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, 2021
-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 28, 2022, there were 110,075,502 shares of the issuer’s common stock outstanding.
TABLE OF CONTENTS
Page
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
4
Condensed Consolidated Balance Sheets
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
15
Item 3. Quantitative And Qualitative Disclosures About Market Risk
20
Item 4. Controls And Procedures
21
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
22
Item 1A. Risk Factors
Item 2.Unregistered Sales Of Equity Securities And Use Of Proceeds
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. Forward-looking statements may relate to, among other things, the impact on our business, operations and financial results of the novel coronavirus (“COVID-19”) pandemic.
Readers are cautioned not to place undue reliance on forward-looking statements as such statements speak only as of the date they were made and involve risks and uncertainties that could cause actual events or results to differ materially from the events or results described in the forward-looking statements. The most important factors which could cause our actual results to differ from our forward-looking statements are set forth in our description of risk factors in Item 1A contained in our Annual Report on Form 10-K for the fiscal year ended September 30, 2021, 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
Item 1. Financial Statements.
SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES
(In thousands, except par value data)
December 31,
2021
September 30,
(Unaudited)
Assets
Current assets:
Cash and cash equivalents
$
298,140
400,959
Trade accounts receivable, net
29,588
32,623
Accounts receivable, other
36,568
33,958
Inventory
1,005,838
871,349
Other current assets
45,396
44,686
Total current assets
1,415,530
1,383,575
Property and equipment, net of accumulated depreciation of $784,622 at
December 31, 2021, and $767,403 at September 30, 2021
293,871
307,377
Operating lease assets
531,657
537,673
Goodwill
540,287
541,209
Intangible assets, excluding goodwill, net of accumulated amortization of
$39,670 at December 31, 2021, and $38,957 at September 30, 2021
54,316
55,532
Other assets
20,281
21,766
Total assets
2,855,942
2,847,132
Liabilities and Stockholders’ Equity
Current liabilities:
Current maturities of long-term debt
184
194
Accounts payable
346,302
291,632
Accrued liabilities
151,938
206,155
Current operating lease liabilities
154,465
156,234
Income taxes payable
28,863
10,666
Total current liabilities
681,752
664,881
Long-term debt
1,381,926
1,382,530
Long-term operating lease liabilities
406,362
404,147
Other liabilities
17,268
29,056
Deferred income tax liabilities, net
87,613
85,777
Total liabilities
2,574,921
2,566,391
Stockholders’ equity:
Common stock, $0.01 par value. Authorized 500,000 shares; 110,052 and
113,138 shares issued and 109,977 and 112,913 shares outstanding at
December 31, 2021, and September 30, 2021, respectively
1,100
1,129
Preferred stock, $0.01 par value. Authorized 50,000 shares; none issued
—
Additional paid-in capital
17,286
Accumulated earnings
378,313
356,967
Accumulated other comprehensive loss, net of tax
(98,392
)
(94,641
Total stockholders’ equity
281,021
280,741
Total liabilities and stockholders’ equity
The accompanying notes are an integral part of these condensed consolidated financial statements.
