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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED:
-OR-
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File No.
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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(Address of principal executive offices) |
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(
(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 class Trading Symbol Name of each exchange on which registered
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.
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).
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.
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☒ |
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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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
As of April 30, 2021, there were
TABLE OF CONTENTS
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5 |
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Item 2. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations |
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Item 3. Quantitative And Qualitative Disclosures About Market Risk |
23 |
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25 |
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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, 2020, 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 and annual financial results and other important information are available by calling our Investor Relations Department at (940) 297-3877.
We maintain a website at www.sallybeautyholdings.com where investors and other interested parties may obtain, free of charge, press releases and other information as well as gain access to our periodic filings with the Securities and Exchange Commission (“SEC”). The information contained on this website should not be considered to be a part of this or any other report filed with or furnished to the SEC.
4
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.
The following condensed consolidated balance sheets as of March 31, 2021, and September 30, 2020, the condensed consolidated statements of earnings, condensed consolidated statements of comprehensive income (loss) and the condensed consolidated statements of stockholders’ equity (deficit) for the three and six months ended March 31, 2021 and 2020, and the condensed consolidated statements of cash flows for the six months ended March 31, 2021 and 2020, are those of Sally Beauty Holdings, Inc. and its subsidiaries.
5
SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except par value data)
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March 31, 2021 |
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September 30, 2020 |
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(Unaudited) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Trade accounts receivable, net |
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Accounts receivable, other |
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Inventory |
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Other current assets |
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Total current assets |
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Property and equipment, net of accumulated depreciation of $
March 31, 2021, and $
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Operating lease assets |
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Goodwill |
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Intangible assets, excluding goodwill, net of accumulated amortization of
$
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Other assets |
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Total assets |
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$ |
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$ |
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Liabilities and Stockholders’ Equity |
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Current liabilities: |
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Current maturities of long-term debt |
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$ |
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$ |
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Accounts payable |
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Accrued liabilities |
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Current operating lease liabilities |
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Income taxes payable |
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Total current liabilities |
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Long-term debt |
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Long-term operating lease liabilities |
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Other liabilities |
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Deferred income tax liabilities, net |
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Total liabilities |
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Stockholders’ equity: |
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Common stock, $
March 31, 2021, and September 30, 2020, respectively |
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Preferred stock, $
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— |
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— |
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Additional paid-in capital |
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Accumulated earnings |
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Accumulated other comprehensive loss, net of tax |
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(
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(
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity |
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$ |
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$ |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
6
SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings
(In thousands, except per share data)
(Unaudited)
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Three Months Ended |
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Six Months Ended |
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March 31, |
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March 31, |
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2021 |
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2020 |
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2021 |
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2020 |
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Net sales |
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$ |
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$ |
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$ |
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$ |
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Cost of goods sold |
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Gross profit |
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Selling, general and administrative expenses |
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Restructuring |
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Operating earnings |
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Interest expense |
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Earnings before provision for income taxes |
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Provision for income taxes |
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Net earnings |
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$ |
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$ |
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$ |
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$ |
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Earnings per share: |
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Basic |
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$ |
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$ |
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$ |
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$ |
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Diluted |
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$ |
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$ |
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$ |
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$ |
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Weighted-average shares: |
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Basic |
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Diluted |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
7
SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
(Unaudited)
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Three Months Ended |
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Six Months Ended |
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March 31, |
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March 31, |
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2021 |
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2020 |
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2021 |
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2020 |
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Net earnings |
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$ |
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$ |
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$ |
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$ |
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Other comprehensive income (loss): |
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Foreign currency translation adjustments |
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(
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) |
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(
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) |
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(
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) |
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Interest rate caps, net of tax |
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- |
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(
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) |
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Foreign exchange contracts, net of tax |
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(
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) |
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Other comprehensive income (loss), net of tax |
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(
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(
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) |
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(
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) |
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Total comprehensive income (loss) |
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$ |
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$ |
(
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) |
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$ |
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$ |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
8
SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders’ Equity (Deficit)
(In thousands)
(Unaudited)
|
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Accumulated |
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Additional |
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Other |
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Total |
