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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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(Zip Code) |
(
(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 29, 2022, there were
TABLE OF CONTENTS
2
In this Quarterly Report, references to “the Company,” “Sally Beauty,” “our company,” “we,” “our,” “ours” and “us” refer to Sally Beauty Holdings, Inc. and its consolidated subsidiaries unless otherwise indicated or the context otherwise requires.
cautionary notice regarding forward-looking statements
Statements in this Quarterly Report on Form 10-Q and in the documents incorporated by reference herein which are not purely historical facts or which depend upon future events may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which we refer to as the Exchange Act. Words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “would” or similar expressions may also identify such forward-looking statements. 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
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.
SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except par value data)
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March 31, 2022 |
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September 30, 2021 |
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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, 2022, 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, 2022, and September 30, 2021, respectively |
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Preferred stock, $
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Additional paid-in capital |
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— |
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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.
4
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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2022 |
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2021 |
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2022 |
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2021 |
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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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— |
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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.
5
SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(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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2022 |
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2021 |
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2022 |
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2021 |
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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 (loss) income: |
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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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Interest rate caps, net of tax |
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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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(
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) |
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Other comprehensive (loss) income, 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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) |
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Total comprehensive income |
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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.
6
SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders’ Equity
(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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Balance at September 30, 2021 |
|
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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 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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|
(
|
) |
|
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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Employee withholding taxes paid related to net share settlement |
|
(
|
) |
|
|
(
|
) |
|
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(
|
) |
|
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— |
|
|
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— |
|
|
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(
|
) |
|
Repurchases and cancellations of common stock |
|
(
|
) |
|
|
(
|
) |
|
|
(
|
) |
|
|
(
|
) |
|
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— |
|
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(
|
) |
|
Balance at December 31, 2021 |
|
|
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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 loss |
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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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Employee withholding taxes paid related to net share settlement |
|
(
|
) |
|
|
— |
|
|
|
(
|
) |
|
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— |
|
|
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— |
|
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(
|
) |
|
Repurchases and cancellations of common stock |
|
(
|
) |
|
|
(
|
) |
|
|
(
|
) |
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|
(
|
) |
|
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— |
|
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(
|
) |
|
Balance at March 31, 2022 |
|
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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’ |
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||||||||||||||
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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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Balance at September 30, 2020 |
|
|
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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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— |
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
Stock issued for equity awards |
|
|
|
|
|
|
|
|
|
|
|
|
|
(
|
) |
|
|
|
|
— |
|
|
|
|
|
— |
|
|
|
|
|
— |
|
|
Employee withholding taxes paid related to net share settlement |
|
(
|
) |
|
|
|
|
(
|
) |
|
|
|
|
(
|
) |
|
|
|
|
— |
|
|
|
|
|
— |
|
|
|
|
|
(
|
) |
|
Balance at December 31, 2020 |
|
|
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
|
|
$ |
(
|
) |
|
|
|
$ |
|
|
|
Net earnings |
|
— |
|
|
|
|
|
— |
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
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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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|
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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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— |
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|
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|
Balance at March 31, 2021 |
|
|
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
|
|
$ |
(
|
) |
|
|
|
$ |
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
|
|
|
Six Months Ended March 31, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
Cash Flows from Operating Activities: |
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
|
|
|
$ |
|
|
|
Adjustments to reconcile net earnings to net cash (used) provided by operating activities: |
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
Share-based compensation expense |
|
|
|
|
|
|
|
|
|
Amortization of deferred financing costs |
|
|
|
|
|
|
|
|
|
Loss on early extinguishment of debt |
|
|
— |
|
|
|
|
|
|
Loss 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 (used) 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: |
|
|
|
|
|
|
|
|
|
Repayments of long-term debt |
|
|
(
|
) |
|
|
(
|
) |
|
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 |
|
|
(
|
) |
|
|
(
|
) |
|
Effect of foreign exchange rate changes on cash and cash equivalents |
|
|
|
|
|
|
|
|
|
Net decrease 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.
