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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, 2019

-OR-

 

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

 

Commission File No. 1-33145

 

SALLY BEAUTY HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware

 

36-2257936

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

3001 Colorado Boulevard

 

 

Denton, Texas

 

76210

(Address of principal executive offices)

 

(Zip Code)

 

(940) 898-7500

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report): N/A

Securities registered pursuant to Section 12(b) of the Act:

Title of each classTrading SymbolName of each exchange on which registered

Common Stock, $0.01 par valueSBHThe New York Stock Exchange

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes    No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes    No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

Smaller reporting company

 

Emerging growth company

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)  Yes      No 

As of January 31, 2020, there were 116,786,229 shares of the issuer’s common stock outstanding.

 

 

 

 


TABLE OF CONTENTS

 

 

 


2


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

cautionary notice regarding forward-looking statements

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

Readers are cautioned not to place undue reliance on forward-looking statements as such statements speak only as of the date they were made and involve risks and uncertainties that could cause actual events or results to differ materially from the events or results described in the forward-looking statements. The most important factors which could cause our actual results to differ from our forward-looking statements are set forth in our description of risk factors in Item 1A contained in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019, which should be read in conjunction with the forward-looking statements in this report. Forward-looking statements speak only as of the date they are made, and we do not undertake any obligation to update any forward-looking statement.

The events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than we have described. As a result, our actual results may differ materially from the results contemplated by these forward-looking statements.

 

3


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.

 

4


PART I — FINANCIAL INFORMATION

Item 1.  Financial Statements.

The following condensed consolidated balance sheets as of December 31, 2019 and September 30, 2019, the condensed consolidated statements of earnings, condensed consolidated statements of comprehensive income, condensed consolidated statements of cash flows and the condensed statements of stockholders’ equity (deficit) for the three months ended December 31, 2019 and 2018 are those of Sally Beauty Holdings, Inc. and its subsidiaries.

5


SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except par value data)

 

 

December 31,

2019

 

 

September 30,

2019

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

67,262

 

 

$

71,495

 

Trade accounts receivable, net

 

 

41,142

 

 

 

43,136

 

Accounts receivable, other

 

 

53,515

 

 

 

61,403

 

Inventory

 

 

991,839

 

 

 

952,907

 

Other current assets

 

 

35,283

 

 

 

34,612

 

Total current assets

 

 

1,189,041

 

 

 

1,163,553

 

Property and equipment, net of accumulated depreciation of $680,928 at

   December 31, 2019 and $659,285 at September 30, 2019

 

 

315,925

 

 

 

319,628

 

Operating lease assets

 

 

553,464

 

 

 

 

Goodwill

 

 

534,116

 

 

 

530,786

 

Intangible assets, excluding goodwill, net of accumulated amortization of

   $57,641 at December 31, 2019 and $64,615 at September 30, 2019

 

 

62,153

 

 

 

62,051

 

Other assets

 

 

20,360

 

 

 

22,428

 

Total assets

 

$

2,675,059

 

 

$

2,098,446

 

Liabilities and Stockholders’ Equity (Deficit)

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current maturities of long-term debt

 

$

855

 

 

$

1

 

Accounts payable

 

 

272,082

 

 

 

278,688

 

Accrued liabilities

 

 

142,848

 

 

 

169,054

 

Current operating lease liabilities

 

 

160,193

 

 

 

 

Income taxes payable

 

 

18,627

 

 

 

8,336

 

Total current liabilities

 

 

594,605

 

 

 

456,079

 

Long-term debt

 

 

1,578,436

 

 

 

1,594,542

 

Long-term operating lease liabilities

 

 

400,490

 

 

 

 

Other liabilities

 

 

18,368

 

 

 

27,757

 

Deferred income tax liabilities, net

 

 

80,961

 

 

 

80,391

 

Total liabilities

 

 

2,672,860

 

 

 

2,158,769

 

Stockholders’ equity (deficit):

 

 

 

 

 

 

 

 

Common stock, $0.01 par value. Authorized 500,000 shares; 116,757 and

   116,986 shares issued and 116,165 and 116,725 shares outstanding at

   December 31, 2019 and September 30, 2019, respectively

 

 

1,162

 

 

 

1,167

 

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

 

 

 

 

 

 

Additional paid-in capital

 

 

 

 

 

 

Accumulated earnings

 

 

103,454

 

 

 

55,797

 

Accumulated other comprehensive loss, net of tax

 

 

(102,417

)

 

 

(117,287

)

Total stockholders’ equity (deficit)

 

 

2,199

 

 

 

(60,323

)

Total liabilities and stockholders’ equity (deficit)

 

$

2,675,059

 

 

$

2,098,446

 

 

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

 

6


SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Earnings

(In thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2019

 

 

2018

 

Net sales

 

$

980,208

 

 

$

989,453

 

Cost of goods sold

 

 

505,360

 

 

 

508,748

 

Gross profit

 

 

474,848

 

 

 

480,705

 

Selling, general and administrative expenses

 

 

377,930

 

 

 

366,987

 

Restructuring

 

 

2,531

 

 

 

3,980

 

Operating earnings

 

 

94,387

 

 

 

109,738

 

Interest expense

 

 

21,541

 

 

 

24,489

 

Earnings before provision for income taxes

 

 

72,846

 

 

 

85,249

 

Provision for income taxes

 

 

19,631

 

 

 

19,522

 

Net earnings

 

$

53,215

 

 

$

65,727

 

Earnings per share:

 

 

 

 

 

 

 

 

Basic

 

$

0.46

 

 

$

0.55

 

Diluted

 

$

0.45

 

 

$

0.54

 

Weighted-average shares:

 

 

 

 

 

 

 

 

Basic

 

 

116,125

 

 

 

119,989

 

Diluted

 

 

117,154

 

 

 

120,979

 

 

 

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

7


SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2019

 

 

2018

 

Net earnings

 

$

53,215

 

 

$

65,727

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

14,961

 

 

 

(13,463

)

Interest rate caps, net of tax

 

 

109

 

 

 

(2,830

)

Foreign exchange contracts, net of tax

 

 

(200

)

 

 

(412

)

Other comprehensive income (loss), net of tax

 

 

14,870

 

 

 

(16,705

)

Total comprehensive income

 

$

68,085

 

 

$

49,022

 

 

 

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

8


SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Three Months Ended December 31,

 

 

 

2019

 

 

2018

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

 

Net earnings

 

$

53,215

 

 

$

65,727

 

Adjustments to reconcile net earnings to net cash provided by operating

   activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

27,076

 

 

 

26,506

 

Share-based compensation expense

 

 

3,473

 

 

 

3,354

 

Amortization of deferred financing costs

 

 

887

 

 

 

990

 

Gain on early extinguishment of debt

 

 

(223

)

 

 

 

Deferred income taxes

 

 

555

 

 

 

4,597

 

Changes in (exclusive of effects of acquisitions):

 

 

 

 

 

 

 

 

Trade accounts receivable

 

 

2,457

 

 

 

4,203

 

Accounts receivable, other

 

 

8,793

 

 

 

(6,379

)

Inventory

 

 

(30,138

)

 

 

(45,924

)

Other current assets

 

 

(482

)

 

 

1,745

 

Other assets

 

 

(2,480

)

 

 

(187

)

Accounts payable and accrued liabilities

 

 

(11,930

)

 

 

(13,855

)

Income taxes payable

 

 

10,352

 

 

 

12,406

 

Other liabilities

 

 

770

 

 

 

(2,927

)

Net cash provided by operating activities

 

 

62,325

 

 

 

50,256

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

 

Payments for property and equipment, net

 

 

(40,875

)

 

 

(23,710

)

Acquisitions, net of cash acquired

 

 

(1,944

)

 

 

(451

)

Net cash used by investing activities

 

 

(42,819

)

 

 

(24,161

)

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of long-term debt

 

 

232,000

 

 

 

126,500

 

Repayments of long-term debt

 

 

(247,830

)

 

 

(127,876

)

