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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, 2023

or

 

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

 

Commission File No. 1-33145

 

SALLY BEAUTY HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

36-2257936

(State or other jurisdiction of incorporation or organization)

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

3001 Colorado Boulevard

Denton, Texas

76210

(Address of principal executive offices)

(Zip Code)

 

(940) 898-7500

(Registrant’s telephone number, including area code)

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

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, $0.01 par value

SBH

The New York Stock Exchange

 

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

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

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

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

Smaller reporting company

 

Emerging growth company

 

 

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

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

Number of shares of common stock outstanding as of January 26, 2024: 104,883,609

 

 


 

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

16

Item 3. Quantitative and Qualitative Disclosures About Market Risk

21

Item 4. Controls and Procedures

21

 

PART II — OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

22

Item 1A. Risk Factors

22

Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities.

22

Item 5. Other Information

22

Item 6. Exhibits

23

 

 

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, 2023, which should be read in conjunction with the forward-looking statements in this report. Forward-looking statements speak only as of the date they are made, and we do not undertake any obligation to update any forward-looking statement.

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

3


 

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except par value data)

 

 

 

December 31,
2023

 

 

September 30,
2023

 

 

 

(Unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

120,999

 

 

$

123,001

 

Trade accounts receivable, net

 

 

32,164

 

 

 

33,421

 

Accounts receivable, other

 

 

46,325

 

 

 

42,454

 

Inventory

 

 

1,007,628

 

 

 

975,218

 

Other current assets

 

 

55,748

 

 

 

53,903

 

Total current assets

 

 

1,262,864

 

 

 

1,227,997

 

Property and equipment, net of accumulated depreciation of $811,658 at
   December 31, 2023, and $
780,212 at September 30, 2023

 

 

284,899

 

 

 

297,779

 

Operating lease assets

 

 

551,639

 

 

 

570,657

 

Goodwill

 

 

536,686

 

 

 

533,081

 

Intangible assets, excluding goodwill, net of accumulated amortization of
   $
32,121 at December 31, 2023, and $30,587 at September 30, 2023

 

 

55,186

 

 

 

55,171

 

Other assets

 

 

40,112

 

 

 

40,565

 

Total assets

 

$

2,731,386

 

 

$

2,725,250

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Current maturities of long-term debt

 

$

4,168

 

 

$

4,173

 

Accounts payable

 

 

267,479

 

 

 

258,884

 

Accrued liabilities

 

 

139,573

 

 

 

163,366

 

Current operating lease liabilities

 

 

147,069

 

 

 

150,479

 

Income taxes payable

 

 

14,780

 

 

 

2,355

 

Total current liabilities

 

 

573,069

 

 

 

579,257

 

Long-term debt

 

 

1,065,299

 

 

 

1,065,811

 

Long-term operating lease liabilities

 

 

438,928

 

 

 

455,071

 

Other liabilities

 

 

22,465

 

 

 

23,139

 

Deferred income tax liabilities, net

 

 

90,285

 

 

 

93,224

 

Total liabilities

 

 

2,190,046

 

 

 

2,216,502

 

Stockholders’ equity:

 

 

 

 

 

 

Common stock, $0.01 par value. Authorized 500,000 shares; 104,857 and
   
106,266 shares issued and shares outstanding at December 31, 2023, and
   September 30, 2023, respectively

 

 

1,049

 

 

 

1,063

 

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

 

 

 

 

 

 

Additional paid-in capital

 

 

 

 

 

5,677

 

Accumulated earnings

 

 

652,247

 

 

 

624,772

 

Accumulated other comprehensive loss, net of tax

 

 

(111,956

)

 

 

(122,764

)

Total stockholders’ equity

 

 

541,340

 

 

 

508,748

 

Total liabilities and stockholders’ equity

 

$

2,731,386

 

 

$

2,725,250

 

 

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

4


 

SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Earnings

(In thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2023

 

 

2022

 

Net sales

 

$

931,302

 

 

$

957,055

 

Cost of goods sold

 

 

464,126

 

 

 

468,481

 

Gross profit

 

 

467,176

 

 

 

488,574

 

Selling, general and administrative expenses

 

 

398,138

 

 

 

391,580

 

Restructuring

 

 

(85

)

 

 

10,406

 

Operating earnings

 

 

69,123

 

 

 

86,588

 

