

Stock option and stock award programs

 

 

861

 

 

 

1,229

 

Weighted average diluted shares

 

 

128,645

 

 

 

144,860

 

Earnings per share:

 

 

 

 

 

 

 

 

Basic

 

$

0.65

 

 

$

0.39

 

Diluted

 

$

0.65

 

 

$

0.39

 

 

Three Months Ended

December 31,

 

 

 

2022

 

 

2021

 

Weighted-average basic shares

 

 

107,140

 

 

 

111,995

 

Dilutive securities:

 

 

 

 

 

 

 

 

Stock option and stock award programs

 

 

2,320

 

 

 

1,973

 

Weighted-average diluted shares

 

 

109,460

 

 

 

113,968

 

 

 

 

 

 

 

 

 

 

Anti-dilutive options excluded from our computation of diluted shares

 

 

2,123

 

 

 

2,775

 

6.

Goodwill and Intangible Assets

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


 

 

Three Months Ended

December 31,

 

(in thousands)

 

2022

 

 

2021

 

Intangible assets amortization expense

 

$

1,008

 

 

$

1,071

 

 

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

7.

Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

 

 

December 31,

2022

 

 

September 30,

2022

 

Compensation and benefits

 

$

46,027

 

 

$

58,693

 

Deferred revenue

 

 

20,384

 

 

 

18,810

 

Rental obligations

 

 

14,353

 

 

 

10,701

 

Insurance reserves

 

 

6,104

 

 

 

5,742

 

Property and other taxes

 

 

4,266

 

 

 

4,161

 

Interest payable

 

 

3,865

 

 

 

13,445

 

Operating accruals and other

 

 

47,786

 

 

 

49,513

 

Total accrued liabilities

 

$

142,785

 

 

$

161,065

 

 

 

 

 

 

 

 

 

 

8.

Short-term Borrowings and Long-term Debt

At December 31, 2017 2022, our ABL facility had $65.0 million in outstanding borrowingsand 2016, options to purchase 5,802,107 shares and 2,457,972 shares, respectively, of our common stock were outstanding but not included in our computations of diluted earnings per share, because these options were anti-dilutive. An anti-dilutive option is an option that is: (a) out-of-the-money (an option with an exercise price which is greater than the average price per share of our common stock during the period), and (b) in-the-money (an option with an exercise price which is less than the average price per share of our common stock during the period) for which the sum of assumed proceeds, including any unrecognized compensation expense related to such option, exceeds the average price per share for the period.

7.   Share-Based Payments

Performance-Based Awards

The following table presents a summary of the activity for our performance unit awards assuming 100% payout:

Performance Unit Awards

 

Number

of Shares

(in Thousands)

 

 

Weighted

Average Fair

Value Per

Share

 

 

Weighted

Average

Remaining

Vesting Term

(in Years)

 

Unvested at September 30, 2017

 

 

197

 

 

$

24.50

 

 

 

1.5

 

Granted

 

 

215

 

 

 

17.42

 

 

 

 

 

Vested

 

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(6

)

 

 

24.55

 

 

 

 

 

Unvested at December 31, 2017

 

 

406

 

 

$

20.76

 

 

 

2.0

 

14


Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

Service-Based Awards

The following table presents a summary of the activity for our stock option awards:

 

 

Number of

Outstanding

Options

(in Thousands)

 

 

Weighted

Average

Exercise

Price

 

 

Weighted

Average

Remaining

Contractual

Term

(in Years)

 

 

Aggregate

Intrinsic

Value

(in Thousands)

 

Outstanding at September 30, 2017

 

 

5,211

 

 

$

24.12

 

 

 

5.6

 

 

$

3,867

 

Granted

 

 

1,122

 

 

 

17.42

 

 

 

 

 

 

 

 

 

Exercised

 

 

(26

)

 

 

10.52

 

 

 

 

 

 

 

 

 

Forfeited or expired

 

 

(145

)

 

 

24.73

 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2017

 

 

6,162

 

 

$

22.94

 

 

 

6.1

 

 

$

4,732

 

Exercisable at December 31, 2017

 

 

3,658

 

 

$

23.61

 

 

 

4.6

 

 

$

3,229

 

The following table presents a summary of the activity for our Restricted Stock Awards:

Restricted Stock Awards

 

Number

of Shares

(in Thousands)

 

 

Weighted

Average Fair

Value Per

Share

 

 

Weighted

Average

Remaining

Vesting Term

(in Years)

 

Unvested at September 30, 2017

 

 

125

 

 

$

26.00

 

 

 

1.3

 

Granted

 

 

264

 

 

 

17.42

 

 

 

 

 

Vested

 

 

(23

)

 

 

24.18

 

 

 

 

 

Forfeited

 

 

 

 

 

 

 

 

 

 

Unvested at December 31, 2017

 

 

366

 

 

$

19.94

 

 

 

2.7

 

The following table presents a summary of the activity for our Restricted Stock Units:

Restricted Stock Units

 

Number

of Shares

(in Thousands)

 

 

Weighted

Average Fair

Value Per

Share

 

 

Weighted

Average

Remaining

Vesting Term

(in Years)

 

Unvested at September 30, 2017

 

 

 

 

$

 

 

 

 

Granted

 

 

72

 

 

 

17.42

 

 

 

 

 

Vested

 

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(7

)

 

 

17.42

 

 

 

 

 

Unvested at December 31, 2017

 

 

65

 

 

$

17.42

 

 

 

0.7

 

8.   Commitments and Contingencies

During the fiscal year 2014, we disclosed that we had experienced a data security incident (the “2014 data security incident”). During the fiscal year 2015, we disclosed that we had experienced a second data security incident (the “2015 data security incident” and, together with the 2014 data security incident, the “data security incidents”). The costs that we have incurred to date in connection with the data security incidents include assessments by payment card networks, professional advisory fees and legal fees relating to investigating and remediating the data security incidents. In April 2017, we entered into agreements pursuant to which all existing claims and assessments by certain payment card networks were settled. We cannot provide any assurances regarding whether assessments by other payment card networks will be received.

We expect to incur additional costs and expenses related to the data security incidents in the future. These costs and expenses may result from potential additional liabilities to other payment card networks, governmental or third party investigations, proceedings or litigation and legal and other fees necessary to defend against any potential liabilities or claims, and further investigatory and

15


Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

remediation costs. While we do not anticipate these additional costs and expenses or liabilities would have a material adverse impact on our business, financial condition and operating results, these additional costs and expenses could be significant.

9.   Short-term Borrowings and Long-term Debt

Our debt outstanding at December 31, 2017 was not materially different from that at September 31, 2017. At December 31, 2017, we have $381.3$417.7 million available for borrowing, under the ABL facility, including the Canadian sub-facility. At December 31, 2017, we are in compliance withsub-facility, subject to the agreements and instruments governing our debt, including our financial covenants.conditions contained therein.

10.    Derivative Instruments and Hedging Activities

9.

Derivative Instruments and Hedging Activities

During the three months ended December 31, 2017,2022, we did not purchase or hold any derivative instruments for trading or speculative purposes. See Note 3, Fair Value Measurements, for the classification and fair value of our derivative instruments.

Designated Cash Flow Hedges

Foreign Currency Forwards

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

Notional Currency

 

Notional Amount

 

Mexican Peso

 

$

17,629

 

Euro

 

 

11,549

 

Canadian Dollar

 

 

8,921

 

Total

 

$

38,099

 

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

Interest Rate Caps

In July 2017, we purchased two interest rate caps with an initial aggregate notional amount of $550 million (the “interest rate caps”). to mitigate the exposure to higher interest rates in connection with our term loan B. The interest rate caps are comprised of individual caplets that expire onratably through June 30, 2023, and are designated and qualifying 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.

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


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

Non-Designated Derivative Instruments

We also use foreign exchange contracts to mitigate our exposure to exchange rate changes in connection with certain intercompany balances not permanently invested. At December 31, 2017,2022, we held foreign currency forward contractsforwards, which expire on various dates in the first month of both the second and third fiscal quarters of fiscal year 2023, with an aggregatea notional amount, of $100.6 million based upon exchange rates at December 31, 2017. These derivative instruments expire at various dates though September 30, 2018.2022, 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

 

The table below presents theWe 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 our derivative financial instruments as well as their classificationthese foreign exchange contracts on our condensed consolidated balance sheets (in thousands):

financial statements were gains of $0.4 million in both years.

 

 

Asset Derivatives

 

 

Liability Derivatives

 

 

 

Classification

 

December 31,

2017

 

 

September 30,

2017

 

 

Classification

 

December 31,

2017

 

 

September 30,

2017

 

Derivatives designated as hedging

  instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate caps

 

Other current assets

 

$

4,048

 

 

$

5,178

 

 

N/A

 

$

 

 

$

 

Derivatives not designated as hedging

   instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

Other current

assets

 

 

572

 

 

 

779

 

 

Accrued

liabilities

 

 

 

 

 

207

 

 

 

 

 

$

4,620

 

 

$

5,957

 

 

 

 

$

 

 

$

207

 

10.

Segment Reporting

The effect of our derivative financial instruments on our consolidated statements of earnings was not materialSegment data for the three months ended December 31, 20172022 and 2016.

11. Income Taxes

On December 22, 2017, the U.S. enacted comprehensive amendments to the Internal Revenue Code of 1986 (“U.S. Tax Reform”). Among other things, U.S. Tax Reform (a) reduces the federal statutory tax rate for corporate taxpayers, (b) provides for a deemed repatriation of undistributed foreign earnings by U.S. taxpayers and makes other fundamental changes on how foreign earnings will be taxed by the U.S. and (c) otherwise modifies corporate tax rules in significant ways. In accordance with ASC Topic No. 740, Income Taxes, entities must revalue their deferred income taxes considering the new tax rates and recognize any impact of the deemed repatriation of undistributed foreign earnings on their financial statements based on the enacted tax law.

