What changed in this filing

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Item 7. Management’s Discussion and Analysis

2020-08-31 compared with 2019-08-27 · 292 added, 242 removed, 247 unchanged (68% of the section changed)

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In October 2017, the Company sold substantially all of its mall-based salon business in North America, representing 858 company-owned salons, and substantially all of its International segment, representing approximately 250 company-owned salons, to TBG.

In the second quarter of fiscal year 2020, TBG transferred 207 of its North American salons to the Company.

See Note 3 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K, as the results of operations for the mall-based business and International segment are accounted for as a discontinued operation for all periods presented.

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A summary of costs associated with the SmartStyle salon restructuring for fiscal year 2018 is as follows:

Financial Line Item

Fiscal Year 2018

Financial Line Item Fiscal Year 2018

(Dollars in thousands)

Inventory reserves

Cost of Service

Inventory reserves

Cost of Product

General and administrative

Long-lived fixed asset impairment

Depreciation and amortization

Asset retirement obligation

Depreciation and amortization

Lease termination and other related closure costs

Deferred rent

Inventory reserves Cost of Service $ 656

Inventory reserves Cost of Product 586

Severance General and administrative 897

Long-lived fixed asset impairment Depreciation and amortization 5,460

Asset retirement obligation Depreciation and amortization 7,680

Lease termination and other related closure costs Rent 27,290

Deferred rent Rent (3,291)

Total $ 39,278

In addition, the Company recorded approximately $1.9 million of other related costs to the SmartStyle restructuring, primarily warehouse related costs.

Substantially all related costs associated with the SmartStyle salon restructuring requiring cash outflow were complete as of June 30, 2018.

As part of the Company's strategic transition to a franchise focused business the Company is selling salons to franchisees.

As part of the Company's strategic transition to a fully-franchised model, the Company is selling salons to franchisees.

The impact of these transactions are as follows:

Twelve Months Ended

(Decrease) Increase

Fiscal Years Increase (Decrease)

2020 2019 2018 2020 2019

(Dollars in thousands)

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Non-cash goodwill derecognition (76,966) (67,055) (3,899) (9,911) (63,156)

Gain from sale of salon assets to franchisees, net

(Loss) gain from sale of salon assets to franchisees, net $ (27,306) $ 2,918 $ 241 $ (30,224) $ 2,677

____________________________________________________________________________

(1) In October 2017, the Company sold substantially all of its mall-based salon business in North America, representing

858 salons, and substantially all of its International segment, representing approximately 250 salons in the UK, to The Beautiful Group (TBG).

(1) Fiscal year 2018 includes the mall salons transferred to The Beautiful Group for no proceeds.

RESULTS OF OPERATIONS

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The estimated impact of the field reorganization (decreased) increased Cost of Service, Site Operating expense and General and Administrative expense by $(2.4), $(0.4) and $2.8 million, respectively, for fiscal year 2018.

This expense classification does not have a financial impact on the Company's reported operating (loss) income, reported net (loss) income or cash flows from operations.

This expense classification does not have a financial impact on the Company's reported operating loss, reported net (loss) income or cash flows from operations.

COVID-19 Impact:

During the second half of fiscal year 2020, the global coronavirus pandemic (COVID-19) had an adverse impact on our operations, including the closure of all company-owned salons and almost all franchise locations from March 2020 due to government mandates.

Salons continued to be closed until April 23, 2020 when franchise salons began re-opening slowly, as government, state and local restrictions eased.

As of June 30, 2020, approximately 87% of franchise salons were open.

Company-owned salons were closed through May 21, 2020 and are gradually re-opening.

As of June 30, 2020, approximately 54% of company-owned salons were open.

As salons re-open, the Company is taking additional measures across its portfolio of franchise and company-owned salons to facilitate customer and employee safety.

As a result, COVID-19 has and will continue to negatively affect revenue and profitability.

To offset the loss of revenue, in April 2020, we implemented a furlough program for a majority of the workforce across the corporate office, field support, and distribution centers;

and reductions in the pay for executives and other working employees.

The furlough program was in effect for the majority of the fiscal fourth quarter.

Despite actions taken to resume business operations, COVID-19, and the volatile regional and global economic conditions stemming from the pandemic, as well as reactions to future pandemics or resurgences of COVID-19, could potentially prolong and intensify the impact of the global crisis on our business.

The economic disruption due to COVID-19 was determined to be a triggering event and as a result, management assessed its long-term assets, including long-lived salon assets, right of use assets, goodwill and other intangibles for impairment.

See Note 1 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K for further discussion on the pandemic.

System-wide results

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System-wide same-store sales (1) by concept are detailed in the table below:

Twelve Months Ended

2020 2019 2018

SmartStyle (5.5) % 1.0 % (0.2) %

Supercuts (4.2) (0.2) 1.9

Signature Style (3.7) (0.8) 0.5

Total, excluding TBG mall-locations

TBG mall-locations

Total, excluding TBG mall-locations N/A (0.1) N/A

TBG mall-locations N/A (4.5) N/A

Total (4.4) % (0.5) % 0.9 %

____________________________________________________________________________

System-wide same-store sales are calculated as the total change in sales for system-wide company-owned and franchise locations for more than one year (including TBG mall locations in 2019) that were open on a specific day of the week during the current period and the corresponding prior period.

(1) System-wide same-store sales are calculated as the total change in sales for system-wide franchise and company-owned locations for more than one year (including TBG mall locations in 2019) that were open on a specific day of the week during the current period and the corresponding prior period.

TBG salons were not a franchise locations in 2018 or 2020 so they are by definition excluded from same-store sales in 2018 and 2020.

Year-to-date system-wide same-store sales are the sum of the system-wide same-store sales computed on a daily basis.