(In thousands, except per share data)
Three Months Ended
2020
Net sales
980,251
936,022
Cost of goods sold
480,122
465,298
Gross profit
500,129
470,724
Selling, general and administrative expenses
386,250
366,170
Restructuring
1,099
232
Operating earnings
112,780
104,322
Interest expense
20,241
25,978
Earnings before provision for income taxes
92,539
78,344
Provision for income taxes
23,701
21,153
Net earnings
68,838
57,191
Earnings per share:
Basic
0.61
0.51
Diluted
0.60
0.50
Weighted-average shares:
111,995
112,475
113,968
113,828
(In thousands)
Other comprehensive (loss) income:
Foreign currency translation adjustments
(4,509
25,007
Interest rate caps, net of tax
278
175
Foreign exchange contracts, net of tax
480
(1,594
Other comprehensive (loss) income, net of tax
(3,751
23,588
Total comprehensive income
65,087
80,779
Accumulated
Additional
Other
Total
Common Stock
Paid-in
Comprehensive
Stockholders’
Shares
Amount
Capital
Earnings
Loss
Equity
Balance at September 30, 2021
112,913
Other comprehensive income
Share-based compensation
3,958
Stock issued for equity awards
795
7,364
7,372
Employee withholding taxes paid related to net share settlement
(56
(1
(1,136
(1,137
Repurchases and cancellations of
common stock
(3,675
(36
(27,472
(47,492
(75,000
Balance at December 31, 2021
109,977
Balance at September 30, 2020
112,405
1,124
1,913
117,109
(104,703
15,443
2,893
158
(2
(25
(248
(249
Balance at December 31, 2020
112,538
1,125
4,556
174,300
(81,115
98,866
Three Months Ended December 31,
Cash Flows from Operating Activities:
Adjustments to reconcile net earnings to net cash (used) provided by operating
activities:
Depreciation and amortization
24,421
26,386
Share-based compensation expense
Amortization of deferred financing costs
932
1,496
Loss on disposal of equipment and other property
1,589
Deferred income taxes
1,867
229
Changes in (exclusive of effects of acquisitions):
Trade accounts receivable
2,841
(3,502
(1,724
(8,643
(137,326
(67,764
(446
3,220
1,371
(240
Operating leases, net
6,475
2,996
Accounts payable and accrued liabilities
16,729
12,401
18,166
14,307
(11,790
(3,573
Net cash (used) provided by operating activities
(5,685
38,986
Cash Flows from Investing Activities:
Payments for property and equipment, net of proceeds
(26,390
(15,483
Acquisitions, net of cash acquired
(319
(2,025
Net cash used by investing activities
(26,709
(17,508
Cash Flows from Financing Activities:
Repayments of long-term debt
(1,421
(63
Payments for common stock repurchased
Proceeds from equity awards
Employee withholding taxes paid related to net share settlement of equity awards
Net cash used by financing activities
(70,185
(312
Effect of foreign exchange rate changes on cash and cash equivalents
2,327
Net (decrease) increase in cash and cash equivalents
(102,819
23,493
Cash and cash equivalents, beginning of period
514,151
Cash and cash equivalents, end of period
537,644
Supplemental Cash Flow Information:
Interest paid
35,034
43,439
Income taxes paid
3,978
2,609
Capital expenditures incurred but not paid
3,594
6,707
Sally Beauty Holdings, Inc. and Subsidiaries
1. Significant Accounting Policies
Business Operations
Sally Beauty Holdings is an international specialty retailer and distributor of professional beauty supplies with operations in North America, South America and Europe. We are one of the largest distributers of professional beauty supplies in the U.S. based on store count, operating under two segments, Sally Beauty Supply (“SBS”) and Beauty Systems Group (“BSG”). Our operations consist of company-operated stores, franchise stores and several e-commerce platforms. Within BSG, we also have one of the largest networks of distributor sales consultants (“DSCs”) for professional beauty products in North America, who sell directly to salons and salon professionals. SBS targets retail consumers, salons and salon professionals, while BSG targets salons and salons professionals.
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 included herein are adequate for the interim period presented. These condensed consolidated interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2021. 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, 2021 and September 30, 2021, and our consolidated results of operations, consolidated comprehensive income, consolidated statements of stockholders’ equity and our consolidated cash flows for the for the three months ended December 31, 2021 and 2020.
Principles of Consolidation
The condensed consolidated interim financial statements include all accounts of Sally Beauty Holdings, Inc. and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. All amounts are in U.S. Dollars.
Accounting Policies
We adhere to the same accounting policies in the preparation of our condensed consolidated interim financial statements as we do in the preparation of our full year consolidated financial statements. As permitted under GAAP, interim accounting for certain expenses, including income taxes, is based on full-year assumptions. For interim financial reporting purposes, income taxes are recorded based upon our estimated annual effective income tax.