Payments for common stock repurchased

 

 

(11,357

)

 

 

 

Proceeds from exercises of stock options

 

 

2,766

 

 

 

1,449

 

Net cash (used) provided by financing activities

 

 

(24,421

)

 

 

73

 

Effect of foreign exchange rate changes on cash and cash equivalents

 

 

682

 

 

 

(692

)

Net (decrease) increase in cash and cash equivalents

 

 

(4,233

)

 

 

25,476

 

Cash and cash equivalents, beginning of period

 

 

71,495

 

 

 

77,295

 

Cash and cash equivalents, end of period

 

$

67,262

 

 

$

102,771

 

Supplemental Cash Flow Information:

 

 

 

 

 

 

 

 

Interest paid

 

$

33,297

 

 

$

40,630

 

Income taxes paid

 

$

9,216

 

 

$

3,770

 

Capital expenditures incurred but not paid

 

$

3,491

 

 

$

4,000

 

 

 

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

 

 

 


 

9


SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders’ Equity (Deficit)

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Other

 

 

Total

 

 

Common Stock

Paid-in

 

 

Accumulated

 

 

Comprehensive

 

 

Stockholders’

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Loss

 

 

Equity (Deficit)

 

Balance at September 30, 2019

 

116,725

 

 

$

1,167

 

 

$

 

 

$

55,797

 

 

$

(117,287

)

 

$

(60,323

)

Cumulative effect of ASC 842 adoption

 

 

 

 

 

 

 

 

 

 

(445

)

 

 

 

 

 

(445

)

Net earnings

 

 

 

 

 

 

 

 

 

 

53,215

 

 

 

 

 

 

53,215

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

14,870

 

 

 

14,870

 

Repurchases and cancellations of

   common stock

 

(766

)

 

 

(7

)

 

 

(6,237

)

 

 

(5,113

)

 

 

 

 

 

(11,357

)

Share-based compensation

 

 

 

 

 

 

 

3,473

 

 

 

 

 

 

 

 

 

3,473

 

Stock issued for stock options

 

206

 

 

 

2

 

 

 

2,764

 

 

 

 

 

 

 

 

 

2,766

 

Balance at December 31, 2019

 

116,165

 

 

$

1,162

 

 

$

 

 

$

103,454

 

 

$

(102,417

)

 

$

2,199

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Other

 

 

Total

 

 

Common Stock

Paid-in

 

 

Accumulated

 

 

Comprehensive

 

 

Stockholders’

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Loss

 

 

Deficit

 

Balance at September 30, 2018

 

119,926

 

 

$

1,199

 

 

$

 

 

$

(179,764

)

 

$

(89,991

)

 

$

(268,556

)

Net earnings

 

 

 

 

 

 

 

 

 

 

65,727

 

 

 

 

 

 

65,727

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

(16,705

)

 

 

(16,705

)

Repurchases and cancellations of

   common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation

 

 

 

 

 

 

 

3,354

 

 

 

 

 

 

 

 

 

3,354

 

Stock issued for stock options

 

115

 

 

 

1

 

 

 

1,448

 

 

 

 

 

 

 

 

 

1,449

 

Balance at December 31, 2018

 

120,041

 

 

$

1,200

 

 

$

4,802

 

 

$

(114,037

)

 

$

(106,696

)

 

$

(214,731

)

 

 

 

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

 

 

10


 

 

Sally Beauty Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1.   Basis of Presentation

The condensed consolidated interim financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and pursuant to the rules and regulations of the SEC. Accordingly, certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC, although we believe that the disclosures are adequate to make the information not misleading. 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, 2019. In the opinion of management, these condensed consolidated interim financial statements reflect all adjustments that are of a normal recurring nature and which are necessary to present fairly our consolidated financial position as of December 31, 2019 and September 30, 2019, our consolidated results of operations, consolidated comprehensive income, consolidated statements of stockholders’ equity (deficit) and our consolidated cash flows for the three months ended December 31, 2019 and 2018.

2.   Significant Accounting Policies

We adhere to the same accounting policies in the preparation of our condensed consolidated interim financial statements as we do in the preparation of our full-year consolidated financial statements. See Note 3 for more information about the adoption of the new lease accounting standard. 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 estimated annual effective income tax rates.

3.   Accounting Changes

In February 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (“ASU No. 2016-02”), which requires most operating leases to be reported on the balance sheet as a right-of-use asset and a lease liability. On October 1, 2019, we adopted ASU No. 2016-02 using a modified retrospective transition method without restating comparative periods. We have elected the package of practical expedients permitted within the transition guidance under the new standard relating to the identification, classification and initial direct costs of leases commencing before the effective date of Topic 842. In addition, we have elected to not recognize a right-of-use asset or lease obligation for short-term leases with an initial term of 12 months or less.

Additionally, the adoption of ASU No. 2016-02, as amended, resulted in the recognition of an operating lease asset of $513.9 million and an operating lease liability of $523.5 million.  Existing straight-line rent liability, prepaid rent and accrued rent were reclassified from certain other assets and liabilities into the operating lease asset. Furthermore, the cumulative effect of the adoption of ASU No. 2016-02 resulted in a $0.4 million adjustment to accumulated earnings resulting from the impairment of certain operating lease assets. The impact on our condensed consolidated results of operations or condensed consolidated cash flows was not material.

See Note 8 for additional information in connection with ASU No. 2016-02.

4.   Revenue Recognition

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

Changes to our contract liabilities for the period were as follows (in thousands):

September 30, 2019

 

 

 

 

 

$

12,866

 

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

 

 

11,099

 

Revenue recognized from beginning liability

 

 

(9,330

)

December 31, 2019

 

 

 

 

 

$

14,635

 

Private Label Credit Card - In September 2019, we signed a multi-year agreement with a third-party bank to launch a private label credit card (the “Program”). As of December 31, 2019, Program operations have not yet commenced.  

See Note 11 for additional information regarding the disaggregation of our sales revenue.

11


 

 

5.   Fair Value Measurements

Fair value on recurring basis

Consistent with the three-level hierarchy defined in ASC Topic 820, Fair Value Measurement, as amended, we categorize our financial assets and liabilities as follows (in thousands):

 

 

Classification

 

Fair Value Hierarchy Level

 

December 31,

2019

 

 

September 30,

2019

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate caps

 

Other assets

 

Level 2

 

$

347

 

 

$

344

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

Accrued liabilities

 

Level 2

 

$

214

 

 

$

 

 

Other fair value disclosures

 

 

 

 

December 31, 2019

 

 

September 30, 2019

 

 

 

Fair Value Hierarchy Level

 

Carrying Value

 

 

Fair Value

 

 

Carrying Value

 

 

Fair Value

 

Long-term debt, excluding capital leases

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior notes

 

Level 1

 

$

885,296

 

 

$

918,279

 

 

$

885,296

 

 

$

898,814

 

Other long-term debt

 

Level 2

 

 

707,815

 

 

 

705,690

 

 

 

724,000

 

 

 

709,830

 

Total debt

 

 

 

$

1,593,111

 

 

$

1,623,969

 

 

$

1,609,296

 

 

$

1,608,644

 

 

6.   Stockholder’s Equity (Deficit)

Share Repurchases

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

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

 

 

Three Months Ended

December 31,

 

 

 

2019

 

 

2018

 

Number of shares repurchased

 

 

766

 

 

 

 

Total cost of share repurchased

 

$

11,357

 

 

$

 

Accumulated Other Comprehensive Loss

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

 

 

Foreign Currency Translation Adjustments

 

 

Interest Rate Caps

 

 

Foreign Exchange Contracts

 

 

Total

 

Balance at September 30, 2019

 

$

(113,932

)

 

$

(3,201

)

 

$

(154

)

 

$

(117,287

)

Other comprehensive income (loss) before

    reclassification, net of tax

 

 

14,961

 

 

 

3

 

 

 

(291

)

 

 

14,673

 

Reclassification to net earnings, net of tax

 

 

 

 

 

106

 

 

 

91

 

 

 

197

 

Balance at December 31, 2019

 

$

(98,971

)

 

$

(3,092

)

 

$

(354

)

 

$

(102,417

)

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

12


 

 

7.   Weighted-Average Shares

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

 

 

 

Three Months Ended

December 31,

 

 

 

2019

 

 

2018

 

Weighted-average basic shares

 

 

116,125

 

 

 

119,989

 

Dilutive securities:

 

 

 

 

 

 

 

 

Stock option and stock award programs

 

 

1,029

 

 

 

990

 

Weighted-average diluted shares

 

 

117,154

 

 

 

120,979

 

 

 

 

 

 

 

 

 

 

Anti-dilutive options excluded from our computation of diluted shares

 

 

5,132

 

 

 

5,695

 

 

8.   Leases

Substantially all of our leases are operating leases and relate primarily to retail stores and warehousing properties with lease terms of five to ten years. Some of our leases include options to extend the agreement by a certain number of years, typically five years. At the lease commencement date, an operating lease liability and related operating lease asset are recognized and include the extended terms to the extent we are reasonably certain that we will exercise the option.