In December 2017, the SEC provided guidance allowing registrants to record provisional amounts, during a specified measurement period, when the necessary information2021, is not available, prepared or analyzed in reasonable detail to account for the impact of U.S. Tax Reform. Accordingly, we have reported the revaluation of deferred income taxes and the impact of the deemed repatriation on our consolidated financial statements based on provisional amounts. Specifically, in the three months ended December 31, 2017, we recognized a provisional income tax benefit of $33.6 million in connection with the revaluation of our deferred income tax assets and

16


Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

liabilities, and a provisional income tax charge of $11.4 million for federal and state income taxes, including $10.4 million payable beyond one year, related to accumulated but undistributed earnings of our foreign operations.

For the fiscal year ending September 30, 2018, our U.S. federal statutory tax rate will be 24.5% and, for fiscal years after that, 21.0%. Among the factors that could affect the accuracy of our provisional amounts is uncertainty about the statutory tax rate applicable to our deferred income tax assets and liabilities, since the actual rate will be dependent on the timing of realization or settlement of such assets and liabilities. At December 31, 2017, we estimated the dates when such realization or settlement would occur. The actual dates when such realization or settlement occurs may be significantly different from our estimates, which could result in the ultimate revaluation of our deferred income taxes to be different from our provisional amounts. In addition, there is uncertainty about the impact of expected Internal Revenue Service (IRS) guidance intended to interpret the most complex provisions of U.S. Tax Reform. Our liability for federal and state income taxes applicable to undistributed earnings of our foreign operations may be materially different from our provisional amount as a result of such future IRS guidance and interpretation and in connection with estimates related to the amount of undistributed foreign earnings and cash balances.

We are currently assessing the potential additional impact of U.S. Tax Reform on our business and consolidated financial statements, and expect to complete such assessment on or before September 30, 2018.

The difference between our U.S. federal statutory income tax rate and our effective income tax rate is summarized below:follows (in thousands):

 

Three Months Ended December 31, 2017

U.S. federal statutory income tax rate

24.5

%

State income taxes, net of federal tax benefit

3.2

Effect of foreign operations

0.8

Deferred tax revaluation

(39.1)

Deemed repatriation tax

13.3

Other, net

0.6

Effective tax rate

3.3

%

 

 

Three Months Ended

December 31,

 

 

 

2022

 

 

2021

 

Net sales:

 

 

 

 

 

 

 

 

Sally Beauty Supply ("SBS")

 

$

549,472

 

 

$

561,530

 

Beauty Systems Group ("BSG")

 

 

407,583

 

 

 

418,721

 

Total

 

$

957,055

 

 

$

980,251

 

Earnings before provision for income taxes:

 

 

 

 

 

 

 

 

Segment operating earnings:

 

 

 

 

 

 

 

 

SBS

 

$

99,174

 

 

$

100,623

 

BSG

 

 

49,647

 

 

 

58,546

 

Segment operating earnings

 

 

148,821

 

 

 

159,169

 

Unallocated expenses

 

 

51,827

 

 

 

45,290

 

Restructuring

 

 

10,406

 

 

 

1,099

 

Consolidated operating earnings

 

 

86,588

 

 

 

112,780

 

Interest expense

 

 

17,923

 

 

 

20,241

 

Earnings before provision

   for income taxes

 

$

68,665

 

 

$

92,539

 

 

12.   Business Segments

Our business is organized into two operating and reporting segments: (i) SBS, a domestic and international chain of retail stores and a consumer-facing e-commerce website that offers professional beauty supplies to both salon professionals and retail customers in North America, Puerto Rico, and parts of Europe and South America and (ii) BSG, including its franchise-based business Armstrong McCall, a full service distributor of beauty products and supplies that offers professional beauty products directly to salons and salon professionals through its professional-only stores, e-commerce websites and its own sales force in partially exclusive geographical territories in North America.

The accounting policies of both of our reportable segments are the same as described in the summary of significant accounting policies contained in Note 2 of the “Notes to Consolidated Financial Statements” in “Item 8 - Financial Statements and Supplementary Data” contained in our Annual Report on Form 10-K for the fiscal year ended September 30, 2017. Sales between segments, which are eliminated in consolidation, were not material during the three months ended December 31, 20172022 and 2016.2021.

17


Sally Beauty Holdings, Inc. and SubsidiariesDisaggregation of net sales by segment  

Condensed NotesThe following tables disaggregate our segment revenues by merchandise category. We have reclassified certain prior year amounts within BSG to Consolidated Financial Statementsconform to current year presentation.

(Unaudited)

 

 

Three Months Ended

December 31,

 

SBS

 

2022

 

 

2021

 

Hair color

 

 

38.7

%

 

 

36.8

%

Hair care

 

 

23.4

%

 

 

23.8

%

Styling tools and supplies

 

 

19.5

%

 

 

20.2

%

Nail

 

 

10.3

%

 

 

10.4

%

Skin and cosmetics

 

 

7.4

%

 

 

7.9

%

Other beauty items

 

 

0.7

%

 

 

0.9

%

Total

 

 

100.0

%

 

 

100.0

%

 


Segment data

 

 

Three Months Ended

December 31,

 

BSG

 

2022

 

 

2021

 

Hair care

 

 

43.5

%

 

 

43.5

%

Hair color

 

 

38.3

%

 

 

38.4

%

Styling tools and supplies

 

 

10.8

%

 

 

11.4

%

Skin and cosmetics

 

 

4.4

%

 

 

4.4

%

Nail

 

 

2.7

%

 

 

2.0

%

Other beauty items

 

 

0.3

%

 

 

0.3

%

Total

 

 

100.0

%

 

 

100.0

%

The following tables disaggregate our segment revenue by sales channels:

 

 

Three Months Ended

December 31,

 

SBS

 

2022

 

 

2021

 

Company-operated stores

 

 

93.6

%

 

 

94.2

%

E-commerce

 

 

6.4

%

 

 

5.8

%

Total

 

 

100.0

%

 

 

100.0

%

 

 

Three Months Ended

December 31,

 

BSG

 

2022

 

 

2021

 

Company-operated stores

 

 

66.3

%

 

 

67.5

%

E-commerce

 

 

13.6

%

 

 

11.7

%

Distributor sales consultants

 

 

12.6

%

 

 

13.6

%

Franchise stores

 

 

7.5

%

 

 

7.2

%

Total

 

 

100.0

%

 

 

100.0

%

11.

Restructuring

Restructuring expenses, included in Cost of Goods Sold (“COGS”) and Restructuring for the three months ended December 31, 20172022 and 2016 is2021 are as follows (in thousands):

 

 

Three Months Ended

December 31,

 

 

 

2017

 

 

2016

 

Net sales:

 

 

 

 

 

 

 

 

SBS

 

$

585,574

 

 

$

589,859

 

BSG

 

 

409,390

 

 

 

409,750

 

Total

 

$

994,964

 

 

$

999,609

 

Earnings before provision for income taxes:

 

 

 

 

 

 

 

 

Segment operating earnings:

 

 

 

 

 

 

 

 

SBS

 

$

86,594

 

 

$

92,526

 

BSG

 

 

64,565

 

 

 

63,600

 

Segment operating earnings

 

 

151,159

 

 

 

156,126

 

Unallocated expenses

 

 

(35,816

)

 

 

(38,669

)

Restructuring charges

 

 

(5,210

)

 

 

 

Consolidated operating earnings

 

 

110,133

 

 

 

117,457

 

Interest expense

 

 

(24,016

)

 

 

(26,799

)

Earnings before provision for income taxes

 

$

86,117

 

 

$

90,658

 

 

 

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

13.   Parent, Issuers, GuarantorIn the fourth quarter of fiscal year 2022, our Board approved the Distribution Center Consolidation and Non-Guarantor Condensed Consolidating Financial Statements

The following consolidating financial information presentsStore Optimization Plan authorizing the condensed consolidating balance sheets asclosure of December 31, 2017330 SBS stores and September 30, 2017, the related condensed consolidating statements of earnings and comprehensive income35 BSG stores, and the condensed consolidating statementsclosure of cash flows fortwo BSG distribution centers in Clackamas, Oregon and Pottsville, Pennsylvania (“the Plan”).

During the three months ended December 31, 2017 and 2016 of: (i) Sally Beauty Holdings, Inc., or the “Parent;” (ii) Sally Holdings and Sally Capital Inc. (iii) the guarantor subsidiaries; (iv) the non-guarantor subsidiaries; (v) elimination entries necessary for consolidation purposes; and (vi) Sally Beauty on a condensed consolidated basis.

Investments in subsidiaries are accounted for using the equity method for purposes of the consolidating presentation. The principal elimination entries relate to investments in subsidiaries and intercompany balances and transactions. Separate financial statements and other disclosures with respect to the subsidiary guarantors have not been provided because2022, we believe the following information is sufficient since the guarantor subsidiaries are 100% indirectly owned by the Parent and all guarantees are full and unconditional.

18


Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

Condensed Consolidating Balance Sheet

December 31, 2017

(In thousands)

 

 

Parent

 

 

Sally

Holdings LLC

and Sally

Capital Inc.