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The percentages are computed as a percent of total revenues, except as otherwise indicated.

(Dollars in millions)

% of Total Revenues (1)

(Decrease) Increase

2020 2019 2018 2020 2019 2018 2020 2019

(Dollars in millions) % of Total Revenues (1) Basis Point (Decrease) Increase

Service revenues $ 331.5 $ 749.7 $ 899.3 49.5 % 70.1 % 72.8 % (2,060) (270)

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Franchise royalties and fees 73.4 93.8 77.4 11.0 8.8 6.3 220 250

Franchise rental income 127.2 — — 19.0 — — N/A N/A

Cost of service (2) 222.3 452.8 530.6 67.1 60.4 59.0 670 140

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General and administrative 131.0 177.0 174.0 19.6 16.6 14.1 300 250

Rent 76.4 131.8 183.1 11.4 12.3 14.8 (90) (250)

Franchise rent expense 127.2 — — 19.0 — — N/A N/A

Depreciation and amortization 37.0 37.8 58.2 5.5 3.5 4.7 200 (120)

Long-lived asset impairment 22.6 — — 3.4 — — N/A N/A

TBG restructuring 2.3 21.8 — 0.3 2.0 — (170) 200

Operating (loss) income

Goodwill impairment 40.2 — — 6.0 — — N/A N/A

Operating loss (145.3) (22.1) (5.1) (21.7) (2.1) (0.4) (1,960) (170)

Interest expense (7.5) (4.8) (10.5) (1.1) (0.4) (0.8) (70) 40

Gain on sale of salon assets to franchisees, net

(Loss) gain from sale of salon assets to franchisees, net (27.3) 2.9 0.2 (4.1) 0.3 — (440) 30

Interest income and other, net 3.4 1.7 5.2 0.5 0.2 0.4 30 (20)

Income tax benefit (expense) (3)

Income tax benefit (3) 4.6 2.1 69.8 2.6 9.6 685.0 N/A N/A

Income (loss) from discontinued operations, net of taxes 0.8 5.9 (53.2) 0.1 0.6 (4.3) (50) 490

____________________________________________________________________________

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(2) Excludes depreciation and amortization expense.

Computed as a percent of income (loss) from continuing operations before income taxes .

(3) Computed as a percent of loss from continuing operations before income taxes.

The income taxes basis point change is noted as not applicable (N/A) as the discussion below is related to the effective income tax rate.

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Consolidated Revenues

Consolidated revenues primarily include revenues of company-owned salons, product and equipment sales to franchisees and franchise royalties and fees.

The following tables summarize revenues and same-store sales by concept:

Consolidated revenues primarily include revenues of company-owned salons, product and equipment sales to franchisees franchise royalties and fees and franchise rental income.

The following tables summarize revenues and same-store sales by concept, as well as the reasons for the percentage change:

2020 2019 2018

(Dollars in thousands)

Company-owned salons

Signature Style

Total Company-owned salons

Company-owned salon same-store sales (decrease) increase (1)

Franchise salons:

Product excluding TBG $ 50,411 $ 42,915 $ 34,638

TBG product 2,010 16,990 19,065

Total franchise product 52,421 59,905 53,703

Royalties and fees 73,402 93,761 77,394

Total franchise salons revenue

Franchise same-store sales, excluding TBG mall locations (2)

Franchise salon same-store sales (decrease) increase (2)

Franchise rental income 127,203 — —

Total, Franchise salons 253,026 153,666 131,097

Franchise same-store sales (decrease) increase (1) (4.4) % 0.3 % 2.1 %

Company-owned salons:

SmartStyle $ 203,361 $ 208,531 $ 283,942

Supercuts 54,121 383,380 463,644

Signature Style 159,221 323,462 356,796

Total, Company-owned salons 416,703 915,373 1,104,382

Company-owned salon same-store sales (decrease) increase (2) (4.4) % (0.4) % 0.4 %

Consolidated revenues $ 669,729 $ 1,069,039 $ 1,235,479

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_______________________________________________________________________________

Same-store sales are calculated on a daily basis as the total change in sales for company-owned locations which were open on a specific day of the week during the current period and the corresponding prior period.

Fiscal year same-store sales are the sum of the same-store sales computed on a daily basis.

Locations relocated within a one mile radius are included in same-store sales as they are considered to have been open in the prior period.

Same-store sales are calculated in local currencies to remove foreign currency fluctuations from the calculation.

(1) Franchise same-store sales are calculated as the total change in sales for salons that have been a franchise location for more than one year that were open on a specific day of the week during the current period and the corresponding prior period.

Franchise same-store sales are the sum of the franchise same-store sales computed on a daily basis.

Fiscal year franchise same-store sales are the sum of the franchise same-store sales computed on a daily basis.

Franchise salons that do not report daily sales are excluded from same-store sales.

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Franchise same-store sales are calculated in local currencies to remove foreign currency fluctuations from the calculation.

TBG is not included in 2018 same-store sales as it was not a franchise location in the previous year.

As of June 27, 2019, TBG North American mall locations are no longer franchise locations so they will not be included in same store sales going forward.

Decreases in consolidated revenues were driven by the following:

Company-owned same-store sales

Closed salons

Salons sold to franchisees

New company-owned stores

Franchise product and royalties and fees

Franchise same-store sales (1)

TBG product, royalties and fees

Advertising fund

Foreign currency

(1) Franchise same-store sales increase (decrease) franchise royalties.

As we transition to the asset-light franchise platform, franchise same-store sales will become more significant to consolidated revenues.

TBG salons were not a franchise location in fiscal years 2018 or 2020 so by definition they are not included in franchise same-store sales in 2018 or 2020.

TBG same-store sales are excluded from fiscal year 2019 same-store sales to be comparative to fiscal years 2018 and 2020.