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|||
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Common Stock |
Paid-in |
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Accumulated |
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Comprehensive |
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Stockholders’ |
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Shares |
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Amount |
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Capital |
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Earnings |
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Loss |
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Equity |
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||||||
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Balance at September 30, 2020 |
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$ |
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$ |
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$ |
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$ |
(
|
) |
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$ |
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Net earnings |
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— |
|
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— |
|
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— |
|
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— |
|
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Other comprehensive income |
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— |
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— |
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— |
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— |
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Share-based compensation |
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— |
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— |
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— |
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— |
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Stock issued for equity awards |
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(
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) |
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— |
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— |
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(
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) |
|
Balance at December 31, 2020 |
|
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$ |
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$ |
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$ |
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$ |
(
|
) |
|
$ |
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Net earnings |
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— |
|
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— |
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— |
|
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|
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— |
|
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Other comprehensive loss |
|
— |
|
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— |
|
|
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— |
|
|
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— |
|
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(
|
) |
|
|
(
|
) |
|
Share-based compensation |
|
— |
|
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|
— |
|
|
|
|
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— |
|
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— |
|
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Stock issued for equity awards |
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— |
|
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— |
|
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Balance at March 31, 2021 |
|
|
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$ |
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$ |
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$ |
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$ |
(
|
) |
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$ |
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Accumulated |
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Additional |
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Other |
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Total |
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|||
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Common Stock |
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Paid-in |
|
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Accumulated |
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Comprehensive |
|
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|
Stockholders’ |
|
||||||||||||||
|
|
Shares |
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Amount |
|
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Capital |
|
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|
|
Earnings |
|
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|
Loss |
|
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|
Equity (Deficit) |
|
||||||
|
Balance at September 30, 2019 |
|
|
|
|
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|
$ |
|
|
|
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$ |
— |
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$ |
|
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|
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|
$ |
(
|
) |
|
|
|
$ |
(
|
) |
|
Cumulative effect of ASC 842 adoption |
|
— |
|
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— |
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|
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— |
|
|
|
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(
|
) |
|
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|
|
— |
|
|
|
|
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(
|
) |
|
Net earnings |
|
— |
|
|
|
|
|
— |
|
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— |
|
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|
|
|
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— |
|
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|
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Other comprehensive income |
|
— |
|
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— |
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— |
|
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— |
|
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|
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|
Repurchases and cancellations of common stock |
|
(
|
) |
|
|
|
|
(
|
) |
|
|
|
|
(
|
) |
|
|
|
|
(
|
) |
|
|
|
|
— |
|
|
|
|
|
(
|
) |
|
Share-based compensation |
|
— |
|
|
|
|
|
— |
|
|
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|
|
|
|
|
|
— |
|
|
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|
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— |
|
|
|
|
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|
Stock issued for equity awards |
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|
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|
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|
|
|
|
|
|
— |
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
Balance at December 31, 2019 |
|
|
|
|
|
|
$ |
|
|
|
|
|
$ |
— |
|
|
|
|
$ |
|
|
|
|
|
$ |
(
|
) |
|
|
|
$ |
|
|
|
Net earnings |
|
— |
|
|
|
|
|
— |
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
Other comprehensive loss |
|
— |
|
|
|
|
|
— |
|
|
|
|
|
— |
|
|
|
|
|
— |
|
|
|
|
|
(
|
) |
|
|
|
|
(
|
) |
|
Repurchases and cancellations of common stock |
|
(
|
) |
|
|
|
|
(
|
) |
|
|
|
|
(
|
) |
|
|
|
|
(
|
) |
|
|
|
|
— |
|
|
|
|
|
(
|
) |
|
Share-based compensation |
|
— |
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
Stock issued for equity awards |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
Balance at March 31, 2020 |
|
|
|
|
|
|
$ |
|
|
|
|
|
$ |
— |
|
|
|
|
$ |
|
|
|
|
|
$ |
(
|
) |
|
|
|
$ |
(
|
) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
9
SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
|
|
|
Six Months Ended March 31, |
|
|||||
|
|
|
2021 |
|
|
2020 |
|
||
|
Cash Flows from Operating Activities: |
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
|
|
|
$ |
|
|
|
Adjustments to reconcile net earnings to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
Share-based compensation expense |
|
|
|
|
|
|
|
|
|
Amortization of deferred financing costs |
|
|
|
|
|
|
|
|
|
Loss (gain) on early extinguishment of debt |
|
|
|
|
|
|
(
|
) |
|
Loss (gain) on disposal of equipment and other property |
|
|
|
|
|
|
(
|
) |
|
Deferred income taxes |
|
|
(
|
) |
|
|
|
|
|
Changes in (exclusive of effects of acquisitions): |
|
|
|
|
|
|
|
|
|
Trade accounts receivable |
|
|
(
|
) |
|
|
|
|
|
Accounts receivable, other |
|
|
(
|
) |
|
|
|
|
|
Inventory |
|
|
(
|
) |
|
|
|
|
|
Other current assets |
|
|
|
|
|
|
(
|
) |
|
Other assets |
|
|
(
|
) |
|
|
|
|
|
Operating leases, net |
|
|
(
|
) |
|
|
— |
|
|
Accounts payable and accrued liabilities |
|
|
|
|
|
|
(
|
) |
|
Income taxes payable |
|
|
|
|
|
|
(
|
) |
|
Other liabilities |
|
|
(
|
) |
|
|
|
|
|
Net cash provided by operating activities |
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
|
|
Payments for property and equipment, net of proceeds |
|
|
(
|
) |
|
|
(
|
) |
|
Acquisitions, net of cash acquired |
|
|
(
|
) |
|
|
(
|
) |
|
Net cash used by investing activities |
|
|
(
|
) |
|
|
(
|
) |
|
Cash Flows from Financing Activities: |
|
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt |
|
|
— |
|
|
|
|
|
|
Repayments of long-term debt |
|
|
(
|
) |
|
|
(
|
) |
|
Payments for common stock repurchased |
|
|
— |
|
|
|
(
|
) |
|
Proceeds from equity awards |
|
|
|
|
|
|
|
|
|
Net cash (used) provided by financing activities |
|
|
(
|
) |
|
|
|
|
|
Effect of foreign exchange rate changes on cash and cash equivalents |
|
|
|
|
|
|
(
|
) |
|
Net (decrease) increase in cash and cash equivalents |
|
|
(
|
) |
|
|
|
|
|
Cash and cash equivalents, beginning of period |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
|
|
|
$ |
|
|
|
Supplemental Cash Flow Information: |
|
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
|
|
|
$ |
|
|
|
Income taxes paid |
|
$ |
|
|
|
$ |
|
|
|
Capital expenditures incurred but not paid |
|
$ |
|
|
|
$ |
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
10
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The condensed consolidated interim financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and pursuant to the rules and regulations of the SEC. Accordingly, certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC, although we believe that the disclosures included herein 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, 2020. 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 March 31, 2021 and September 30, 2020, and our consolidated results of operations, consolidated comprehensive income, and consolidated statements of stockholders’ equity for the three and six months ended March 31, 2021 and 2020, our consolidated cash flows for the six months ended March 31, 2021 and 2020.
Our operating results for the three and six months ended March 31, 2021, may not be indicative of the results that may be expected for the full fiscal year ending September 30, 2021, in particular as a result of the uncertainty around the continuing effects of the COVID-19 pandemic on future periods. Due to the uncertainty over the duration and severity of the economic and operational impacts of COVID-19, the adverse impact of the pandemic may continue further into our fiscal year 2021 and possibly beyond, and it may be material.
