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
Page
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
5
Item 2. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations
25
Item 3. Quantitative And Qualitative Disclosures About Market Risk
29
Item 4. Controls And Procedures
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
31
Item 1a. Risk Factors
Item 2. Unregistered Sales Of Equity Securities And Use Of Proceeds
Item 6. Exhibits
32
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
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.
SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except par value data)
December 31,
2019
September 30,
(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)
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
Condensed Consolidated Statements of Earnings
(In thousands, except per share data)
Three Months Ended
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:
116,125
119,989
117,154
120,979
7
Condensed Consolidated Statements of Comprehensive Income
(In thousands)
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
8
Condensed Consolidated Statements of Cash Flows
Three Months Ended December 31,
Cash Flows from Operating Activities:
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
8,793
(6,379
(30,138
(45,924
(482
1,745
(2,480
(187
Accounts payable and accrued liabilities
(11,930
(13,855
10,352
12,406
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
77,295
Cash and cash equivalents, end of period
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
9
Condensed Consolidated Statements of Stockholders’ Equity (Deficit)
Accumulated
Additional
Other
Total
Common Stock
Paid-in
Comprehensive
Stockholders’
Shares
Amount
Capital
Earnings
Loss
Equity (Deficit)
Balance at September 30, 2019
116,725
Cumulative effect of ASC 842 adoption
(445
Other comprehensive income
Repurchases and cancellations of
common stock
(766
(7
(6,237
(5,113
Share-based compensation
Stock issued for stock options
206
2,764
Balance at December 31, 2019
116,165
Deficit
Balance at September 30, 2018
119,926
1,199
(179,764
(89,991
(268,556
Other comprehensive loss
115
1,448
Balance at December 31, 2018
120,041
1,200
4,802
(114,037
(106,696
(214,731
10
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
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
Financial Assets:
Interest rate caps
Level 2
347
344
Financial Liabilities:
Foreign exchange contracts
214
Other fair value disclosures
Carrying Value
Fair Value
Long-term debt, excluding capital leases
Senior notes
Level 1
885,296
918,279
898,814
Other long-term debt
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):
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
(113,932
(3,201
(154
Other comprehensive income (loss) before
reclassification, net of tax
(291
14,673
Reclassification to net earnings, net of tax
106
91
197
(98,971
(3,092
(354
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):
Weighted-average basic shares
Dilutive securities:
Stock option and stock award programs
1,029
Weighted-average diluted shares
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
Assets:
Operating lease
Finance lease
Property and equipment, net
2,982
Total lease assets
556,446
Liabilities:
Current:
Long-term:
Total lease liabilities
561,538
13
Our lease costs, net of immaterial sublease income, consisted of the following (in thousands):
Statement of Earnings Classification
Operating lease costs (a)
Cost of goods sold and
selling, general and administrative expenses (b)
45,345
Finance lease costs:
Amortization of leased assets
75
Interest on lease liabilities
Variable lease costs
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
2021
151,045
2022
110,683
2023
76,127
2024
48,507
Thereafter
85,284
Total undiscounted lease payments
607,182
Less: imputed interest
(46,499
Present value of lease liabilities
560,683
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):
2020
174,578
136,900
95,918
61,944
33,803
40,545
543,688
14
Other lease information is as follows (dollars in thousands):
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows – operating leases
44,972
Operating cash flows – finance leases
Financing cash flows – finance leases
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
Weighted-average remaining lease term (in years):
4.8
0.5
Weighted-average discount rate:
4.2
%
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
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.
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):
Net sales:
Sally Beauty Supply ("SBS")
569,147
580,608
Beauty Systems Group ("BSG")
411,061
408,845
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
Consolidated operating earnings
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
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
100.0
16
37.5
38.0
34.5
33.4
8.1
3.6
3.9
5.8
Promotional items
10.5
10.8
The following tables disaggregate our segment revenue by sales channels:
Company-operated stores
95.8
96.8
E-commerce
4.0
2.9
Franchise stores
0.2
0.3
69.4
69.1
Distributor sales consultants
17.9
18.9
7.3
7.6
5.4
4.4
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
Parent
Sally
Holdings LLC
and Sally
Capital Inc.