Interest expense

 

 

17,314

 

 

 

17,923

 

Earnings before provision for income taxes

 

 

51,809

 

 

 

68,665

 

Provision for income taxes

 

 

13,419

 

 

 

18,328

 

Net earnings

 

$

38,390

 

 

$

50,337

 

Earnings per share:

 

 

 

 

 

 

Basic

 

$

0.36

 

 

$

0.47

 

Diluted

 

$

0.35

 

 

$

0.46

 

Weighted-average shares:

 

 

 

 

 

 

Basic

 

 

105,948

 

 

 

107,140

 

Diluted

 

 

108,718

 

 

 

109,460

 

 

 

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

5


 

SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(In thousands)

(Unaudited)

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2023

 

 

2022

 

Net earnings

 

$

38,390

 

 

$

50,337

 

Other comprehensive income:

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

16,367

 

 

 

25,941

 

Interest rate swap, net of tax

 

 

(3,088

)

 

 

 

Interest rate caps, net of tax

 

 

 

 

 

203

 

Foreign exchange contracts, net of tax

 

 

(2,471

)

 

 

(910

)

Other comprehensive income, net of tax

 

 

10,808

 

 

 

25,234

 

Total comprehensive income

 

$

49,198

 

 

$

75,571

 

 

 

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

6


 

SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders’ Equity

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

Other

 

 

Total

 

 

Common Stock

Paid-in

 

 

Accumulated

 

 

Comprehensive

 

 

Stockholders’

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Loss

 

 

Equity

 

Balance at September 30, 2023

 

106,266

 

 

$

1,063

 

 

$

5,677

 

 

$

624,772

 

 

$

(122,764

)

 

$

508,748

 

Net earnings

 

 

 

 

 

 

 

 

 

 

38,390

 

 

 

 

 

 

38,390

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

10,808

 

 

 

10,808

 

Share-based compensation

 

 

 

 

 

 

 

5,118

 

 

 

 

 

 

 

 

 

5,118

 

Stock issued for equity awards

 

722

 

 

 

7

 

 

 

209

 

 

 

 

 

 

 

 

 

216

 

Employee withholding taxes paid
   related to net share settlement

 

(192

)

 

 

(2

)

 

 

(1,738

)

 

 

 

 

 

 

 

 

(1,740

)

Repurchases and cancellations of
   common stock

 

(1,939

)

 

 

(19

)

 

 

(9,266

)

 

 

(10,915

)

 

 

 

 

 

(20,200

)

Balance at December 31, 2023

 

104,857

 

 

$

1,049

 

 

$

-

 

 

$

652,247

 

 

$

(111,956

)

 

$

541,340

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

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,

 

 

 

2023

 

 

2022

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

Net earnings

 

$

38,390

 

 

$

50,337

 

Adjustments to reconcile net earnings to net cash provided
    by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

28,063

 

 

 

25,285

 

Share-based compensation expense

 

 

5,118

 

 

 

5,135

 

Amortization of deferred financing costs

 

 

637

 

 

 

648

 

Impairment of long-lived assets, including operating lease assets

 

 

 

 

 

2,103

 

Loss on disposal of equipment and other property

 

 

2

 

 

 

77

 

Deferred income taxes

 

 

(3,237

)

 

 

889

 

Changes in (exclusive of effects of acquisitions):

 

 

 

 

 

 

Trade accounts receivable

 

 

1,715

 

 

 

2,270

 

Accounts receivable, other

 

 

(3,294

)

 

 

(3,817

)

Inventory

 

 

(24,159

)

 

 

(38,019

)

Other current assets

 

 

(1,117

)

 

 

(4,018

)

Other assets

 

 

(1,709

)

 

 

4,074

 

Operating leases, net

 

 

(641

)

 

 

(10,392

)

Accounts payable and accrued liabilities

 

 

(642

)

 

 

7,606

 

Income taxes payable

 

 

12,586

 

 

 

12,460

 

Other liabilities

 

 

(692

)

 

 

313

 

Net cash provided by operating activities

 

 

51,020

 

 

 

54,951

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

Payments for property and equipment, net of proceeds

 

 

(30,551

)

 

 

(25,007

)

Acquisitions, net of cash acquired

 

 

(218

)

 

 

 

Net cash used by investing activities

 

 

(30,769

)

 

 