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. 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. Recent Accounting Pronouncements
In December 2019, the FASB issued ASU No. 2019-12 which simplifies the accounting for income taxes by removing an exception related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period with year to date losses and the recognition of deferred tax liabilities for outside basis differences. Additionally, the update clarifies and simplifies other areas of ASC 740, Income Taxes . For public companies, the amendments in the update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted, but all amendments must be adopted at once. The amendments in this update have different adoption methods including prospective basis, retrospective basis, and a modified retrospective basis dependent on the specific change. We are currently evaluating the impact of this update, but based on our preliminary assessment we do not believe that adoption of this update will have a material impact on our results of operations or financial position.
4. 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 for the period were as follows (in thousands):
|
September 30, 2020 |
|
|
|
|
|
$ |
|
|
|
Loyalty points and gift cards issued but not redeemed, net of estimated breakage |
|
|
|
|
||||
|
Revenue recognized from beginning liability |
|
|
(
|
) |
||||
|
March 31, 2021 |
|
|
|
|
|
$ |
|
|
See Note 11, Business Segments , 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 |
|
March 31, 2021 |
|
|
September 30, 2020 |
|
||
|
Financial Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents |
|
Cash and cash equivalents |
|
Level 1 |
|
$ |
— |
|
|
$ |
|
|
|
Foreign exchange contracts |
|
Other current assets |
|
Level 2 |
|
|
|
|
|
|
— |
|
|
Interest rate caps |
|
Other assets |
|
Level 2 |
|
|
|
|
|
|
|
|
|
Total assets |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
. |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
Accrued liabilities |
|
Level 2 |
|
$ |
|
|
|
$ |
— |
|
Other fair value disclosures
|
|
|
|
|
March 31, 2021 |
|
|
September 30, 2020 |
|
||||||||||
|
|
|
Fair Value Hierarchy Level |
|
Carrying Value |
|
|
Fair Value |
|
|
Carrying Value |
|
|
Fair Value |
|
||||
|
Long-term debt, excluding capital leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior notes |
|
Level 1 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Term loan B |
|
Level 2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
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.
6. Stockholders’ Equity
Share Repurchases
In August 2017, our Board of Directors approved a share repurchase program authorizing the Company to repurchase up to $
Information related to our shares repurchased and subsequently retired were as follows (in thousands):
|
|
|
Three Months Ended March 31, |
|
|
Six Months Ended March 31, |
|
||||||||||
|
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
|
Number of shares repurchased |
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
Total cost of share repurchased |
|
$ |
— |
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
Accumulated Other Comprehensive Loss
The change in accumulated other comprehensive loss (“AOCL”) was as follows (in thousands):
|
|
|
Foreign Currency Translation Adjustments |
|
|
Interest Rate Caps |
|
|
Foreign Exchange Contracts |
|
|
Total |
|
|
||||
|
Balance at September 30, 2020 |
|
$ |
(
|
) |
|
$ |
(
|
) |
|
$ |
|
|
|
$ |
(
|
) |
|
|
Other comprehensive income (loss) before reclassification, net of tax |
|
|
|
|
|
|
(
|
) |
|
|
(
|
) |
|
|
|
|
|
|
Reclassification to net earnings, net of tax |
|
|
— |
|
|
|
|
|
|
|
(
|
) |
|
|
(
|
) |
|
|
Balance at March 31, 2021 |
|
$ |
(
|
) |
|
$ |
(
|
) |
|
$ |
(
|
) |
|
$ |
(
|
) |
|
The tax impact for the changes in other comprehensive loss and the reclassifications to net earnings was not material.
12
7. Weighted-Average Shares
The following table sets forth the reconciliation of basic and diluted weighted-average shares (in thousands):
|
|
|
Three Months Ended March 31, |
|
|
Six Months Ended March 31, |
|
||||||||||
|
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
|
Weighted-average basic shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option and stock award programs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average diluted shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive options excluded from our computation of diluted shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8. Goodwill and Intangible Assets
During the three months ended March 31, 2021, we completed our annual assessment for impairment of goodwill and other intangible assets. For goodwill, we used a qualitative analysis and our actual and forecasted results are exceeding the estimates from the last quantitative test
.
For the three months ended March 31, 2021 and 2020, amortization expense related to other intangible assets was $
Additionally during the six months ended March 31, 2021, goodwill increased $
9. Short-term Borrowings and Long-term Debt
At March 31, 2021, there were
During the three months ended March 31, 2021, we paid the remaining $
Please see Note 13, Subsequent Event , for further information about our debt.
Covenants
The agreements governing our ABL facility, term loan B and the senior notes contain a customary covenant package that places restrictions on the disposition of assets, the granting of liens and security interests, the prepayment of certain indebtedness, and other matters with customary events of default, including customary cross-default and/or cross-acceleration provisions. As of March 31, 2021, we were in compliance with all debt covenants and all the net assets of our consolidated subsidiaries were unrestricted from transfer.
13
10. Derivative Instruments and Hedging Activities
During the six months ended March 31, 2021, we did
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.
|
Notional Currency |
|
Notional Amount |
|
|
|
Euro |
|
$ |
|
|
|
Mexican Peso |
|
|
|
|
|
Canadian Dollar |
|
|
|
|
|
Total |
|
$ |
|
|
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 and six months ended March 31, 2021, we recognized gains of $
Interest Rate Caps
In July 2017, we purchased
The effects of our interest rate caps on our condensed consolidated statements of earnings were not material for the three and six months ended March 31, 2021.
11. Business Segments
Segment data for the three and six months ended March 31, 2021 and 2020, is as follows (in thousands):
|
|
|
Three Months Ended March 31, |
|
|
Six Months Ended March 31, |
|
||||||||||
|
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
|
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sally Beauty Supply ("SBS") |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Beauty Systems Group ("BSG") |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Earnings before provision for income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBS |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
BSG |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated operating earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before provision for income taxes |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Sales between segments, which are eliminated in consolidation, were not material during the three and six months ended March 31, 2021 and 2020.