(2) Company-owned same-store sales are calculated as the total change in sales for company-owned locations that were open on a specific day of the week during the current period and the corresponding prior period.

Fiscal year company-owned same-store sales are the sum of company-owned same-store sales computed on a daily basis.

Locations relocated within a one-mile radius are included in same-store sales as they are considered to have been open in the prior period.

Company-owned same-store sales are calculated in local currencies to remove foreign currency fluctuations from the calculation.

Fiscal Year Ended June 30, 2020 Compared with Fiscal Year Ended June 30, 2019

Consolidated Revenues

Consolidated revenues are primarily comprised of service and product revenues, as well as franchise royalties and fees, advertising fees and rental income.

Consolidated revenue decreased $399.3 million, or 37.4%.

Service revenue and product revenue decreased $418.1 million and $88.0 million, respectively.

The decline in service and product revenue is primarily the result of the Company's sale of salons to franchisees and the government-mandated salon closures in the fourth quarter.

During fiscal year 2020, 1,448 salons were sold to franchisees, net of buy backs and 487 and 62 system-wide salons were closed and constructed, respectively (2020 Net Salon Count Changes).

The impact to consolidated revenue due to the sale of salons to franchisees and closure of salons was $412.4 million.

Additionally, the decline in revenue was a result of the temporary closure of all franchise and company-owned salons in the fourth quarter due to the COVID-19 pandemic.

Royalties and fees decreased $20.4 million due to the refunding of $14.9 million of previously collected contributions to the cooperative advertising funds.

Additionally, as a result of the Company's adoption of Topic 842, the Company now records revenue related to franchise leases and this adoption resulted in $127.2 million increase in franchise rental income for the year.

Service Revenues

The decrease of $418.1 million, or 55.8%, in service revenues during fiscal year 2020 was primarily due to 2020 Net Salon Count Changes.

The impact to service revenue due to the sale of salons to franchisees and closure of salons was $350.8 million.

Additionally, the temporary closure of salons in the fourth quarter and company-owned same-store service sales decreases also contributed to the decrease in service revenue.

The company-owned same-store service sales decrease of 3.3% during fiscal year 2020 was primarily due to a 7.4% decrease in same-store guest transactions, partially offset by an increase of 4.1% in average ticket price.

Product Revenues

The decrease of $88.0 million, or 39.0%, in product revenues during fiscal year 2020 was primarily due to 2020 Net Salon Count Changes.

The impact to product revenue due to the sale of salons to franchisees and closure of salons was $61.6 million.

Company-owned same-store product sales decrease of 8.7% and the temporary closure of salons in the fourth quarter also contributed to the decrease in product sales.

For fiscal year 2020, the decrease in company-owned same-store product sales was the result of a decrease in company-owned same-store transactions of 12.8%, partially offset by an increase in average ticket price of 4.1%.

Royalties and Fees

The decrease of $20.4 million, or 21.7%, in royalties and fees for fiscal year 2020 was primarily due to the refunding of $14.9 million of previously collected contributions to the cooperative advertising funds to provide temporary relief to our franchisees and the decline in royalties in the fourth quarter is due to government-mandated salon closures.

Total franchised locations open at June 30, 2020 were 5,209 as compared to 3,951 at June 30, 2019.

Franchise Rental Income

The increase of $127.2 million in franchise rental income is due to the adoption of Topic 842 in fiscal year 2020.

Prior to the adoption, the Company recorded franchise rental income and expense on a net basis.

Cost of Service

The 670 basis point increase in cost of service as a percent of service revenues during fiscal year 2020 was due to higher minimum wage and commissions and inefficient stylist hours.

Cost of Product

The 450 basis point increase in cost of product as a percent of product revenue during fiscal year 2020 was primarily due to the shift into lower margin wholesale product sales.

Margins on retail product sales were 47.6% and 50.8% for fiscal years 2020 and 2019, respectively.

Margins on wholesale product sales were 23.6% and 21.2% for fiscal years 2020 and 2019, respectively.

The increase in wholesale product margins in fiscal year 2020 were primarily driven by lower sales to TBG.

Site Operating Expenses

The decrease of $69.5 million, or 49.3%, in site operating expenses during fiscal year 2020 was due to a net reduction in company-owned salon counts, a decrease in cooperative advertising expense and a decrease in marketing spend.

Salons sold to franchisees and closed salons accounted for $37.8 million of the decline.

The Company records advertising expense as the contributions are received as it has an obligation to spend the funds to support the brands.

In fiscal year 2020, the Company refunde d $14.9 mill ion in advertising fees that were previously collected to provide temporary relief to our franchisees.

Marketing expense declined as part of our strategic shift to a full-franchised business model.

General and Administrative

The decrease of $46.1 million, or 26.0%, in general and administrative during fiscal year 2020 was primarily due to lower administrative and field management salaries due in part to the Company's furlough program in response to the COVID-19 pandemic and reductions in headcount as we align our cost structure with our transition to an asset-light franchise model.

Stock compensation benefits associated with a change in performance awards assumptions also contributed to the decrease year over year.

The decrease of $55.4 million, or 42.1%, in rent expense during fiscal year 2020 was primarily due to the net reduction in salon counts associated with the Company's franchise strategy.

Additionally, two months of rent abatement from Walmart and a decline in percentage rent, both due to COVID-19 salon closures, also contributed to the decline, but were partially offset by rent inflation.

Franchise Rent Expense

The increase in franchise rent expense is due to the adoption of Topic 842 in fiscal year 2020.

Prior to the adoption, the Company recorded franchise rental income and expense on a net basis.

Depreciation and Amortization

The decrease of $0.9 million, or 2.4%, in depreciation and amortization during fiscal year 2020 was primarily due to the net reduction in company-owned salon counts, partially offset by an intangible asset impairment of $2.5 million.