 

 

Guarantor

Subsidiaries

 

 

Non-

Guarantor

Subsidiaries

 

 

Consolidating

Eliminations

 

 

Sally Beauty

Holdings,

Inc. and

Subsidiaries

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

 

$

10

 

 

$

31,839

 

 

$

47,463

 

 

$

 

 

$

79,312

 

Trade and other accounts receivable, net

 

 

 

 

 

 

 

 

64,152

 

 

 

32,806

 

 

 

 

 

 

96,958

 

Due from affiliates

 

 

 

 

 

 

 

 

2,360,280

 

 

 

 

 

 

(2,360,280

)

 

 

 

Inventory

 

 

 

 

 

 

 

 

714,682

 

 

 

226,464

 

 

 

 

 

 

941,146

 

Other current assets

 

 

1,280

 

 

 

817

 

 

 

27,856

 

 

 

16,306

 

 

 

 

 

 

46,259

 

Property and equipment, net

 

 

11

 

 

 

 

 

 

225,891

 

 

 

80,519

 

 

 

 

 

 

306,421

 

Investment in subsidiaries

 

 

1,195,373

 

 

 

3,820,552

 

 

 

374,002

 

 

 

 

 

 

(5,389,927

)

 

 

 

Goodwill and other intangible assets, net

 

 

 

 

 

 

 

 

465,755

 

 

 

156,403

 

 

 

 

 

 

622,158

 

Other assets

 

 

1,050

 

 

 

7,171

 

 

 

(7,852

)

 

 

20,698

 

 

 

 

 

 

21,067

 

Total assets

 

$

1,197,714

 

 

$

3,828,550

 

 

$

4,256,605

 

 

$

580,659

 

 

$

(7,750,207

)

 

$

2,113,321

 

Liabilities and Stockholders’ (Deficit) Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

36

 

 

$

 

 

$

234,878

 

 

$

71,356

 

 

$

 

 

$

306,270

 

Due to affiliates

 

 

1,519,033

 

 

 

750,442

 

 

 

 

 

 

90,805

 

 

 

(2,360,280

)

 

 

 

Accrued liabilities

 

 

362

 

 

 

6,170

 

 

 

125,852

 

 

 

34,117

 

 

 

 

 

 

166,501

 

Income taxes payable

 

 

10,566

 

 

 

1,678

 

 

 

 

 

 

87

 

 

 

 

 

 

12,331

 

Long-term debt

 

 

 

 

 

1,874,887

 

 

 

4

 

 

 

1,308

 

 

 

 

 

 

1,876,199

 

Other liabilities

 

 

10,371

 

 

 

 

 

 

17,027

 

 

 

3,749

 

 

 

 

 

 

31,147

 

Deferred income tax liabilities, net

 

 

(19

)

 

 

 

 

 

58,292

 

 

 

5,235

 

 

 

 

 

 

63,508

 

Total liabilities

 

 

1,540,349

 

 

 

2,633,177

 

 

 

436,053

 

 

 

206,657

 

 

 

(2,360,280

)

 

 

2,455,956

 

Total stockholders’ (deficit) equity

 

 

(342,635

)

 

 

1,195,373

 

 

 

3,820,552

 

 

 

374,002

 

 

 

(5,389,927

)

 

 

(342,635

)

Total liabilities and stockholders’ (deficit) equity

 

$

1,197,714

 

 

$

3,828,550

 

 

$

4,256,605

 

 

$

580,659

 

 

$

(7,750,207

)

 

$

2,113,321

 

19


Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

Condensed Consolidating Balance Sheet

September 30, 2017

(In thousands)

 

 

Parent

 

 

Sally

Holdings LLC

and Sally

Capital Inc.

 

 

Guarantor

Subsidiaries

 

 

Non-

Guarantor

Subsidiaries

 

 

Consolidating

Eliminations

 

 

Sally Beauty

Holdings,

Inc. and

Subsidiaries

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

 

$

10

 

 

$

22,090

 

 

$

41,659

 

 

$

 

 

$

63,759

 

Trade and other accounts receivable, net

 

 

200

 

 

 

 

 

 

59,992

 

 

 

32,049

 

 

 

 

 

 

92,241

 

Due from affiliates

 

 

 

 

 

 

 

 

2,289,371

 

 

 

 

 

 

(2,289,371

)

 

 

 

Inventory

 

 

 

 

 

 

 

 

709,890

 

 

 

220,965

 

 

 

 

 

 

930,855

 

Other current assets

 

 

11,763

 

 

 

813

 

 

 

26,144

 

 

 

16,503

 

 

 

 

 

 

55,223

 

Property and equipment, net

 

 

12

 

 

 

 

 

 

230,069

 

 

 

83,636

 

 

 

 

 

 

313,717

 

Investment in subsidiaries

 

 

1,110,891

 

 

 

3,717,999

 

 

 

386,681

 

 

 

 

 

 

(5,215,571

)

 

 

 

Goodwill and other intangible assets, net

 

 

 

 

 

 

 

 

468,118

 

 

 

149,978

 

 

 

 

 

 

618,096

 

Other assets

 

 

1,538

 

 

 

8,116

 

 

 

(7,837

)

 

 

23,299

 

 

 

 

 

 

25,116

 

Total assets

 

$

1,124,404

 

 

$

3,726,938

 

 

$

4,184,518

 

 

$

568,089

 

 

$

(7,504,942

)

 

$

2,099,007

 

Liabilities and Stockholders’ (Deficit) Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

251

 

 

$

4

 

 

$

243,818

 

 

$

63,679

 

 

$

 

 

$

307,752

 

Due to affiliates

 

 

1,487,484

 

 

 

727,856

 

 

 

 

 

 

74,031

 

 

 

(2,289,371

)

 

 

 

Accrued liabilities

 

 

285

 

 

 

20,108

 

 

 

113,628

 

 

 

32,506

 

 

 

 

 

 

166,527

 

Income taxes payable

 

 

 

 

 

1,624

 

 

 

 

 

 

609

 

 

 

 

 

 

2,233

 

Long-term debt

 

 

 

 

 

1,866,455

 

 

 

1

 

 

 

1,479

 

 

 

 

 

 

1,867,935

 

Other liabilities

 

 

 

 

 

 

 

 

16,008

 

 

 

4,132

 

 

 

 

 

 

20,140

 

Deferred income tax liabilities, net

 

 

 

 

 

 

 

 

93,064

 

 

 

4,972

 

 

 

 

 

 

98,036

 

Total liabilities

 

 

1,488,020

 

 

 

2,616,047

 

 

 

466,519

 

 

 

181,408

 

 

 

(2,289,371

)

 

 

2,462,623

 

Total stockholders’ (deficit) equity

 

 

(363,616

)

 

 

1,110,891

 

 

 

3,717,999

 

 

 

386,681

 

 

 

(5,215,571

)

 

 

(363,616

)

Total liabilities and stockholders’ (deficit) equity

 

$

1,124,404

 

 

$

3,726,938

 

 

$

4,184,518

 

 

$

568,089

 

 

$

(7,504,942

)

 

$

2,099,007

 

20


Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

Condensed Consolidating Statement of Earnings and Comprehensive Income

Three Months Ended December 31, 2017

(In thousands)

 

 

Parent

 

 

Sally

Holdings LLC

and Sally

Capital Inc.

 

 

Guarantor

Subsidiaries

 

 

Non-

Guarantor

Subsidiaries

 

 

Consolidating

Eliminations

 

 

Sally Beauty

Holdings,

Inc. and

Subsidiaries

 

Net sales

 

$

 

 

$

 

 

$

796,532

 

 

$

198,432

 

 

$

 

 

$

994,964

 

Related party sales

 

 

 

 

 

 

 

 

446

 

 

 

 

 

 

(446

)

 

 

 

Cost of products sold and distribution expenses

 

 

 

 

 

 

 

 

403,810

 

 

 

104,971

 

 

 

(446

)

 

 

508,335

 

Gross profit

 

 

 

 

 

 

 

 

393,168

 

 

 

93,461

 

 

 

 

 

 

486,629

 

Selling, general and administrative expenses

 

 

2,606

 

 

 

179

 

 

 

284,467

 

 

 

84,034

 

 

 

 

 

 

371,286

 

Restructuring charges

 

 

 

 

 

 

 

 

5,210

 

 

 

 

 

 

 

 

 

5,210

 

Operating earnings (loss)

 

 

(2,606

)

 

 

(179

)

 

 

103,491

 

 

 

9,427

 

 

 

 

 

 

110,133

 

Interest expense

 

 

 

 

 

24,014

 

 

 

 

 

 

2

 

 

 

 

 

 

24,016

 

Earnings (loss) before provision for income taxes

 

 

(2,606

)

 

 

(24,193

)

 

 

103,491

 

 

 

9,425

 

 

 

 

 

 

86,117

 

Provision (benefit) for income taxes

 

 

(251

)

 

 

(6,925

)

 

 

(7,915

)

 

 

17,944

 

 

 

 

 

 

2,853

 

Equity in earnings of subsidiaries, net of tax

 

 

85,619

 

 

 

102,887

 

 

 

(8,519

)

 

 

 

 

 

(179,987

)

 

 

 

Net earnings (loss)

 

 

83,264

 

 

 

85,619

 

 

 

102,887

 

 

 

(8,519

)

 

 

(179,987

)

 

 

83,264

 

Other comprehensive loss, net of tax

 

 

 

 

 

(803

)

 

 

 

 

 

(255

)

 

 

 

 

 

(1,058

)

Total comprehensive income (loss)

 

$

83,264

 

 

$

84,816

 

 

$

102,887

 

 

$

(8,774

)

 

$

(179,987

)

 

$

82,206

 

21


Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

Condensed Consolidating Statement of Earnings and Comprehensive Income

Three Months Ended December 31, 2016

(In thousands)

 

 

Parent

 

 

Sally

Holdings LLC

and Sally

Capital Inc.