14
Disaggregation of net sales by segment
|
|
|
Three Months Ended March 31, |
|
|
Six Months Ended March 31, |
|
||||||||||
|
SBS |
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
|
Hair color |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
Hair care |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
Skin and nail care |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
Styling tools |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
Salon supplies and accessories |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
Textured hair products |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
Other beauty items |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
Total |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
Three Months Ended March 31, |
|
|
Six Months Ended March 31, |
|
||||||||||
|
BSG |
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
|
Hair color |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
Hair care |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
Skin and nail care |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
Styling tools |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
Other beauty items |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
Promotional items |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
Total |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
The following tables disaggregate our segment revenue by sales channels:
|
|
|
Three Months Ended March 31, |
|
|
Six Months Ended March 31, |
|
||||||||||
|
SBS |
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
|
Company-operated stores |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
E-commerce |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
Franchise stores |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
Total |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
Three Months Ended March 31, |
|
|
Six Months Ended March 31, |
|
||||||||||
|
BSG |
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
|
Company-operated stores |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
Distributor sales consultants |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
E-commerce |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
Franchise stores |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
Total |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
12. Income Tax
For the three months ended March 31, 2021 and 2020, our effective tax rates were
15
Refer to the following rate reconciliation for more details relating to the period over period differences in the effective tax rate:
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
March 31, |
|
|
March 31, |
|
||||||||||
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
|
U.S. federal statutory income tax rate |
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
State income taxes, net of federal tax benefit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign operations |
|
(
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign valuation allowances |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other, net |
|
— |
|
|
|
(
|
) |
|
|
|
|
|
|
|
|
|
Effective tax rate |
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
13. Subsequent Event
On April 1, 2021, we called the entire outstanding balance of $
16
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, 2020, and our other filings with the Securities and Exchange Commission, including the Risk Factors sections therein, and information contained elsewhere in this Quarterly Report, including the condensed consolidated interim financial statements and notes to those financial statements. 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, in particular as a result of the uncertainty of the continued effects of the COVID-19 pandemic on future periods.
Highlights for the Three Months Ended March 31, 2021
|
|
• |
During the three months ended March 31, 2021, we experienced further disruption to sales from COVID-19, including mandated store closures in international markets and salon closures in California in January; |
|
|
• |
Consolidated net sales for the three months ended March 31, 2021, increased $55.3 million, or 6.3%, to $926.3 million, compared to the three months ended March 31, 2020; |
|
|
• |
Consolidated same store sales increased 6.5% for the three months ended March 31, 2021, while our global e-commerce sales increased 56%, compared to the three months ended March 31, 2020; |
|
|
• |
Consolidated gross profit for the three months ended March 31, 2021, increased $37.5 million, or 8.7%, to $467.2 million, compared to the three months ended March 31, 2020. Gross margin increased 110 basis points to 50.4% for the three months ended March 31, 2021, compared to the three months ended March 31, 2020; |
|
|
• |
Consolidated operating earnings for the three months ended March 31, 2021, increased $32.2 million, or 74.5%, to $75.5 million, compared to the three months ended March 31, 2020. Operating margin increased 320 basis points to 8.2% for the three months ended March 31, 2021, compared to the three months ended March 31, 2020; |
|
|
• |
Consolidated net earnings for the three months ended March 31, 2021, increased $24.9 million, or 186.6%, to $38.3 million, compared to the three months ended March 31, 2020; |
|
|
• |
For the three months ended March 31, 2021, we had diluted earnings per share of $0.34, compared to $0.12 for the three months ended March 31, 2020; and |
|
|
• |
Cash provided by operations was $92.6 million for the three months ended March 31, 2021, compared to $13.8 million for the three months ended March 31, 2020. |
Impact of COVID-19 on Our Business and Business Strategy Update
As mentioned above, we continued to see disruption resulting from COVID-19 due to mandated store closures in parts of our international markets and salon closures in California in January. However, we did experience an increase in sales driven primarily by the favorable impact in the U.S. from improving consumer confidence, government stimulus payments and the easing of COVID-19 restrictions in the U.S. salons.
The effects of the COVID-19 pandemic and related responses continued to impact our first two quarters of fiscal year 2021 results of operations and cash flows. Additionally, due to the continued uncertainty over the duration and severity of the economic and operational impacts of COVID-19, the adverse impact of the pandemic may continue further into our fiscal year 2021 and possibly beyond, and it may be material.
Furthermore, we continue to make progress against our key business initiatives, which includes leveraging and optimizing our elevated digital capabilities, growing our customer engagement and loyalty, and implementing the final steps in our successful transformation journey, which is remains on track to be substantially completed by the end of the year.