Long-Lived Asset Impairment

In fiscal year 2020, the Company recorded a long-lived asset impairment charge of $22.6 million which included a right of use asset impairment of $17.4 million.

Prior to the Adoption of ASC 842 in fiscal year 2020, we did not record a right of use asset so there was no impairment consideration.

Additionally, salon asset impairment increased in fiscal year 2020.

TBG Mall Restructuring

In fiscal year 2020, the Company incurred professional fees associated with acquiring salons from TBG.

In fiscal year 2019, the Company recorded a reserve against a note receivable of $8.0 million and accounts receivables of $12.7 million due from TBG primarily for inventory shipments.

Goodwill Impairment

In fiscal year 2020, Company recorded $40.2 million of goodwill impairment related to the Company-owned reporting unit.

The Company's forecasted cash flows for company-owned salons decreased significantly due to the impact of the COVID-19 pandemic.

As a result, the carrying value of the Company-owned reporting unit exceeded its fair value resulting in a full impairment of goodwill.

Interest Expense

The increase of $2.7 million in interest expense for fiscal year 2020 was primarily due to interest charges associated with the Company's long-term financing liabilities and the interest associated with the additional borrowing in fiscal year 2020.

(Loss)/Gain from sale of salon assets to franchisees, net

In fiscal year 2020, the loss from sale of salon assets to franchisees was $27.3 million, including non-cash goodwill derecognition of $77.0 million.

In fiscal year 2019, the gain from sale of salon assets to franchisees was $2.9 million, including non-cash goodwill derecognition of $67.1 million.

The decrease year over year is due to lower proceeds per salon sold in fiscal year 2020 compared to fiscal year 2019 as the Company sold more Supercuts salons in fiscal year 2019, which typically vendition for greater proceeds than other concepts.

In fiscal year 2020, average proceeds per salon were $62.1 thousand compared to $123.6 thousand in fiscal year 2019.

Interest Income and Other, net

The increase of $1.6 million, or 93.9%, in interest income and other, net during fiscal year 2020 was primarily due to the gain on the sale of the Company's headquarters of $2.5 million, partially offset by a decline in interest income.

During fiscal year 2020, the Company recognized a tax benefit of $4.6 million, with a corresponding effective tax rate of 2.6% as compared to recognizing tax benefit of $2.1 million, with a corresponding effective tax rates of 9.6% during fiscal year 2019.

See Note 10 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K.

Income from Discontinued Operations

Income from discontinued operations decreased $5.1 million, or 85.9%, during fiscal year 2020, due to the lapping of income tax benefits associated with the wind-down and transfer of legal entities related to discontinued operations recognized in the second quarter of fiscal year 2019, partially offset by beneficial actuarial adjustments recognized in the current year.

Fiscal Year Ended June 30, 2019 Compared with Fiscal Year Ended June 30, 2018

Consolidated Revenues

Consolidated revenues are primarily comprised of service and product revenues, as well as franchise royalties and fees.

Service revenue declined $149.7 million , or 16.6% , primarily due to the sale of salons to franchisees and a decline in company-owned same-store service sales of 0.3% .

We closed 133 company-owned salons, constructed (net of relocations) 10 company-owned salons and sold (net of buybacks) 735 company-owned salons during fiscal year 2019 (2019 Net Salon Count Changes).

Service revenue decreased $149.7 million, or 16.6%, primarily due to the sale of salons to franchisees and a decline in company-owned same-store service sales of 0.3%.

The Company closed 133 company-owned salons, constructed (net of relocations) 10 company-owned salons and sold (net of buybacks) 735 company-owned salons during fiscal year 2019 (2019 Net Salon Count Changes).

Product revenue decreased $33.1 million or 12.8% due to lower sales to TBG and a system-wide decline of retail sales of 2.4% excluding TBG.

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General and Administrative

General and administrative expense (G&A) increased $3.0 million during fiscal year 2019 primarily due to an $8.0 million gain in the prior year associated with life insurance proceeds, increased stock compensation and professional fees, partially offset by lower administrative, corporate and field salaries and bonuses.

General and administrative expense increased by $3.0 million during fiscal year 2019 primarily due to a n $8.0 million gain in the prior year associated with life insurance proceeds, increased stock compensation and professional fees, partially offset by lower administrative, corporate and field salaries and bonuses.

Rent expense decreased by $51.3 million during fiscal year 2019 primarily due to lease termination fees and other related closure costs associated with the January 2018 SmartStyle portfolio restructure and the 2019 Net Salon Count Changes, partially offset by rent inflation.

Depreciation and Amortization

Depreciation and amortization expense (D&A) decreased $20.4 million during fiscal year 2019 , primarily due to costs in the prior year associated with returning certain SmartStyle locations to their pre-occupancy condition in connection with the January 2018 SmartStyle restructuring and lower depreciation due to a reduced salon base and lower salon asset impairments.

TBG Mall Location Restructuring

In fiscal year 2019, the Company recorded a reserve against a note receivable of $8.0 million and accounts receivables of $12.7 million due from TBG based on TBG’s inability to meet the requirements of the promissory notes, including non-payment of amounts due to the Company.

The $8.0 million note relates to prior year inventory shipments and the $12.7 million of receivables primarily relates to current year inventory shipments.

Depreciation and amortization expense decreased $20.4 million during fiscal year 2019, primarily due to costs in the prior year associated with returning certain SmartStyle locations to their pre-occupancy condition in connection with the January 2018 SmartStyle restructuring and lower depreciation due to a reduced salon base and lower salon asset impairments.

