Sally Beauty Holdings, Inc. [SBH] Filings

10-Q 1 sbh-10q_20221231.htm 10-Q sbh-10q_20221231.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

FOR THE QUARTERLY PERIOD ENDED: DECEMBER 31, 2022

-OR-


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

Commission File No. 1-33145

SALLY BEAUTY HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

Delaware		36-2257936
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

3001 Colorado Boulevard
Denton, Texas		76210
(Address of principal executive offices)		(Zip Code)

(940) 898-7500

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report): N/A

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

Title of each classTrading SymbolName of each exchange on which registered

Common Stock, $0.01 par valueSBHThe New York Stock Exchange

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

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

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

Large accelerated filer	☒		Accelerated filer	☐	Non-accelerated filer	☐
Smaller reporting company	☐		Emerging growth company	☐

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

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

As of January 27, 2023, there were 107,328,599 shares of the issuer’s common stock outstanding.

TABLE OF CONTENTS

	Page
PART I — FINANCIAL INFORMATION

Item 1. Financial Statements	4

Condensed Consolidated Balance Sheets	4
Condensed Consolidated Statements of Earnings	5
Condensed Consolidated Statements of Comprehensive Income	6
Condensed Consolidated Statements of Stockholders’ Equity	7
Condensed Consolidated Statements of Cash Flows	8
Notes to Condensed Consolidated Financial Statements	9

Item 2. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations	16
Item 3. Quantitative And Qualitative Disclosures About Market Risk	22
Item 4. Controls And Procedures	22

PART II — OTHER INFORMATION

Item 1. Legal Proceedings	23
Item 1A. Risk Factors	23
Item 6. Exhibits	24

In this Quarterly Report, references to “the Company,” “Sally Beauty,” “our company,” “we,” “our,” “ours” and “us” refer to Sally Beauty Holdings, Inc. and its consolidated subsidiaries unless otherwise indicated or the context otherwise requires.

cautionary notice regarding forward-looking statements

Statements in this Quarterly Report on Form 10-Q and in the documents incorporated by reference herein which are not purely historical facts or which depend upon future events may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which we refer to as the Exchange Act. Words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “would” or similar expressions may also identify such forward-looking statements.

Readers are cautioned not to place undue reliance on forward-looking statements as such statements speak only as of the date they were made and involve risks and uncertainties that could cause actual events or results to differ materially from the events or results described in the forward-looking statements. The most important factors which could cause our actual results to differ from our forward-looking statements are set forth in our description of risk factors in Item 1A contained in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022, 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.

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except par value data)

	December 31, 2022			September 30, 2022
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	99,071		$	70,558
Trade accounts receivable, net		32,671			34,102
Accounts receivable, other		42,741			38,175
Inventory		986,878			936,374
Other current assets		57,840			53,192
Total current assets		1,219,201			1,132,401
Property and equipment, net of accumulated depreciation of $849,202 at December 31, 2022, and $820,811 at September 30, 2022		288,732			297,876
Operating lease assets		542,806			532,177
Goodwill		532,514			526,066
Intangible assets, excluding goodwill, net of accumulated amortization of $28,820 at December 31, 2022, and $26,794 at September 30, 2022		50,963			50,315
Other assets		34,330			38,032
Total assets	$	2,668,546		$	2,576,867
Liabilities and Stockholders’ Equity
Current liabilities:
Current maturities of long-term debt	$	65,171		$	68,658
Accounts payable		296,170			275,717
Accrued liabilities		142,785			161,065
Current operating lease liabilities		156,168			157,734
Income taxes payable		16,972			4,740
Total current liabilities		677,266			667,914
Long-term debt		1,082,175			1,083,043
Long-term operating lease liabilities		427,168			424,762
Other liabilities		22,748			22,427
Deferred income tax liabilities, net		85,891			85,085
Total liabilities		2,295,248			2,283,231
Stockholders’ equity:
Common stock, $0.01 par value. Authorized 500,000 shares; 107,291 and 107,024 shares issued and 107,284 and 106,970 shares outstanding at December 31, 2022, and September 30, 2022, respectively		1,073			1,070
Preferred stock, $0.01 par value. Authorized 50,000 shares; none issued		—			—
Additional paid-in capital		8,329			4,241
Accumulated earnings		490,509			440,172
Accumulated other comprehensive loss, net of tax		(126,613	)		(151,847	)
Total stockholders’ equity		373,298			293,636
Total liabilities and stockholders’ equity	$	2,668,546		$	2,576,867