17
Overview
Key Operating Metrics
The following table sets forth, for the periods indicated, information concerning key measures we rely on to evaluate our operating performance (dollars in thousands):
|
|
|
Three Months Ended March 31, |
|
|
Six Months Ended March 31, |
|
||||||||||||||||||||||||||
|
|
|
2021 |
|
|
2020 |
|
|
Increase (Decrease) |
|
|
2021 |
|
|
2020 |
|
|
Increase (Decrease) |
|
||||||||||||||
|
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBS |
|
$ |
542,664 |
|
|
$ |
519,509 |
|
|
$ |
23,155 |
|
|
|
4.5 |
% |
|
$ |
1,090,334 |
|
|
$ |
1,088,657 |
|
|
$ |
1,677 |
|
|
|
0.2 |
% |
|
BSG |
|
|
383,664 |
|
|
|
351,514 |
|
|
|
32,150 |
|
|
|
9.1 |
% |
|
|
772,016 |
|
|
|
762,574 |
|
|
|
9,442 |
|
|
|
1.2 |
% |
|
Consolidated |
|
$ |
926,328 |
|
|
$ |
871,023 |
|
|
$ |
55,305 |
|
|
|
6.3 |
% |
|
$ |
1,862,350 |
|
|
$ |
1,851,231 |
|
|
$ |
11,119 |
|
|
|
0.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBS |
|
$ |
317,161 |
|
|
$ |
289,067 |
|
|
$ |
28,094 |
|
|
|
9.7 |
% |
|
$ |
632,973 |
|
|
$ |
598,057 |
|
|
$ |
34,916 |
|
|
|
5.8 |
% |
|
BSG |
|
|
150,068 |
|
|
|
140,690 |
|
|
|
9,378 |
|
|
|
6.7 |
% |
|
|
304,980 |
|
|
|
306,548 |
|
|
|
(1,568 |
) |
|
|
(0.5 |
)% |
|
Consolidated |
|
$ |
467,229 |
|
|
$ |
429,757 |
|
|
$ |
37,472 |
|
|
|
8.7 |
% |
|
$ |
937,953 |
|
|
$ |
904,605 |
|
|
$ |
33,348 |
|
|
|
3.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment gross margin: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBS |
|
|
58.4 |
% |
|
|
55.6 |
% |
|
280 |
|
|
bps |
|
|
|
58.1 |
% |
|
|
54.9 |
% |
|
320 |
|
|
bps |
|
||||
|
BSG |
|
|
39.1 |
% |
|
|
40.0 |
% |
|
(90) |
|
|
bps |
|
|
|
39.5 |
% |
|
|
40.2 |
% |
|
(70) |
|
|
bps |
|
||||
|
Consolidated |
|
|
50.4 |
% |
|
|
49.3 |
% |
|
110 |
|
|
bps |
|
|
|
50.4 |
% |
|
|
48.9 |
% |
|
150 |
|
|
bps |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBS |
|
$ |
100,063 |
|
|
$ |
56,373 |
|
|
$ |
43,690 |
|
|
|
77.5 |
% |
|
$ |
195,191 |
|
|
$ |
130,598 |
|
|
$ |
64,593 |
|
|
|
49.5 |
% |
|
BSG |
|
|
47,843 |
|
|
|
41,039 |
|
|
|
6,804 |
|
|
|
16.6 |
% |
|
|
96,415 |
|
|
|
103,473 |
|
|
|
(7,058 |
) |
|
|
(6.8 |
)% |
|
Segment operating earnings |
|
|
147,906 |
|
|
|
97,412 |
|
|
|
50,494 |
|
|
|
51.8 |
% |
|
|
291,606 |
|
|
|
234,071 |
|
|
|
57,535 |
|
|
|
24.6 |
% |
|
Unallocated expenses and restructuring (a) |
|
|
72,395 |
|
|
|
54,147 |
|
|
|
18,248 |
|
|
|
33.7 |
% |
|
|
111,773 |
|
|
|
96,419 |
|
|
|
15,354 |
|
|
|
15.9 |
% |
|
Consolidated operating earnings |
|
|
75,511 |
|
|
|
43,265 |
|
|
|
32,246 |
|
|
|
74.5 |
% |
|
|
179,833 |
|
|
|
137,652 |
|
|
|
42,181 |
|
|
|
30.6 |
% |
|
Interest expense |
|
|
23,883 |
|
|
|
21,644 |
|
|
|
2,239 |
|
|
|
10.3 |
% |
|
|
49,861 |
|
|
|
43,185 |
|
|
|
6,676 |
|
|
|
15.5 |
% |
|
Earnings before provision for income taxes |
|
|
51,628 |
|
|
|
21,621 |
|
|
|
30,007 |
|
|
|
138.8 |
% |
|
|
129,972 |
|
|
|
94,467 |
|
|
|
35,505 |
|
|
|
37.6 |
% |
|
Provision for income taxes |
|
|
13,316 |
|
|
|
8,253 |
|
|
|
5,063 |
|
|
|
61.3 |
% |
|
|
34,469 |
|
|
|
27,884 |
|
|
|
6,585 |
|
|
|
23.6 |
% |
|
Net earnings |
|
$ |
38,312 |
|
|
$ |
13,368 |
|
|
$ |
24,944 |
|
|
|
186.6 |
% |
|
$ |
95,503 |
|
|
$ |
66,583 |
|
|
$ |
28,920 |
|
|
|
43.4 |
% |
|
|
|
. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of stores at end-of-period (including franchises): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
SBS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,625 |
|
|
|
3,701 |
|
|
|
(76 |
) |
|
|
(2.1 |
)% |
|
BSG |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,379 |
|
|
|
1,374 |
|
|
|
5 |
|
|
|
0.4 |
% |
|
Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,004 |
|
|
|
5,075 |
|
|
|
(71 |
) |
|
|
(1.4 |
)% |
|
Same store sales growth (decline) (b) : |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
SBS |
|
|
4.9 |
% |
|
|
(7.0 |
)% |
|
1,190 |
|
|
bps |
|
|
|
0.7 |
% |
|
|
(4.0 |
)% |
|
470 |
|
|
bps |
|
||||
|
BSG |
|
|
9.9 |
% |
|
|
(7.4 |
)% |
|
1,730 |
|
|
bps |
|
|
|
2.1 |
% |
|
|
(3.0 |
)% |
|
510 |
|
|
bps |
|
||||
|
Consolidated |
|
|
6.5 |
% |
|
|
(7.1 |
)% |
|
1,360 |
|
|
bps |
|
|
|
1.2 |
% |
|
|
(3.6 |
)% |
|
480 |
|
|
bps |
|
||||
|
(a) |
Unallocated expenses consist of corporate and shared costs and are included in selling, general and administrative expenses in our consolidated statements of earnings. |
|
(b) |
For the purpose of calculating our same store sales metrics, we compare the current period sales for stores open for 14 months or longer as of the last day of a month with the sales for these stores for the comparable period in the prior fiscal year. Our same store sales are calculated in constant dollars and include e-commerce sales from certain digital platforms, but do not generally include the sales from stores relocated until 14 months after the relocation. The sales from stores acquired are excluded from our same store sales calculation until 14 months after the acquisition. |
18
Results of Operations
The Three Months Ended March 31, 2021, compared to the Three Months Ended March 31, 2020
Net Sales
Consolidated . Consolidated net sales include a positive impact from changes in foreign currency exchange rates of $7.5 million, or 0.9% of consolidated net sales.