(25,007

)

Cash Flows from Financing Activities:

 

 

 

 

 

 

Proceeds from issuance of long-term debt

 

 

67,000

 

 

 

229,000

 

Repayments of long-term debt

 

 

(68,052

)

 

 

(233,927

)

Proceeds from equity awards

 

 

216

 

 

 

60

 

Payments for common stock repurchased

 

 

(20,200

)

 

 

 

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

 

 

(1,740

)

 

 

(1,125

)

Net cash used by financing activities

 

 

(22,776

)

 

 

(5,992

)

Effect of foreign exchange rate changes on cash and cash equivalents

 

 

523

 

 

 

4,561

 

Net (decrease) increase in cash and cash equivalents

 

 

(2,002

)

 

 

28,513

 

Cash and cash equivalents, beginning of period

 

 

123,001

 

 

 

70,558

 

Cash and cash equivalents, end of period

 

$

120,999

 

 

$

99,071

 

Supplemental Cash Flow Information:

 

 

 

 

 

 

Interest paid

 

$

27,272

 

 

$

26,758

 

Income taxes paid

 

$

3,495

 

 

$

3,081

 

Capital expenditures incurred but not paid

 

$

5,206

 

 

$

5,542

 

 

 

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

8


 

Sally Beauty Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Significant Accounting Policies

Basis of Presentation

The unaudited condensed consolidated interim financial statements of Sally Beauty Holdings, Inc. and its subsidiaries included herein have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and pursuant to the rules and regulations of the SEC. Accordingly, certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC, although we believe that the disclosures included herein are adequate for the interim period presented. These condensed consolidated interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2023. 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, 2023, and September 30, 2023, our consolidated results of operations, consolidated comprehensive income, consolidated statements of stockholders’ equity and consolidated cash flows for the three months ended December 31, 2023 and 2022.

Principles of Consolidation

The unaudited condensed consolidated interim financial statements include all accounts of Sally Beauty Holdings, Inc. and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. All amounts are in U.S. Dollars.

Accounting Policies

We adhere to the same accounting policies in the preparation of our condensed consolidated interim financial statements as we do in the preparation of our full year consolidated financial statements. As permitted under GAAP, interim accounting for certain expenses, including income taxes, is based on full-year assumptions. For interim financial reporting purposes, income taxes are recorded based upon our estimated annual effective income tax.

Use of Estimates

In order to present our financial statements in conformity with GAAP, we are required to make certain estimates and assumptions that impact our interim financial statements and supplementary disclosures. These estimates may use forecasted financial information based on reasonable information available, however are subject to change in the future. Significant estimates and assumptions are part of our accounting for sales allowances, deferred revenue, valuation of inventory, amortization and depreciation, intangibles and goodwill, and other reserves. We believe these estimates and assumptions are reasonable; however, they are based on management’s current knowledge of events and actions, and changes in facts and circumstances may result in revised estimates and impact actual results.

2. Recent Accounting Pronouncements

In November 2023, the Financial Accounting Standards Board (“FASB”) issued accounting standards update (“ASU”) No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, to enhance segment disclosures for annual and interim consolidated financial statements, including significant segment expenses that are regularly provided to the chief operating decision maker (“CODM”). For public companies, the amendments in the update are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. We are currently evaluating the impact of this update, but do not expect the update to impact our consolidated results of operations or financial position.

In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, to expand disclosures in an entity’s income tax rate reconciliation table and the disaggregation of taxes paid in U.S. and foreign jurisdictions. For public business entities, the amendments in this update are effective for annual periods beginning after December 15, 2024. Early adoption is permitted. We are currently evaluating the impact of this update, but do not expect the update to impact our consolidated results of operations or financial position.

 

9


 

3. Revenue Recognition

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

Changes to our contract liabilities, which are included in accrued liabilities in our condensed consolidated balance sheets, for the periods were as follows (in thousands):

 

 

 

 

 

 

Three Months Ended December 31,

 

 

 

 

 

 

 

2023

 

 

2022

 

Beginning Balance

 

 

 

 

 

$

14,038

 

 

$

13,460

 

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

 

 

9,494

 

 

 

6,291

 

Revenue recognized from beginning liability

 

 

(7,942

)

 

 

(4,489

)

Ending Balance

 

 

 

 

 

$

15,590

 

 

$

15,262

 

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

 

4. Fair Value Measurements

We measure on a recurring basis and disclose the fair value of our financial instruments under the provisions of ASC Topic 820, Fair Value Measurement, as amended (“ASC 820”). We define “fair value” as the price that would be received to sell an asset or paid to transfer a liability (i.e., the exit price) in an orderly transaction between market participants at the measurement date. ASC 820 establishes a three-level hierarchy for measuring fair value and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. This valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability on the measurement date.