The operating lease liabilities are calculated using the present value of lease payments. The discount rate used is either the rate implicit in the lease, when known, or our estimated incremental borrowing rate. Our incremental borrowing rate for a lease is the rate of interest we would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. Because we do not generally borrow on a collateralized basis, we derive an appropriate incremental borrowing rate using the interest rate we pay on our non-collateralized borrowings, adjusted for the amount of the lease payments, the lease term and the effect of designating specific collateral with a value equal to the unpaid lease payments for that lease. We apply the incremental borrowing rate on a portfolio basis given the impact of applying it on a lease by lease basis would be immaterial.

Operating lease assets are valued based on the initial operating lease liabilities plus any prepaid rent and direct costs from executing the leases, reduced by tenant improvement allowances and any rent abatement. Operating lease assets are tested for impairment in the same manner as our long-lived assets.

Our operating and finance leases consisted of the following (in thousands):

 

 

Balance Sheet Classification

 

December 31, 2019

 

Assets:

 

 

 

 

 

 

Operating lease

 

Operating lease assets

 

$

553,464

 

Finance lease

 

Property and equipment, net

 

 

2,982

 

Total lease assets

 

 

 

$

556,446

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

Current:

 

 

 

 

 

 

Operating lease

 

Current operating lease liabilities

 

$

160,193

 

Finance lease

 

Current maturities of long-term debt

 

 

855

 

 

 

 

 

 

 

 

Long-term:

 

 

 

 

 

 

Operating lease

 

Long-term operating lease liabilities

 

 

400,490

 

Finance lease

 

Long-term debt

 

 

 

Total lease liabilities

 

 

 

$

561,538

 

13


 

 

Our lease costs, net of immaterial sublease income, consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

Statement of Earnings Classification

 

Three Months Ended

December 31, 2019

 

Operating lease costs (a)

 

Cost of goods sold and

    selling, general and administrative expenses (b)

 

$

45,345

 

Finance lease costs:

 

 

 

 

 

 

Amortization of leased assets

 

Selling, general and administrative expenses

 

 

75

 

Interest on lease liabilities

 

Interest expense

 

 

11

 

Variable lease costs

 

Selling, general and administrative expenses

 

 

2,469

 

Total lease costs

 

 

 

$

47,900

 

 

 

(a)

Includes costs related to short-term leases, which are immaterial.

 

(b)

Certain supply chain-related amounts are included in cost of goods sold.

As of December 31, 2019, the approximate future lease payments under our leases are as follows (in thousands):

Fiscal Year

 

 

Operating leases

 

 

Finance leases

 

Remainder of 2020

 

 

$

135,536

 

 

$

855

 

 

2021

 

 

 

151,045

 

 

 

 

 

2022

 

 

 

110,683

 

 

 

 

 

2023

 

 

 

76,127

 

 

 

 

 

2024

 

 

 

48,507

 

 

 

 

Thereafter

 

 

 

85,284

 

 

 

 

Total undiscounted lease payments

 

 

 

607,182

 

 

 

855

 

Less: imputed interest

 

 

 

(46,499

)

 

 

 

Present value of lease liabilities

 

 

$

560,683

 

 

$

855

 

The table above does not include operating leases we have entered into of approximately $31.5 million that have not commenced, primarily related to future retail stores.

As of September 30, 2019, our future minimum lease payments under non-cancelable operating leases as reported under the previous accounting standard were as follows (in thousands):

Fiscal Year

 

 

 

 

2020

 

$

174,578

 

2021

 

 

136,900

 

2022

 

 

95,918

 

2023

 

 

61,944

 

2024

 

 

33,803

 

Thereafter

 

 

40,545

 

 

 

$

543,688

 

14


 

 

Other lease information is as follows (dollars in thousands):

 

 

 

 

 

 

 

Three Months Ended

December 31, 2019

 

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

 

Operating cash flows – operating leases

 

$

44,972

 

Operating cash flows – finance leases

 

 

11

 

Financing cash flows – finance leases

 

 

1

 

 

 

 

 

 

Supplemental non-cash information on lease liabilities:

 

 

 

 

Lease assets obtained in exchange for new operating lease liabilities

 

$

78,737

 

Lease assets obtained in exchange for new finance lease liabilities

 

 

4

 

 

 

 

 

 

 

 

December 31, 2019

 

Weighted-average remaining lease term (in years):

 

 

 

 

Operating leases

 

 

4.8

 

Finance leases

 

 

0.5

 

Weighted-average discount rate:

 

 

 

 

Operating leases

 

 

4.2

%

Finance leases

 

 

5.0

%

 

9.   Short-term Borrowings and Long-term Debt

At December 31, 2019, we had $481.3 million available for borrowing under our ABL facility, including the Canadian sub-facility. At December 31, 2019, we were in compliance with the agreements and instruments governing our debt, including our financial covenants.

During the three months ended December 31, 2019, we paid down $14.8 million aggregate principal amount of our term loan B fixed tranche at a weighted-average price of 97.875% of face value, excluding accrued interest. In connection with the debt repayment, we recognized a $0.2 million gain on the extinguishment of debt, including a gain of approximately $0.3 million from the discount paid under the face value and the write-off of $0.1 million in unamortized deferred financing costs.

10.    Derivative Instruments and Hedging Activities

During the three months ended December 31, 2019, we did not purchase or hold any derivative instruments for trading or speculative purposes. See Note 5 for the classification and fair value of our derivative instruments.

Designated Cash Flow Hedges

Foreign Currency Forwards

During the three months ended December 31, 2019, we entered into foreign currency forwards to mitigate the exposure to exchange rate changes on inventory purchases in USD by our foreign subsidiaries. At December 31, 2019, the notional amount we held through these forwards, based upon exchange rates at December 31, 2019, was as follows (in thousands):

Notional Currency

 

Notional Amount

 

MXP

 

$

15,278

 

CAD

 

 

7,149

 

Total

 

$

22,427

 

 

15


 

 

We record quarterly, net of income tax, the changes in fair value related to the foreign currency forwards into AOCL. As the forwards are exercised, the realized value will be recognized into cost of goods sold based on inventory turns. Based on December 31, 2019 valuations and exchange rates, we expect to reclassify approximately $0.4 million into cost of goods sold over the next 12 months.

The effects of our foreign currency forwards on our condensed consolidated statements of earnings were not material for the three months ended December 31, 2019 and 2018.

Interest Rate Caps

In July 2017, we purchased two interest rate caps with an initial aggregate notional amount of $550 million (the “interest rate caps”) to mitigate the exposure to higher interest rates in connection with our term loan B. The interest rate caps are comprised of individual caplets that expire ratably through June 30, 2023 and are designated as cash flow hedges. Accordingly, changes in fair value of the interest rate caps are recorded quarterly, net of income tax, and are included in AOCL. Over the next 12 months, we expect to reclassify approximately $0.7 million into interest expense, which represents the original value of the expiring caplets.