8
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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
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 March 31, 2022 and September 30, 2021, and our consolidated results of operations, consolidated comprehensive income, consolidated statements of stockholders’ equity for the three and six months ended March 31, 2022 and 2021 and our consolidated cash flows for the for the six months ended March 31, 2022 and 2021.
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 and six months ended March 31, 2022, were adversely impacted by the COVID-19 pandemic and its continuing effects on the economy, including inflationary pressures, continued supply chain disruptions, increased freight costs, labor shortages and increased labor costs. Given the uncertainty around the continuing effects of the COVID-19 pandemic and its economic impact we cannot reasonably predict the effect they will have on future periods. If we become materially and adversely impacted, we may have to consider adjustments to our strategic plans, inventory, liquidity, operational and capital expenditure plans.
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.
9
Changes to our contract liabilities, which are included in accrued liabilities in our condensed balance sheets, for the periods were as follows (in thousands):
|
|
|
|
|
|
|
Six Months Ended March 31, |
|
|||||
|
|
|
|
|
|
|
2022 |
|
|
2021 |
|
||
|
Beginning Balance |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
Loyalty points and gift cards issued but not redeemed, net of estimated breakage |
|
|
|
|
|
|
|
|
||||
|
Revenue recognized from beginning liability |
|
|
(
|
) |
|
|
(
|
) |
||||
|
Ending Balance |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
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 |
|
March 31, 2022 |
|
|
September 30, 2021 |
|
||
|
Financial Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
$ |
|
|
|
$ |
— |
|
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:
|
|
|
|
|
March 31, 2022 |
|
|
September 30, 2021 |
|
||||||||||
|
(in thousands) |
|
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. 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.
4. 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, |
|
|
||||||||||
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
||||
|
Number of shares repurchased |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
Total cost of share repurchased |
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
$ |
— |
|
|
10
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, 2021 |
|
$ |
(
|
) |
|
$ |
(
|
) |
|
$ |
(
|
) |
|
$ |
(
|
) |
|
|
Other comprehensive loss before reclassification, net of tax |
|
|
(
|
) |
|
|
(
|
) |
|
|
(
|
) |
|
|
(
|
) |
|
|
Reclassification to net earnings, net of tax |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2022 |
|
$ |
(
|
) |
|
$ |
(
|
) |
|
$ |
(
|
) |
|
$ |
(
|
) |
|
The tax impact for the changes in other comprehensive loss 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):
|
|
|
Three Months Ended March 31, |
|
|
Six Months Ended March 31, |
|
||||||||||
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6. Goodwill and Intangible Assets
During the three months ended March 31, 2022, 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.
|
|
|
Three Months Ended March 31, |
|
|
Six Months Ended March 31, |
|
||||||||||
|
(in thousands) |
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
|
Intangible assets amortization expense |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Additionally, during the six months ended March 31, 2022, the decrease in goodwill was primarily from the effects of foreign currency exchange rates of $
7. Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
|
|
|
March 31, 2022 |
|
|
September 30, 2021 |
|
||
|
Compensation and benefits |
|
$ |
|
|
|
$ |
|
|
|
Interest payable |
|
|
|
|
|
|
|
|
|
Deferred revenue |
|
|
|
|
|
|
|
|
|
Rental obligations |
|
|
|
|
|
|
|
|
|
Insurance reserves |
|
|
|
|
|
|
|
|
|
Property and other taxes |
|
|
|
|
|
|
|
|
|
Operating accruals and other |
|
|
|
|
|
|
|
|
|
Total accrued liabilities |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
11
8. Derivative Instruments and Hedging Activities
During the six months ended March 31, 2022, 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 |
|
|
|
Mexican Peso |
|
$ |
|
|
|
Euro |
|
|
|
|
|
Canadian Dollar |
|
|
|
|
|
Total |
|
$ |
|
|
Quarterly, the changes in fair value related to the foreign currency forwards are recorded into AOCL. As the forwards are exercised, the realized value is recognized into cost of goods sold, based on inventory turns, in our condensed consolidated statements of earnings. For the six months ended March 31, 2022 and 2021, we recognized a loss of $
Interest Rate Caps
In July 2017, we purchased
For the six months ended March 31, 2022 and 2021, we recognized expense of $
12
9. Segment Reporting
Segment data for the three and six months ended March 31, 2022 and 2021, is as follows (in thousands):
|
|
|
Three Months Ended March 31, |
|
|
Six Months Ended March 31, |
|
||||||||||
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
|
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, 2022 and 2021.