 

 

Guarantor

Subsidiaries

 

 

Non-

Guarantor

Subsidiaries

 

 

Consolidating

Eliminations

 

 

Sally Beauty

Holdings,

Inc. and

Subsidiaries

 

Net sales

 

$

 

 

$

 

 

$

816,051

 

 

$

183,558

 

 

$

 

 

$

999,609

 

Related party sales

 

 

 

 

 

 

 

 

748

 

 

 

 

 

 

(748

)

 

 

 

Cost of products sold and distribution expenses

 

 

 

 

 

 

 

 

411,323

 

 

 

97,326

 

 

 

(748

)

 

 

507,901

 

Gross profit

 

 

 

 

 

 

 

 

405,476

 

 

 

86,232

 

 

 

 

 

 

491,708

 

Selling, general and administrative expenses

 

 

2,549

 

 

 

137

 

 

 

296,724

 

 

 

74,841

 

 

 

 

 

 

374,251

 

Operating earnings (loss)

 

 

(2,549

)

 

 

(137

)

 

 

108,752

 

 

 

11,391

 

 

 

 

 

 

117,457

 

Interest expense

 

 

 

 

 

26,749

 

 

 

 

 

 

50

 

 

 

 

 

 

26,799

 

Earnings (loss) before provision for income taxes

 

 

(2,549

)

 

 

(26,886

)

 

 

108,752

 

 

 

11,341

 

 

 

 

 

 

90,658

 

Provision (benefit) for income taxes

 

 

(990

)

 

 

(10,443

)

 

 

41,998

 

 

 

4,267

 

 

 

 

 

 

34,832

 

Equity in earnings of subsidiaries, net of tax

 

 

57,385

 

 

 

73,828

 

 

 

7,074

 

 

 

 

 

 

(138,287

)

 

 

 

Net earnings

 

 

55,826

 

 

 

57,385

 

 

 

73,828

 

 

 

7,074

 

 

 

(138,287

)

 

 

55,826

 

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

(18,668

)

 

 

 

 

 

(18,668

)

Total comprehensive income (loss)

 

$

55,826

 

 

$

57,385

 

 

$

73,828

 

 

$

(11,594

)

 

$

(138,287

)

 

$

37,158

 

22


Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

Condensed Consolidating Statement of Cash Flows

Three Months Ended December 31, 2017

(In thousands)

 

 

Parent

 

 

Sally

Holdings LLC

and Sally

Capital Inc.

 

 

Guarantor

Subsidiaries

 

 

Non-

Guarantor

Subsidiaries

 

 

Consolidating

Eliminations

 

 

Sally Beauty

Holdings,

Inc. and

Subsidiaries

 

Net cash provided (used) by operating activities

 

$

32,788

 

 

$

(30,211

)

 

$

100,319

 

 

$

1,308

 

 

$

 

 

$

104,204

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payments for property and equipment, net

 

 

 

 

 

 

 

 

(19,664

)

 

 

(2,835

)

 

 

 

 

 

(22,499

)

Acquisitions, net of cash acquired

 

 

 

 

 

 

 

 

 

 

 

(9,175

)

 

 

 

 

 

(9,175

)

Due from affiliates

 

 

 

 

 

 

 

 

(70,909

)

 

 

 

 

 

70,909

 

 

 

 

Net cash used by investing activities

 

 

 

 

 

 

 

 

(90,573

)

 

 

(12,010

)

 

 

70,909

 

 

 

(31,674

)

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from issuance of long-term debt

 

 

 

 

 

126,500

 

 

 

5

 

 

 

 

 

 

 

 

 

126,505

 

Repayments of long-term debt

 

 

 

 

 

(118,875

)

 

 

(2

)

 

 

(190

)

 

 

 

 

 

(119,067

)

Repurchases of common stock

 

 

(64,612

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(64,612

)

Proceeds from exercises of stock options

 

 

275

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

275

 

Due to affiliates

 

 

31,549

 

 

 

22,586

 

 

 

 

 

 

16,774

 

 

 

(70,909

)

 

 

 

Net cash (used) provided by financing activities

 

 

(32,788

)

 

 

30,211

 

 

 

3

 

 

 

16,584

 

 

 

(70,909

)

 

 

(56,899

)

Effect of foreign exchange rate changes on cash and

   cash equivalents

 

 

 

 

 

 

 

 

 

 

 

(78

)

 

 

 

 

 

(78

)

Net increase in cash and cash equivalents

 

 

 

 

 

 

 

 

9,749

 

 

 

5,804

 

 

 

 

 

 

15,553

 

Cash and cash equivalents, beginning of period

 

 

 

 

 

10

 

 

 

22,090

 

 

 

41,659

 

 

 

 

 

 

63,759

 

Cash and cash equivalents, end of period

 

$

 

 

$

10

 

 

$

31,839

 

 

$

47,463

 

 

$

 

 

$

79,312

 

23


Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

Condensed Consolidating Statement of Cash Flows

Three Months Ended December 31, 2016

(In thousands)

 

 

Parent

 

 

Sally

Holdings LLC

and Sally

Capital Inc.

 

 

Guarantor

Subsidiaries

 

 

Non-

Guarantor

Subsidiaries

 

 

Consolidating

Eliminations

 

 

Sally Beauty

Holdings,

Inc. and

Subsidiaries

 

Net cash provided (used) by operating activities

 

$

27,303

 

 

$

(41,347

)

 

$

104,449

 

 

$

(611

)

 

$

 

 

$

89,794

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payments for property and equipment, net

 

 

 

 

 

 

 

 

(20,883

)

 

 

(7,125

)

 

 

 

 

 

(28,008

)

Due from affiliates

 

 

 

 

 

 

 

 

(68,741

)

 

 

 

 

 

68,741

 

 

 

 

Net cash used by investing activities

 

 

 

 

 

 

 

 

(89,624

)

 

 

(7,125

)

 

 

68,741

 

 

 

(28,008

)

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from issuance of long-term debt

 

 

 

 

 

58,500

 

 

 

 

 

 

 

 

 

 

 

 

58,500

 

Repayments of long-term debt

 

 

 

 

 

(58,500

)

 

 

(4

)

 

 

(170

)

 

 

 

 

 

(58,674

)

Repurchases of common stock

 

 

(67,183

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(67,183

)

Proceeds from exercises of stock options

 

 

14,280

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14,280

 

Due to affiliates

 

 

25,600

 

 

 

31,418

 

 

 

 

 

 

11,723

 

 

 

(68,741

)

 

 

 

Net cash (used) provided by financing activities

 

 

(27,303

)

 

 

31,418

 

 

 

(4

)

 

 

11,553

 

 

 

(68,741

)

 

 

(53,077

)

Effect of foreign exchange rate changes on cash and

   cash equivalents

 

 

 

 

 

 

 

 

 

 

 

(921

)

 

 

 

 

 

(921

)

Net (decrease) increase in cash and cash equivalents

 

 

 

 

 

(9,929

)

 

 

14,821

 

 

 

2,896

 

 

 

 

 

 

7,788

 

Cash and cash equivalents, beginning of period

 

 

 

 

 

28,372

 

 

 

22,368

 

 

 

35,882

 

 

 

 

 

 

86,622

 

Cash and cash equivalents, end of period

 

$

 

 

$

18,443

 

 

$

37,189

 

 

$

38,778

 

 

$

 

 

$

94,410

 


24


Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

14.   Restructuring Plans

2017 Restructuring Plan

In January 2017, our Board of Directors approved a comprehensive restructuring plan (the “2017 Restructuring Plan”) for our businesses that included a number of organizational efficiency initiatives and other cost reduction opportunities. The 2017 Restructuring Plan comprisedcompleted the closure of four administrative offices in the U.S.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 Canada, reductions in both salariedreduce overall costs.


As of December 31, 2022, we have closed 327 SBS stores and hourly workforce14 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 certain other cost reduction activities. At September 30, 2017,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 initiatives contemplated by the 2017 Restructuring Plan were substantially completed.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 2017 Restructuring Plan, which is included in accrued liabilities inon our consolidated balance sheets, is as follows (in thousands):

follows:

Restructuring Activity

 

Liability at

September 30,

2017

 

 

Expenses

 

 

Expenses Paid or Otherwise Settled

 

 

Adjustments

 

 

Liability at

December 31,

2017

 

Workforce reductions

 

$

1,860

 

 

$

 

 

$

1,072

 

 

$

 

 

$

788

 

Facility closures

 

 

1,747

 

 

 

 

 

 

781

 

 

 

 

 

 

966

 

Other

 

 

235

 

 

 

 

 

 

235

 

 

 

 

 

 

 

Total

 

$

3,842

 

 

$

 

 

$

2,088

 

 

$

 

 

$

1,754

 

(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.


 

2018 Restructuring Plan

In November 2017, our Board approved a restructuring plan (the “2018 Restructuring Plan”) focused primarily on significantly improving the profitability of our international businesses, with particular focus on our European operations. We estimate that we will incur total aggregate charges of approximately $13 million to $14 million related primarily to potential employee separation costs. We anticipate substantially completing the 2018 Restructuring Plan in the fiscal year 2018.

The liability related to the 2018 Restructuring Plan, which is included in accrued liabilities in our consolidated balance sheets, is as follows (in thousands):

Restructuring Activity

 

Liability at

September 30,

2017

 

 

Expenses

 

 

Expenses Paid or Otherwise Settled

 

 

Adjustments

 

 

Liability at

December 31,

2017

 

Workforce reductions

 

$

 

 

$

4,260

 

 

$

3,376

 

 

$

 

 

$

884

 

Other

 

 

 

 

 

950

 

 

 

328

 

 

 

 

 

 

622

 

Total

 

$

 

 

$

5,210

 

 

$

3,704

 

 

$

 

 

$

1,506

 

Expenses incurred in the three months ended December 31, 2017 represent costs incurred by SBS ($4.5 million) and corporate ($0.7 million).

25


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, 2017,2022, including the Risk Factors section,sections therein, and information contained elsewhere in this Quarterly Report, including the interim condensed consolidated interim financial statements and condensed notes to those financial statements. This Management’s Discussion

Executive Overview

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

Enhancing our customer centricity;

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

Increasing the efficiency of Financial Conditionour operations and Resultsoptimizing 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 Operations section may contain forward-looking statements. BSG merchandise choices and enables their clients to purchase directly from their shops without the stylists having to finance and carry inventory. In addition, SBS has identified the locations for its initial Studio by Sally pilot stores that we expect to open this fiscal year. The Studio by Sally pilot store program will have a digital-first focus, from digital check-in to digital education throughout the store and beyond, including personalized appointments at our in-store salons with licensed stylists who will train and educate consumers on how to color their own hair and achieve their desired results. We believe that we will be able to expand the Studio by Sally concept to 100 locations throughout the U.S. over the next three to four fiscal years if successful.