The three levels of that hierarchy are defined as follows:

Level 1 - Quoted prices are available in active markets for identical assets or liabilities;

Level 2 - Pricing inputs are other than quoted prices in active markets, included in Level 1, that are either directly or indirectly observable; and

Level 3 - Unobservable pricing inputs in which little or no market activity exists, therefore requiring an entity to develop its own model with estimates and assumptions.

Financial instruments measured at fair value on recurring basis

Consistent with the fair value hierarchy, we categorized our financial assets and liabilities as follow:

(in thousands)

 

Classification

 

Fair Value Hierarchy Level

 

December 31,
2023

 

 

September 30,
2023

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

 

 

 

 

 

 

 

 

 

Non-designated cash flow hedges

 

Other current assets

 

Level 2

 

$

446

 

 

$

1,160

 

Interest rate swap

 

Other assets

 

Level 2

 

 

788

 

 

 

4,668

 

Total assets

 

 

 

 

 

$

1,234

 

 

$

5,828

 

.

 

 

 

 

 

 

 

 

 

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

 

 

 

 

 

 

 

 

 

Designated cash flow hedges

 

Accrued liabilities

 

Level 2

 

$

1,869

 

 

$

 

Non-designated cash flow hedges

 

Accrued liabilities

 

Level 2

 

 

1,543

 

 

 

397

 

Total liabilities

 

 

 

 

 

$

3,412

 

 

$

397

 

The fair value of each asset and liability were measured using widely accepted valuation techniques, such as discounted cash flow analyses and observable inputs, such as market interest rates and foreign exchange rates.

 

10


 

Other fair value disclosures

The carrying amounts of cash equivalents, trade and other accounts receivable, and accounts payable and borrowing under our ABL facility approximate their respective fair values due to the short-term nature of these financial instruments. Carrying amounts and the related estimated fair value of our long-term debt, excluding finance lease obligations, debt issuance costs and original issue discounts, are as follows:

 

 

 

 

December 31, 2023

 

 

September 30, 2023

 

(in thousands)

 

Fair Value Hierarchy Level

 

Carrying Value

 

 

Fair Value

 

 

Carrying Value

 

 

Fair Value

 

Long-term debt, excluding finance lease obligations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior notes

 

Level 1

 

$

679,961

 

 

$

679,961

 

 

$

679,961

 

 

$

662,962

 

Term loan B due 2030

 

Level 2

 

 

397,000

 

 

 

397,993

 

 

 

398,000

 

 

 

398,000

 

Total long-term debt

 

 

 

$

1,076,961

 

 

$

1,077,954

 

 

$

1,077,961

 

 

$

1,060,962

 

 

The fair values of our term loans were measured using quoted market prices for similar debt securities in active markets or widely accepted valuation techniques, such as discounted cash flow analyses, using observable inputs, such as market interest rates.

5. Stockholders’ Equity

Share Repurchases

In August 2017, our Board of Directors (“Board”) approved a share repurchase program authorizing us to repurchase up to $1.0 billion of our common stock, subject to certain limitations governed by our debt agreements. In July 2021, our Board approved a term extension of our share repurchase program to September 30, 2025. As of December 31, 2023, we had approximately $560.8 million of additional share repurchase authorizations remaining under our share repurchase program. For the three months ended December 31, 2023, we repurchased 1.9 million shares of our common stock at a total cost of $20.0 million, excluding the impact of excise taxes. For the three months ended December 31, 2022, we did not repurchase shares under our share repurchase program.