SBS . The increase in net sales for SBS was primarily driven by the following (in thousands):
|
Same store sales |
|
$ |
24,295 |
|
|
Other (a) |
|
|
(6,758 |
) |
|
Foreign currency exchange |
|
|
5,618 |
|
|
Total |
|
$ |
23,155 |
|
|
|
(a) |
Other consists of non-store sales, which include catalog and internet sales of our Sinelco Group subsidiaries. |
SBS experienced higher unit volume primarily due to temporary closure of all of our customer-facing store operations in the U.S. and Canada due to the effects of COVID-19 in the prior year, the expansion of our digital commerce capabilities and the favorable impact in the U.S. from improving consumer confidence. For the three months ended March 31, 2021, there was minimal impact from temporary closures of certain customer-facing store operations as a result of COVID-19. Additionally, SBS experienced an increase in average unit prices, resulting from a change in product mix to higher-priced products.
BSG . The increase in net sales for BSG was primarily driven by the following (in thousands):
|
Same store sales |
|
$ |
23,845 |
|
|
Distributor sales consultants |
|
|
3,309 |
|
|
Other (a) |
|
|
3,163 |
|
|
Foreign currency exchange |
|
|
1,833 |
|
|
Total |
|
$ |
32,150 |
|
|
|
(a) |
Other consists of stores outside same store sales, included recently acquired businesses, and sales to our franchisees. |
BSG experienced an increase in average unit prices and higher unit volume. The increase in average unit price was driven primarily from a decrease in promotional activity. The higher unit volume was primarily due to temporary closure of all of our customer-facing store operations in the U.S. and Canada due to the effects of COVID-19 in the prior year and higher operating capacities in salons. During the three months ended March 31, 2021, we experienced minimal temporary store closures and restricted capacity of certain customer-facing store operations in various markets in the U.S. and Canada due to the effects of COVID-19.
Gross Profit
Consolidated . Consolidated gross profit increased for the three months ended March 31, 2021, due to higher net sales in both segments and a higher gross margin in SBS, partially offset by a lower gross margin in BSG.
SBS . SBS’s gross profit increased for the three months ended March 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 fewer promotions, partially offset by the write-down of personal-protective equipment inventory.
BSG . BSG’s gross profit increased for the three months ended March 31, 2021, as a result of an increase in net sales, partially offset by a lower gross margin. BSG’s gross margin decreased primarily as a result of the write-down of personal-protective equipment inventory.
Selling, General and Administrative Expenses
Consolidated . Consolidated selling, general and administrative expenses increased primarily as a result of donation expense related to personal-protective equipment inventory and incremental costs from businesses acquired in the past 12 months. These increases were partially offset by a decrease in advertising and field labor expenses. Consolidated selling, general and administrative expenses, as a percentage of net sales, decreased 180 basis points to 42.2% for the three months ended March 31, 2021, due to the increase in sales.
SBS . SBS’s selling, general and administrative expenses decreased $15.6 million, or 6.7%, for the three months ended March 31, 2021. The decrease was driven by lower compensation and compensation-related expenses of $8.4 million and lower advertising expenses of $8.3 million.
BSG . BSG’s selling, general and administrative expenses increased $2.6 million, or 2.6%, for the three months ended March 31, 2021. The increase was driven primarily by an increase in shipping costs of $1.8 million, resulting primarily from increased e-commerce
19
volume, and incremental expenses from recently acquired businesses in the past twelve months. These increases were partially offset by lower compensation and compensation-related expenses of $1.3 million.
Unallocated. Unallocated selling, general and administrative expenses, which represent certain corporate costs that have not been charged to our reporting segments, increased $20.8 million, or 40.8%, for the three months ended March 31, 2021, primarily due to higher COVID-19 expense in the current period mainly from the donation expense related to personal-protective equipment inventory of $31.2 million, compared to COVID-19 expense of $14.7 million last year, and higher compensation and compensation-related expenses of $7.9 million as a result of employees furloughed in the prior year.
Restructuring
For the three months ended March 31, 2021, we incurred restructuring charges of $0.6 million primarily in connection with our previously communicated Project Surge and the Transformation Plan. For the three months ended March 31, 2020, we recognized charges of $3.2 million in connection with our previously communicated Project Surge and the Transformation Plan.
Interest Expense
The increase in interest expense is primarily from incremental interest on the senior notes issued in April 2020 of $6.6 million, partially offset by the impact of lower interest rates on our term loan B variable tranche of $1.7 million and the repayment of our term loan B fixed tranche in January 2021 of $3.1 million. See “Liquidity and Capital Resources” below for additional information.
Provision for Income Taxes
The effective tax rates were 25.8% and 38.2%, for the three months ended March 31, 2021, and 2020, respectively. The higher effective tax rate in the prior year period was primarily driven by the establishment of a valuation allowance for a foreign subsidiary and increased foreign losses, as compared to the current period.
The Six Months Ended March 31, 2021, compared to the Six Months Ended March 31, 2020
Net Sales
Consolidated . Consolidated net sales include a positive impact from changes in foreign currency exchange rates of $11.0 million, or 0.6% of consolidated net sales.