TBG Mall Restructuring

In fiscal year 2019, the Company recorded a reserve against a note receivable o f $8.0 million and accounts receivables of $12.7 million due from TBG based on TBG’s inability to meet the requirements of the promissory notes, including non-payment of amounts due to the Company.

The $8.0 million note relates to prior year inventory shipments and the $12.7 m illion of receivables primarily relates to current year inventory shipments.

The remaining charge relates to reserves in connection with the settlement agreement with TBG in June 2019.

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Interest Expense

Interest expense decreased by $5.7 million during fiscal year 2019 primarily due to a lower outstanding principal and lower interest rates associated with the revolving credit facility compared to the retired senior term note and the lapping of the premium and unamortized debt discount expense associated with retirement of the senior term note in March 2018.

Interest expe nse decreased b y $5.7 million during fiscal year 2019 primarily due to a lower outstanding principal and lower interest rates associated with the revolving credit facility compared to the retired senior term note and the lapping of the premium and unamortized debt discount expense associated with retirement of the senior term note in March 2018.

Gain from sale of salon assets to franchisees, net

In fiscal year 2019, the gain from sale of salon assets to franchisees was $2.9 million, including non-cash goodwill derecognition of 67.1 million.

In fiscal year 2018, the gain from the sale of salons assets to franchisees was $0.2 million , including $3.9 million of non-cash goodwill derecognition.

In fiscal year 2018, the gain from the sale of salons assets to franchisees was $0.2 million, includi ng $3.9 million o f non-cash goodwill derecognition.

Interest Income and Other, net

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See Note 10 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K.

Income (Loss) from Discontinued Operations, Net of Income Taxes

Income (Loss) from Discontinued Operations

Income from TBG discontinued operations was $5.9 million during fiscal year 2019 primarily due to tax benefits associated with the wind-down and transfer of legal entities.

1 unchanged sentence

See Note 3 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K.

Fiscal Year Ended June 30, 2018 Compared with Fiscal Year Ended June 30, 2017

Consolidated Revenues

Consolidated revenues are primarily comprised of service and product revenues, as well as franchise royalties and fees.

Service revenue declined $61.4 million , or 6.4%, and product revenue declined $1.2 million , or 0.5%, primarily due to salon count.

Royalty and fee revenue increased $5.3 million or 7.4% due to the increase in franchise locations.

We closed 701 company-owned salons, constructed (net of relocations) 3 company-owned salons and sold (net of buybacks) 448 company-owned salons during fiscal year 2018 (2018 Net Salon Count Changes).

Our franchisees closed 194 salons and constructed (net of relocations) 79 salons during the same period.

Consolidated revenues are primarily comprised of service and product revenues, as well as franchise royalties and fees.

Service Revenues

The $61.4 million decrease in service revenues during fiscal year 2018 was primarily due to the 2018 Net Salon Count Changes.

The same-store service sales increase of 0.5% was primarily a result of a 3.8% increase in average ticket price, partly offset by a 3.3% decrease in same-store guest visits.

Service revenues were also favorably impacted by a cumulative adjustment related to discontinuing a piloted loyalty program.

Product Revenues

The $1.2 million decrease in product revenues during fiscal year 2018 was primarily due to 2018 Net Salon Count Changes and an unfavorable impact of hurricanes in the southern United States, partly offset by product sold to TBG and same-store product sales increases of 0.2%.

The increase in same-store product sales was primarily a result of a 3.7% increase in average ticket price, partly offset by a 3.5% decrease in same-store transactions.

Royalties and Fees

The increase of $5.3 million in royalties and fees during fiscal year 2018 was primarily due to the increase of 1,468 in franchised locations and same-store sales increases at franchised locations.

Cost of Service

The 450 basis point decrease in cost of service as a percent of service revenues during fiscal year 2018 was primarily due to the change in expense categorization as a result of the field reorganization that took place during the first quarter of fiscal year 2018.

After considering the change in expense categorization, cost of service as a percent of service revenues decreased 170 basis points as a result of improved stylist productivity, one-time benefit from a settlement and cost savings associated with salon tools, partly offset by state minimum wage increases, higher commissions expense as a result of same-store sales increases and higher health insurances costs.

Cost of service was also negatively impacted by hurricanes in the southern United States.

Cost of Product

The 570 basis point increase in cost of product as a percent of product revenues during fiscal year 2018 was primarily due to franchise product sold to TBG, the shift to lower margin wholesale product sales and inventory reserves related to the January 2018 SmartStyle portfolio restructure, less favorable shrink as compared to the prior year and a promotional sale implemented in the fourth quarter, partly offset by a one-time benefit from a settlement.

Margins on retail product sales were 52.0% and 54.8% in fiscal years 2018 and 2017, respectively.

Margins on wholesale product sales were 21.6% and 25.9% in fiscal years 2018 and 2017, respectively.

Site Operating Expenses

Site operating expenses increased $0.4 million during fiscal year 2018 .

After considering the change in expense categorization as a result of the field reorganization that took place during the first quarter of fiscal year 2018 , site operating expenses increased $5.2 million primarily due to higher marketing costs associated with the SmartStyle marketing campaign and fees associated with an industry exclusive sponsorship with Major League Baseball, unfavorable actuarial adjustments related to workers' compensation accruals and higher contract maintenance, repairs and services costs, partly offset by the 2018 Net Salon Count Changes.

General and Administrative

General and administrative expense (G&A) increased $16.7 million during fiscal year 2018 .

After considering the change in expense categorization as a result of the field reorganization that took place during the first quarter of fiscal year 2018 , G&A decreased $15.6 million, primarily due to an $8.0 million gain associated with life insurance proceeds in connection with the passing of a former executive officer, lower severance expense due to the prior year including severance related to the termination of former executive officers including the Company's Chief Executive Officer and professional fees, partly offset by increases in incentive compensation accruals.