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.
|
|
|
Three Months Ended March 31, |
|
|
Six Months Ended March 31, |
|
||||||||||
|
SBS |
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
|
Hair color |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
Hair care |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
Styling tools and supplies |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
Nail |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
Skin and cosmetics |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
Other beauty items |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
Total |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
Three Months Ended March 31, |
|
|
Six Months Ended March 31, |
|
||||||||||
|
BSG |
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
|
Hair color |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
Hair care |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
Styling tools and supplies |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
Skin and cosmetics |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
Nail |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
Other beauty items |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
Total |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
13
The following tables disaggregate our segment revenue by sales channels:
|
|
|
Three Months Ended March 31, |
|
|
Six Months Ended March 31, |
|
||||||||||
|
SBS |
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
|
Company-operated stores |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
E-commerce |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
Franchise stores |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
Total |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
Three Months Ended March 31, |
|
|
Six Months Ended March 31, |
|
||||||||||
|
BSG |
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
|
Company-operated stores |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
Distributor sales consultants |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
E-commerce |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
Franchise stores |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
Total |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
10. Subsequent Event
On April 29, 2022, we announced that our wholly-owned subsidiaries, Sally Holdings LLC (“Holdings”) and Sally Capital Inc. (together with Holdings, the “Issuers”), issued a notice of redemption (the “Redemption Notice”), to redeem on May 31, 2022, the entire $
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 results in the second quarter of 2022 delivered a solid financial performance with increases in gross margin, net earnings and diluted earnings per share, compared to the same period last year. We achieved all of this despite the ongoing macro-environment challenges surrounding the COVID-19 Omicron variant, supply chain, and inflationary pressures, which have impacted customer behavior and purchasing power. However, by continuing to focus on our four strategic pillars; leveraging our digital platform, driving loyalty and personalization, delivering product innovation and optimizing our supply chain, we believe we are well-positioned to navigate these macro headwinds and continue to drive growth in both of our businesses, retail and professional.
Highlights for the Three Months Ended March 31, 2022
|
|
• |
Consolidated net sales for the three months ended March 31, 2022, decreased $14.9 million, or 1.6%, to $911.4 million, compared to the three months ended March 31, 2021; |
|
|
• |
Consolidated comparable sales increased 0.2% for the three months ended March 31, 2022, compared to the three months ended March 31, 2021; |
|
|
• |
Consolidated gross profit for the three months ended March 31, 2022, decreased $1.9 million, or 0.4%, to $465.3 million, compared to the three months ended March 31, 2021. Gross margin increased 70 basis points to 51.1% for the three months ended March 31, 2022, compared to the three months ended March 31, 2021; |
|
|
• |
Consolidated operating earnings for the three months ended March 31, 2022, increased $11.0 million, or 14.5%, to $86.5 million, compared to the three months ended March 31, 2021. Operating margin increased 130 bps to 9.5% for the three months ended March 31, 2022, compared to the three months ended March 31, 2021; |
|
|
• |
For the three months ended March 31, 2022, our consolidated net earnings increased $8.5 million, or 22.2%, to $46.8 million, compared to the three months ended March 31, 2021; |
|
|
• |
For the three months ended March 31, 2022, our diluted earnings per share was $0.42 compared to $0.34 for the three months ended March 31, 2021; and |
|
|
• |
Cash provided by operations was $2.8 million for the three months ended March 31, 2022, compared to cash provided by operations of $92.6 million for the three months ended March 31, 2021. |
Impact of COVID-19 on Our Business
Throughout the current quarter and year we continued to experience disruptions to our business as a result of the COVID-19 pandemic and continued to take certain actions in order to protect our customers and associates. In particular, our store operations were disrupted by the Omicron variant due to employee illnesses primarily in December and January and we continued to incur additional costs associated with testing and vaccinations, disinfectant cleanings in connection with positive cases in stores and support centers, and the write-down of obsolete personal-protective equipment inventory .