Use of Estimates
In order to present our financial statements in conformity with GAAP, we are required to make certain estimates and assumptions that impact our interim financial statements and supplementary disclosures. These estimates may use forecasted financial information based on reasonable information available, however are subject to change in the future. Additionally, unknown future impacts of COVID-19 may impact those estimates and assumptions as well. Significant estimates and assumptions are part of our accounting for sales allowances, deferred revenue, valuation of inventory, amortization and depreciation, intangibles and goodwill, and other reserves. We believe these estimates and assumptions are reasonable however they are based on management’s current knowledge of events and actions and changes in facts and circumstances may result in revised estimates, and impact actual results.
Impact of COVID-19
Our operating results for the three months ended December 31, 2021, may not be indicative of the results that may be expected for the full fiscal year ending September 30, 2022, in particular as a result of the uncertainty around the continuing effects of the COVID-19 pandemic and its variants on future periods. While trends have been improving, we cannot reasonably predict the effects of the pandemic or expect these positive trends to continue. If we become negatively impacted, we may have to consider adjustments to our strategic plans, inventory, liquidity, operational and capital expenditure plans.
Additionally, as the uncertainty of the economy as a result of COVID-19 continues to be prolonged, it may have an impact on our net sales and operations, and may require changes to our reserves including adjustments, write-downs and restructuring charges.
2. Revenue Recognition
Substantially all of our revenue is derived through the sale of merchandise at the point-of-sale. Revenue is recognized net of estimated sales returns and sales taxes. We estimate sales returns based on historical data.
Changes to our contract liabilities, which are included in accrued liabilities in our condensed balance sheets, for the periods were as follows (in thousands):
Beginning Balance
16,744
13,947
Loyalty points and gift cards issued but not redeemed, net of estimated breakage
5,842
5,709
Revenue recognized from beginning liability
(3,509
(3,476
Ending Balance
19,077
16,180
See Note 9, Segment Reporting, for additional information regarding the disaggregation of our sales revenue.
3. Fair Value Measurements
Financial instruments measured 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:
Foreign exchange contracts
Level 2
439
Interest rate caps
133
35
572
.
Financial Liabilities:
51
Financial instruments not measured at fair value
Carrying amounts and the related estimated fair value of our long-term debt, excluding capital lease obligations and debt issuance costs, are as follows:
December 31, 2021
September 30, 2021
Carrying Value
Fair Value
Long-term debt, excluding capital leases
Senior notes
Level 1
979,961
1,012,310
1,019,635
Term loan B
411,625
410,700
413,000
411,451
Total long-term debt
1,391,586
1,423,010
1,392,961
1,431,086
The table above excludes amounts, if any, related to our ABL facility as the balance approximates fair value due to the short-term nature of our borrowings. The fair value of the senior notes was measured using unadjusted quoted market prices. The fair value of other long-term debt was measured using quoted market prices for similar debt securities in active markets or widely accepted valuation techniques, such as discounted cash flow analyses, using observable inputs, such as market interest rates.
10
4. Stockholders’ Equity
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, subject to certain limitations governed by our debt agreements. In July 2021, our Board of Directors approved a term extension of the share repurchase program for the four-year period ending September 30, 2025.
Information related to our shares repurchased and subsequently retired were as follows (in thousands):
Number of shares repurchased
3,675
Total cost of share repurchased
75,000
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
(92,154
(2,085
(402
Other comprehensive income (loss) before
reclassification, net of tax
(114
171
(4,452
Reclassification to net earnings, net of tax
392
309
701
(96,663
(1,807
78
The tax impact for the changes in other comprehensive (loss) income and the reclassifications to net earnings was not material.
5. 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
1,973
1,353
Weighted-average diluted shares
Anti-dilutive options excluded from our computation of diluted shares
2,775
6,009
6. Goodwill and Intangible Assets
We considered potential triggering events and determined there were none during the three months ended December 31, 2021. No material impairment losses were recognized in the current or prior periods presented in connection with our goodwill and other intangible assets.