Rent expense increased by $2.6 million during fiscal year 2018 primarily due to lease termination fees and other related closure costs associated with the January 2018 SmartStyle portfolio restructure, rent inflation, partly offset by the 2018 Net Salon Count Changes and a deferred rent adjustment related to the January 2018 SmartStyle portfolio restructure.

Depreciation and Amortization

Depreciation and amortization expense (D&A) increased $6.1 million during fiscal year 2018 , primarily due to costs associated with returning certain SmartStyle locations to their pre-occupancy condition in connection with the January 2018 SmartStyle restructuring and higher fixed asset impairment charges, partly offset by lower depreciation due to a reduced salon base.

Interest Expense

Interest expense increased by $1.9 million during fiscal year 2018 primarily due to the premium and unamortized debt discount expense associated with paying off the 5.5% senior term note originally due December 2019, partly offset by savings resulting from a reduced interest rate and lower debt levels.

Gain From Sale of Salon Assets to Franchisees, net

In fiscal year 2018, the gain from the sale of salons assets to franchisees was $0.2 million compared to $0.5 million in fiscal year 2017.

The Company sold 1,581 and 100 salons to franchisees in 2018 and 2017, respectively.

The decrease in the gain from sales is due to the mix of salons sold.

Interest Income and Other, net

The $3.7 million increase in interest income and other, net during fiscal year 2018 was primarily due to income from transition services related to TBG and incremental interest income, partly offset by a non-recurring insurance recovery benefit in the prior year.

During fiscal year 2018 , the Company recognized an income tax benefit of $69.8 million on $10.2 million of loss from continuing operations before income taxes as compared to recognizing income tax expense of $9.2 million on $5.9 million of income from continuing operations before income taxes during fiscal year 2017.

On December 22, 2017, the U.S.

government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”).

In connection with the Tax Act, the Company recorded a provisional net tax benefit of $68.1 million in continuing operations for the twelve months ended June 30, 2018.

The net tax benefit is primarily attributable to the impact of the corporate rate reduction on our deferred tax assets and liabilities along with a partial release of the U.S.

valuation allowance.

The benefit recognized on current losses and the partial valuation allowance release is solely attributable to tax reform and the law change that allows for the indefinite carryforward of net operating losses ("NOLs") arising in tax years ending after December 31, 2017.

Prior law limited the carryforward period to 20 years.

As a result of the new tax rules, companies can now consider its indefinite lived deferred tax liabilities as a source of income to support the realization of its existing deferred tax assets that upon reversal are expected to generate indefinite lived NOLs.

Consequently, the Company was able to remove the valuation allowance associated with these deferred tax assets.

The Company continues to maintain a valuation allowance on the historical balance of its finite lived federal NOLs, tax credits and various state tax attributes.

Changes in interpretations, assumptions, and guidance regarding the new tax legislation, as well as the potential for technical corrections to the Tax Act, could have a material impact to the Company’s effective tax rate in future periods.

The recorded tax provision and effective tax rate for the twelve months ended June 30, 2018 were different than what would normally be expected primarily due to the impact of the Tax Act and state conformity of the new federal provisions, closure of the IRS examination and the deferred tax valuation allowance.

Additionally, the Company is currently paying taxes in Canada and certain states in which it has profitable entities.

See Note 9 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K.

Loss from Discontinued Operations, Net of Income Taxes

During fiscal year 2018, the Company recognized $53.2 million of loss, net of taxes from discontinued operations, primarily due to asset impairment charges based on the sale prices and the carrying values of the mall-based salon business and the International segment, the recognition of net loss of amounts previously classified within accumulated other comprehensive income, professional fees associated with the transactions and losses from operations.

In fiscal year 2017 the loss from discontinued operations represents the mall-based and International segment's loss from operations.

See Note 3 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K.

Results of Operations by Segment

Based on our internal management structure, we report two segments:

Company-owned salons and Franchise salons.

Franchise salons and Company-owned salons.

See Note 15 to the Consolidated Financial Statements in in Part II, Item 8, of this Form 10-K.

Significant results of operations are discussed below with respect to each of these segments.

Company-owned Salons

(Dollars in millions)

Increase (Decrease)

Total revenue

Same-store sales

Operating income

Company-owned Salon Revenues

Decreases in Company-owned salon revenues were driven by the following:

Same-store sales

Closed salons

Salons sold to franchisees

Foreign currency

Fiscal Year Ended June 30, 2019 Compared with Fiscal Year Ended June 30, 2018

Company-owned Salons Revenues

Company-owned salon revenues decreased $189.0 million in fiscal year 2019 primarily due to the 2019 Net Salon Count Changes and same-store sales decrease of 0.4% .

The same-store sales decrease was due to a 4.7% decrease in same-store guest visits, partially offset by a 4.3% increase in average ticket price.

Company-owned Salon Operating Income

Company-owned salon operating income increased $7.8 million during fiscal year 2019 primarily due to the January 2018 SmartStyle portfolio restructure consisting of lease termination and other related closure costs and costs associated with returning the salons to pre-occupancy condition, and field general and administrative savings primarily due to lower headcount.

These increases were partially offset by the 2019 Net Salon Count Changes, state minimum wage increases, rent inflation and marketing investments.

Fiscal Year Ended June 30, 2018 Compared with Fiscal Year Ended June 30, 2017

Company-owned Salons Revenues

Company-owned salon revenues decreased $85.7 million in fiscal year 2018 primarily due to the 2018 Net Salon Count Changes, partly offset by same-store sales increase of 0.4% .

The same-store sales decrease was due to a 3.4% increase in average ticket price, partly offset by a 2.9% decrease in same-store guest visits.