Due to general labor shortages in the U.S., especially among retail and hourly employees, we have also experienced staffing shortages at our U.S. stores and an increase in our compensation costs in order to attract and retain associates. While the situation has 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 decreased customer in-store traffic, new waves of infection, labor and supply chain disruptions, developing variants, changes in guidance from international and domestic authorities, and availability and timing of vaccines.
Refer to Item 1A. “Risk Factors” in our Form 10-K for the fiscal year ended September 30, 2021, for further discussion on the risks and uncertainties created by COVID-19.
15
Global Supply Chain and Inflationary Impact
There continues to be volatility in the global supply chain as shipment delays continue to impact ports, inflationary pressures are exacerbated by global political instability, and consumer demand continues to evolve as a lingering effect from the COVID-19 pandemic. In the current quarter we continued to experience elevated distribution costs as these shifts in demand and supply have led to longer lead times and delays, and carriers are faced with increased costs associated with capacity imbalances between ports as well as overall prolonged transportation challenges. Moreover, the war in Ukraine has created additional uncertainty in the global markets, which have seen a rise in fuel prices, and is another factor impacting distribution costs. Due to these events, we have seen an increase in our inbound freight costs and extended inventory in transit times. Inflationary pressures also impacted customer behavior which resulted in lower traffic and conversion in the current quarter.
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. O ur 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):
|
|
|
Three Months Ended March 31, |
|
|
Six Months Ended March 31, |
|
||||||||||||||||||||||||||
|
|
|
2022 |
|
|
2021 |
|
|
Increase (Decrease) |
|
|
2022 |
|
|
2021 |
|
|
Increase (Decrease) |
|
||||||||||||||
|
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBS |
|
$ |
525,785 |
|
|
$ |
542,664 |
|
|
$ |
(16,879 |
) |
|
|
(3.1 |
)% |
|
$ |
1,087,315 |
|
|
$ |
1,090,334 |
|
|
$ |
(3,019 |
) |
|
|
(0.3 |
)% |
|
BSG |
|
|
385,602 |
|
|
|
383,664 |
|
|
|
1,938 |
|
|
|
0.5 |
% |
|
|
804,323 |
|
|
|
772,016 |
|
|
|
32,307 |
|
|
|
4.2 |
% |
|
Consolidated |
|
$ |
911,387 |
|
|
$ |
926,328 |
|
|
$ |
(14,941 |
) |
|
|
(1.6 |
)% |
|
$ |
1,891,638 |
|
|
$ |
1,862,350 |
|
|
$ |
29,288 |
|
|
|
1.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBS |
|
$ |
309,262 |
|
|
$ |
317,161 |
|
|
$ |
(7,899 |
) |
|
|
(2.5 |
)% |
|
$ |
637,434 |
|
|
$ |
632,973 |
|
|
$ |
4,461 |
|
|
|
0.7 |
% |
|
BSG |
|
|
156,070 |
|
|
|
150,068 |
|
|
|
6,002 |
|
|
|
4.0 |
% |
|
|
328,027 |
|
|
|
304,980 |
|
|
|
23,047 |
|
|
|
7.6 |
% |
|
Consolidated |
|
$ |
465,332 |
|
|
$ |
467,229 |
|
|
$ |
(1,897 |
) |
|
|
(0.4 |
)% |
|
$ |
965,461 |
|
|
$ |
937,953 |
|
|
$ |
27,508 |
|
|
|
2.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment gross margin: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBS |
|
|
58.8 |
% |
|
|
58.4 |
% |
|
40 |
|
|
bps |
|
|
|
58.6 |
% |
|
|
58.1 |
% |
|
50 |
|
|
bps |
|
||||
|
BSG |
|
|
40.5 |
% |
|
|
39.1 |
% |
|
140 |
|
|
bps |
|
|
|
40.8 |
% |
|
|
39.5 |
% |
|
130 |
|
|
bps |
|
||||
|
Consolidated |
|
|
51.1 |
% |
|
|
50.4 |
% |
|
70 |
|
|
bps |
|
|
|
51.0 |
% |
|
|
50.4 |
% |
|
60 |
|
|
bps |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBS |
|
$ |
80,940 |
|
|
$ |
100,063 |
|
|
$ |
(19,123 |
) |
|
|
(19.1 |
)% |
|
$ |
181,563 |
|
|
$ |
195,191 |
|
|
$ |
(13,628 |
) |
|
|
(7.0 |
)% |
|
BSG |
|
|
46,008 |
|
|
|
47,843 |
|
|
|
(1,835 |
) |
|
|
(3.8 |
)% |
|
|
104,554 |
|
|
|
96,415 |
|
|
|
8,139 |
|
|
|
8.4 |
% |
|
Segment operating earnings |
|
|
126,948 |
|
|
|
147,906 |
|
|
|
(20,958 |
) |
|
|
(14.2 |
)% |
|
|
286,117 |
|
|
|
291,606 |
|
|
|
(5,489 |
) |
|
|
(1.9 |
)% |
|
Unallocated expenses and restructuring (a) |
|
|
40,487 |
|
|
|
72,395 |
|
|
|
(31,908 |
) |
|
|
(44.1 |
)% |
|
|
86,876 |
|
|
|
111,773 |
|
|
|
(24,897 |
) |
|
|
(22.3 |
)% |
|
Consolidated operating earnings |
|
|
86,461 |
|
|
|
75,511 |
|
|
|
10,950 |
|
|
|
14.5 |
% |
|
|
199,241 |
|
|
|
179,833 |
|
|
|
19,408 |
|
|
|
10.8 |
% |
|
Interest expense |
|
|
19,896 |
|
|
|
23,883 |
|
|
|
(3,987 |
) |
|
|
(16.7 |
)% |
|
|
40,137 |
|
|
|
49,861 |
|
|
|
(9,724 |
) |
|
|
(19.5 |
)% |
|
Earnings before provision for income taxes |
|
|
66,565 |
|
|
|
51,628 |
|
|
|
14,937 |
|
|
|
28.9 |
% |
|
|
159,104 |
|
|
|
129,972 |
|
|
|
29,132 |
|
|
|
22.4 |
% |
|
Provision for income taxes |
|
|
19,757 |
|
|
|
13,316 |
|
|
|
6,441 |
|
|
|
48.4 |
% |
|
|
43,458 |
|
|
|
34,469 |
|
|
|
8,989 |
|
|
|
26.1 |
% |
|
Net earnings |
|
$ |
46,808 |
|
|
$ |
38,312 |
|
|
$ |
8,496 |
|
|
|
22.2 |
% |
|
$ |
115,646 |
|
|
$ |
95,503 |
|
|
$ |
20,143 |
|
|
|
21.1 |
% |
|
|
|
. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of stores at end-of-period (including franchises): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
SBS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,499 |
|
|
|
3,625 |
|
|
|
(126 |
) |
|
|
(3.5 |
)% |
|
BSG |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,363 |
|
|
|
1,379 |
|
|
|
(16 |
) |
|
|
(1.2 |
)% |
|
Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,862 |
|
|
|
5,004 |
|
|
|
(142 |
) |
|
|
(2.8 |
)% |
|
Comparable sales growth (decline) (b) : |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
SBS |
|
|
(0.5 |
)% |
|
|
3.7 |
% |
|
(420) |
|
|
bps |
|
|
|
2.0 |
% |
|
|
(0.2 |
)% |
|
220 |
|
|
bps |
|
||||
|
BSG |
|
|
1.3 |
% |
|
|
8.0 |
% |
|
(670) |
|
|
bps |
|
|
|
4.9 |
% |
|
|
0.2 |
% |
|
470 |
|
|
bps |
|
||||
|
Consolidated |
|
|
0.2 |
% |
|
|
5.4 |
% |
|
(520) |
|
|
bps |
|
|
|
3.2 |
% |
|
|
(0.1 |
)% |
|
330 |
|
|
bps |
|
||||
|
(a) |
Unallocated expenses consist of corporate and shared costs and are included in selling, general and administrative expenses in our condensed 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. |
17
Results of Operations
The Three Months Ended March 31, 2022, compared to the Three Months Ended March 31, 2021
Net Sales
SBS . The decrease in net sales for SBS was primarily driven by the following (in thousands):
|
Comparable sales |
|
$ |
(2,580 |
) |
|
Sales outside comparable sales (a) |
|
|
(10,409 |
) |
|
Foreign currency exchange |
|
|
(3,890 |
) |
|
Total |
|
$ |
(16,879 |
) |
|
|
(a) |
Includes stores opened for less than 14 months, net of stores closures |
The decrease in net sales was driven by lower unit volume, primarily due to operating fewer stores compared to the same period last year, lower traffic and conversion due to the impact of COVID-19, supply chain disruptions, the lapping of stimulus gains in the prior year, and inflationary pressures impacting consumer behavior, along with the negative impact of foreign exchange rates. This decrease was partially offset by an increase in average unit prices, led by our color and care categories.