Intangible assets amortization expense
1,071
1,698
Additionally, during the three months ended December 31, 2021, the decrease in goodwill was primarily from the effects of foreign currency exchange rates of $0.9 million.
11
7. Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
Compensation and benefits
44,946
73,344
Deferred revenue
20,373
18,543
Rental obligations
11,524
10,501
Interest payable
7,978
24,101
Insurance reserves
6,408
5,934
Property and other taxes
2,976
3,853
Operating accruals and other
57,733
69,879
Total accrued liabilities
8. Derivative Instruments and Hedging Activities
During the three months ended December 31, 2021, we did not purchase or hold any derivative instruments for trading or speculative purposes. See Note 3, Fair Value Measurements, for the classification and fair value of our derivative instruments.
Designated Cash Flow Hedges
Foreign Currency Forwards
We regularly enter into foreign currency forwards to mitigate our exposure to exchange rate changes on inventory purchases in U.S. dollars by our foreign subsidiaries. At December 31, 2021, the notional amount we held through these forwards, based upon exchange rates at December 31, 2021, was as follows (in thousands):
Notional Currency
Notional Amount
Mexican Peso
17,759
Euro
12,364
Canadian Dollar
8,090
38,213
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 is recognized into cost of goods sold based on inventory turns. For the three months ended December 31, 2021 and 2020, we recognized a loss of $0.3 million and a gain of $0.4 million, respectively, into cost of goods sold on our condensed consolidated statements of earnings. Based on December 31, 2021 valuations and exchange rates, we expect to reclassify losses of approximately $0.6 million into cost of goods sold over the next 12 months.
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 $1.8 million into interest expense, which represents the original value of the expiring caplets.
For the three months ended December 31, 2021, we recognized expense of approximately $0.4 million into interest expense on our condensed consolidated statements of earnings. The effects of our interest rate caps on our condensed consolidated statements of earnings were not material for the three months ended December 31, 2020.
12
9. Segment Reporting
Segment data for the three months ended December 31, 2021 and 2020, is as follows (in thousands):
Net sales:
Sally Beauty Supply ("SBS")
561,530
547,670
Beauty Systems Group ("BSG")
418,721
388,352
Earnings before provision for income taxes:
Segment operating earnings:
SBS
100,623
95,128
BSG
58,546
48,572
Segment operating earnings
159,169
143,700
Unallocated expenses
45,290
39,146
Consolidated operating earnings
Sales between segments, which are eliminated in consolidation, were not material during the three months ended December 31, 2021 and 2020.
Disaggregation of net sales by segment
The following tables disaggregate our segment revenues by merchandise category. We have reclassified certain prior year amounts to conform to current year presentation.
Hair color
36.8
%
36.0
Hair care
23.8
20.9
Styling tools and supplies
20.2
23.1
Nail
10.4
10.8
Skin and cosmetics
7.9
8.4
Other beauty items
0.9
0.8
100.0
41.9
40.2
39.9
39.1
12.6
3.6
3.7
3.5
4.0
0.3
0.4
13
The following tables disaggregate our segment revenue by sales channels:
Company-operated stores
94.2
93.9
E-commerce
5.8
6.0
Franchise stores
0.0
0.1
67.5
69.6
Distributor sales consultants
13.6
14.3
11.7
8.5
7.2
7.6
14
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This section should be read in conjunction with the information contained in our Annual Report on Form 10-K for the fiscal year ended September 30, 2021.
Executive Overview
Our financial results in the first quarter of 2022 reflect strong performance across our core categories of color and care as well as our ability to mitigate the current macro environment’s challenges and respond to them effectively. Our company and team of talented associates remain focused on providing first-rate experiences for our customers. We believe that this, coupled with our healthy levels of inventory, position us to meet customer demand and continue executing on our strategic initiatives. To that end, during the quarter we continued making progress on four strategic pillars; leveraging our digital platform, driving loyalty and personalization, delivering product innovation and advancing our supply chain.