Growing high margin owned brands at Sally Beauty and amplifying innovation

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

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

Increasing the efficiency of our operations and optimizing our capabilities

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

See “Cautionary Notice Regarding Forward-Looking Statements,” included at the beginningNote 11, Restructuring, in Item 1 of this Quarterly Reportquarterly report for a discussion ofmore information on the uncertainties, risks and assumptions associated with these forward-looking statements that could cause results to differ materially from those reflected in such forward-looking statements.Plan.

The results of operations for any interim period may not necessarily be indicative of the results that may be expected for any future interim period or the entire fiscal year.

HighlightsFinancial Summary for the Three Months Ended December 31, 2017:2022

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

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

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


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

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

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

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

Trends Impacting Our Business

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

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

Impact of COVID-19 on Our Business

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

Refer to Item 1A. “Risk Factors” in our Form 10-K for the three monthsfiscal year ended December 31, 2017, decreased $4.6 million, or 0.5%,September 30, 2022, for further discussion on the risks and uncertainties created by COVID-19.

Comparable Sales

We believe that comparable sales is an appropriate performance indicator to $995.0 million,measure our sales growth compared to the three months ended December 31, 2016;

Consolidated netprior period. Our comparable sales include sales from company-operated stores that have been openoperating for 14 months or longer which we refer to as same store sales, decreased 2.2% for the three months ended December 31, 2017, compared to an increase of 0.4% for the three months ended December 31, 2016;

Consolidated gross profit for the three months ended December 31, 2017 decreased $5.1 million, or 1.0%, to $486.6 million compared to the three months ended December 31, 2016. Gross margin decreased 30 basis points to 48.9% for the three months ended December 31, 2017, compared to the three months ended December 31, 2016;

During the three months ended December 31, 2017, we incurred approximately $5.2 million in expenses, including severance and related expenses of $4.3 million and other costs of $0.9 million, in connection with the 2018 Restructuring Plan announced in November 2017;

Consolidated operating earnings for the three months ended December 31, 2017 decreased $7.3 million, or 6.2%, to $110.1 million compared to the three months ended December 31, 2016. Operating margin decreased 70 basis points to 11.1% for the three months ended December 31, 2017, compared to the three months ended December 31, 2016;

Consolidated net earnings increased $27.4 million, or 49.1%, to $83.3 million for the three months ended December 31, 2017 compared to the three months ended December 31, 2016. As a percentage of net sales, net earnings increased 280 basis points to 8.4% for the three months ended December 31, 2017, compared to the three months ended December 31, 2017;

In December 2017, the United States enacted comprehensive amendments to the Internal Revenue Code of 1986 (“U.S. Tax Reform”). In connection therewith, we recorded a net provisional benefit of approximately $22.2 million and our U.S. federal statutory tax rate decreased to 24.5%;

Diluted earnings per share for the three months ended December 31, 2017, were $0.65, compared to $0.39 for the three months ended December 31, 2016;

Cash provided by operations was $104.2 million for the three months ended December 31, 2017, compared to $89.8 million for the three months ended December 31, 2016;

During the three months ended December 31, 2017, we repurchased and subsequently retired approximately 3.8 million shares of our common stock at an aggregate cost of approximately $64.5 million; and

In December 2017, we acquired certain assets and business operations of H. Chalut Ltee, a 21-store professional-only distributor of beauty supplies operating in Quebec, Canada, for approximately $8.8 million.

Overview

Description of Business

We operate primarily through two reportable segments: Sally Beauty Supply (“SBS”) and Beauty Systems Group (“BSG”). We believe we are the largest open-line distributor of professional beauty supplies in the U.S. based on store count. As of December 31, 2017, through SBS and BSG, we had 4,993 company-operated stores and supplied 184 franchised stores in North America and select South American and European countries. Within BSG, we also have one of the largest networkslast day of distributora month and e-commerce revenue. Additionally, comparable sales consultants for professional beauty productsinclude sales to franchisees and full service sales. Our comparable sales excludes the effect of changes in North America. We offer a wide varietyforeign 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 leading third-party branded and exclusive-label professional beauty supplies, including hair color products, hair care products, styling tools, skin and nail care products andcomparable sales might not be the same as other retailers as the calculation varies across the retail industry.



beauty items. SBS targets retail consumers and salon professionals, while BSG exclusively targets salons and salonprofessionals. Neither the sales nor the product assortment for SBS or BSG are generally seasonal in nature.

Restructuring PlansOverview

During the three months ended December 31, 2017, we recognized restructuring charges of approximately $5.2 million in connection with the 2018 Restructuring Plan, including severance and related expenses of approximately $4.3 million and expenses related to other cost-reduction initiatives of $0.9 million. We anticipate substantially completing the 2018 Restructuring Plan in fiscal year 2018. We expect to realize annualized pre-tax benefits in the range of $12 million to $14 million from the 2018 Restructuring Plan, with an estimated benefit of approximately $8 million realized in fiscal year 2018. See Note 14 of the Condensed Notes to Consolidated Financial Statements included in Item 1 of this Quarterly Report for more information about our restructuring plans.

U.S. Tax Reform

On December 22, 2017, the U.S. enacted comprehensive amendments to the Internal Revenue Code of 1986 (“U.S. Tax Reform”). See Note 11 of the Condensed Notes to Consolidated Financial Statements included in Item 1 of this Quarterly Report for more information about the impact of the US. Tax Reform on our financial statements.

Data Security Incidents

As previously disclosed, we experienced a data security incident during fiscal year 2014 and a second data security incident during fiscal year 2015 (together, the “data security incidents”). In the fiscal years 2016 and 2015, we incurred $14.6 million and $5.6 million, respectively, of expenses in connection with the data security incidents. In the fiscal year 2017, we settled prior assessments by two payment card networks for $9.3 million. We expect to incur additional costs and expenses related to the data security incidents in future periods. These costs and expenses may result from potential additional liabilities to other payment card networks, governmental or third party investigations, proceedings or litigation and legal and other fees necessary to defend against any potential liabilities or claims, and further investigatory and remediation costs. As of December 31, 2017, the scope of these additional costs and expenses, or a range thereof, beyond amounts management has determined to be probable, cannot be reasonably estimated and, while we do not anticipate these additional costs and expenses or liabilities would have a material adverse impact on our business, financial condition and operating results, these additional costs and expenses could be significant.


Key Operating Metrics

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

 

 

Three Months Ended

December 31,

 

 

Three Months Ended

December 31,

 

 

2017

 

 

2016

 

 

Increase (Decrease)

 

 

2022

 

 

2021

 

 

Increase (Decrease)

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBS

 

$

585,574

 

 

$

589,859

 

 

$

(4,285

)

 

 

(0.7

)%

 

$

549,472

 

 

$

561,530

 

 

$

(12,058

)

 

 

(2.1

)%

BSG

 

 

409,390

 

 

 

409,750

 

 

 

(360

)

 

 

(0.1

)%

 

 

407,583

 

 

 

418,721

 

 

 

(11,138

)

 

 

(2.7

)%

Consolidated

 

$

994,964

 

 

$

999,609

 

 

$

(4,645

)

 

 

(0.5

)%

 

$

957,055

 

 

$

980,251

 

 

$

(23,196

)

 

 

(2.4

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBS

 

$

319,785

 

 

$

324,183

 

 

$

(4,398

)

 

 

(1.4

)%

 

$

323,475

 

 

$

328,172

 

 

$

(4,697

)

 

 

(1.4

)%

BSG

 

 

166,844

 

 

 

167,525

 

 

 

(681

)

 

 

(0.4

)%

 

 

165,099

 

 

 

171,957

 

 

 

(6,858

)

 

 

(4.0

)%

Consolidated

 

$

486,629

 

 

$

491,708

 

 

$

(5,079

)

 

 

(1.0

)%

 

$

488,574

 

 

$

500,129

 

 

$

(11,555

)

 

 

(2.3

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment gross margin:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBS

 

 

54.6

%

 

 

55.0

%

 

(40) bps

 

 

 

 

 

 

 

58.9

%

 

 

58.4

%

 

50

 

 

bps

 

BSG

 

 

40.8

%

 

 

40.9

%

 

(10) bps

 

 

 

 

 

 

 

40.5

%

 

 

41.1

%

 

(60)

 

 

bps

 

Consolidated

 

 

48.9

%

 

 

49.2

%

 

(30) bps

 

 

 

 

 

 

 

51.0

%

 

 

51.0

%

 

 

 

bps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

$

371,286

 

 

$

374,251

 

 

$

(2,965

)

 

 

(0.8

)%

Restructuring charges

 

$

5,210

 

 

$

 

 

$

5,210

 

 

 

100.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment operating earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBS

 

$

86,594

 

 

$

92,526

 

 

$

(5,932

)

 

 

(6.4

)%

 

$

99,174

 

 

$

100,623

 

 

$

(1,449

)

 

 

(1.4

)%

BSG

 

 

64,565

 

 

 

63,600

 

 

 

965

 

 

 

1.5

%

 

 

49,647

 

 

 

58,546

 

 

 

(8,899

)

 

 

(15.2

)%

Segment operating earnings

 

 

151,159

 

 

 

156,126

 

 

 

(4,967

)

 

 

(3.2

)%

 

 

148,821

 

 

 

159,169

 

 

 

(10,348

)

 

 

(6.5

)%

Unallocated expenses and restructuring charges (a)

 

 

(41,026

)

 

 

(38,669

)

 

 

2,357

 

 

 

6.1

%

Unallocated expenses and restructuring (a)

 

 

62,233

 

 

 

46,389

 

 

 

15,844

 

 

 

34.2

%

Consolidated operating earnings

 

$

110,133

 

 

$

117,457

 

 

$

(7,324

)

 

 

(6.2

)%

 

 

86,588

 

 

 

112,780

 

 

 

(26,192

)

 

 

(23.2

)%

Interest expense

 

 

17,923

 

 

 

20,241

 

 

 

(2,318

)

 

 

(11.5

)%

Earnings before provision for income taxes

 

 

68,665

 

 

 

92,539

 

 

 

(23,874

)

 

 

(25.8

)%

Provision for income taxes

 

 

18,328

 

 

 

23,701

 

 

 

(5,373

)

 

 

(22.7

)%

Net earnings

 

$

50,337

 

 

$

68,838

 

 

$

(18,501

)

 

 

(26.9

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

.