Accumulated Other Comprehensive Loss

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

 

 

Foreign Currency Translation Adjustments

 

 

Interest Rate Swap

 

 

Foreign Exchange Contracts

 

 

Total

 

 

Balance at September 30, 2023

 

$

(124,846

)

 

$

3,716

 

 

$

(1,634

)

 

$

(122,764

)

 

Other comprehensive income (loss) before
    reclassification, net of tax

 

 

16,367

 

 

 

(2,257

)

 

 

(3,895

)

 

 

10,215

 

 

Reclassification to net earnings, net of tax

 

 

 

 

 

(831

)

 

 

1,424

 

 

 

593

 

 

Balance at December 31, 2023

 

$

(108,479

)

 

$

628

 

 

$

(4,105

)

 

$

(111,956

)

 

The tax impact for the changes in other comprehensive income (loss) and the reclassifications to net earnings was not material.

6. Weighted-Average Shares

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

 

 

Three Months Ended
December 31,

 

 

 

2023

 

 

2022

 

Weighted-average basic shares

 

 

105,948

 

 

 

107,140

 

Dilutive securities:

 

 

 

 

 

 

Stock option and stock award programs

 

 

2,770

 

 

 

2,320

 

Weighted-average diluted shares

 

 

108,718

 

 

 

109,460

 

 

 

 

 

 

 

 

Anti-dilutive options excluded from our computation of diluted shares

 

 

1,804

 

 

 

2,123

 

 

 

11


 

7. Goodwill and Intangible Assets

For the three months ended December 31, 2023, we considered potential triggering events and determined there were none during the period. No material impairment losses were recognized in the current or prior periods presented in connection with our goodwill and other intangible assets.

As of September 30, 2023, we determined that due to the recent decline in the Company's share price and market capitalization, among other factors, a quantitative assessment was required. Based on our September 30, 2023 quantitative assessment using a discounted cash flow, we estimated the fair value for our BSG reporting unit to be approximately 18% more than its carrying value. The critical assumptions used as part of our evaluation included a projected long-term revenue growth rate of 2.0% and a discount rate of 11.25%, based on a weighted-average cost of capital analysis (adjusted for company specific risk). Our September 30, 2023 quantitative assessment indicated that the fair value of our SBS segment was substantially higher than its carrying value. Goodwill allocated to our SBS and BSG reporting units, which are also defined as our SBS and BSG segment, was $86.4 million and $450.3 million, respectively, as of December 31, 2023.

 

 

 

Three Months Ended
December 31,

 

(in thousands)

 

2023

 

 

2022

 

Intangible assets amortization expense

 

$

860

 

 

$

1,008

 

 

For the three months ended December 31, 2023, changes in goodwill reflects the effects of foreign currency exchange rates of $4.0 million and adjustments of $0.4 million from the completion of our Goldwell of NY, Inc. acquisition fair value assessment. Additionally, the changes to other intangibles included effects of foreign currency exchange rates of $0.9 million.

8. Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

 

 

December 31,
2023

 

 

September 30,
2023

 

Compensation and benefits

 

$

49,846

 

 

$

69,915

 

Deferred revenue

 

 

20,422

 

 

 

18,259

 

Rental obligations

 

 

11,368

 

 

 

11,266

 

Insurance reserves

 

 

6,805

 

 

 

6,656

 

Interest payable

 

 

3,898

 

 

 

13,447

 

Property and other taxes

 

 

2,271

 

 

 

2,617

 

Operating accruals and other

 

 

44,963

 

 

 

41,206

 

Total accrued liabilities

 

$

139,573

 

 

$

163,366

 

 

 

 

 

 

 

 

 

9. Derivative Instruments and Hedging Activities

During the three months ended December 31, 2023, we did not purchase or hold any derivative instruments for trading or speculative purposes. See Note 4, 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, 2023, we held forwards, which expire ratably through September 30, 2024, with a notional amount, based upon exchange rates at December 31, 2023, as follows (in thousands):

Notional Currency

 

Notional Amount

 

Mexican Peso

 

$

16,538

 

Euro

 

 

8,742

 

Canadian Dollar

 

 

8,404

 

Total

 

$

33,684

 

 

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, 2023 and 2022, we recognized a loss of $1.4 million and a gain of $0.3 million, respectively. Based on December 31, 2023 valuations and exchange rates, we expect to reclassify losses of approximately $2.2 million out of AOCL and into cost of goods sold over the next 12 months.