Highlights for the Three Months Ended December 31, 2021
•
Consolidated net sales for the three months ended December 31, 2021, increased $44.2 million, or 4.7%, to $980.3 million, compared to the three months ended December 31, 2020;
Consolidated comparable sales increased 6.1% for the three months ended December 31, 2021, compared to the three months ended December 31, 2020;
Consolidated gross profit for the three months ended December 31, 2021, increased $29.4 million, or 6.2%, to $500.1 million, compared to the three months ended December 31, 2020. Gross margin increased 70 basis points to 51.0% for the three months ended December 31, 2021, compared to the three months ended December 31, 2020;
Consolidated operating earnings for the three months ended December 31, 2021, increased $8.5 million, or 8.1%, to $112.8 million, compared to the three months ended December 31, 2020. Operating margin increased 40 bps to 11.5% for the three months ended December 31, 2021, compared to the three months ended December 31, 2020;
For the three months ended December 31, 2021, our consolidated net earnings increased $11.6 million, or 20.4%, to $68.8 million, compared to the three months ended December 31, 2020;
For the three months ended December 31, 2021, our diluted earnings per share was $0.60 compared to $0.50 for the three months ended December 31, 2020; and
Cash used by operations was $5.7 million for the three months ended December 31, 2021, compared to cash provided by operations of $39.0 million for the three months ended December 31, 2020.
Impact of COVID-19 on Our Business
During the current quarter, the COVID-19 Omicron variant started to spread globally. Meanwhile, we continued to stay vigilant to developments in compliance and guidance from local and federal authorities, as well as geographical impacts of the virus and its variants. We continue to take decisive actions to protect our customers and associates. As such, we incurred additional costs around COVID-19, including testing in our distribution centers and COVID-19 cleanings during the quarter. While trends in business have been improving, we cannot reasonably predict the effects of new variants or expect these positive trends to continue. Therefore, our future performance may partially depend on impacts of COVID-19 such as widespread infections, labor shortages, global supply chain disruptions, variants of the virus, changes in governmental compliance and availability of vaccines and testing.
Refer Item 1A. “Risk Factors” in Part I of our Annual Report on Form 10-K for the fiscal year ended September 30, 2021, for further discussion of the risks and uncertainties pertaining to COVID-19.
Global Supply Chain and Inflationary Impact
There continues to be volatility in the global supply chain as strong U.S. customer demand, COVID-19 restrictions, and labor shortages in many U.S. ports have caused logistical and delivery challenges specifically with inbound container volume. Shifts in demand have led to longer lead times and delays, and carriers have been faced with increased costs associated with capacity imbalances between Chinese and U.S ports, causing the freight market to increase as well. Due to these events, we have seen an increase in our inbound freight costs and the number of out-of-stock products. Furthermore, the increase in customer demand, along with COVID-19, have created labor shortages in the U.S and caused an increase in labor costs. As a result, we may experience an increase in our compensation costs in order to attract and retain associates.
Comparable Sales
We have recently launched many digital initiatives to support our omni-channel strategies to provide customers an enhanced shopping experience. As such, 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 e-commerce revenue. Additionally, our comparable sales include sales to franchisees and full service sales. Our comparable sales excludes the effect of changes in foreign exchange rates and sales from stores relocated until 14 months after the relocation. Revenue from acquisitions are excluded from our comparable sales calculation until 14 months after the acquisition. Our calculation of comparable sales might not be the same as other retailers as the calculation varies across the retail industry.