During the three months ended December 31, 2019, we reclassified $0.1 million out of AOCL into interest expense.

11.   Business Segments

Segment data for the three months ended December 31, 2019 and 2018 is as follows (in thousands):

 

 

 

Three Months Ended

December 31,

 

 

 

2019

 

 

2018

 

Net sales:

 

 

 

 

 

 

 

 

Sally Beauty Supply ("SBS")

 

$

569,147

 

 

$

580,608

 

Beauty Systems Group ("BSG")

 

 

411,061

 

 

 

408,845

 

Total

 

$

980,208

 

 

$

989,453

 

Earnings before provision for income taxes:

 

 

 

 

 

 

 

 

Segment operating earnings:

 

 

 

 

 

 

 

 

SBS

 

$

74,225

 

 

$

89,991

 

BSG

 

 

62,434

 

 

 

62,330

 

Segment operating earnings

 

 

136,659

 

 

 

152,321

 

Unallocated expenses

 

 

39,741

 

 

 

38,603

 

Restructuring charges

 

 

2,531

 

 

 

3,980

 

Consolidated operating earnings

 

 

94,387

 

 

 

109,738

 

Interest expense

 

 

21,541

 

 

 

24,489

 

Earnings before provision for income taxes

 

$

72,846

 

 

$

85,249

 

 

Sales between segments, which are eliminated in consolidation, were not material during the three months ended December 31, 2019 and 2018.

Disaggregation of net sales by segment

 

 

Three Months Ended

December 31,

 

SBS

 

2019

 

 

2018

 

Hair color

 

 

29.4

%

 

 

27.5

%

Hair care

 

 

19.4

%

 

 

19.9

%

Styling tools

 

 

14.9

%

 

 

15.7

%

Skin and nail care

 

 

14.0

%

 

 

15.1

%

Salon supplies and accessories

 

 

7.7

%

 

 

7.1

%

Multicultural products

 

 

6.1

%

 

 

6.5

%

Other beauty items

 

 

8.5

%

 

 

8.2

%

Total

 

 

100.0

%

 

 

100.0

%

 

16


 

 

 

 

Three Months Ended

December 31,

 

BSG

 

2019

 

 

2018

 

Hair color

 

 

37.5

%

 

 

38.0

%

Hair care

 

 

34.5

%

 

 

33.4

%

Skin and nail care

 

 

8.1

%

 

 

8.1

%

Styling tools

 

 

3.6

%

 

 

3.9

%

Other beauty items

 

 

5.8

%

 

 

5.8

%

Promotional items

 

 

10.5

%

 

 

10.8

%

Total

 

 

100.0

%

 

 

100.0

%

The following tables disaggregate our segment revenue by sales channels:

 

 

Three Months Ended December 31,

 

SBS

 

2019

 

 

2018

 

Company-operated stores

 

 

95.8

%

 

 

96.8

%

E-commerce

 

 

4.0

%

 

 

2.9

%

Franchise stores

 

 

0.2

%

 

 

0.3

%

Total

 

 

100.0

%

 

 

100.0

%

 

 

 

Three Months Ended December 31,

 

BSG

 

2019

 

 

2018

 

Company-operated stores

 

 

69.4

%

 

 

69.1

%

Distributor sales consultants

 

 

17.9

%

 

 

18.9

%

Franchise stores

 

 

7.3

%

 

 

7.6

%

E-commerce

 

 

5.4

%

 

 

4.4

%

Total

 

 

100.0

%

 

 

100.0

%

 

 

17


 

 

12.   Parent, Issuers, Guarantor and Non-Guarantor Condensed Consolidating Financial Statements

Certain 100% wholly owned domestic subsidiaries (“guarantor subsidiaries”), as defined in our credit agreements, of Sally Beauty serve as guarantors to the ABL facility, term loan B and senior notes due 2023 and 2025. The guarantees related to these debt instruments are full and unconditional, joint and several and have certain restrictions on the ability to pay restricted payments to Sally Beauty Holdings, Inc. (“parent”). Certain other subsidiaries, including our foreign subsidiaries, do not serve as guarantors (“non-guarantor subsidiaries”).

The following condensed consolidating financial information represents financial information for (i) parent, (ii) Sally Holdings LLC 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 consolidated basis.  

 

Condensed Consolidating Balance Sheet

December 31, 2019

(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

 

 

$

31,576

 

 

$

35,676

 

 

$

 

 

$

67,262

 

Trade and other accounts receivable, net

 

 

 

 

 

 

 

 

60,807

 

 

 

33,850

 

 

 

 

 

 

94,657

 

Due from affiliates

 

 

 

 

 

 

 

 

2,922,258

 

 

 

 

 

 

(2,922,258

)

 

 

 

Inventory

 

 

 

 

 

 

 

 

734,858

 

 

 

256,981

 

 

 

 

 

 

991,839

 

Other current assets

 

 

871

 

 

 

295

 

 

 

25,360

 

 

 

8,757

 

 

 

 

 

 

35,283

 

Property and equipment, net

 

 

5

 

 

 

 

 

 

254,728

 

 

 

61,192

 

 

 

 

 

 

315,925

 

Operating lease asset

 

 

 

 

 

 

 

 

395,339

 

 

 

158,125

 

 

 

 

 

 

553,464

 

Investment in subsidiaries

 

 

1,691,511

 

 

 

4,460,037

 

 

 

402,993

 

 

 

 

 

 

(6,554,541

)

 

 

 

Goodwill and other intangible assets, net

 

 

 

 

 

 

 

 

452,111

 

 

 

144,158

 

 

 

 

 

 

596,269

 

Other assets

 

 

1,446

 

 

 

3,399

 

 

 

802

 

 

 

14,713

 

 

 

 

 

 

20,360

 

Total assets

 

$

1,693,833

 

 

$

4,463,741

 

 

$

5,280,832

 

 

$

713,452

 

 

$

(9,476,799

)

 

$

2,675,059

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

94

 

 

$

37

 

 

$

220,578

 

 

$

51,373

 

 

$

 

 

$

272,082

 

Due to affiliates

 

 

1,668,100

 

 

 

1,186,221

 

 

 

 

 

 

67,937

 

 

 

(2,922,258

)

 

 

 

Accrued liabilities

 

 

250

 

 

 

5,462

 

 

 

107,134

 

 

 

30,002

 

 

 

 

 

 

142,848

 

Income taxes payable

 

 

16,738

 

 

 

2,161

 

 

 

 

 

 

(272

)

 

 

 

 

 

18,627

 

Long-term debt

 

 

 

 

 

1,578,436

 

 

 

4

 

 

 

851

 

 

 

 

 

 

1,579,291

 

Long-term operating lease liabilities

 

 

 

 

 

 

 

 

404,008

 

 

 

156,675

 

 

 

 

 

 

560,683

 

Other liabilities

 

 

6,441

 

 

 

 

 

 

11,894

 

 

 

33

 

 

 

 

 

 

18,368

 

Deferred income tax liabilities, net

 

 

11

 

 

 

(87

)

 

 

77,177

 

 

 

3,860

 

 

 

 

 

 

80,961

 

Total liabilities

 

 

1,691,634

 

 

 

2,772,230

 

 

 

820,795

 

 

 

310,459

 

 

 

(2,922,258

)

 

 

2,672,860

 

Total stockholders’ equity

 

 

2,199

 

 

 

1,691,511

 

 

 

4,460,037

 

 

 

402,993

 

 

 

(6,554,541

)

 

 

2,199

 

Total liabilities and stockholders’ equity

 

$

1,693,833

 

 

$

4,463,741

 

 

$

5,280,832

 

 

$

713,452

 

 

$

(9,476,799

)

 

$

2,675,059

 

18


 

 

Condensed Consolidating Balance Sheet

September 30, 2019

(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

 

 

$

41,009

 

 

$

30,476

 

 

$

 

 

$

71,495

 

Trade and other accounts receivable, net

 

 

 

 

 

 

 