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

SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Earnings

(In thousands, except per share data)

(Unaudited)

	Three Months Ended
	December 31,
	2022		2021
Net sales	$	957,055	$	980,251
Cost of goods sold		468,481		480,122
Gross profit		488,574		500,129
Selling, general and administrative expenses		391,580		386,250
Restructuring		10,406		1,099
Operating earnings		86,588		112,780
Interest expense		17,923		20,241
Earnings before provision for income taxes		68,665		92,539
Provision for income taxes		18,328		23,701
Net earnings	$	50,337	$	68,838
Earnings per share:
Basic	$	0.47	$	0.61
Diluted	$	0.46	$	0.60
Weighted-average shares:
Basic		107,140		111,995
Diluted		109,460		113,968

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

SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(In thousands)

(Unaudited)

	Three Months Ended
	December 31,
	2022			2021
Net earnings	$	50,337		$	68,838
Other comprehensive income (loss):
Foreign currency translation adjustments		25,941			(4,509	)
Interest rate caps, net of tax		203			278
Foreign exchange contracts, net of tax		(910	)		480
Other comprehensive income (loss), net of tax		25,234			(3,751	)
Total comprehensive income	$	75,571		$	65,087

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

SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders’ Equity

(In thousands)

(Unaudited)

												Accumulated
							Additional					Other			Total
	Common Stock						Paid-in			Accumulated		Comprehensive			Stockholders’
	Shares			Amount			Capital			Earnings		Loss			Equity
Balance at September 30, 2022		106,970		$	1,070		$	4,241		$	440,172	$	(151,847	)	$	293,636
Net earnings		—			—			—			50,337		—			50,337
Other comprehensive income		—			—			—			—		25,234			25,234
Share-based compensation		—			—			5,135			—		—			5,135
Stock issued for equity awards		404			4			78			—		—			82
Employee withholding taxes paid related to net share settlement		(90	)		(1	)		(1,125	)		—		—			(1,126	)
Balance at December 31, 2022		107,284		$	1,073		$	8,329		$	490,509	$	(126,613	)	$	373,298

													Accumulated
							Additional						Other			Total
	Common Stock						Paid-in			Accumulated			Comprehensive			Stockholders’
	Shares			Amount			Capital			Earnings			Loss			Equity
Balance at September 30, 2021		112,913		$	1,129		$	17,286		$	356,967		$	(94,641	)	$	280,741
Net earnings		—			—			—			68,838			—			68,838
Other comprehensive loss		—			—			—			—			(3,751	)		(3,751	)
Share-based compensation		—			—			3,958			—			—			3,958
Stock issued for equity awards		795			8			7,364			—			—			7,372
Employee withholding taxes paid related to net share settlement		(56	)		(1	)		(1,136	)		—			—			(1,137	)
Repurchases and cancellations of common stock		(3,675	)		(36	)		(27,472	)		(47,492	)		—			(75,000	)
Balance at December 31, 2021		109,977		$	1,100		$	—		$	378,313		$	(98,392	)	$	281,021

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

SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Three Months Ended December 31,
	2022			2021
Cash Flows from Operating Activities:
Net earnings	$	50,337		$	68,838
Adjustments to reconcile net earnings to net cash provided (used) by operating activities:
Depreciation and amortization		25,285			24,421
Share-based compensation expense		5,135			3,958
Amortization of deferred financing costs		648			932
Impairment of long-lived assets, including operating lease assets		2,103			—
Loss on disposal of equipment and other property		77			3
Deferred income taxes		889			1,867
Changes in (exclusive of effects of acquisitions):
Trade accounts receivable		2,270			2,841
Accounts receivable, other		(3,817	)		(1,724	)
Inventory		(38,019	)		(137,326	)
Other current assets		(4,018	)		(446	)
Other assets		4,074			1,371
Operating leases, net		(10,392	)		6,475
Accounts payable and accrued liabilities		7,606			16,729
Income taxes payable		12,460			18,166
Other liabilities		313			(11,790	)
Net cash provided (used) by operating activities		54,951			(5,685	)
Cash Flows from Investing Activities:
Payments for property and equipment, net of proceeds		(25,007	)		(26,390	)
Acquisitions, net of cash acquired		—			(319	)
Net cash used by investing activities		(25,007	)		(26,709	)
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt		229,000			—
Repayments of long-term debt, including prepayment costs		(233,927	)		(1,421	)
Payments for common stock repurchased		—			(75,000	)
Proceeds from equity awards		60			7,372
Employee withholding taxes paid related to net share settlement of equity awards		(1,125	)		(1,136	)
Net cash used by financing activities		(5,992	)		(70,185	)
Effect of foreign exchange rate changes on cash and cash equivalents		4,561			(240	)
Net increase (decrease) in cash and cash equivalents		28,513			(102,819	)
Cash and cash equivalents, beginning of period		70,558			400,959
Cash and cash equivalents, end of period	$	99,071		$	298,140
Supplemental Cash Flow Information:
Interest paid	$	26,758		$	35,034
Income taxes paid	$	3,081		$	3,978
Capital expenditures incurred but not paid	$	5,542		$	3,594

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

Sally Beauty Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1.	Significant Accounting Policies

Basis of Presentation

The unaudited condensed consolidated interim financial statements of Sally Beauty Holdings, Inc. and its subsidiaries included herein have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and pursuant to the rules and regulations of the SEC. Accordingly, certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC, although we believe that the disclosures included herein are adequate for the interim period presented. These condensed consolidated interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022. In the opinion of management, these unaudited condensed consolidated interim financial statements reflect all adjustments that are of a normal recurring nature and which are necessary to present fairly our consolidated financial position as of December 31, 2022, and September 30, 2022, and our consolidated results of operations, consolidated comprehensive income, consolidated cash flows and consolidated statements of stockholders’ equity for the three months ended December 31, 2022 and 2021.

Principles of Consolidation

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

Accounting Policies

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

Use of Estimates

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

2.	Revenue Recognition

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

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

	Three Months Ended December 31,
	2022			2021
Beginning Balance	$	13,460		$	16,744
Loyalty points and gift cards issued but not redeemed, net of estimated breakage		6,291			5,842
Revenue recognized from beginning liability		(4,489	)		(3,509	)
Ending Balance	$	15,262		$	19,077

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

3.	Fair Value Measurements

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

The three levels of that hierarchy are defined as follows:

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

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

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

Financial instruments measured at fair value on recurring basis

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

(in thousands)	Classification	Fair Value Hierarchy Level	December 31, 2022		September 30, 2022
Financial Assets:
Foreign exchange contracts
Non-designated cash flow hedges	Other current assets	Level 2	$	4,463	$	294
Interest rate caps	Other current assets	Level 2		3,627		3,860
Total assets			$	8,090	$	4,154
.
Financial Liabilities:
Foreign exchange contracts
Designated cash flow hedges	Accrued liabilities	Level 2	$	1,930	$	—
Non-designated cash flow hedges	Accrued liabilities	Level 2		4,045		79
Total liabilities			$	5,975	$	79

The fair value for interest rate caps and foreign exchange contracts were measured using widely accepted valuation techniques, such as discounted cash flow analyses and observable inputs, such as market interest rates and foreign exchange rates.

Other fair value disclosures

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

		December 31, 2022				September 30, 2022
(in thousands)	Fair Value Hierarchy Level	Carrying Value		Fair Value		Carrying Value		Fair Value
Long-term debt, excluding capital leases
Senior notes	Level 1	$	679,961	$	652,763	$	679,961	$	639,163
Term loan B	Level 2		406,125		403,587		407,500		398,331
Total long-term debt		$	1,086,086	$	1,056,350	$	1,087,461	$	1,037,494

The fair value of term loan B 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 (“Board”) approved a share repurchase program authorizing us to repurchase up to $1.0 billion of its common stock, subject to certain limitations governed by our debt agreements. In July 2021, our Board approved a term extension of the share repurchase program for the four-year period ending September 30, 2025. As of December 31, 2022, we had authorization of approximately $595.8 million of additional potential share repurchases remaining under our share repurchase program. For the three months ended December 31, 2022, we did not repurchase shares under our share repurchase program. For the three months ended December 31, 2021, we repurchased 3.7 million shares of common stock at a total cost of $75.0 million.

Accumulated Other Comprehensive Income (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, 2022	$	(153,128	)	$	1,960	$	(679	)	$	(151,847	)
Other comprehensive income (loss) before reclassification, net of tax		25,941			155		(608	)		25,488
Reclassification to net earnings, net of tax		—			48		(302	)		(254	)
Balance at December 31, 2022	$	(127,187	)	$	2,163	$	(1,589	)	$	(126,613	)

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):