Company-owned Salon Operating Income

Company-owned salon operating income decreased $28.4 million during fiscal year 2018 primarily due to the January 2018 SmartStyle portfolio restructure consisting of lease termination and other related closure costs and costs associated with returning the salons to pre-occupancy condition.

Also contributing to the decrease were state minimum wage increases, costs associated with the SmartStyle marketing campaign, the hurricanes in the southern United States and higher health insurance costs, partly offset by improved stylist productivity, the 2018 Net Salon Count Changes and prior year inventory expense related to salon tools.

Franchise Salons

(Dollars in millions)

Increase (Decrease)

2020 2019 2018 2020 2019

(Dollars in millions) Increase (Decrease)

Product $ 50.4 $ 42.9 $ 34.6 $ 7.5 $ 8.3

Product sold to TBG 2.0 17.0 19.1 (15.0) (2.1)

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Royalties and fees (1) 73.4 93.8 77.4 (20.4) 16.4

Franchise rental income 127.2 — — 127.2 —

Total franchise salons revenue (2) $ 253.0 $ 153.7 $ 131.1 $ 99.4 $ 22.6

Franchise same-store sales (3) (4.4) % 0.3 % 2.1 %

Operating income $ 35.2 $ 36.4 $ 34.0 $ (1.2) $ 2.4

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line items calculated individually may not sum to total due to rounding.

Increases in Franchise revenues were driven by the following:

Same-store sales

Franchise product

Franchise royalties and fees

TBG product, royalties and fees

Closed salons

Advertising fund

Foreign currency

Salons sold to franchisees and new salons

(3) Franchise same-store sales are calculated as the total change in sales for salons that have been a franchise location for more than one year that were open on a specific day of the week during the current period and the corresponding prior period.

Quarterly and year-to-date franchise same-store sales are the sum of the franchise same-store sales computed on a daily basis.

Franchise salons that do not report daily sales are excluded from same-store sales.

Locations relocated within a one-mile radius are included in same-store sales as they are considered to have been open in the prior period.

Franchise same-store sales are calculated in local currencies to remove foreign currency fluctuations from the calculation.

TBG salons were not a franchise location in fiscal years 2018 or 2020 so by definition they are not included in franchise same-store sales in 2018 or 2020.

TBG same-store sales are excluded from fiscal year 2019 same-store sales to be comparative to fiscal years 2018 and 2020.

Franchise same-store sales by concept are detailed in the table below:

2020 2019 2018

SmartStyle (9.7) % (5.6) % (3.0) %

Supercuts (4.0) % 0.8 % 2.1 %

Signature Style (3.5) % 0.1 % 2.1 %

Total (4.4) % 0.3 % 2.1 %

Fiscal Year Ended June 30, 2020 Compared with Fiscal Year Ended June 30, 2019

Franchise Salon Revenues

Franchise salon revenues increased $22.6 million during fiscal year 2019 due to a $8.3 million increase in franchise product sales and a $16.4 million increase in royalties and fees as a result of higher franchise salons counts, partially offset by lower product sales to TBG.

Our franchisees constructed (net of relocations) 65 salons, purchased (net of Company buybacks) 735 salons from the Company and closed 156 salons (excluding TBG mall locations).

Franchise salon revenues increased $99.4 million during fiscal year 2020, excluding franchise rental income recorded as a result of the adoption of Topic 842, franchise salon revenues decreased $27.8 million compared to the prior comparable period.

The decrease was due to the refund of previously collected contributions to the cooperative advertising funds, a waiver of fourth quarter advertising fees, as well as franchise product sales to TBG.

Royalties were flat year over year despite the increase in franchise salon count, due to the fourth quarter government-mandated salon closures.

Franchisees purchased (net of Company buybacks) 1,448 salons from the Company and constructed (net of relocations) and closed 47 and 237 franchise-owned salons, respectively.

Franchise Salon Operating Income

Franchise salon operating income excluding TBG increased $2.4 million due to higher product and royalty revenue as a result of the increase in franchise salon count.

Franchise salon operating income including TBG, decreased $19.5 million during fiscal year 2019 due to the TBG restructuring charge of $21.8 million related primarily related to notes and accounts receivable reserves.

During fiscal year 2020, Franchise salon operations generated operating income of $32.9 million, an increase of $16.7 million compared to the prior comparable period.

The increase was primarily due to the decrease in TBG mall restructuring costs.

Cash Generated from Salons Sold to Franchisees

During fiscal years 2020 and 2019, the Company generated $91.6 million and $94.8 million of cash respectively, from the sale of company-owned salons to franchisees.

The decrease is due to lower proceeds per salon sold partially offset by an increase in the number of salons sold.

Fiscal Year Ended June 30, 2019 Compared with Fiscal Year Ended June 30, 2018

Franchise Salon Revenues

Franchise salon revenues increased $28.4 million during fiscal year 2018 due to a $23.1 million increase in franchise product sales primarily due to product sold to TBG and a $5.3 million increase in royalties and fees.

The increase in royalties and fees was primarily due to increased franchised locations and an increase in the number of new salons open during fiscal year 2018.

Our franchisees closed 963 salons, constructed (net of relocations) 65 salons and purchased (net of Company buybacks) 767 salons from the Company, including 1,132 salons previously included in the Company's mall-based business and International segment.

Our franchisees constructed (net of relocations) 65 salons, purchased (net of Company buybacks) 735 salons from the Company and closed 156 salons (excluding TBG mall locations).

Franchise Salon Operating Income

Franchise salon operating income increased $3.2 million during fiscal year 2018 primarily due to the increased number of new franchised locations and increased franchise product sales.

Franchise salon operating income excluding TBG increased $2.4 million due to higher product and royalty revenue as a result of the increase in franchise salon count.