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment operating margin:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

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

 

 

 

 

 

 

 

 

 

SBS

 

 

14.8

%

 

 

15.7

%

 

(90) bps

 

 

 

 

 

 

 

3,146

 

 

 

3,529

 

 

 

(383

)

 

 

 

 

BSG

 

 

15.8

%

 

 

15.5

%

 

30 bps

 

 

 

 

 

 

 

1,352

 

 

 

1,364

 

 

 

(12

)

 

 

 

 

Consolidated

 

 

11.1

%

 

 

11.8

%

 

(70) bps

 

 

 

 

 

 

 

4,498

 

 

 

4,893

 

 

 

(395

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comparable sales growth (decline):

Comparable sales growth (decline):

 

 

 

 

 

 

 

 

 

 

 

 

 

SBS

 

 

3,787

 

 

 

3,815

 

 

 

(28

)

 

 

(0.7

)%

 

 

3.0

%

 

 

4.4

%

 

(140)

 

 

bps

 

BSG

 

 

1,390

 

 

 

1,340

 

 

 

50

 

 

 

3.7

%

 

 

(1.5

)%

 

 

8.6

%

 

(1,010)

 

 

bps

 

Consolidated

 

 

5,177

 

 

 

5,155

 

 

 

22

 

 

 

0.4

%

 

 

1.1

%

 

 

6.1

%

 

(500)

 

 

bps

 

Same store sales growth (decline) (b)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBS

 

 

(2.6

)%

 

 

(0.6

)%

 

(200) bps

 

 

 

 

 

BSG

 

 

(1.3

)%

 

 

2.6

%

 

(390) bps

 

 

 

 

 

Consolidated

 

 

(2.2

)%

 

 

0.4

%

 

(260) bps

 

 

 

 

 

 

 

(a)

(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. Restructuring charges relate to the 2018 Restructuring Plan announced in November 2017.

(b)

For(b)

Our December 31, 2022 store count was impacted by the purposeclosure of calculating our same327 SBS store sales metrics, we compareand 14 BSG store from the current period salesPlan. See Note 11, Restructuring, in Item 1 of this quarterly report for stores open for 14 months or longer as ofmore information on the last day of a month with the sales for these stores for the comparable period in the prior fiscal year. Our same store sales are calculated in constant dollars and include internet-based sales (which are not material for each of the periods presented) and the effect of store expansions, if applicable, but do not generally include the sales from stores that have been relocated until 14 months after the relocation. The sales from stores acquired are excluded from our same store sales calculation until 14 months after the acquisition.Plan.



Results of Operations

The Three Months Ended December 31, 20172022, compared to the Three Months Ended December 31, 20162021

Net Sales

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

Comparable sales

 

$

15,954

 

Sales outside comparable sales (a)

 

 

(16,220

)

Foreign currency exchange

 

 

(11,792

)

Total

 

$

(12,058

)

(a)

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

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

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

Comparable sales

 

$

(6,109

)

Sales outside comparable sales (a)

 

 

(2,396

)

Foreign currency exchange

 

 

(2,633

)

Total

 

$

(11,138

)

(a)

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

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

Gross Profit

SBS. SBS’s gross profit decreased $4.6 million, or 0.5% for the three months ended December 31, 2017, compared to the three months ended December 31, 2016. Consolidated2022, as a result of lower net sales, partially offset by a higher gross margin. SBS’s gross margin grew as a result of pricing leverage and increased penetration of our owned-brand products.

BSG. BSG’s gross profit decreased for the three months ended December 31, 2017, are inclusive of a positive impact from changes in foreign currency exchange rates of $11.8 million, or 1.2% of consolidated net sales.

Sally Beauty Supply. Net sales for SBS decreased $4.3 million, or 0.7%, for the three months ended December 31, 2017, compared to the three months ended December 31, 2016. Net sales for SBS for the three months ended December 31, 2017, are inclusive of a positive impact from changes in foreign currency exchange rates of approximately $10.3 million, or 1.7% of the segment’s net sales.

In the SBS segment, sales of company-operated stores that have been open for 14 months or longer decreased approximately $5.1 million and net sales from stores that have been open for less than 14 months decreased approximately $1.8 million. Net sales from other sales channels, which include catalog and internet sales of our Sinelco Group subsidiaries and incremental sales from businesses acquired in the preceding 12 months, increased $2.6 million compared to the three months ended December 31, 2016.

The decrease in SBS’s net sales reflects lower unit volume, including as a result of lower customer traffic primarily in the U.S., partially offset by the positive impact from changes in foreign currency exchange rates and an increase in average unit prices, resulting primarily from selective price increases in certain geographical areas of the U.S. and a change in product mix (to higher-priced products) resulting from shifts in customer preferences.

Beauty Systems Group. Net sales for BSG decreased $0.4 million, or 0.1%, for the three months ended December 31, 2017, compared to the three months ended December 31, 2016. BSG’s net sales for the three months ended December 31, 2017, are inclusive of a positive impact from changes in foreign currency exchange rates of approximately $1.5 million, or 0.4% of the segment’s net sales.

In the BSG segment, sales by our distributor sales consultants decreased approximately $2.6 million compared to three months ended December 31, 2016, while sales from stores that have been open for less than 14 months increased approximately $1.9 million. Net sales from other BSG sales channels, which include sales of company-operated stores that have been open for 14 months or longer, sales to our franchisees and incremental sales from businesses acquired in the preceding 12 months, in the aggregate increased approximately $0.3 million compared to the three months ended December 31, 2016.

The decrease in BSG’s net sales is primarily the result of a decrease in unit volume (notwithstanding the impact of incremental sales from 46 company-operated stores opened or acquired during the last 12 months), partially offset by an increase in average unit prices (resulting primarily from the introduction of certain third-party brands with higher average unit prices in the preceding 12 months).

Gross Profit

Consolidated. Consolidated gross profit decreased $5.1 million, or 1.0%, for the three months ended December 31, 2017, compared to the three months ended December 31, 2016, due principally to lower net sales and lower gross margins in both reportable segments, as more fully described below. Consolidated gross margin decreased 30 basis points to 48.9% for the three months ended December 31, 2017, compared to 49.2% for the three months ended December 31, 2016.

Sally Beauty Supply. SBS’s gross profit decreased $4.4 million, or 1.4%, for the three months ended December 31, 2017, compared to the three months ended December 31, 2016, principally2022, as a result of lower net sales and a lower gross margin. SBS’sBSG’s gross margin decreased 40 basis points to 54.6% for the three months ended December 31, 2017, compared to 55.0% for the three months ended December 31, 2016. This decrease reflects a change in geographicdecline was driven by lower product margin resulting from an unfavorable sales channel mix as a result ofbetween stores and lower-margin non-U.S.Regis e-commerce sales, making up a greater portion of total segment sales and the net impact of prior year price increasespartially offset by selective price reductions in the three months ended December 31, 2017, comparedadjustments to our expected obsolescence reserve related to the three months ended December 31, 2016.Plan.  

Beauty Systems GroupSelling, General and Administrative Expenses

SBS. BSG’s gross profit SBS’s selling, general and administrative expenses decreased $0.7$3.2 million, or 0.4%1.4%, for the three months ended December 31, 2017, compared to the three months ended December 31, 2016, principally as2022 and included a resultfavorable impact from foreign exchange rates of lower$4.6 million. As a percentage of SBS net sales, and lower gross margin. BSG’s gross margin decreased 10 basis points to 40.8% for of the three months ended December 31, 2017, compared to 40.9%SG&A for the three months ended December 31, 2016, primarily2022 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 higher distribution, shipping and handling expenses.lower net sales.

Selling, General and Administrative Expenses

ConsolidatedBSG. Consolidated BSG’s selling, general and administrative expenses decreased $3.0increased $2.0 million, or 0.8%1.8%, for the three months ended December 31, 2017, compared to the three months ended December 31, 2016, primarily as a result of cost-reduction initiatives, as discussed below. Consolidated selling, general and administrative expenses, as2022. As a percentage of BSG net sales, were 37.3%SG&A for the three months ended December 31, 2017,2022 was 28.3% compared to 37.4%27.1% for the three months ended December 31, 2016.


Sally Beauty Supply. SBS’s selling and general and administrative expenses increased $1.5 million, or 0.7%, for the three months ended December 31, 2017, compared to the three months ended December 31, 2016. This2021. The increase reflects higher compensation and compensation-related expensesas a percentage of $2.8 million (including the impact of wage increases for sales staff at existing stores), higher rent expense of $1.4 million and higher depreciation of $0.8 million resulting from capital expenditures mainly in connection with store refreshes and information technology upgrades made in the prior 12 months. These increases were partially offsetwas driven primarily by lower advertising expense of $2.0 million and a reduction of estimated casualty losses of $1.3 million in connection with natural disasters that occurred in the fourth quarter of our fiscal year 2017.