12


 

Interest Rate Swap

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

For the three months ended December 31, 2023, we recognized income of $0.8 million into interest expense on our condensed consolidated statements of earnings related to the interest rate swap. At December 31, 2023, we expect to reclassify gains of approximately $1.9 million out of AOCL and into interest expense 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 prior term loan due 2024. The interest rate caps were comprised of individual caplets and were designated as cash flow hedges. Accordingly, the changes in fair value of the interest rate caps were recorded quarterly, net of income tax, and included in AOCL. During fiscal year 2023, we early settled both interest rate caps due to the forecasted transactions being hedged no longer occurring as a result of the repayment of our prior term loan. The effects of our interest rate caps on our condensed consolidated statements of earnings were not material for the three months ended December 31, 2022.

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, 2023, we held forwards, which settle on various dates in the first month of the next two fiscal quarters, with a notional amount, based upon exchange rates at December 31, 2023, as follows (in thousands):

Notional Currency

 

Notional Amount

 

British Pound

 

$

44,723

 

Mexican Peso

 

 

21,517

 

Euro

 

 

20,679

 

Canadian Dollar

 

 

17,275

 

Total

 

$

104,194

 

We record changes in fair value and realized gains or losses related to these foreign currency forwards into selling, general and administrative expenses. For the three months ended December 31, 2023 and 2022, the effects of these foreign exchange contracts on our condensed consolidated financial statements were losses of $1.3 million and gains of $0.4 million, respectively.

 

10. Segment Reporting

Segment data for the three months ended December 31, 2023 and 2022, is as follows (in thousands):

 

 

Three Months Ended
December 31,

 

 

 

2023

 

 

2022

 

Net sales:

 

 

 

 

 

 

Sally Beauty Supply ("SBS")

 

$

523,238

 

 

$

549,472

 

Beauty Systems Group ("BSG")

 

 

408,064

 

 

 

407,583

 

Total

 

$

931,302

 

 

$

957,055

 

Earnings before provision for income taxes:

 

 

 

 

 

 

Segment operating earnings:

 

 

 

 

 

 

SBS

 

$

77,629

 

 

$

99,174

 

BSG

 

 

44,627

 

 

 

49,647

 

Segment operating earnings

 

 

122,256

 

 

 

148,821

 

Unallocated expenses

 

 

53,218

 

 

 

51,827

 

Restructuring

 

 

(85

)

 

 

10,406

 

Consolidated operating earnings

 

 

69,123

 

 

 

86,588

 

Interest expense

 

 

17,314

 

 

 

17,923

 

Earnings before provision for income taxes

 

$

51,809

 

 

$

68,665

 

 

Sales between segments, which are eliminated in consolidation, were not material during the three months ended December 31, 2023 and 2022.

 

13


 

Disaggregation of net sales by segment

Periodically, we make minor adjustments to our product hierarchy, that impacts the roll-up of our merchandise categories. As a result, certain prior year amounts have been reclassified to conform to current year presentation. The following tables disaggregate our segment revenues by merchandise category.

 

 

Three Months Ended
December 31,

 

SBS

 

2023

 

 

2022

 

Hair color

 

 

39.1

%

 

 

38.7

%

Hair care

 

 

24.6

%

 

 

23.4

%

Styling tools and supplies

 

 

18.2

%

 

 

19.5

%

Nail

 

 

10.1

%

 

 

10.3

%

Skin and cosmetics

 

 

7.4

%

 

 

7.4

%

Other beauty items

 

 

0.6

%

 

 

0.7

%

Total

 

 

100.0

%

 

 

100.0

%

 

 

 

Three Months Ended
December 31,

 

BSG

 

2023

 

 

2022

 

Hair care

 

 

42.9

%

 

 

43.5

%

Hair color

 

 

39.4

%

 

 

38.3

%

Styling tools and supplies

 

 

10.7

%

 

 

10.8

%

Skin and cosmetics

 

 

4.3

%

 

 

4.4

%

Nail

 

 

2.4

%

 

 

2.7

%

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

 

2023

 

 

2022

 

Company-operated stores

 

 

93.3

%

 

 

93.6

%

E-commerce

 

 

6.7

%

 

 

6.4

%

Total

 

 

100.0

%

 

 

100.0

%

 

 

 

Three Months Ended
December 31,

 

BSG

 

2023

 

 

2022

 

Company-operated stores

 

 

68.6

%

 

 

66.3

%

E-commerce

 

 

13.8

%

 

 

13.6

%

Distributor sales consultants

 

 

10.6

%

 

 

12.6

%

Franchise stores

 