SBS . The increase in net sales for SBS was primarily driven by the following (in thousands):
|
Same store sales |
|
$ |
6,784 |
|
|
Other (a) |
|
|
(13,806 |
) |
|
Foreign currency exchange |
|
|
8,699 |
|
|
Total |
|
$ |
1,677 |
|
|
|
(a) |
Other consists of non-store sales, which include catalog and internet sales of our Sinelco Group subsidiaries. |
SBS experienced an increase in average unit prices, resulting from a reduction in promotional activity and consumers selecting higher-priced products. The increase in average unit prices was partially offset by lower unit volume primarily due to the impact of the restrictions in the U.S. and Canada due to the effects of COVID-19 along with fewer company-operated stores. For the six months ended March 31, 2021, various markets globally where impacted by temporary closures of certain customer-facing store operations and reduced capacity.
BSG . The increase in net sales for BSG was primarily driven by the following (in thousands):
|
Same store sales |
|
$ |
11,050 |
|
|
Distributor sales consultants |
|
|
(11,957 |
) |
|
Other (a) |
|
|
8,093 |
|
|
Foreign currency exchange |
|
|
2,256 |
|
|
Total |
|
$ |
9,442 |
|
|
|
(a) |
Other consists of stores outside same store sales, included recently acquired businesses, and sales to our franchisees. |
BSG experienced an increase in average unit prices and a higher unit volume. The increase in the average unit price was primarily driven by lower promotional activity. The higher unit volume was primarily due to the impact of the temporary closure of certain customer-facing store operations in the U.S. and Canada due to the effects of COVID-19 in the prior period. For the six months ended March 31, 2021, we experienced additional temporary closures and restricted capacity of certain customer-facing store operations in various markets in the U.S. and Canada, as well as salon closures in parts of California and Canada due to the effects of COVID-19.
20
Gross Profit
Consolidated . Consolidated gross profit increased for the six months ended March 31, 2021, due to higher net sales in both segments and a higher gross margin in SBS, partially offset by a lower gross margin in BSG.
SBS . SBS’s gross profit increased for the six months ended March 31, 2021, as a result of increased net sales and a higher gross margin. SBS’s gross margin increased primarily as a result of fewer promotions, partially offset by the write-down of personal-protective equipment inventory.
BSG . BSG’s gross profit decreased for the six months ended March 31, 2021, as a result of a lower gross margin, partially offset by increased net sales. BSG’s gross margin decreased primarily as a result of the write-down of personal-protective equipment inventory during our second fiscal quarter, partially offset by fewer promotions.
Selling, General and Administrative Expenses
Consolidated . Consolidated selling, general and administrative expenses decreased primarily as a result of cost saving initiatives in response to COVID-19, including savings associated with lower compensation and compensation-related expenses and advertising expenses, and the suspension or elimination of all non-critical projects and non-essential spend. These decreases were partially offset by donation expense related to personal-protective equipment inventory, increased shipping costs resulting from increased e-commerce volume and incremental costs from businesses acquired in the past 12 months. Consolidated selling, general and administrative expenses, as a percentage of net sales, increased 40 basis points to 40.7% for the six months ended March 31, 2021, due to the increase in sales.
SBS . SBS’s selling, general and administrative expenses decreased $29.7 million, or 6.3%, for the six months ended March 31, 2021. The decrease was driven by lower compensation and compensation-related expenses of $19.2 million and lower advertising expenses of $13.2 million. These decreases were partially offset by an increase in shipping costs of $4.2 million, resulting primarily from increased e-commerce volume.
BSG . BSG’s selling, general and administrative expenses increased $5.5 million, or 2.7%, for the six months ended March 31, 2021. The increase was driven primarily by an increase in shipping costs of $4.7 million, resulting primarily from increased e-commerce volume, and incremental expenses from recently acquired businesses in the past 12 months. These increases were partially offset by lower compensation and compensation-related expenses of $2.5 million.
Unallocated. Unallocated selling, general and administrative expenses, which represent certain corporate costs that have not been charged to our reporting segments, increased $20.2 million, or 22.3%, for the six months ended March 31, 2021, primarily due to higher COVID-19 expense in the current period mainly from the donation expense related to personal-protective equipment inventory of $31.2 million, compared to COVID-19 expense of $14.7 million last year, and higher compensation and compensation-related expenses of $10.5 million as a result of employees furloughed in the prior year.
Restructuring
For the six months ended March 31, 2021, we incurred restructuring charges of $0.9 million primarily in connection with the Project Surge and Transformation Plan. For the six months ended March 31, 2020, we recognized charges of $5.7 million in connection with Project Surge and the Transformation Plan.
Interest Expense
The increase in interest expense is primarily from incremental interest on the senior notes issued in April 2020 of $13.1 million, partially offset by the impact of the repayment of our term loan B fixed tranche in January 2021 of $4.0 million and lower interest rates on our term loan B variable tranche of $3.5 million. See “Liquidity and Capital Resources” below for additional information.
Provision for Income Taxes
The effective tax rates were 26.5% and 29.5%, for the six months ended March 31, 2021, and 2020, respectively. The higher effective tax rate in the prior year period was primarily driven by the establishment of a valuation allowance for a foreign subsidiary and increased foreign losses, as compared to the current period, which cannot be tax benefitted.
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 $278.3 million, to $591.4 million at March 31, 2021, compared to $869.7 million at September 30, 2020, resulting primarily from the reclassification of our 5.50% Senior Notes due 2023 (“2023 Senior Notes”) to current maturities of long-term debt.