 

65,746

 

 

 

38,793

 

 

 

 

 

 

104,539

 

Due from affiliates

 

 

 

 

 

 

 

 

2,878,072

 

 

 

 

 

 

(2,878,072

)

 

 

 

Inventory

 

 

 

 

 

 

 

 

722,830

 

 

 

230,077

 

 

 

 

 

 

952,907

 

Other current assets

 

 

1,436

 

 

 

132

 

 

 

22,480

 

 

 

10,564

 

 

 

 

 

 

34,612

 

Property and equipment, net

 

 

6

 

 

 

 

 

 

258,132

 

 

 

61,490

 

 

 

 

 

 

319,628

 

Investment in subsidiaries

 

 

1,621,843

 

 

 

4,374,334

 

 

 

385,629

 

 

 

 

 

 

(6,381,806

)

 

 

 

Goodwill and other intangible assets, net

 

 

 

 

 

 

 

 

452,645

 

 

 

140,192

 

 

 

 

 

 

592,837

 

Other assets

 

 

1,446

 

 

 

3,499

 

 

 

(581

)

 

 

18,064

 

 

 

 

 

 

22,428

 

Total assets

 

$

1,624,731

 

 

$

4,377,975

 

 

$

4,825,962

 

 

$

529,656

 

 

$

(9,259,878

)

 

$

2,098,446

 

Liabilities and Stockholders’ Equity (Deficit)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

48

 

 

$

 

 

$

235,940

 

 

$

42,700

 

 

$

 

 

$

278,688

 

Due to affiliates

 

 

1,672,322

 

 

 

1,142,324

 

 

 

 

 

 

63,426

 

 

 

(2,878,072

)

 

 

 

Accrued liabilities

 

 

188

 

 

 

17,937

 

 

 

121,375

 

 

 

29,554

 

 

 

 

 

 

169,054

 

Income taxes payable

 

 

6,055

 

 

 

2,161

 

 

 

1

 

 

 

119

 

 

 

 

 

 

8,336

 

Long-term debt

 

 

 

 

 

1,593,710

 

 

 

1

 

 

 

832

 

 

 

 

 

 

1,594,543

 

Other liabilities

 

 

6,441

 

 

 

 

 

 

17,639

 

 

 

3,677

 

 

 

 

 

 

27,757

 

Deferred income tax liabilities, net

 

 

 

 

 

 

 

 

76,672

 

 

 

3,719

 

 

 

 

 

 

80,391

 

Total liabilities

 

 

1,685,054

 

 

 

2,756,132

 

 

 

451,628

 

 

 

144,027

 

 

 

(2,878,072

)

 

 

2,158,769

 

Total stockholders’ equity (deficit)

 

 

(60,323

)

 

 

1,621,843

 

 

 

4,374,334

 

 

 

385,629

 

 

 

(6,381,806

)

 

 

(60,323

)

Total liabilities and stockholders’ equity (deficit)

 

$

1,624,731

 

 

$

4,377,975

 

 

$

4,825,962

 

 

$

529,656

 

 

$

(9,259,878

)

 

$

2,098,446

 

 

19


 

 

Condensed Consolidating Statement of Earnings and Comprehensive Income

Three Months Ended December 31, 2019

(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

 

$

 

 

$

 

 

$

786,615

 

 

$

193,593

 

 

$

 

 

$

980,208

 

Related party sales

 

 

 

 

 

 

 

 

613

 

 

 

 

 

 

(613

)

 

 

 

Cost of goods sold

 

 

 

 

 

 

 

 

400,280

 

 

 

105,693

 

 

 

(613

)

 

 

505,360

 

Gross profit

 

 

 

 

 

 

 

 

386,948

 

 

 

87,900

 

 

 

 

 

 

474,848

 

Selling, general and administrative expenses

 

 

2,729

 

 

 

156

 

 

 

296,453

 

 

 

78,592

 

 

 

 

 

 

377,930

 

Restructuring

 

 

 

 

 

 

 

 

2,531

 

 

 

 

 

 

 

 

 

2,531

 

Operating earnings (loss)

 

 

(2,729

)

 

 

(156

)

 

 

87,964

 

 

 

9,308

 

 

 

 

 

 

94,387

 

Interest expense (income)

 

 

 

 

 

21,561

 

 

 

2

 

 

 

(22

)

 

 

 

 

 

21,541

 

Earnings (loss) before provision for income taxes

 

 

(2,729

)

 

 

(21,717

)

 

 

87,962

 

 

 

9,330

 

 

 

 

 

 

72,846

 

Provision (benefit) for income taxes

 

 

(700

)

 

 

(5,574

)

 

 

22,778

 

 

 

3,127

 

 

 

 

 

 

19,631

 

Equity in earnings of subsidiaries, net of tax

 

 

55,244

 

 

 

71,387

 

 

 

6,203

 

 

 

 

 

 

(132,834

)

 

 

 

Net earnings

 

 

53,215

 

 

 

55,244

 

 

 

71,387

 

 

 

6,203

 

 

 

(132,834

)

 

 

53,215

 

Other comprehensive income, net of tax

 

 

 

 

 

109

 

 

 

 

 

 

14,761

 

 

 

 

 

 

14,870

 

Total comprehensive income

 

$

53,215

 

 

$

55,353

 

 

$

71,387

 

 

$

20,964

 

 

$

(132,834

)

 

$

68,085

 

 

20


 

 

Condensed Consolidating Statement of Earnings and Comprehensive Income

Three Months Ended December 31, 2018

(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

 

$

 

 

$

 

 

$

793,530

 

 

$

195,923

 

 

$

 

 

$

989,453

 

Related party sales

 

 

 

 

 

 

 

 

669

 

 

 

 

 

 

(669

)

 

 

 

Cost of goods sold

 

 

 

 

 

 

 

 

404,040

 

 

 

105,377

 

 

 

(669

)

 

 

508,748

 

Gross profit

 

 

 

 

 

 

 

 

390,159

 

 

 

90,546

 

 

 

 

 

 

480,705

 

Selling, general and administrative expenses

 

 

2,809

 

 

 

168

 

 

 

286,216

 

 

 

77,794

 

 

 

 

 

 

366,987

 

Restructuring

 

 

 

 

 

 

 

 

3,980

 

 

 

 

 

 

 

 

 

3,980

 

Operating earnings (loss)

 

 

(2,809

)

 

 

(168

)

 

 

99,963

 

 

 

12,752

 

 

 

 

 

 

109,738

 

Interest expense (income)

 

 

 

 

 

24,552

 

 

 

(1

)

 

 

(62

)

 

 

 

 

 

24,489

 

Earnings (loss) before provision for income taxes

 

 

(2,809

)

 

 

(24,720

)

 

 

99,964

 

 

 

12,814

 

 

 

 

 

 

85,249

 

Provision (benefit) for income taxes

 

 

(721

)

 

 

(6,345

)

 

 

25,683

 

 

 

905

 

 

 

 

 

 

 

19,522

 

Equity in earnings of subsidiaries, net of tax

 

 

67,815

 

 

 

86,190

 

 

 

11,909

 

 

 

 

 

 

(165,914

)

 

 

 

Net earnings

 

 

65,727

 

 

 

67,815

 

 

 

86,190

 

 

 

11,909

 

 

 

(165,914

)

 

 

65,727

 

Other comprehensive loss, net of tax

 

 

 

 

 

(2,830

)

 

 

 

 

 

(13,875

)

 

 

 

 

 

 

(16,705

)

Total comprehensive income (loss)

 

$

65,727

 

 

$

64,985

 

 

$

86,190

 

 

$

(1,966

)

 

$

(165,914

)

 

$

49,022

 

21


 

 

Condensed Consolidating Statement of Cash Flows

Three Months Ended December 31, 2019

(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 (used) provided by operating activities

 

$

12,813

 

 

$

(28,064

)

 

$

74,649

 

 

$

2,927

 

 

$

 

 

$

62,325

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payments for property and equipment, net

 

 

 

 