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):
Increase (Decrease)
13,860
2.5
30,369
7.8
Consolidated
44,229
4.7
Gross profit:
328,172
315,811
12,361
3.9
171,957
154,913
17,044
11.0
29,405
6.2
Segment gross margin:
58.4
57.7
70
bps
41.1
120
51.0
50.3
Net earnings:
5,495
9,974
20.5
15,469
Unallocated expenses and restructuring (a)
46,389
39,378
7,011
17.8
8,458
8.1
(5,737
(22.1
)%
14,195
18.1
2,548
12.0
11,647
20.4
Number of stores at end-of-period (including franchises):
3,529
3,645
(116
(3.2
1,364
1,384
(20
(1.4
4,893
5,029
(136
(2.7
Comparable sales growth (decline) (b):
4.4
(3.9
830
8.6
(6.4
1,500
6.1
(4.9
(a)
Unallocated expenses consist of corporate and shared costs and are included in selling, general and administrative expenses in our consolidated statements of earnings.
(b)
Our comparable sales include sales from stores that have been operating for 14 months or longer as of the last day of a month and e-commerce revenue. Additionally, our comparable sales include sales to franchisees and full service sales. Our comparable sales excludes the effect of changes in foreign exchange rates and sales from stores relocated until 14 months after the relocation. Revenue from acquisitions are excluded from our comparable sales calculation until 14 months after the acquisition. Prior to fiscal year 2022, we reported Same Store Sales. For fiscal year 2022, we are reporting Comparable Sales, which includes sales to franchisees and full service sales. We have recast prior year amounts to conform to the change. See “Comparable Sales” discussion above for further information.
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Results of Operations
The Three Months Ended December 31, 2021, compared to the Three Months Ended December 31, 2020
Net Sales
SBS. The increase in net sales for SBS was primarily driven by the following (in thousands):
Comparable sales
23,155
Sales outside comparable sales (a)
(7,932
Foreign currency exchange
(1,363
Includes stores opened for less than 14 months, net of stores closures
The increase in net sales was driven by an increase in comparable sales, reflecting strong customer demand. While store traffic and conversion remained consistent with recent trends, average unit price increased this quarter, led by our color categories. These increases were offset by a decrease in unit volume due to operating fewer stores compared to the same quarter last year.
BSG. The increase in net sales for BSG was primarily driven by the following (in thousands):
32,268
(3,144
1,245
The increase in net sales was driven by an increase in comparable sales, primarily due to an increase in average unit prices, salons operating at full capacity during the quarter, as well as strong e-commerce growth. These increases were offset by a decrease in overall unit volume due to operating fewer stores in the current quarter compared to the same quarter last year.
Gross Profit
SBS. SBS’s gross profit increased for the three months ended December 31, 2021, as a result of an increase in net sales and a higher gross margin. SBS’s gross margin increased primarily as a result of the impact of pricing leverage, partially offset by higher distribution and freight costs.
BSG. BSG’s gross profit increased for the three months ended December 31, 2021, as a result of an increase in net sales and a higher gross margin. BSG’s gross margin increased primarily as a result of increased pricing leverage and an increase in sales volume from e-commerce customers.
Selling, General and Administrative Expenses
SBS. SBS’s selling, general and administrative expenses increased $6.9 million, or 3.1%, for the three months ended December 31, 2021. The increase was driven primarily by higher compensation and compensation-related expenses of $11.2 million, driven by general economic inflationary conditions and to international markets re-opening, partially offset by lower delivery expense of $2.4 million, as a result of a change in fulfillment strategy, and lower depreciation and amortization expenses of $2.1 million.
BSG. BSG’s selling, general and administrative expenses increased $7.1 million, or 6.6%, for the three months ended December 31, 2021. The increase was driven primarily by higher compensation and compensation-related expenses of $3.0 million, an increase in variable-sales related expense of $1.8 million, higher advertising expenses of $1.0 million and an increase in other operating expenses of $0.8 million.
Unallocated. Unallocated selling, general and administrative expenses, which represent certain corporate costs that have not been charged to our reporting segments, increased $6.1 million, or 15.7%, for the three months ended December 31, 2021, primarily due to higher COVID-19 related expenses and compensation and compensation-related expenses.