21
At March 31, 2021 , cash and cash equivalents were $408.3 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, anticipated capital expenditures, including information technology upgrades and store remodels, and debt repayments over the next 12 months. Due to the improving COVID-19 conditions, we have shifted our focus to reducing our debt levels 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 opportunistic share repurchases. During the six months ended March 31, 2021, we did not borrow on our ABL facility. As of March 31, 2021, we had $496.9 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 six months ended March 31, 2021, we did not repurchase any common stock. As of March 31, 2021, we had authorization of approximately $726.1 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. While historically, the primary uses of cash have been for share repurchases, capital expenditures, repayments and servicing of long-term debt and acquisitions, we have shifted our focus in the short-term to reduce cash expenditures.
Net Cash Provided by Operating Activities
Net cash provided by operating activities during the six months ended March 31, 2021, increased $55.4 million to $131.6 million, compared to the six months ended March 31, 2020, mainly due to increased net income and the timing of inventory purchases and payments as we restock to new levels of demand.
Net Cash Used by Investing Activities
Net cash used by investing activities during the six months ended March 31, 2021, decreased $44.6 million to $29.3 million, compared to the six months ended March 31, 2020. This change was primarily a result of our focus on reduced capital expenditures.
Net Cash (Used) Provided by Financing Activities
Net cash used by financing activities during the six months ended March 31, 2021 resulted from the paydown of our term loan B fixed tranche. During the six months ended March 31, 2020, we had a source of cash from financing activities primarily from the borrowings on our ABL and the issuance of senior notes as a response to COVID-19.
Long-Term Debt and Guarantor Financial Information
At March 31, 2021, we had $1,600.0 million in debt, not including capital leases, unamortized debt issuance costs and debt discounts, in the aggregate, of $13.0 million. Our debt consisted of $1,177.4 million of senior notes outstanding and a term loan with an outstanding principal balance of $422.6 million. As of March 31, 2021, there were no outstanding borrowings under our ABL facility.
During the three months ended March 31, 2021, we paid the remaining $213.2 million of aggregate outstanding principal on our term loan B fixed tranche at par.
We are currently in compliance with the agreements and instruments governing our debt, including our financial covenants.
See Note 9, Short-term Borrowings and Long-term Debt , and Note 13, Subsequent Event , for more information on our debt.
Guarantor Financial Information
We are providing the following information in compliance with Rule 13-01 of Regulation S-X for guaranteed issued securities that have been registered under such regulation. Currently, our issued securities consist of the 5.625% Senior Notes due 2025 and the 2023 Senior Notes. These debt instruments were issued by our wholly-owned subsidiaries, Sally Holdings LLC and Sally Capital Inc. (the “Issuers”), under a shelf registration statement. See and Note 13, Subsequent Event , for more information on our 2023 Senior Notes.
These 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.
22
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 March 31, 2021 and September 30, 2020 (in thousands):
|
|
|
March 31, 2021 |
|
|
September 30, 2020 |
|
||
|
Inventory |
|
$ |
736,497 |
|
|
$ |
615,092 |
|
|
Intercompany receivable |
|
$ |
72,845 |
|
|
$ |
75,892 |
|
|
Current assets |
|
$ |
1,177,328 |
|
|
$ |
1,166,250 |
|
|
Total assets |
|
$ |
2,272,374 |
|
|
$ |
2,281,896 |
|
|
Current liabilities |
|
$ |
438,933 |
|
|
$ |
325,380 |
|
|
Total liabilities |
|
$ |
2,550,861 |
|
|
$ |
2,657,033 |
|
The following table presents the summarized statement of income information for six months ended March 31, 2021 (in thousands):
|
Net sales |
|
|
|
$ |
1,553,633 |
|
|
Gross profit |
|
|
|
$ |
787,895 |
|
|
Earnings before provision for income taxes |
|
|
|
$ |
114,872 |
|
|
Net earnings |
|
|
|
$ |
85,546 |
|
Contractual Obligations
There have been no material changes outside the ordinary course of our business in any of our contractual obligations since September 30, 2020, other than the extinguishment of our term loan B fixed tranche, as discussed above.
Off-Balance Sheet Financing Arrangements
At March 31, 2021, and September 30, 2020, 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, 2020.
Recent Accounting Pronouncements
See Note 3, Recent Accounting Pronouncements , 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, 2020. 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, 2020.
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 March 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.
23
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 March 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.
24
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
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, 2020, 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 6. Exhibits
|
Exhibit No. |
|
Description |
|
|
|
|
|
3.1 |
|
|
|
|
|
|
|
3.2 |
|
|
|
|
|
|
|
22 |
|
|
|
|
|
|
|
31.1 |
|
Rule 13a-14(a)/15d-14(a) Certification of Christian A. Brickman* |
|
|
|
|
|
31.2 |
|
|
|
|
|
|
|
32.1 |
|
|
|
|
|
|
|
32.2 |
|
|
|
|
|
|
|
101 |
|
The following financial information from our Quarterly Report on Form 10-Q for the fiscal quarter ended March 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 (Loss); (iv) the Condensed Consolidated Statements of Stockholders’ Equity (Deficit); (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 March 31, 2021, formatted in Inline XBRL (contained in Exhibit 101). |
* Included herewith
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
SALLY BEAUTY HOLDINGS, INC. |
|
|
|
|
(Registrant) |
|
|
|
|
|
|
Date: May 6, 2021 |
|
|
|
|
|
|
|
|
|
|
By: |
|
/s/ Marlo M. Cormier |
|
|
|
|
Marlo M. Cormier |
|
|
|
|
Senior Vice President, Chief Financial Officer |
|
|
|
|
For the Registrant and as its Principal Financial Officer |
26
No information found
* THE VALUE IS THE MARKET VALUE AS OF THE LAST DAY OF THE QUARTER FOR WHICH THE 13F WAS FILED.
| FUND | NUMBER OF SHARES | VALUE ($) | PUT OR CALL |
|---|
| DIRECTORS | AGE | BIO | OTHER DIRECTOR MEMBERSHIPS |
|---|
No information found
No Customers Found
No Suppliers Found
Price
Yield
| Owner | Position | Direct Shares | Indirect Shares |
|---|