BSG . The increase in net sales for BSG was primarily driven by the following (in thousands):
|
Comparable sales |
|
$ |
4,737 |
|
|
Sales outside comparable sales (a) |
|
|
(2,741 |
) |
|
Foreign currency exchange |
|
|
(58 |
) |
|
Total |
|
$ |
1,938 |
|
|
|
(a) |
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, primarily due to an increase in average unit prices and from strong e-commerce growth. These increases were offset by a decrease in overall unit volume due to operating fewer stores compared to the same period last year.
Gross Profit
SBS . SBS’s gross profit decreased for the three months ended March 31, 2022, as a result of a decrease in net sales, partially offset by a higher gross margin. SBS’s gross margin increased primarily as a result of pricing leverage and a decrease in write-downs of obsolete personal-protective equipment, partially offset by higher distribution and freight costs and an unfavorable sales mix shift between the U.S. and international markets.
BSG . BSG’s gross profit increased for the three months ended March 31, 2022, driven by an improvement in pricing leverage and a decrease in write-downs of obsolete personal-protective equipment, partially offset by higher distribution and freight costs.
Selling, General and Administrative Expenses
SBS . SBS’s selling, general and administrative expenses increased $11.2 million, or 5.2%, for the three months ended March 31, 2022. The increase was driven primarily by higher compensation and compensation-related expenses of $8.9 million, driven by general economic inflationary conditions and to store re-openings in certain international markets, as well as higher store facility costs associated with those re-openings.
BSG . BSG’s selling, general and administrative expenses increased $7.8 million, or 7.7%, for the three months ended March 31, 2022. The increase was driven primarily by higher delivery expense of $1.9 million as a result of supply chain disruptions and the cost of fuel. Additionally, there were increases in depreciation expense of $1.0 million, credit card fees of $0.9 million and other increases in variable operating expenses.
Unallocated. Unallocated selling, general and administrative expenses, which represent certain corporate costs that have not been charged to our reporting segments, decreased $31.3 million, or 43.6%, for the three months ended March 31, 2022, primarily due to the recognition of $31.2 million donation expense related to personal-protective equipment inventory in the prior period.
Interest Expense
The decrease in interest expense is primarily due to the lower outstanding debt principal for the three months ended March 31, 2022, as a result of the pay-down of our senior notes due 2023 and our term loan B fixed tranche during fiscal year 2021. Additionally, we recognized $1.4 million of loss on debt extinguishment in connection with the pay-down of our term loan B fixed tranche in the prior period with no comparable amounts in the current period. See “Liquidity and Capital Resources” below for additional information.
18
Provision for Income Taxes
The effective tax rates were 29.7% and 25.8%, for the three months ended March 31, 2022, and 2021, respectively. The increase in the effective tax rate was primarily due to the impact of the write-off of deferred tax assets related to share-based compensation in connection with expired stock options.
The Six Months Ended March 31, 2022, compared to the Six Months Ended March 31, 2021
Net Sales
SBS . The decrease in net sales for SBS was primarily driven by the following (in thousands):
|
Comparable sales |
|
$ |
20,704 |
|
|
Sales outside comparable sales (a) |
|
|
(18,791 |
) |
|
Foreign currency exchange |
|
|
(4,932 |
) |
|
Total |
|
$ |
(3,019 |
) |
|
|
(a) |
Includes stores opened for less than 14 months, net of stores closures |
The decrease in net sales was driven by lower unit volume, primarily due to operating fewer stores compared to the same period last year, and the negative impact of foreign exchange rates. This decrease was partially offset by an increase in comparable sales, reflecting stronger customer demand in the first fiscal quarter, and higher average unit prices, led by our color and care categories.