Guarantor
Subsidiaries
Non-
Consolidating
Eliminations
Sally Beauty
Holdings,
Inc. and
31,576
35,676
Trade and other accounts receivable, net
60,807
33,850
94,657
Due from affiliates
2,922,258
(2,922,258
734,858
256,981
871
295
25,360
8,757
254,728
61,192
Operating lease asset
395,339
158,125
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
1,446
3,399
802
14,713
1,693,833
4,463,741
5,280,832
713,452
(9,476,799
Liabilities and Stockholders’ Equity
94
37
220,578
51,373
Due to affiliates
1,668,100
1,186,221
67,937
250
5,462
107,134
30,002
16,738
2,161
(272
851
1,579,291
404,008
156,675
6,441
11,894
33
(87
77,177
3,860
1,691,634
2,772,230
820,795
310,459
Total stockholders’ equity
Total liabilities and stockholders’ equity
18
41,009
30,476
65,746
38,793
104,539
2,878,072
(2,878,072
722,830
230,077
1,436
132
22,480
10,564
258,132
61,490
1,621,843
4,374,334
385,629
(6,381,806
452,645
140,192
592,837
3,499
(581
18,064
1,624,731
4,377,975
4,825,962
529,656
(9,259,878
48
235,940
42,700
1,672,322
1,142,324
63,426
188
17,937
121,375
29,554
6,055
119
1,593,710
832
1,594,543
17,639
3,677
76,672
3,719
1,685,054
2,756,132
451,628
144,027
19
Condensed Consolidating Statement of Earnings and Comprehensive Income
Three Months Ended December 31, 2019
Holdings, Inc.
and Subsidiaries
786,615
193,593
Related party sales
613
(613
400,280
105,693
386,948
87,900
2,729
156
296,453
78,592
Operating earnings (loss)
(2,729
(156
87,964
9,308
Interest expense (income)
21,561
(22
Earnings (loss) before provision for income taxes
(21,717
87,962
9,330
Provision (benefit) for income taxes
(700
(5,574
22,778
3,127
Equity in earnings of subsidiaries, net of tax
55,244
71,387
6,203
(132,834
Other comprehensive income, net of tax
14,761
55,353
20,964
20
Three Months Ended December 31, 2018
793,530
195,923
669
(669
404,040
105,377
390,159
90,546
2,809
168
286,216
77,794
(2,809
(168
99,963
12,752
24,552
(1
(62
(24,720
99,964
12,814
(721
(6,345
25,683
905
67,815
86,190
11,909
(165,914
Other comprehensive loss, net of tax
(13,875
Total comprehensive income (loss)
64,985
(1,966
21
Condensed Consolidating Statement of Cash Flows
Net cash (used) provided by operating activities
12,813
(28,064
74,649
2,927
(38,208
(2,667
(1,691
(253
(44,186
44,186
(84,085
(2,920
(247,833
Repurchases of common stock
(4,222
43,897
4,511
(12,813
28,064
Effect of foreign exchange rate changes on cash and
cash equivalents
(9,433
5,200
22
12,295
(34,734
71,284
1,411
(21,439
(2,271
(27,014
27,014
(48,453
(2,722
(127,875
(13,744
36,109
4,649
(12,295
34,734
22,830
2,646
29,050
48,235
51,880
50,881
23
13. Restructuring
Restructuring expenses for the three months ended December 31, 2019 and 2018, are as follows (in thousands):
Project Surge
1,253
Transformation Plan
1,278
Total expense
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):
Liability at
Expenses
Expenses Paid or Otherwise Settled
Adjustments
Workforce reductions
892
627
265
361
310
51
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.
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):
654
288
786
Consulting
204
713
70
277
238
928
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.
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):
Increase (Decrease)
(11,461
(2.0
)%
2,216
Consolidated
(9,245
(0.9
Gross profit:
308,989
317,229
(8,240
(2.6
165,859
163,476
2,383
1.5
(5,857
(1.2
Segment gross margin:
54.3
54.6
(30)
bps
40.3
40.0
30
48.4
48.6
(20)
Net earnings:
(15,766
(17.5
104
(15,662
(10.3
Unallocated expenses and restructuring (a)
42,272
42,583
311
(0.7
(15,351
(14.0
(2,948
(12.0
(12,403
(14.5
0.6
(12,512
(19.0
.
Number of stores at end-of-period (including franchises):
3,703
3,739
(36
1,369
1,390
(21
5,072
5,129
(57
Same store sales growth (decline) (b):
(1.1
0.7
(180)
1.2
(0.6
180
(0.3
(60)
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.
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
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):
3,415
50
(1,249
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
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
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.
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
776,120,613
November 1 - November 30, 2019
-
December 1 - December 31, 2019
Total this quarter
(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”).
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.
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
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.
(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