Beauty Systems Group. BSG’s selling and general and administrative expenses decreased $1.6 million, or 1.6%, for the three months ended December 31, 2017, compared to the three months ended December 31, 2016, primarilydeleveraging as a result of cost-reduction initiatives, partially offset by the incremental operating expenses associated with 46lower net additional company-operated stores (including 21 stores acquiredsales as well as increases in December 2017).labor and personnel costs and depreciation expenses.

Unallocated Selling, General and Administrative Expenses.Unallocated. Unallocated selling, general and administrative expenses, which represent certain corporate costs (such as payroll, share-based compensation, employee benefits and travel expense for corporate staff, certain professional fees and corporate governance expenses) that have not been charged to our reporting segments, decreased $2.9increased $6.5 million, or 7.4%14.4%, for the three months ended December 31, 2017, compared2022, primarily due to increased labor and personnel costs of $4.6 million and information technology expense of $2.9 million.

Restructuring

For the three months ended December 31, 2016. This decrease reflects lower corporate compensation2022, we incurred $10.4 million in restructuring charges related to our Distribution Center Consolidation and compensation-related expenses of $1.7 million and lower share-based compensation expenses of $0.7 million.

Restructuring Charges

DuringStore Optimization Plan. For the three months ended December 31, 2017, we incurred 2021, restructuring charges of approximately $5.2 million in connection with the 2018 Restructuringour previously communicated Transformation Plan including $4.3 million in severance and related expenses and other costs of $0.9 million.were immaterial. See Note 14 of the Condensed Notes to Consolidated Financial Statements included11, Restructuring, in Item 1 of this Quarterly Reportquarterly report for more information about our restructuring plans.on the Plan.


Interest Expense

InterestThe decrease in interest expense decreased $2.8 million to $24.0 million for the three months ended December 31, 2017, comparedis due to the three months ended December 31, 2016, primarilyinterest savings from the repayment of our redemption of certain senior notes in July 2017 with the proceeds from a new term loan B with lower interest rates. The decrease was8.75% Senior Notes due 2025 during fiscal year 2022, partially offset in part by incrementalhigher interest expense on our variable rate debt resulting from the increase in borrowing rates and outstanding amounts under our ABL facility. See Note 9, Derivatives, in Item 1 of $0.7 million in connection with borrowings under the ABL facility. 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 provision for income taxes was $2.9 million and $34.8 million, resulting in an effective tax rate of 3.3%rates were 26.7% and 38.4%25.6%, for the three months ended December 31, 20172022, and 2016,2021, respectively. The decreaseincrease in the effective tax rate was primarily due primarily to the tax impact of U.S. Tax Reform. More specifically,share-based compensation which was detrimental in connection therewith, we recognized a provisional income tax benefit of $33.6 million resulting from the revaluation of our deferred income tax assets and liabilities and a provisional income tax charge of $11.4 million for federal and state income taxes applicable to accumulatedcurrent year quarter, but undistributed earnings of our foreign operations. See Note 11 ofbeneficial in the Condensed Notes to Consolidated Financial Statements included in Item 1 of this Quarterly Report for more information about the impact of U.S. Tax Reform on our financial statements.

Net Earnings and Diluted Earnings per Share

As a result of the foregoing, consolidated net earnings increased $27.4 million, or 49.1%, to $83.3 million for the three months ended December 31, 2017, compared to $55.8 million for the three months ended December 31, 2016. Diluted earnings per share for the three months ended December 31, 2017 were $0.65 compared to $0.39 for the three months ended December 31, 2016.prior year quarter.

Liquidity and Capital Resources

We broadly defineOverview

Our principal sources of liquidity as our ability to generate sufficientare from cash and cash equivalents, cash from internaloperations and external sources, to meet our contractual obligations and commitments. In addition, liquidity includes the ability to obtain appropriate debt and equity financing and to convert into cash those assets that are no longer required to meet existing strategic and financial objectives. Therefore, liquidity cannot be considered separately from capital resources that consist of current or potentially available funds for use in achieving long-range business objectives and meeting debt service commitments.

We are highly leveraged and aABL facility. A substantial portion of our liquidity needs will arise from debt service on our outstanding indebtedness and from funding the costs of our operations, working capital, capital expenditures, debt interest 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) increased $4.2$77.4 million, to $573.7$541.9 million at December 31, 2017,2022, compared to $569.5$464.5 million at September 30, 2017,2022. This increase was driven by higher inventory balances, resulting primarily from inflationary cost increases and the impact of foreign exchange rates of $12.7 million, and an increase in cash and cash equivalents and inventory, partially offset by a decrease in other current


assets and an increase in income taxes payable. As a holding company, Sally Beauty depends on its subsidiaries, including Sally Holdings, to distribute funds to it so that it may pay its obligations and expenses. The ability of Sally Beauty’s subsidiaries to make such distributions will be subject to their operating results, cash requirements and financial condition and their compliance with relevant laws, and covenants and financial ratios related to their existing or future indebtedness, including covenants restricting Sally Holdings’ ability to pay dividends to Sally Beauty. If, as a consequence of these limitations, the Company cannot receive sufficient distributions from its subsidiaries, it may not be able to meet its obligations to fund general corporate expenses.equivalents.  

The Company may from time to time repurchase or otherwise retire or refinance its debt (through its subsidiaries or otherwise) and take other steps to reduce or refinance its debt. These actions may include open market repurchases of its notes or other retirements of outstanding debt. The amount of debt that may be repurchased, or refinanced or otherwise retired, if any, will be determined in the sole discretion of our Board of Directors and will depend on market conditions, trading levels of the Company’s debt from time to time, the Company’s cash position and other considerations.

At December 31, 2017, cash and cash equivalents were $79.3 million. Based upon the current level of operations and anticipated growth, weWe anticipate that existing cash balances (excluding certain amounts permanently invested in connection with foreign operations), fundscash expected to be generated by operations, and funds available under theour ABL facility will be sufficient to meetfund our working capital requirements, fund share repurchases and potential acquisitions, and finance anticipated capital expenditures, including information technology upgrades and store openings,expenditure requirements over the next 12twelve months.

Cash Flows

 

 

Three Months Ended December 31,

 

(in thousands)

 

2022

 

 

2021

 

Net cash provided (used) by operating activities

 

 

54,951

 

 

 

(5,685

)

Net cash used by investing activities

 

 

(25,007

)

 

 

(26,709

)

Net cash used by financing activities

 

 

(5,992

)

 

 

(70,185

)

Net Cash Provided (Used) by Operating Activities

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

Net Cash Used by Investing Activities

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

Net Cash Used by Financing Activities

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

Debt and Guarantor Financial Information

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

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


drawn on our indebtedness and share repurchases.ABL facility are generally paid down with cash provided by our operating activities. During the three months ended December 31, 2017, total borrowings outstanding have ranged from $77.5 million up to $133.0 million and the average daily balance outstanding was $100.5 million. During the three months ended December 31, 2017,2022, the weighted average interest rate on our borrowings under the ABL facility was 3.0%5.2%. The amounts drawn are generally paid down with cash provided by our operating activities. As of December 31, 2017, Sally Holdings had $381.3 million available for borrowings under the ABL facility, subject to borrowing base limitations, as reduced by outstanding letters of credit.

We are a holding company and do not have any material assets or operations other than ownership of equity interests in our subsidiaries. The agreements and instruments governing the debt of Sally Holdings and its subsidiaries contain material limitations on their ability to pay dividends and other restricted payments to us which, in turn, constitute material limitations on our ability to pay dividends and other payments to our stockholders.

Share Repurchase Programs

During the three months ended December 31, 2017 and 2016, we repurchased and subsequently retired approximately 3.8 million shares and 2.5 million shares of our common stock under Board approved share repurchase programs at an aggregate cost of $64.5 million and $67.0 million, respectively. We funded these share repurchases with existing cash balances, cash from operations and borrowings under the ABL facility. As of December 31, 2017, we had authorization of approximately $935.5 million of additional potential share repurchases remaining under the 2017 Share Repurchase Program. Future share repurchases of our common stock are expected to be funded with existing cash balances, funds generated by operations and funds available under the ABL facility.

Historical Cash Flows

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

Net Cash Provided by Operating Activities

Net cash provided by operating activities during the three months ended December 31, 2017 increased $14.4 million to $104.2 million, compared to the three months ended December 31, 2016, mainly due to net changes in the components of working capital of $9.9 million and a favorable impact of $9.8 million on our provision for income taxes resulting primarily from a lower U.S. federal statutory tax rate, partially offset by a decrease in earnings before provision for income taxes. As a result of U.S. Tax Reform, our U.S. federal statutory tax rate will be 24.5% for fiscal year 2018.

Net Cash Used by Investing Activities

Net cash used by investing activities during the three months ended December 31, 2017 increased $3.7 million to $31.7 million, compared to the three months ended December 31, 2016. This increase reflects cash used for acquisitions, net of cash acquired, in the three months ended December 31, 2017 of $9.2 million, partially offset by lower capital expenditures of $5.5 million related primarily


to SBS store openings and lower investments in information technology upgrades in the three months ended December 31, 2017, compared to three months ended December 31, 2016, as information technology upgrade projects were completed.

Net Cash Used by Financing Activities

Net cash used by financing activities during the three months ended December 31, 2017 increased $3.8 million to $56.9 million, compared to the three months ended December 31, 2016, due primarily to a decrease in proceeds from exercises of stock options of $14.0 million. This decrease was partially offset by higher net debt proceeds, primarily from borrowings under the ABL facility, and by a decrease in cash paid for share repurchases of $2.6 million.

U.S. Tax Reform

On December 22, 2017, U.S. Tax Reform was signed into law. U.S. Tax Reform, among other things, (a) reduces the federal statutory tax rate for corporate taxpayers, (b) provides for a deemed repatriation of undistributed foreign earnings by U.S. taxpayers and makes other fundamental changes on how foreign earnings will be taxed by the U.S. and (c) otherwise modifies corporate tax rules in significant ways. We are currently assessing the potential additional impact of U.S. Tax Reform on our business and liquidity.