For the three months ended December 31, 2021, restructuring charges in connection with our previously communicated Transformation Plan increased $0.9 million to $1.1 million.
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Interest Expense
The decrease in interest expense is primarily due to the lower outstanding debt principal for the three months ended December 31, 2021 compared to the three months ended December 31, 2020, as a result of the paydown of our senior notes due 2023 and our term loan B fixed tranche during fiscal year 2021. See “Liquidity and Capital Resources” below for additional information.
Provision for Income Taxes
The effective tax rates were 25.6% and 27.0%, for the three months ended December 31, 2021, and 2020, respectively. The decrease in the effective tax rate was primarily due to the tax impact of share-based compensation which was beneficial in the current year quarter, but detrimental in the prior year quarter.
Liquidity and Capital Resources
We are highly leveraged and a substantial portion of our liquidity needs arise from debt service on our outstanding indebtedness and from funding the costs of our operations, working capital, capital expenditures, debt repayment and share repurchases. Working capital (current assets less current liabilities) increased $15.1 million, to $733.8 million at December 31, 2021, compared to $718.7 million at September 30, 2021, primarily from increased inventory as a result of restocking to new levels of demand and our risk mitigation strategy to protect against potential, continued supply chain disruptions, partially offset by a decrease in cash and cash equivalents.
At December 31, 2021, cash and cash equivalents were $298.1 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 our ABL facility will be sufficient to fund working capital requirements, potential acquisitions, anticipated capital expenditures, including information technology upgrades and store remodels, and debt repayments over the next twelve months. We have continued to focus on reducing our debt levels and shares outstanding through repurchases, while also being proactive in maintaining our financial flexibility.
We utilize our ABL facility for the issuance of letters of credit, certain working capital and liquidity needs, and to manage normal fluctuations in our operational cash flow. In that regard, we may from time to time draw funds under the ABL facility for general corporate purposes including funding of capital expenditures, acquisitions, interest payments due on our indebtedness, paying down other debt and share repurchases. During the three months ended December 31, 2021, we did not draw funds under our ABL facility. As of December 31, 2021, we had $481.1 million available for borrowings under our ABL facility, subject to borrowing base limitations, as reduced by outstanding letters of credit. Amounts drawn on our ABL facility are generally paid down with cash provided by our operating activities.
Share Repurchase Programs
During the three months ended December 31, 2021, we repurchased 3.7 million shares of our common stock for $75.0 million. As of December 31, 2021, we had authorization of approximately $651.1 million of additional potential share repurchases remaining under the 2017 Share Repurchase Program.
Cash Flows
Historically, our primary source of cash has been net funds provided by operating activities and, when necessary, borrowings under our ABL facility. Historically, the primary uses of cash have been for share repurchases, capital expenditures, repayments and servicing of long-term debt and acquisitions.
Net Cash (Used) Provided by Operating Activities
The $44.7 million decrease in net cash (used) provided by operating activities was driven by an increase in inventory purchases as we increased stocking levels to new demand and our risk mitigation strategy to protect against potential, continued supply chain disruptions, partially offset by an increase in net earnings and the timing of our receivable collections.
Net Cash Used by Investing Activities
Net cash used by investing activities during the three months ended December 31, 2021, increased $9.2 million to $26.7 million, compared to the three months ended December 31, 2020. This change was primarily a result of additional investments in information technology and store improvements.
Net Cash Used by Financing Activities
Net cash used by financing activities for the three months ended December 31, 2021, increased $69.9 million to $70.2 million, as a result of share repurchases, partially offset by an increase in stock options exercised.
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Debt and Guarantor Financial Information
At December 31, 2021, we had $1,391.6 million in debt, not including capital leases, unamortized debt issuance costs and debt discounts, in the aggregate, of $9.5 million. Our debt consisted of $980.0 million of senior notes outstanding and a term loan with an outstanding principal balance of $411.6 million. As of December 31, 2021, there were no outstanding borrowings under our ABL facility.