 

 

 

 

(38,208

)

 

 

(2,667

)

 

 

 

 

 

(40,875

)

Acquisitions, net of cash acquired

 

 

 

 

 

 

 

 

(1,691

)

 

 

(253

)

 

 

 

 

 

(1,944

)

Due from affiliates

 

 

 

 

 

 

 

 

(44,186

)

 

 

 

 

 

44,186

 

 

 

 

Net cash used by investing activities

 

 

 

 

 

 

 

 

(84,085

)

 

 

(2,920

)

 

 

44,186

 

 

 

(42,819

)

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from issuance of long-term debt

 

 

 

 

 

232,000

 

 

 

 

 

 

 

 

 

 

 

 

232,000

 

Repayments of long-term debt

 

 

 

 

 

(247,833

)

 

 

3

 

 

 

 

 

 

 

 

 

(247,830

)

Repurchases of common stock

 

 

(11,357

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(11,357

)

Proceeds from exercises of stock options

 

 

2,766

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,766

 

Due to affiliates

 

 

(4,222

)

 

 

43,897

 

 

 

 

 

 

4,511

 

 

 

(44,186

)

 

 

 

Net cash (used) provided by financing activities

 

 

(12,813

)

 

 

28,064

 

 

 

3

 

 

 

4,511

 

 

 

(44,186

)

 

 

(24,421

)

Effect of foreign exchange rate changes on cash and

   cash equivalents

 

 

 

 

 

 

 

 

 

 

 

682

 

 

 

 

 

 

682

 

Net (decrease) increase in cash and cash equivalents

 

 

 

 

 

 

 

 

(9,433

)

 

 

5,200

 

 

 

 

 

 

(4,233

)

Cash and cash equivalents, beginning of period

 

 

 

 

 

10

 

 

 

41,009

 

 

 

30,476

 

 

 

 

 

 

71,495

 

Cash and cash equivalents, end of period

 

$

 

 

$

10

 

 

$

31,576

 

 

$

35,676

 

 

$

 

 

$

67,262

 

 

22


 

 

Condensed Consolidating Statement of Cash Flows

Three Months Ended December 31, 2018

(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 (used) provided by operating activities

 

$

12,295

 

 

$

(34,734

)

 

$

71,284

 

 

$

1,411

 

 

$

 

 

$

50,256

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payments for property and equipment, net

 

 

 

 

 

 

 

 

(21,439

)

 

 

(2,271

)

 

 

 

 

 

(23,710

)

Acquisitions, net of cash acquired

 

 

 

 

 

 

 

 

 

 

 

(451

)

 

 

 

 

 

(451

)

Due from affiliates

 

 

 

 

 

 

 

 

(27,014

)

 

 

 

 

 

27,014

 

 

 

 

Net cash used by investing activities

 

 

 

 

 

 

 

 

(48,453

)

 

 

(2,722

)

 

 

27,014

 

 

 

(24,161

)

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from issuance of long-term debt

 

 

 

 

 

126,500

 

 

 

 

 

 

 

 

 

 

 

 

126,500

 

Repayments of long-term debt

 

 

 

 

 

(127,875

)

 

 

(1

)

 

 

 

 

 

 

 

 

(127,876

)

Repurchases of common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from exercises of stock options

 

 

1,449

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,449

 

Due to affiliates

 

 

(13,744

)

 

 

36,109

 

 

 

 

 

 

4,649

 

 

 

(27,014

)

 

 

 

Net cash (used) provided by financing activities

 

 

(12,295

)

 

 

34,734

 

 

 

(1

)

 

 

4,649

 

 

 

(27,014

)

 

 

73

 

Effect of foreign exchange rate changes on cash and

   cash equivalents

 

 

 

 

 

 

 

 

 

 

 

(692

)

 

 

 

 

 

(692

)

Net (decrease) increase in cash and cash equivalents

 

 

 

 

 

 

 

 

22,830

 

 

 

2,646

 

 

 

 

 

 

25,476

 

Cash and cash equivalents, beginning of period

 

 

 

 

 

10

 

 

 

29,050

 

 

 

48,235

 

 

 

 

 

 

77,295

 

Cash and cash equivalents, end of period

 

$

 

 

$

10

 

 

$

51,880

 

 

$

50,881

 

 

$

 

 

$

102,771

 

 


23


 

 

 

13.   Restructuring

 

Restructuring expenses for the three months ended December 31, 2019 and 2018, are as follows (in thousands):

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2019

 

 

2018

 

Project Surge

 

$

1,253

 

 

$

 

Transformation Plan

 

 

1,278

 

 

 

3,980

 

Total expense

 

$

2,531

 

 

$

3,980

 

Project Surge

In November 2019, we announced that we were launching Project Surge, which takes the successful elements of the North American Sally Beauty transformation and integrates them into our European operations, with the support and participation of several key leaders from the corporate headquarters. As part of this plan, we will be focusing on several operating elements, including a review of our talent and operating structure.

The liability related to Project Surge, which is included in accrued liabilities on our condensed consolidated balance sheets, is as follows (in thousands):

Project Surge

 

Liability at

September 30,

2019

 

 

Expenses

 

 

Expenses Paid or Otherwise Settled

 

 

Adjustments

 

 

Liability at

December 31,

2019

 

Workforce reductions

 

$

 

 

$

892

 

 

$

627

 

 

$

 

 

$

265

 

Other

 

 

 

 

 

361

 

 

 

310

 

 

 

 

 

 

51

 

Total

 

$

 

 

$

1,253

 

 

$

937

 

 

$

 

 

$

316

 

Expenses incurred during the three months ended December 31, 2019, represent costs incurred by SBS of $1.2 million and corporate of $0.1 million.

Transformation Plan

We previously disclosed a Transformation Plan focused on certain core business strategies.  In addition to optimizing our Supply Chain Network with changes to our transportation model and network of nodes, we are improving our marketing and digital commerce capabilities, and advancing our merchandising transformation efforts.

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

Transformation Plan

 

Liability at

September 30,

2019

 

 

Expenses

 

 

Expenses Paid or Otherwise Settled

 

 

Adjustments

 

 

Liability at

December 31,

2019

 

Workforce reductions

 

$

654

 

 

$

288

 

 

$

786

 

 

$

 

 

$

156

 

Consulting

 

 

204

 

 

 

713

 

 

 

204

 

 

 

 

 

 

713

 

Other

 

 

70

 

 

 

277

 

 

 

238

 

 

 

 

 

 

109

 

Total

 

$

928

 

 

$

1,278

 

 

$

1,228

 

 

$

 

 

$

978

 

Expenses incurred during the three months ended December 31, 2019, represent costs incurred by corporate of $0.9 million, SBS of $0.3 million and BSG of $0.1 million.

 

24


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, 2019, including the Risk Factors section, and information contained elsewhere in this Quarterly Report, including the condensed consolidated interim financial statements and notes to those financial statements. 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.

Highlights for the Three Months Ended December 31, 2019:

 

Consolidated net sales for the three months ended December 31, 2019 decreased $9.2 million, or 0.9%, to $980.2 million, compared to the three months ended December 31, 2018;

 

Our global e-commerce sales increased 27.6% compared to the three months ended December 31, 2018;

 

Consolidated same store sales decreased 0.3% for the three months ended December 31, 2019. SBS same store sales decreased 1.1% and BSG same store sales increased 1.2%;

 

Consolidated gross profit for the three months ended December 31, 2019 decreased $5.9 million, or 1.2%, to $474.8 million compared to the three months ended December 31, 2018. Gross margin decreased 20 basis points to 48.4% for the three months ended December 31, 2019, compared to the three months ended December 31, 2018;

 

Consolidated operating earnings for the three months ended December 31, 2019 decreased $15.4 million, or 14.0%, to $94.4 million compared to the three months ended December 31, 2018. Operating margin decreased 150 basis points to 9.6% for the three months ended December 31, 2019, compared to the three months ended December 31, 2018;

 

Consolidated net earnings decreased $12.5 million, or 19.0%, to $53.2 million for the three months ended December 31, 2019, compared to the three months ended December 31, 2018. As a percentage of net sales, net earnings decreased 120 basis points to 5.4% for the three months ended December 31, 2019, compared to the three months ended December 31, 2018;

 

Diluted earnings per share for the three months ended December 31, 2019 were $0.45, compared to $0.54 for the three months ended December 31, 2018;

 

Cash provided by operations was $62.3 million for the three months ended December 31, 2019, compared to $50.3 million for the three months ended December 31, 2018;

 

We repurchased and retired approximately 0.8 million shares of our common stock under the 2017 Share Repurchase Program at an aggregate cost of $11.4 million; and

 

We paid down $14.8 million aggregate principal of our term loan B fixed rate tranche.