 

7.0

%

 

 

7.5

%

Total

 

 

100.0

%

 

 

100.0

%

 

 

 

14


 

11. Restructuring

Restructuring expenses, included in Cost of Goods Sold (“COGS”) and Restructuring for the three months ended December 31, 2023 and 2022, are as follows (in thousands):

 

 

Three Months Ended
December 31,

 

 

 

2023

 

 

2022

 

Included in COGS (a)

 

 

 

 

 

 

Distribution Center Consolidation and Store Optimization Plan

 

$

 

 

$

(2,680

)

 

 

 

 

 

 

 

Included in Restructuring (b)

 

 

 

 

 

 

Distribution Center Consolidation and Store Optimization Plan

 

$

(85

)

 

$

10,406

 

(a)
Amounts included in COGS relate to adjustments to our expected obsolescence reserve related to the Plan (as defined below).
(b)
For the three months ended December 31, 2022, restructuring consisted of closing costs related to lease terminations, employee termination benefits and $2.1 million in impairment charges.

Distribution Center Consolidation and Store Optimization Plan

In the fourth quarter of fiscal year 2022, our Board approved the Distribution Center Consolidation and Store Optimization Plan (“the Plan”) authorizing the closure of 330 SBS stores and 35 BSG stores, and the closure of two BSG distribution centers in Clackamas, Oregon and Pottsville, Pennsylvania. Stores identified for early closure were part of a strategic evaluation which included a market analysis of certain locations where we believed we would be able to recapture demand and improve profitability.

The Plan has been substantially completed, as the remaining two BSG stores were closed during the quarter. However we may still incur future immaterial charges related to store closures such as exit costs, lease negotiation penalties and adjustments to estimates. As of December 31, 2023, there were no material outstanding liabilities for exit costs or involuntary employee termination benefits.

15


 

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

This section discusses management’s view of the financial condition, results of operations and cash flows of Sally Beauty for the periods covered by this Quarterly Report. This section should be read in conjunction with the information contained in our Annual Report on Form 10-K for the fiscal year ended September 30, 2023, including the Risk Factors sections therein, and information contained elsewhere in this Quarterly Report, including the condensed consolidated interim financial statements and notes to those financial statements.

Financial Summary for the Three Months Ended December 31, 2023

Consolidated net sales for the three months ended December 31, 2023 decreased $25.8 million, or 2.7%, to $931.3 million, compared to the three months ended December 31, 2022. Consolidated net sales included a net positive impact from changes in foreign currency exchange rates of $8.6 million;
Consolidated comparable sales decreased 0.8% for the three months ended December 31, 2023;
Consolidated gross profit for the three months ended December 31, 2023 decreased $21.4 million, or 4.4%, to $467.2 million, compared to the three months ended December 31, 2022. Consolidated gross margin decreased 80 bps to 50.2% for the three months ended December 31, 2023, compared to the three months ended December 31, 2022;
Consolidated operating earnings for the three months ended December 31, 2023 decreased $17.5 million, or 20.2%, to $69.1 million, compared to the three months ended December 31, 2022. Operating margin decreased 160 bps to 7.4% for the three months ended December 31, 2023, compared to the three months ended December 31, 2022;
For the three months ended December 31, 2023, our consolidated net earnings decreased $11.9 million, or 23.7%, to $38.4 million, compared to the three months ended December 31, 2022;
For the three months ended December 31, 2023, our diluted earnings per share was $0.35 compared to $0.46 for the three months ended December 31, 2022; and
Cash provided by operations was $51.0 million for the three months ended December 31, 2023, compared to $55.0 million for the three months ended December 31, 2022.

Comparable Sales

We believe that comparable sales is an appropriate performance indicator to measure our sales growth compared to the prior period. Our comparable sales include sales from stores that have been operating for 14 months or longer as of the last day of a month and from e-commerce revenue. Additionally, comparable sales include sales to franchisees and full service sales. Our comparable sales excludes the effect of changes in foreign exchange rates and sales from stores relocated until 14 months after the relocation. Revenue from acquired stores are excluded from our comparable sales calculation until 14 months after the acquisition. Our calculation of comparable sales might not be the same as other retailers as the calculation varies across the retail industry.

 

16


 

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,

 

 

 

2023

 

 

2022

 

 

Increase (Decrease)

 

Net sales: