Published: 2022-02-02 00:00:00 ET

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

 

FOR THE QUARTERLY PERIOD ENDED: DECEMBER 31, 2021

-OR-

 

 

Commission File No. 1-33145

 

SALLY BEAUTY HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

(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.

 

 

 

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

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

As of January 28, 2022, there were 110,075,502 shares of the issuer’s common stock outstanding.

 

 

 

 

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TABLE OF CONTENTS

 

 

 

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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.

 

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PART I — FINANCIAL INFORMATION

Item 1.  Financial Statements.

SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except par value data)

 

 

 

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

 

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SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Earnings

(In thousands, except per share data)

(Unaudited)

 

 

 

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

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SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(In thousands)

(Unaudited)

 

 

 

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

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SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders’ Equity

(In thousands)

(Unaudited)

 

 

 

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

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SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

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

 

 

 

 

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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 two segments, Sally Beauty Supply (“SBS”) and Beauty Systems Group (“BSG”). Our operations consist of company-operated stores, franchise stores and several e-commerce platforms. Within BSG, we also have one of the largest networks of distributor sales consultants (“DSCs”) for professional beauty products in North America, who sell directly to salons and salon professionals. SBS targets retail consumers, salons and salon professionals, while BSG targets salons and salons professionals.

Basis of Presentation

The condensed consolidated interim financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and pursuant to the rules and regulations of the SEC. Accordingly, certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC, although we believe that the disclosures included herein are adequate for the interim period presented. These condensed consolidated interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2021. In the opinion of management, these condensed consolidated interim financial statements reflect all adjustments that are of a normal recurring nature and which are necessary to present fairly our consolidated financial position as of December 31, 2021 and September 30, 2021, and our consolidated results of operations, consolidated comprehensive income, consolidated statements of stockholders’ equity and our consolidated cash flows for the for the three months ended December 31, 2021 and 2020.

Principles of Consolidation

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

Accounting Policies

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

Use of Estimates

In order to present our financial statements in conformity with GAAP, we are required to make certain estimates and assumptions that impact our interim financial statements and supplementary disclosures. These estimates may use forecasted financial information based on reasonable information available, however are subject to change in the future. Additionally, unknown future impacts of COVID-19 may impact those estimates and assumptions as well. Significant estimates and assumptions are part of our accounting for sales allowances, deferred revenue, valuation of inventory, amortization and depreciation, intangibles and goodwill, and other reserves. We believe these estimates and assumptions are reasonable however they are based on management’s current knowledge of events and actions and changes in facts and circumstances may result in revised estimates, and impact actual results.

Impact of COVID-19

Our operating results for the three months ended December 31, 2021, may not be indicative of the results that may be expected for the full fiscal year ending September 30, 2022, in particular as a result of the uncertainty around the continuing effects of the COVID-19 pandemic and its variants on future periods. While trends have been improving, we cannot reasonably predict the effects of the pandemic or expect these positive trends to continue. If we become negatively impacted, we may have to consider adjustments to our strategic plans, inventory, liquidity, operational and capital expenditure plans.

Additionally, as the uncertainty of the economy as a result of COVID-19 continues to be prolonged, it may have an impact on our net sales and operations, and may require changes to our reserves including adjustments, write-downs and restructuring charges.

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2.   Revenue Recognition

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

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

						Three Months Ended December 31,
						2021				2020
Beginning Balance						$	16,744			$	13,947
Loyalty points and gift cards issued but not redeemed, net of estimated breakage							5,842				5,709
Revenue recognized from beginning liability							(3,509	)			(3,476	)
Ending Balance						$	19,077			$	16,180

See Note 9, Segment Reporting, for additional information regarding the disaggregation of our sales revenue.

3.   Fair Value Measurements

Financial instruments measured on recurring basis

Consistent with the three-level hierarchy defined in ASC Topic 820, Fair Value Measurement, as amended, we categorize our financial assets and liabilities as follows:

(in thousands)		Classification		Fair Value Hierarchy Level		December 31, 2021				September 30, 2021
Financial Assets:
Foreign exchange contracts		Other current assets		Level 2		$	439			$	—
Interest rate caps		Other assets		Level 2			133				35
Total assets						$	572			$	35
.
Financial Liabilities:
Foreign exchange contracts		Accrued liabilities		Level 2		$	51			$	—

 

Financial instruments not measured at fair value

Carrying amounts and the related estimated fair value of our long-term debt, excluding capital lease obligations and debt issuance costs, are as follows:

				December 31, 2021								September 30, 2021
(in thousands)		Fair Value Hierarchy Level		Carrying Value				Fair Value				Carrying Value				Fair Value
Long-term debt, excluding capital leases
Senior notes		Level 1		$	979,961			$	1,012,310			$	979,961			$	1,019,635
Term loan B		Level 2			411,625				410,700				413,000				411,451
Total long-term debt				$	1,391,586			$	1,423,010			$	1,392,961			$	1,431,086

 

The table above excludes amounts, if any, related to our ABL facility as the balance approximates fair value due to the short-term nature of our borrowings. The fair value of the senior notes was measured using unadjusted quoted market prices. The fair value of other long-term debt was measured using quoted market prices for similar debt securities in active markets or widely accepted valuation techniques, such as discounted cash flow analyses, using observable inputs, such as market interest rates.

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4.   Stockholders’ Equity

Share Repurchases

In August 2017, our Board of Directors approved a share repurchase program authorizing the Company to repurchase up to $1.0 billion of its common stock, subject to certain limitations governed by our debt agreements. In July 2021, our Board of Directors approved a term extension of the share repurchase program for the four-year period ending September 30, 2025.

Information related to our shares repurchased and subsequently retired were as follows (in thousands):

		Three Months Ended December 31,
		2021				2020
Number of shares repurchased			3,675				—
Total cost of share repurchased		$	75,000			$	—

Accumulated Other Comprehensive Loss

The change in accumulated other comprehensive loss (“AOCL”) was as follows (in thousands):

		Foreign Currency Translation Adjustments				Interest Rate Caps				Foreign Exchange Contracts				Total
Balance at September 30, 2021		$	(92,154	)		$	(2,085	)		$	(402	)		$	(94,641	)
Other comprehensive income (loss) before     reclassification, net of tax			(4,509	)			(114	)			171				(4,452	)
Reclassification to net earnings, net of tax			—				392				309				701
Balance at December 31, 2021		$	(96,663	)		$	(1,807	)		$	78			$	(98,392	)

The tax impact for the changes in other comprehensive (loss) income and the reclassifications to net earnings was not material.

5.   Weighted-Average Shares

The following table sets forth the reconciliation of basic and diluted weighted-average shares (in thousands):

 

		Three Months Ended December 31,
		2021				2020
Weighted-average basic shares			111,995				112,475
Dilutive securities:
Stock option and stock award programs			1,973				1,353
Weighted-average diluted shares			113,968				113,828
Anti-dilutive options excluded from our computation of diluted shares			2,775				6,009

 

6. Goodwill and Intangible Assets

We considered potential triggering events and determined there were none during the three months ended December 31, 2021.  No material impairment losses were recognized in the current or prior periods presented in connection with our goodwill and other intangible assets.

 

		Three Months Ended December 31,
(in thousands)		2021				2020
Intangible assets amortization expense		$	1,071			$	1,698

 

Additionally, during the three months ended December 31, 2021, the decrease in goodwill was primarily from the effects of foreign currency exchange rates of $0.9 million.

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7. Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

		December 31, 2021				September 30, 2021
Compensation and benefits		$	44,946			$	73,344
Deferred revenue			20,373				18,543
Rental obligations			11,524				10,501
Interest payable			7,978				24,101
Insurance reserves			6,408				5,934
Property and other taxes			2,976				3,853
Operating accruals and other			57,733				69,879
Total accrued liabilities		$	151,938			$	206,155

 

8.    Derivative Instruments and Hedging Activities

During the three months ended December 31, 2021, we did not purchase or hold any derivative instruments for trading or speculative purposes. See Note 3, Fair Value Measurements, for the classification and fair value of our derivative instruments.

Designated Cash Flow Hedges

Foreign Currency Forwards

We regularly enter into foreign currency forwards to mitigate our exposure to exchange rate changes on inventory purchases in U.S. dollars by our foreign subsidiaries. At December 31, 2021, the notional amount we held through these forwards, based upon exchange rates at December 31, 2021, was as follows (in thousands):

Notional Currency		Notional Amount
Mexican Peso		$	17,759
Euro			12,364
Canadian Dollar			8,090
Total		$	38,213

 

We record quarterly, net of income tax, the changes in fair value related to the foreign currency forwards into AOCL. As the forwards are exercised, the realized value is recognized into cost of goods sold based on inventory turns. For the three months ended December 31, 2021 and 2020, we recognized a loss of $0.3 million and a gain of $0.4 million, respectively, into cost of goods sold on our condensed consolidated statements of earnings. Based on December 31, 2021 valuations and exchange rates, we expect to reclassify losses of approximately $0.6 million into cost of goods sold over the next 12 months.

Interest Rate Caps

In July 2017, we purchased two interest rate caps with an initial aggregate notional amount of $550 million (the “interest rate caps”) to mitigate the exposure to higher interest rates in connection with our term loan B. The interest rate caps are comprised of individual caplets that expire ratably through June 30, 2023, and are designated as cash flow hedges. Accordingly, changes in fair value of the interest rate caps are recorded quarterly, net of income tax, and are included in AOCL. Over the next 12 months, we expect to reclassify approximately $1.8 million into interest expense, which represents the original value of the expiring caplets.

For the three months ended December 31, 2021, we recognized expense of approximately $0.4 million into interest expense on our condensed consolidated statements of earnings. The effects of our interest rate caps on our condensed consolidated statements of earnings were not material for the three months ended December 31, 2020.

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9.   Segment Reporting

Segment data for the three months ended December 31, 2021 and 2020, is as follows (in thousands):

 

		Three Months Ended December 31,
		2021				2020
Net sales:
Sally Beauty Supply ("SBS")		$	561,530			$	547,670
Beauty Systems Group ("BSG")			418,721				388,352
Total		$	980,251			$	936,022
Earnings before provision for income taxes:
Segment operating earnings:
SBS		$	100,623			$	95,128
BSG			58,546				48,572
Segment operating earnings			159,169				143,700
Unallocated expenses			45,290				39,146
Restructuring			1,099				232
Consolidated operating earnings			112,780				104,322
Interest expense			20,241				25,978
Earnings before provision for income taxes		$	92,539			$	78,344

 

Sales between segments, which are eliminated in consolidation, were not material during the three months ended December 31, 2021 and 2020.

Disaggregation of net sales by segment  

The following tables disaggregate our segment revenues by merchandise category. We have reclassified certain prior year amounts to conform to current year presentation.

		Three Months Ended December 31,
SBS		2021				2020
Hair color			36.8	%			36.0	%
Hair care			23.8	%			20.9	%
Styling tools and supplies			20.2	%			23.1	%
Nail			10.4	%			10.8	%
Skin and cosmetics			7.9	%			8.4	%
Other beauty items			0.9	%			0.8	%
Total			100.0	%			100.0	%

 

		Three Months Ended December 31,
BSG		2021				2020
Hair color			41.9	%			40.2	%
Hair care			39.9	%			39.1	%
Styling tools and supplies			10.8	%			12.6	%
Skin and cosmetics			3.6	%			3.7	%
Nail			3.5	%			4.0	%
Other beauty items			0.3	%			0.4	%
Total			100.0	%			100.0	%

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The following tables disaggregate our segment revenue by sales channels:

		Three Months Ended December 31,
SBS		2021				2020
Company-operated stores			94.2	%			93.9	%
E-commerce			5.8	%			6.0	%
Franchise stores			0.0	%			0.1	%
Total			100.0	%			100.0	%

 

		Three Months Ended December 31,
BSG		2021				2020
Company-operated stores			67.5	%			69.6	%
Distributor sales consultants			13.6	%			14.3	%
E-commerce			11.7	%			8.5	%
Franchise stores			7.2	%			7.6	%
Total			100.0	%			100.0	%

 

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

This section should be read in conjunction with the information contained in our Annual Report on Form 10-K for the fiscal year ended September 30, 2021.

Executive Overview

Our financial results in the first quarter of 2022 reflect strong performance across our core categories of color and care as well as our ability to mitigate the current macro environment’s challenges and respond to them effectively. Our company and team of talented associates remain focused on providing first-rate experiences for our customers. We believe that this, coupled with our healthy levels of inventory, position us to meet customer demand and continue executing on our strategic initiatives. To that end, during the quarter we continued making progress on four strategic pillars; leveraging our digital platform, driving loyalty and personalization, delivering product innovation and advancing our supply chain.

Highlights for the Three Months Ended December 31, 2021

Impact of COVID-19 on Our Business

During the current quarter, the COVID-19 Omicron variant started to spread globally. Meanwhile, we continued to stay vigilant to developments in compliance and guidance from local and federal authorities, as well as geographical impacts of the virus and its variants. We continue to take decisive actions to protect our customers and associates. As such, we incurred additional costs around COVID-19, including testing in our distribution centers and COVID-19 cleanings during the quarter. While trends in business have been improving, we cannot reasonably predict the effects of new variants or expect these positive trends to continue. Therefore, our future performance may partially depend on impacts of COVID-19 such as widespread infections, labor shortages, global supply chain disruptions, variants of the virus, changes in governmental compliance and availability of vaccines and testing.

Refer Item 1A. “Risk Factors” in Part I of our Annual Report on Form 10-K for the fiscal year ended September 30, 2021, for further discussion of the risks and uncertainties pertaining to COVID-19.

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Global Supply Chain and Inflationary Impact

There continues to be volatility in the global supply chain as strong U.S. customer demand, COVID-19 restrictions, and labor shortages in many U.S. ports have caused logistical and delivery challenges specifically with inbound container volume. Shifts in demand have led to longer lead times and delays, and carriers have been faced with increased costs associated with capacity imbalances between Chinese and U.S ports, causing the freight market to increase as well. Due to these events, we have seen an increase in our inbound freight costs and the number of out-of-stock products. Furthermore, the increase in customer demand, along with COVID-19, have created labor shortages in the U.S and caused an increase in labor costs. As a result, we may experience an increase in our compensation costs in order to attract and retain associates.

Comparable Sales

We have recently launched many digital initiatives to support our omni-channel strategies to provide customers an enhanced shopping experience. As such, we believe that comparable sales is an appropriate performance indicator to measure our sales growth compared to the prior period. Our comparable sales include sales from stores that have been operating for 14 months or longer as of the last day of a month and e-commerce revenue. Additionally, our comparable sales include sales to franchisees and full service sales. Our comparable sales excludes the effect of changes in foreign exchange rates and sales from stores relocated until 14 months after the relocation. Revenue from acquisitions are excluded from our comparable sales calculation until 14 months after the acquisition. Our calculation of comparable sales might not be the same as other retailers as the calculation varies across the retail industry.

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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):

 

 

 

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Results of Operations

The Three Months Ended December 31, 2021, compared to the Three Months Ended December 31, 2020

Net Sales

SBS. The increase in net sales for SBS was primarily driven by the following (in thousands):

The increase in net sales was driven by an increase in comparable sales, reflecting strong customer demand. While store traffic and conversion remained consistent with recent trends, average unit price increased this quarter, led by our color categories. These increases were offset by a decrease in unit volume due to operating fewer stores compared to the same quarter last year.

BSG. The increase in net sales for BSG was primarily driven by the following (in thousands):

The increase in net sales was driven by an increase in comparable sales, primarily due to an increase in average unit prices, salons operating at full capacity during the quarter, as well as strong e-commerce growth. These increases were offset by a decrease in overall unit volume due to operating fewer stores in the current quarter compared to the same quarter last year.

Gross Profit

SBS. SBS’s gross profit increased for the three months ended December 31, 2021, as a result of an increase in net sales and a higher gross margin. SBS’s gross margin increased primarily as a result of the impact of pricing leverage, partially offset by higher distribution and freight costs.

BSG. BSG’s gross profit increased for the three months ended December 31, 2021, as a result of an increase in net sales and a higher gross margin. BSG’s gross margin increased primarily as a result of increased pricing leverage and an increase in sales volume from e-commerce customers.

Selling, General and Administrative Expenses

SBS. SBS’s selling, general and administrative expenses increased $6.9 million, or 3.1%, for the three months ended December 31, 2021. The increase was driven primarily by higher compensation and compensation-related expenses of $11.2 million, driven by general economic inflationary conditions and to international markets re-opening, partially offset by lower delivery expense of $2.4 million, as a result of a change in fulfillment strategy, and lower depreciation and amortization expenses of $2.1 million.

BSG. BSG’s selling, general and administrative expenses increased $7.1 million, or 6.6%, for the three months ended December 31, 2021. The increase was driven primarily by higher compensation and compensation-related expenses of $3.0 million, an increase in variable-sales related expense of $1.8 million, higher advertising expenses of $1.0 million and an increase in other operating expenses of $0.8 million.

Unallocated. Unallocated selling, general and administrative expenses, which represent certain corporate costs that have not been charged to our reporting segments, increased $6.1 million, or 15.7%, for the three months ended December 31, 2021, primarily due to higher COVID-19 related expenses and compensation and compensation-related expenses.

Restructuring

For the three months ended December 31, 2021, restructuring charges in connection with our previously communicated Transformation Plan increased $0.9 million to $1.1 million.

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Interest Expense

The decrease in interest expense is primarily due to the lower outstanding debt principal for the three months ended December 31, 2021 compared to the three months ended December 31, 2020, as a result of the paydown of our senior notes due 2023 and our term loan B fixed tranche during fiscal year 2021. See “Liquidity and Capital Resources” below for additional information.

Provision for Income Taxes

The effective tax rates were 25.6% and 27.0%, for the three months ended December 31, 2021, and 2020, respectively. The decrease in the effective tax rate was primarily due to the tax impact of share-based compensation which was beneficial in the current year quarter, but detrimental in the prior year quarter. 

Liquidity and Capital Resources

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 $15.1 million, to $733.8 million at December 31, 2021, compared to $718.7 million at September 30, 2021, primarily from increased inventory as a result of restocking to new levels of demand and our risk mitigation strategy to protect against potential, continued supply chain disruptions, partially offset by a decrease in cash and cash equivalents.

At December 31, 2021, cash and cash equivalents were $298.1 million. Based upon the current level of operations and anticipated growth, we anticipate that existing cash balances (excluding certain amounts permanently invested in connection with foreign operations), funds expected to be generated by operations and funds available under our ABL facility will be sufficient to fund working capital requirements, potential acquisitions, anticipated capital expenditures, including information technology upgrades and store remodels, and debt repayments over the next twelve months. We have continued to focus on reducing our debt levels and shares outstanding through repurchases, while also being proactive in maintaining our financial flexibility.

We utilize our ABL facility for the issuance of letters of credit, certain working capital and liquidity needs, and to manage normal fluctuations in our operational cash flow. In that regard, we may from time to time draw funds under the ABL facility for general corporate purposes including funding of capital expenditures, acquisitions, interest payments due on our indebtedness, paying down other debt and share repurchases. During the three months ended December 31, 2021, we did not draw funds under our ABL facility. As of December 31, 2021, we had $481.1 million available for borrowings under our ABL facility, subject to borrowing base limitations, as reduced by outstanding letters of credit. Amounts drawn on our ABL facility are generally paid down with cash provided by our operating activities.

Share Repurchase Programs

During the three months ended December 31, 2021, we repurchased 3.7 million shares of our common stock for $75.0 million. As of December 31, 2021, we had authorization of approximately $651.1 million of additional potential share repurchases remaining under the 2017 Share Repurchase Program.

Cash Flows

Historically, our primary source of cash has been net funds provided by operating activities and, when necessary, borrowings under our ABL facility. Historically, the primary uses of cash have been for share repurchases, capital expenditures, repayments and servicing of long-term debt and acquisitions.

Net Cash (Used) Provided by Operating Activities

The $44.7 million decrease in net cash (used) provided by operating activities was driven by an increase in inventory purchases as we increased stocking levels to new demand and our risk mitigation strategy to protect against potential, continued supply chain disruptions, partially offset by an increase in net earnings and the timing of our receivable collections.

Net Cash Used by Investing Activities

Net cash used by investing activities during the three months ended December 31, 2021, increased $9.2 million to $26.7 million, compared to the three months ended December 31, 2020. This change was primarily a result of additional investments in information technology and store improvements.

Net Cash Used by Financing Activities

Net cash used by financing activities for the three months ended December 31, 2021, increased $69.9 million to $70.2 million, as a result of share repurchases, partially offset by an increase in stock options exercised.

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Debt and Guarantor Financial Information

At December 31, 2021, we had $1,391.6 million in debt, not including capital leases, unamortized debt issuance costs and debt discounts, in the aggregate, of $9.5 million. Our debt consisted of $980.0 million of senior notes outstanding and a term loan with an outstanding principal balance of $411.6 million. As of December 31, 2021, there were no outstanding borrowings under our ABL facility.

We are currently in compliance with the agreements and instruments governing our debt, including our financial covenants.

Guarantor Financial Information

Currently, our issued securities consist of the 5.625% Senior Notes due 2025. This debt instrument was issued by our wholly-owned subsidiaries, Sally Holdings LLC and Sally Capital Inc. (the “Issuers”), under a shelf registration statement.

The notes are unsecured debt instruments guaranteed by us and certain of our wholly-owned domestic subsidiaries (together, the “Guarantors”) and have certain restrictions on the ability to pay restrictive payments to Sally Beauty. The guarantees are joint and several, and full and unconditional. Certain other subsidiaries, including our foreign subsidiaries, do not serve as guarantors.

The following summarized consolidating financial information represents financial information for the Issuers and the Guarantors on a combined basis. All transactions and intercompany balances between these combined entities has been eliminated.

The following table presents the summarized balance sheets information for the Issuers and the Guarantors as of December 31, 2021 and September 30, 2021 (in thousands):

The following table presents the summarized statement of income information for three months ended December 31, 2021 (in thousands):

Contractual Obligations

There have been no material changes outside the ordinary course of our business in any of our contractual obligations since September 30, 2021.

Off-Balance Sheet Financing Arrangements

At December 31, 2021, and September 30, 2021, we had no off-balance sheet financing arrangements other than outstanding letters of credit related to inventory purchases and self-insurance programs.

Critical Accounting Estimates

There have been no material changes to our critical accounting estimates or assumptions since September 30, 2021.

Recent Accounting Pronouncements

There have been no recent accounting pronouncements issued that will have a material impact to our business.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

As a multinational corporation, we are subject to certain market risks including foreign currency fluctuations, interest rates and government actions. There have been no material changes to our market risks from September 30, 2021. See our disclosures about market risks contained in Item 7A. “Quantitative and Qualitative Disclosures about Market Risk” in Part II of our Annual Report on Form 10-K for the fiscal year ended September 30, 2021.

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Item 4.  Controls and Procedures

Controls Evaluation and Related CEO and CFO Certifications.   Our management, with the participation of our principal executive officer (“CEO”) and principal financial officer (“CFO”), conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2021. The controls evaluation was conducted by our Disclosure Committee, comprised of senior representatives from our finance, accounting, internal audit, and legal departments under the supervision of our CEO and CFO.

Certifications of our CEO and our CFO, which are required in accordance with Rule 13a-14 of the Exchange Act, are attached as exhibits to this Quarterly Report. This “Controls and Procedures” section includes the information concerning the controls evaluation referred to in the certifications and it should be read in conjunction with the certifications for a more complete understanding of the topics presented.

Limitations on the Effectiveness of Controls.   We do not expect that our disclosure controls and procedures will prevent all errors and all fraud. A system of controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the system are met. Because of the limitations in all such systems, no evaluation can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Furthermore, the design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how unlikely. Because of these inherent limitations in a cost-effective system of controls and procedures, misstatements or omissions due to error or fraud may occur and not be detected.

Scope of the Controls Evaluation.   The evaluation of our disclosure controls and procedures included a review of their objectives and design, our implementation of the controls and procedures and the effect of the controls and procedures on the information generated for use in this Quarterly Report. In the course of the evaluation, we sought to identify whether we had any data errors, control problems or acts of fraud and to confirm that appropriate corrective action, including process improvements, was being undertaken if needed. This type of evaluation is performed on a quarterly basis so that conclusions concerning the effectiveness of our disclosure controls and procedures can be reported in our Quarterly Reports on Form 10-Q and our Annual Reports on Form 10-K. Many of the components of our disclosure controls and procedures are also evaluated by our internal audit department, by our legal department and by personnel in our finance organization. The overall goals of these various evaluation activities are to monitor our disclosure controls and procedures on an ongoing basis and to maintain them as dynamic systems that change as conditions warrant.

Conclusions regarding Disclosure Controls.  Based on the required evaluation of our disclosure controls and procedures, our CEO and CFO have concluded that, as of December 31, 2021, we maintain disclosure controls and procedures that are effective in providing reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting.   During our most recent fiscal quarter, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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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

 

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Item 6.  Exhibits

 

 

 

* Included herewith

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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.

 

 

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