BSG . The increase in net sales for BSG was primarily driven by the following (in thousands):
|
Comparable sales |
|
$ |
36,394 |
|
|
Sales outside comparable sales (a) |
|
|
(5,283 |
) |
|
Foreign currency exchange |
|
|
1,196 |
|
|
Total |
|
$ |
32,307 |
|
|
|
(a) |
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, primarily due to an increase in average unit prices and from strong e-commerce growth. These increases were offset by a decrease in overall unit volume due to operating fewer stores compared to the same period last year.
Gross Profit
SBS . SBS’s gross profit increased for the six months ended March 31, 2022, as a result of a higher gross margin, primarily due to pricing leverage and a decrease in obsolete personal-protective equipment write-downs, partially offset by higher distribution and freight costs.
BSG . BSG’s gross profit increased for the six months ended March 31, 2022, driven by an increase in sales, and improvement of pricing leverage, coupled with a decrease in personal-protective equipment write-downs.
Selling, General and Administrative Expenses
SBS . SBS’s selling, general and administrative expenses increased $18.1 million, or 4.1%, for the six months ended March 31, 2022. The increase was driven primarily by higher compensation and compensation-related expenses of $18.6 million, as a result of general economic inflationary conditions and store re-openings in certain international markets.
BSG . BSG’s selling, general and administrative expenses increased $14.9 million, or 7.1%, for the six months ended March 31, 2022. The increase was driven primarily by an increase in delivery expense of $2.5 million, compensation and compensation-related expenses of $2.3 million, depreciation expense of $1.9 million, advertising expense of $1.6 million, technology expense of $1.1 million and other increases in variable operating expenses.
Unallocated. Unallocated selling, general and administrative expenses, which represent certain corporate costs that have not been charged to our reporting segments, decreased $25.1 million, or 22.7%, for the six months ended March 31, 2022, driven by the recognition of $31.2 million donation expense related to personal-protective equipment inventory in the prior period, partially offset by an increase in information technology expense of $2.7 million.
Restructuring
For the six months ended March 31, 2022, restructuring charges in connection with our previously communicated Transformation Plan increased $0.2 million, to $1.1 million for the current year.
19
Interest Expense
The decrease in interest expense is primarily due to the lower outstanding debt principal for the six months ended March 31, 2022, as a result of the pay-down of our senior notes due 2023 and our term loan B fixed tranche during fiscal year 2021. Additionally, we recognized $1.4 million of loss on debt extinguishment in connection with the pay-down of our term loan B fixed tranche in the prior period with no comparable amounts in the current period. See “Liquidity and Capital Resources” below for additional information.
Provision for Income Taxes
The effective tax rates were 27.3% and 26.5%, for the six months ended March 31, 2022 and 2021, respectively. The increase in the effective tax rate was primarily due to an increase in foreign losses, for which we do not receive a tax benefit, and the write-off of deferred tax assets related to share-based compensation in connection with expired stock option awards.
Liquidity and Capital Resources
Overview
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 $8.7 million, to $727.4 million at March 31, 2022, compared to $718.7 million at September 30, 2021, primarily from increased inventory as a result of restocking to normal levels of demand following prior year shipping delays, and our risk mitigation strategy to protect against potential, continued supply chain disruptions, and the reduction in accounts payable and accrued liabilities, due to the timing of payments. These increases were partially offset by a decrease in cash and cash equivalents.
At March 31, 2022, cash and cash equivalents were $227.4 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), cash 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 six months ended March 31, 2022, we did not draw funds under our ABL facility. As of March 31, 2022, 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 six months ended March 31, 2022, we repurchased 6.8 million shares of our common stock for $130.3 million with existing cash balances. As of March 31, 2022, we had authorization of approximately $595.8 million of additional potential share repurchases remaining under our 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 $134.3 million decrease in operating activities was driven by the reduction in accounts payable and accrued liabilities primarily due to the timing of payments, partially offset by lower inventory purchases compared to the six months ended March 31, 2021 and an increase in net earnings.