 

Business Strategy Update

We continue to make solid progress against our Transformation Plan as we play to win by focusing on hair color and hair care, improve our retail fundamentals, advance our digital commerce capabilities and drive costs out of the business. As part of this effort, we have launched new products, made progress on our restructuring efforts and were able to be able to reduce our debt levels during the quarter.

We continue to roll out a new point-of-sale system in both SBS and BSG nationwide, which will allow our store associates to better serve our customers. In addition, we continue to prepare our new 500,000 square foot automated and concentrated distribution center.

In November 2019, we announced that we were launching Project Surge, which will take successful elements of the North American Sally Beauty transformation efforts and transplant them into our European operations. During the quarter, certain key leaders on the U.S. team have started working with our European leaders and we have begun reviewing our talent and implementing changes to our operating structure.

 

 

25


 

Overview

Key Operating Metrics

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

 

 

 

Three Months Ended

December 31,

 

 

 

 

2019

 

 

2018

 

 

Increase (Decrease)

 

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBS

 

$

569,147

 

 

$

580,608

 

 

$

(11,461

)

 

 

(2.0

)%

 

BSG

 

 

411,061

 

 

 

408,845

 

 

 

2,216

 

 

 

0.5

%

 

Consolidated

 

$

980,208

 

 

$

989,453

 

 

$

(9,245

)

 

 

(0.9

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBS

 

$

308,989

 

 

$

317,229

 

 

$

(8,240

)

 

 

(2.6

)%

 

BSG

 

 

165,859

 

 

 

163,476

 

 

 

2,383

 

 

 

1.5

%

 

Consolidated

 

$

474,848

 

 

$

480,705

 

 

$

(5,857

)

 

 

(1.2

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment gross margin:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBS

 

 

54.3

%

 

 

54.6

%

 

(30)

 

 

bps

 

 

BSG

 

 

40.3

%

 

 

40.0

%

 

30

 

 

bps

 

 

Consolidated

 

 

48.4

%

 

 

48.6

%

 

(20)

 

 

bps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment operating earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBS

 

$

74,225

 

 

$

89,991

 

 

$

(15,766

)

 

 

(17.5

)%

 

BSG

 

 

62,434

 

 

 

62,330

 

 

 

104

 

 

 

0.2

%

 

Segment operating earnings

 

 

136,659

 

 

 

152,321

 

 

 

(15,662

)

 

 

(10.3

)%

 

Unallocated expenses and restructuring (a)

 

 

42,272

 

 

 

42,583

 

 

 

311

 

 

 

(0.7

)%

 

Consolidated operating earnings

 

 

94,387

 

 

 

109,738

 

 

 

(15,351

)

 

 

(14.0

)%

 

Interest expense

 

 

21,541

 

 

 

24,489

 

 

 

(2,948

)

 

 

(12.0

)%

 

Earnings before provision for income taxes

 

 

72,846

 

 

 

85,249

 

 

 

(12,403

)

 

 

(14.5

)%

 

Provision for income taxes

 

 

19,631

 

 

 

19,522

 

 

 

109

 

 

 

0.6

%

 

Net earnings

 

$

53,215

 

 

$

65,727

 

 

$

(12,512

)

 

 

(19.0

)%

 

 

 

.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

SBS

 

 

3,703

 

 

 

3,739

 

 

 

(36

)

 

 

 

 

 

BSG

 

 

1,369

 

 

 

1,390

 

 

 

(21

)

 

 

 

 

 

Consolidated

 

 

5,072

 

 

 

5,129

 

 

 

(57

)

 

 

 

 

 

Same store sales growth (decline) (b):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBS

 

 

(1.1

)%

 

 

0.7

%

 

(180)

 

 

bps

 

 

BSG

 

 

1.2

%

 

 

(0.6

)%

 

180

 

 

bps

 

 

Consolidated

 

 

(0.3

)%

 

 

0.3

%

 

(60)

 

 

bps

 

 

 

 

(a)

Unallocated expenses consist of corporate and shared costs and are included in selling, general and administrative expenses in our consolidated statements of earnings. See Note 13 of the Notes to Condensed Consolidated Financial Statements for details on our restructuring charges.

(b)

For the purpose of calculating our same store sales metrics, we compare the current period sales for stores open for 14 months or longer as of 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 e-commerce sales from certain digital platforms, but do not generally include the sales from stores 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.

26


 

 

Results of Operations

The Three Months Ended December 31, 2019 compared to the Three Months Ended December 31, 2018

Net Sales

Consolidated. Consolidated net sales include a negative impact from changes in foreign currency exchange rates of $1.0 million, or 0.1% of consolidated net sales.

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

 

Same store sales

 

$

(5,891

)

Sales outside same store sales

 

 

(4,509

)

Foreign currency exchange

 

 

(1,061

)

Total

 

$

(11,461

)

SBS experienced lower unit volume (which was caused by lower customer traffic, the reduction in company-operated stores during the last 12 months and a shortened retail holiday calendar). The segment also experienced a lapped non-recurring benefit from the prior year. These headwinds were partially offset by an increase in average unit prices, resulting from targeted price increases, a change in product mix to higher-priced products and a promotional efficiency effort, partially offset by implementation related technology disruptions which led to incorrect POS pricing, elevated promotional discounts and higher loyalty program redemptions.  

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

 

Same store sales

 

$

3,415

 

Foreign currency exchange

 

 

50

 

Sales outside same store sales

 

 

(1,249

)

Total

 

$

2,216

 

BSG experienced 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), partially offset by lower unit volume (notwithstanding the impact of incremental sales from company-operated stores opened or acquired during the last 12 months).

Gross Profit

Consolidated. Consolidated gross profit decreased for the three months ended December 31, 2019, primarily due to lower net sales and a lower gross margin in SBS, partially offset by higher net sales and a higher gross margin in BSG.

SBS. SBS’s gross profit decreased for the three months ended December 31, 2019, primarily as a result of a lower net sales and a lower gross margin. SBS’s gross margin decreased primarily as a result of the implementation related technology disruptions and non-recurring benefits that we lapped from prior year, as discussed above, partially offset by continued promotional efficiencies and targeted price increases.

BSG. BSG’s gross profit increased for the three months ended December 31, 2019, primarily as a result of a higher gross margin and higher net sales. BSG’s gross margin increased primarily as a result of the introduction of new product lines with higher margins during the previous 12 months and fewer promotional activities.

Selling, General and Administrative Expenses

Consolidated. Consolidated selling, general and administrative expenses increased primarily as a result of higher compensation and compensation-related expenses, SBS advertising expenses and legal costs. Consolidated selling, general and administrative expenses, as a percentage of net sales, increased 150 basis points to 38.6% for the three months ended December 31, 2019.

SBS. SBS’s selling, general and administrative expenses increased $7.5 million, or 3.3%, for the three months ended December 31, 2019. This increase reflects higher compensation and compensation-related expenses of $3.8 million, increased digital shipping costs of $1.9 million and higher advertising expense of $1.6 million.

BSG. BSG’s selling, general and administrative expenses increased $2.3 million, or 2.3%, for the three months ended December 31, 2019, primarily as a result of higher compensation and compensation-related expenses.