We are currently in compliance with the agreements and instruments governing our debt, including our financial covenants.
Guarantor Financial Information
Currently, our issued securities consist of the 5.625% Senior Notes due 2025. This debt instrument was issued by our wholly-owned subsidiaries, Sally Holdings LLC and Sally Capital Inc. (the “Issuers”), under a shelf registration statement.
The notes are unsecured debt instruments guaranteed by us and certain of our wholly-owned domestic subsidiaries (together, the “Guarantors”) and have certain restrictions on the ability to pay restrictive payments to Sally Beauty. The guarantees are joint and several, and full and unconditional. Certain other subsidiaries, including our foreign subsidiaries, do not serve as guarantors.
The following summarized consolidating financial information represents financial information for the Issuers and the Guarantors on a combined basis. All transactions and intercompany balances between these combined entities has been eliminated.
The following table presents the summarized balance sheets information for the Issuers and the Guarantors as of December 31, 2021 and September 30, 2021 (in thousands):
782,320
662,802
Intercompany receivable
-
67,337
Current assets
1,082,672
1,069,266
2,199,462
2,198,990
Intercompany payable
16,248
Current liabilities
432,598
422,137
2,348,793
2,343,946
The following table presents the summarized statement of income information for three months ended December 31, 2021 (in thousands):
788,081
405,136
74,557
Net Earnings
56,315
Contractual Obligations
There have been no material changes outside the ordinary course of our business in any of our contractual obligations since September 30, 2021.
Off-Balance Sheet Financing Arrangements
At December 31, 2021, and September 30, 2021, we had no off-balance sheet financing arrangements other than outstanding letters of credit related to inventory purchases and self-insurance programs.
Critical Accounting Estimates
There have been no material changes to our critical accounting estimates or assumptions since September 30, 2021.
Recent Accounting Pronouncements
There have been no recent accounting pronouncements issued that will have a material impact to our business.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As a multinational corporation, we are subject to certain market risks including foreign currency fluctuations, interest rates and government actions. There have been no material changes to our market risks from September 30, 2021. See our disclosures about market risks contained in Item 7A. “Quantitative and Qualitative Disclosures about Market Risk” in Part II of our Annual Report on Form 10-K for the fiscal year ended September 30, 2021.
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, 2021. 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, 2021, 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.
In addition to the other information set forth in this Quarterly Report, you should carefully consider the factors contained in Item 1A. “Risk Factors” in Part I of our Annual Report on Form 10-K for the fiscal year ended September 30, 2021, 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 (1)
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)(2)
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
October 1 - October 31, 2021
726,120,621
November 1 - November 30, 2021
1,495,824
20.85
694,938,779
December 1 - December 31, 2021
2,179,273
20.11
651,120,625
Total this quarter
3,675,097
20.41
(1)
The table above does not include 56,458 shares of the Company’s common stock surrendered by grantees during the quarter to satisfy tax withholding obligations due upon the vesting of equity-based awards under the Company’s share-based compensation plans.
(2)
In July 2021, we announced that our Board of Directors had approved a term extension our 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, 2025.
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
List of Subsidiary Guarantors*
31.1
Rule 13a-14(a)/15d-14(a) Certification of Denise Paulonis*
31.2
Rule 13a-14(a)/15d-14(a) Certification of Marlo M. Cormier*
32.1
Section 1350 Certification of Denise Paulonis*
32.2
Section 1350 Certification of Marlo M. Cormier*
101
The following financial information from our Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2021, 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 Stockholders’ Equity; (v) the Condensed Consolidated Statements of Cash Flows; and (vi) the Notes to Condensed Consolidated Financial Statements.
104
The cover page from our Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2021, 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 2, 2022
By:
/s/ Marlo M. Cormier
Marlo M. Cormier
Senior Vice President, Chief Financial Officer
For the Registrant and as its Principal Financial Officer
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