Net Cash Used by Investing Activities
Net cash used by investing activities during the six months ended March 31, 2022, increased $15.1 million to $44.4 million, compared to the six months ended March 31, 2021. This change was primarily a result of additional investments in information technology and store improvements.
20
Net Cash Used by Financing Activities
Net cash used by financing activities for the six months ended March 31, 2022, decreased $84.7 million to $126.5 million, as a result of the debt pay-down during the six months ended March 31, 2021 and an increase in stock options exercised, partially offset by share repurchases during the six months ended March 31, 2022.
Debt and Guarantor Financial Information
At March 31, 2022, we had $1,390.2 million in debt, not including capital leases, unamortized debt issuance costs and debt discounts, in the aggregate, of $8.6 million. Our debt consisted of $980.0 million of senior notes outstanding and a term loan with an outstanding principal balance of $410.3 million. As of March 31, 2022, 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
We currently have 5.625% Senior Notes due 2025 outstanding . These notes were issued by our wholly-owned subsidiaries, Sally Holdings LLC and Sally Capital Inc. (the “Issuers”), and registered with the Securities and Exchange Commission 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 March 31, 2022 and September 30, 2021 (in thousands):
|
|
|
March 31, 2022 |
|
|
September 30, 2021 |
|
||
|
Inventory |
|
$ |
735,272 |
|
|
$ |
662,802 |
|
|
Intercompany receivable |
|
$ |
- |
|
|
$ |
67,337 |
|
|
Current assets |
|
$ |
976,855 |
|
|
$ |
1,069,266 |
|
|
Total assets |
|
$ |
2,098,588 |
|
|
$ |
2,198,990 |
|
|
Intercompany payable |
|
$ |
13,531 |
|
|
$ |
- |
|
|
Current liabilities |
|
$ |
331,459 |
|
|
$ |
422,137 |
|
|
Total liabilities |
|
$ |
2,258,947 |
|
|
$ |
2,343,946 |
|
The following table presents the summarized statement of income information for six months ended March 31, 2022 (in thousands):
|
Net sales |
|
|
|
$ |
1,532,316 |
|
|
Gross profit |
|
|
|
$ |
787,970 |
|
|
Earnings before provision for income taxes |
|
|
|
$ |
132,691 |
|
|
Net Earnings |
|
|
|
$ |
98,176 |
|
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 March 31, 2022, 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
21
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 March 31, 2022. 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 March 31, 2022, 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.
22
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, 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 |
|
||||
|
January 1 - January 30, 2022 |
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
$ |
651,120,625 |
|
|
February 1 - February 28, 2022 |
|
|
2,234,514 |
|
|
|
17.68 |
|
|
|
2,234,514 |
|
|
|
611,606,688 |
|
|
March 1 - March 31, 2022 |
|
|
922,460 |
|
|
|
17.14 |
|
|
|
922,460 |
|
|
|
595,792,425 |
|
|
Total this quarter |
|
|
3,156,974 |
|
|
$ |
17.53 |
|
|
|
3,156,974 |
|
|
$ |
595,792,425 |
|
|
|
(1) |
The table above does not include 808 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. |
23
Item 6. Exhibits
|
Exhibit No. |
|
Description |
|
|
|
|
|
3.1 |
|
|
|
|
|
|
|
3.2 |
|
|
|
|
|
|
|
22 |
|
|
|
|
|
|
|
31.1 |
|
|
|
|
|
|
|
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, 2022, 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 March 31, 2022, formatted in Inline XBRL (contained in Exhibit 101). |
* Included herewith
24
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 5, 2022 |
|
|
|
|
|
|
|
|
|
|
By: |
|
/s/ Marlo M. Cormier |
|
|
|
|
Marlo M. Cormier |
|
|
|
|
Senior Vice President, Chief Financial Officer |
|
|
|
|
For the Registrant and as its Principal Financial Officer |
25