Unallocated. Unallocated selling, general and administrative expenses, which represent certain corporate costs that have not been charged to our reporting segments, increased $1.1 million, or 2.9%, for the three months ended December 31, 2019, primarily from higher legal costs of $0.8 million.

27


 

Restructuring

For the three months ended December 31, 2019 and 2018, we incurred restructuring charges of $2.5 million and $4.0 million, respectively, in connection with Project Surge and the Transformation Plan. See Note 13 of the Notes to Condensed Consolidated Financial Statements included in Item 1 of this Quarterly Report for more information about our restructuring plans.

Interest Expense

The decrease in interest expense is primarily from lower outstanding principal balances on our term loan B and our senior notes. See “Liquidity and Capital Resources” below for additional information.

Provision for Income Taxes

The effective tax rates were 26.9% and 22.9%, for the three months ended December 31, 2019 and 2018, respectively. For the three months ended December 31, 2018, the provision for income taxes included an income tax benefit of $3.0 million due to an adjustment to our previously recorded transition tax on unrepatriated foreign earnings as a result of the Tax Cuts and Jobs Act.

Liquidity and Capital Resources

We are highly leveraged and a substantial portion of our liquidity needs will arise from debt service on our outstanding indebtedness and from funding the costs of operations, working capital, capital expenditures, debt repayment and share repurchases. Working capital (current assets less current liabilities) decreased $113.1 million, to $594.4 million at December 31, 2019, compared to $707.5 million at September 30, 2019, resulting primarily from the impact of the adoption of the new lease standard, partially offset by an increase in inventory.

At December 31, 2019, cash and cash equivalents were $67.3 million. Based upon the current level of operations and anticipated growth, we anticipate that existing cash balances (excluding certain amounts permanently invested in connection with foreign operations), funds expected to be generated by operations and funds available under the ABL facility will be sufficient to fund working capital requirements, potential acquisitions, finance anticipated capital expenditures, including information technology upgrades and store remodels, debt repayments and opportunistic share repurchases over the next 12 months. For the foreseeable future, we will prioritize needed investments in our business that we believe will deliver value for shareholders, and will consider measured debt repayment within our ratings guidance as well as opportunistic share repurchases.

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 due on our indebtedness, paying down other debt and opportunistic share repurchases. During the three months ended December 31, 2019, the weighted-average interest rate on our borrowings under the ABL facility was 3.8%. The amounts drawn are generally paid down with cash provided by our operating activities. As of December 31, 2019, we had $481.3 million available for borrowings under the ABL facility, subject to borrowing base limitations, as reduced by outstanding letters of credit.

Share Repurchase Programs

During the three months ended December 31, 2019, we repurchased and subsequently retired approximately 0.8 million shares of our common stock at an aggregate cost of $11.4 million. We funded these share repurchases with existing cash balances, cash from operations and borrowings under the ABL facility. As of December 31, 2019, we had authorization of approximately $776.1 million of additional potential share repurchases remaining under the 2017 Share Repurchase Program.

Historical Cash Flows

Historically, our primary source of cash has been net 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, 2019, increased $12.1 million to $62.3 million, compared to the three months ended December 31, 2018, mainly due to higher inventory purchases in the prior year resulting from the correction of supply chain issues created by certain vendors and the launch of new product lines.

Net Cash Used by Investing Activities

Net cash used by investing activities during the three months ended December 31, 2019, increased $18.7 million to $42.8 million, compared to the three months ended December 31, 2018. This change was primarily a result of higher of capital expenditures, related to our investments in information technology.

28


 

Net Cash Provided (Used) by Financing Activities

The change in financing activities cash flows was primarily a result of our early pay down of $14.8 million of our term loan B and the repurchase of $11.4 million of our common stock.  

Long-Term Debt

At December 31, 2019, we had $1,593.1 million in debt, not including capital leases, unamortized debt issuance costs and debt discounts, in the aggregate, of $13.8 million. Our debt consisted of $885.3 million of senior notes outstanding and a term loan B with an outstanding principal balance of $707.8 million. There were no borrowings outstanding under our ABL facility as of December 31, 2019.

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

Contractual Obligations

There have been no material changes outside the ordinary course of our business in any of our contractual obligations since September 30, 2019.

Off-Balance Sheet Financing Arrangements

At December 31, 2019 and September 30, 2019, we had no off-balance sheet financing arrangements other than outstanding letters of credit related to inventory purchases and self-insurance programs.

Critical Accounting Estimates

There have been no material changes to our critical accounting estimates or assumptions since September 30, 2019.

Accounting Changes and Recent Accounting Pronouncements

See Note 3 of the Notes to Condensed Consolidated Financial Statements in Item 1 – “Financial Statements” in Part I – Financial Information.

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, 2019. See our disclosures about market risks contained in Item 7A. “Quantitative and Qualitative Disclosures about Market Risk” in Part II of our Annual Report on Form 10-K for the fiscal year ended September 30, 2019.

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, 2019. The controls evaluation was conducted by our Disclosure Committee, comprised of senior representatives from our finance, accounting, internal audit, and legal departments under the supervision of our CEO and CFO.

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

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

Scope of the Controls Evaluation.   The evaluation of our disclosure controls and procedures included a review of their objectives and design, our implementation of the controls and procedures and the effect of the controls and procedures on the information generated for use in this Quarterly Report. In the course of the evaluation, we sought to identify whether we had any data errors, control problems or acts of fraud and to confirm that appropriate corrective action, including process improvements, was being undertaken if

29


 

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, 2019, 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.

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PART II — OTHER INFORMATION

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

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

Item 1A.  Risk Factors

In addition to the other information set forth in this Quarterly Report, you should carefully consider the factors contained in Item 1A. “Risk Factors” in Part I of our Annual Report on Form 10-K for the fiscal year ended September 30, 2019, 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

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

Fiscal Period

 

Total Number of Shares Purchased

 

 

Average Price Paid per Share

 

 

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

 

 

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

 

October 1 - October 31, 2019

 

 

766,018

 

 

$

14.83

 

 

 

766,018

 

 

$

776,120,613

 

November 1 - November 30, 2019

 

 

-

 

 

 

-

 

 

 

-

 

 

 

776,120,613

 

December 1 - December 31, 2019

 

 

-

 

 

 

-

 

 

 

-

 

 

 

776,120,613

 

Total this quarter

 

 

766,018

 

 

$

14.83

 

 

 

766,018

 

 

$

776,120,613

 

 

(1)          In August 2017, we announced that our Board of Directors had 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 (the “2017 Share Repurchase Program”).

 


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Item 6.  Exhibits

 

 

Exhibit No.

 

Description

 

 

 

3.1

 

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

 

 

 

3.2

 

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

 

 

 

31.1

 

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

 

 

 

31.2

 

Rule 13a-14(a)/15d-14(a) Certification of Aaron E. Alt*

 

 

 

32.1

 

Section 1350 Certification of Christian A. Brickman*

 

 

 

32.2

 

Section 1350 Certification of Aaron E. Alt*

 

 

 

101

 

The following financial information from our Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2019, formatted in iXBRL (Inline Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets; (ii) the Condensed Consolidated Statements of Earnings; (iii) the Condensed Consolidated Statements of Comprehensive Income; (iv) the Condensed Consolidated Statements of Cash Flows; (v) the Condensed Consolidated Statements of Stockholders’ Equity (Deficit); and (vi) the Notes to Condensed Consolidated Financial Statements.

 

 

 

104

 

The cover page from our Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2019, formatted in Inline XBRL (contained in Exhibit 101).

 

* Included herewith

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SIGNATURES

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

 

 

 

 

SALLY BEAUTY HOLDINGS, INC.

 

 

 

(Registrant)

 

 

 

 

Date:  February 6, 2020

 

 

 

 

 

 

 

 

By:

 

/s/ Aaron E. Alt

 

 

 

Aaron E. Alt

 

 

 

Senior Vice President, Chief Financial Officer

and President – Sally Beauty Supply

 

 

 

For the Registrant and as its Principal Financial Officer

 

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