Long-Term Debt

At December 31, 2017, we had borrowings of $99.0 million outstanding under our ABL facility. In addition, we had $950.0 million of senior notes outstanding and a term loan B with an outstanding principal balance of $848.6 million. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources - Long-term Debt” and Note 12 of the “Notes to Consolidated Financial Statements” in “Item 8. Financial Statements and Supplementary Data” contained in our Annual Report on Form 10-K for the fiscal year ended September 30, 2017 for more information about our debt obligations.

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

Guarantor Financial Information

Our 2025 Senior Notes were issued by our wholly-owned subsidiaries, Sally Holdings LLC and Sally Capital Inc. (the “Issuers”). The notes are unsecured debt instruments guaranteed by us and certain of our wholly-owned domestic subsidiaries (together, the “Guarantors”) and have certain restrictions on the ability to comply withpay 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 covenants in future periods will depend oncombined entities has been eliminated.

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

(in thousands)

 

December 31, 2022

 

 

September 30, 2022

 

Inventory

 

$

742,642

 

 

$

714,477

 

Intercompany receivable

 

$

394

 

 

$

 

Current assets

 

$

882,858

 

 

$

827,155

 

Total assets

 

$

2,032,279

 

 

$

1,982,982

 

Current liabilities

 

$

550,883

 

 

$

549,415

 

Intercompany payable

 

$

 

 

$

4,431

 

Total liabilities

 

$

2,084,606

 

 

$

2,085,169

 

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

Net sales

 

 

 

$

775,768

 

Gross profit

 

 

 

$

399,794

 

Earnings before provision for income taxes

 

 

 

$

52,383

 

Net Earnings

 

 

 

$

38,413

 

Share Repurchase Programs

Under our ongoing financial and operating performance, which in turn will be subject to economic conditions and to financial, market and competitive factors, many of which are beyondcurrent share repurchase program, we may from time-to-time repurchase our control. Further, our ability to comply with these covenants in future periods will also depend substantiallycommon stock on the pricing of our products, our success at implementing cost-reduction initiatives and our ability to successfully implement our overall business strategy.

Capital Requirements

open market. During the three months ended December 31, 2017, capital expenditures2022, no shares were approximately $16.6 million, including amounts incurred but not paid atrepurchased in connection with our share repurchase program. During three months ended December 31, 2017 (approximately $2.5 million).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, 2017.2022.

Off-Balance Sheet Financing Arrangements

At December 31, 20172022 and September 30, 2017,2022, we had no off-balance sheet financing arrangements other than operating leases incurred in the ordinary course of our business, and outstanding letters of credit related to inventory purchases and self-insurance programs.

Inflation

We do not believe inflation has had a material effect on our results of operations. However, during the past few years, we have experienced and an increase in labor and real estate costs in the U.S. Employee compensation and rent expenses represent our two most significant operating expense categories. A material increase in labor or real estate costs in the future, particularly for an extended period of time, could have a material adverse effect on our results of operations.

Critical Accounting Estimates

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities in the financial statements. Actual results may differ from these estimates. We believe these estimates and assumptions are reasonable. We consider accounting policies to be critical when they require us to make assumptions about matters that are highly uncertain at the time the accounting estimate is made and when different estimates that our management reasonably could have used have a material effect on the presentation of our financial condition, changes in financial condition or results of operations.


Our critical accounting estimates, as described in our Annual Report on Form 10-K for the fiscal year ended September 30, 2017, include the valuation of inventory, vendor rebates and concessions, retention of risk, income taxes, assessment of long-lived assets and intangible assets for impairment and share-based payments. There have been no material changes to our critical accounting estimates or assumptions since September 30, 2017.2022.

Accounting Changes and Recent Accounting Pronouncements

See Note 3 of the Condensed NotesThere have been no recent accounting pronouncements issued that will have a material impact to Consolidated Financial Statements in Item 1 – “Financial Statements” in Part I – Financial Information.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, 2017. 2022. See “Itemour disclosures about market risks contained in Item 7A. Quantitative“Quantitative and Qualitative Disclosures Aboutabout Market Risk” contained in Part II of our Annual Report on Form 10-K for the fiscal year ended September 30, 2017 for more information.2022.

Item 4.  Controls and Procedures

Controls Evaluation and Related CEO and CFO Certifications.   Our management, with the participation of our principal executive officer (“CEO”) and principal financial officer (“CFO”), conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2017.2022. 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 report.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 report.Quarterly Report. In the course of the evaluation, we sought to identify whether we had any data errors, control problems or acts of fraud and to confirm that appropriate corrective action, including process improvements, was being undertaken if needed. This type of evaluation is performed on a quarterly basis so that conclusions concerning the effectiveness of our disclosure controls and procedures can be reported in our Quarterly Reports on Form 10-Q and our Annual Reports on Form 10-K. Many of the components of our disclosure controls and procedures are also evaluated by our internal audit department, by our legal department and by personnel in our finance organization. The overall goals of these various evaluation activities are to monitor our disclosure controls and procedures on an ongoing basis and to maintain them as dynamic systems that change as conditions warrant.

Conclusions regarding Disclosure Controls.  Based on the required evaluation of our disclosure controls and procedures, our CEO and CFO have concluded that, as of December 31, 2017,2022, 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 — OTHEROTHER INFORMATION

We are involved, from time to time, in various claims and lawsuits incidental to the conduct of our business in the ordinary course. We carry insurance coverage in such amounts in excess of our self-insured retention as we believe to be reasonable under the circumstances and that may or may not cover any or all of our liabilities in respect of these matters. We do not believe that the ultimate resolution of these matters will have a material adverse impact on our consolidated financial position, cash flows or results of operations.

We are subject to a number of U.S., federal, state and local laws and regulations, as well as the laws and regulations applicable in each foreign country or jurisdiction in which we do business. These laws and regulations govern, among other things, the composition, packaging, labeling and safety of the products we sell, the methods we use to sell these products and the methods we use to import these products. We believe that we are in material compliance with such laws and regulations, although no assurance can be provided that this will remain true going forward.

Item 1A.  Risk Factors

In addition to the other information set forth in this report,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, 2017,2022, 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 2.  Unregistered Sales of Equity Securities and Use of Proceeds

(a) Not applicable

(b) Not applicable

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

The following table provides information about the Company’s repurchases of shares of its common stock during the three months ended December 31, 2017:

Fiscal Period

 

Total Number of Shares Purchased (1)

 

 

Average Price Paid per Share

 

 

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)(2)

 

 

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

 

October 1 through October 31, 2017

 

 

869,116

 

 

$

18.14

 

 

 

869,116

 

 

$

984,238,464

 

November 1 through November 30, 2017

 

 

2,060,928

 

 

 

16.13

 

 

 

2,060,928

 

 

 

950,994,895

 

December 1 through December 31, 2017

 

 

917,519

 

 

 

16.87

 

 

 

917,519

 

 

 

935,520,250

 

Total this quarter

 

 

3,847,563

 

 

$

16.76

 

 

 

3,847,563

 

 

$

935,520,250

 

(1)

The table above does not include 7,403 shares of the Company’s common stock surrendered by grantees during the three months ended December 31, 2017 to satisfy tax withholding obligations due upon the vesting of equity-based awards under the Company’s share-based compensation plans.

(2)

In August 2017, we announced that our Board of Directors approved a share repurchase program authorizing us to repurchase up to $1.0 billion of our common stock over an approximate four-year period expiring on September 30, 2021.

Item 3.  Defaults Upon Senior Securities

Not applicable

Item 4.  Mine Safety Disclosures

Not applicable

Item 5.  Other Information

(a) Not applicable

(b) Not applicable


Item 6.  ExhibitsExhibits

 

 

Exhibit No.

 

Description

 

 

 

3.1

 

Third Restated Certificate of Incorporation of Sally Beauty Holdings, Inc., dated January 30, 2014, which is incorporated herein by reference from Exhibit 3.3 to the Company’s Current Report on Form 8-K filed on January 30, 2014

 

 

 

3.2

 

Amended and Restated Bylaws of Sally Beauty Holdings, Inc., dated April 26, 2017, which is incorporated herein by reference from Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on April 28, 2017

 

 

 

10.122

 

Separation Agreement dated January 26, 2018 between Sally Beauty Holdings, Inc. and Matthew O. Haltom, which is incorporated herein by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 26, 2018List of Subsidiary Guarantors*

 

 

 

31.1

 

Rule 13a-14(a)/15d-14(a) Certification of Christian A. Brickman*Denise Paulonis*

 

 

 

31.2

 

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

 

 

 

32.1

 

Section 1350 Certification of Christian A. Brickman*Denise Paulonis*

 

 

 

32.2

 

Section 1350 Certification of Donald T. Grimes*Marlo M. Cormier*

 

 

 

101

 

The following financial information from our Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2017,2022, formatted in XBRL (ExtensibleiXBRL (Inline Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets; (ii) the Condensed Consolidated Statements of Earnings; (iii) the Condensed Consolidated Statements of Comprehensive Income; (iv) the Condensed Consolidated Statements of Stockholders’ Equity; (v) the Condensed Consolidated Statements of Cash Flows; and (v)(vi) the Condensed Notes to Condensed Consolidated Financial Statements.

104

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

 

* Included herewith


SIGNATURESSIGNATURES

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

 

 

 

 

SALLY BEAUTY HOLDINGS, INC.

 

 

 

(Registrant)

 

 

 

 

Date:  February 8, 20182, 2023

 

 

 

 

 

 

 

 

By:

 

/s/ Donald T. GrimesMarlo M. Cormier

 

 

 

Donald T. GrimesMarlo M. Cormier

 

 

 

Senior Vice President, Chief Financial Officer and

Chief Operations Officer

 

 

 

For the Registrant and as its Principal Financial Officer

 

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