Franchise salon operating income including TBG, decreased $19.5 million during fiscal year 2019 due to the TBG restructuring charge of $21.8 million related primarily to notes and accounts receivable reserves.

Cash Generated from Salons Sold to Franchisees

During fiscal years 2019 and 2018, the Company generated $94.8 million and $11.6 million of cash respectively, from the sale of company-owned salons to franchisees.

Company-owned Salons

2020 2019 2018 2020 2019

(Dollars in millions) Increase (Decrease)

Total revenue $ 416.7 $ 915.4 $ 1,104.4 $ (498.7) $ (189.0)

Company-owned same-store sales (4.4) % (0.4) % 0.4 % (400 bps) (80 bps)

Operating (loss) income $ (96.1) $ 58.3 $ 50.5 $ (154.4) $ 7.8

Salon counts 1,632 3,108 3,966

2020 2019 2018

SmartStyle (4.4) % 1.5 % 0.3 %

Supercuts (5.3) % (2.3) % 1.7 %

Signature Style (4.0) % (1.3) % (0.2) %

Total (4.4) % (0.4) % 0.4 %

Fiscal Year Ended June 30, 2020 Compared with Fiscal Year Ended June 30, 2019

Company-owned Salon Revenues

Company-owned salon revenues decreased $498.7 million in fiscal year 2020, primarily due to the closure of a net 250 salons and the sale of 1,448 company-owned salons (net of buybacks) to franchisees during the year and the government-mandated temporary closure of our salons in third and fourth quarters due to the COVID-19 pandemic.

The decreases were also due to company-owned same-store sale decrease of 4.4%.

The company-owned same-store sales decrease was due to a decrease of 7.7% in same-store guest transactions, which were negatively impacted by the COVID-19 pandemic.

This decrease was partially offset by an increase of 3.3% in average ticket prices.

Company-owned Salon Operating (Loss) Income

During fiscal year 2020, the company-owned salon operations incurred an operating loss of $96.1 million, compared to operating income of $58.3 million in the prior comparable period.

The decrease was primarily due to the $71.9 million reduction in operating income due to the reduction in company-owned salons, the recording of a $40.2 million goodwill impairment charge due to the economic disruption of COVID-19, the closure of company-owned salons due to the COVID-19 pandemic, same-store sales decline and the right of use asset impairment.

These declines were partially offset by an overall decline in general and administrative expense and marketing spend.

Fiscal Year Ended June 30, 2019 Compared with Fiscal Year Ended June 30, 2018

Company-owned Salons Revenues

Company-owned salon revenues decreased $189.0 million in fiscal year 2019, primarily due to the 2019 Net Salon Count Changes and same-store sale s decrease of 0.4% .

The same-store sa les decrease was due to a 4.7% decrease in same-store guest visits, partially offset by a 4.3% increase in average ticket price.

Company-owned Salon Operating Income

Company-owned salon operating income increased $7.8 million during fiscal year 2019, primarily due to the January 2018 SmartStyle portfolio restructure consisting of lease termination and other related closure costs and costs associated with returning the salons to pre-occupancy condition, and field general and administrative savings primarily due to lower headcount.

These increases were partially offset by the 2019 Net Salon Count Changes, state minimum wage increases, rent inflation and marketing investments.

Fiscal Year Ended June 30, 2020 Compared with Fiscal Year Ended June 30, 2019

Corporate Operating Loss (1)

Corporate operating loss of $96.6 million increased $5.3 million during fiscal year 2019 primarily driven by a prior year gain of $8.0 million associated with life insurance proceeds, partly offset by savings realized from Company initiatives, including lowering headcount and lower incentive compensation.

Corporate operating loss of $82.1 million decreased $14.5 million during fiscal year 2020, primarily driven by lower general and administrative salaries and stock compensation benefits associated with a change in performance awards assumptions during the year, partially offset by the prior year's franchise convention cost, which was recorded as Corporate expenses in fiscal year 2020 compared to Franchise expense in fiscal year 2019.

Fiscal Year Ended June 30, 2019 Compared with Fiscal Year Ended June 30, 2018

Corporate Operating Loss (1)

Corporate operating loss of $91.3 million decreased $7.5 million during fiscal year 2018 primarily driven by the prior year including severance related to the termination of former executive officers including the Company's Chief Executive Officer, a gain of $8.0 million associated with life insurance proceeds and savings realized from Company initiatives, partly offset by higher incentive compensation and severance associated with terminations of former executives and professional fees in 2018.

Corporate operating loss of $96.6 million increased $5.3 million during fiscal year 2019 primarily driven by a prior year gain of $ 8.0 million associated with life insurance proceeds, partially offset by savings realized from Company initiatives, including lowering headcount and lower incentive compensation.

_______________________________________________________________________________

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Recent Accounting Pronouncements

Recent accounting pronouncements are discussed in Note 1 to the Consolidated Financial Statements.

Recent accounting pronouncements are discussed in Note 1 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K.

LIQUIDITY AND CAPITAL RESOURCES

Sources of Liquidity

Funds generated by salons sold to franchisees, operating activities, available cash and cash equivalents, and our borrowing agreements are our most significant sources of liquidity.

As of June 30, 2019 , cash and cash equivalents were $70.1 million , with $65.4 million , $4.5 and $0.2 million within the United States, Canada and Europe, respectively.

Funds generated by operating activities, available cash and cash equivalents, proceeds from sale of salons sold to franchisees, and our borrowing agreements are our most significant sources of liquidity.

As of June 30, 2020, cash and cash equivalents were $113.7 million, with $110.9, $2.6 and $0.2 million within the United States, Canada and Europe, respectively.

The Company has a credit agreement which provides for a $295.0 million five-year unsecured revolving credit facility that expires in March 2023, of which $96.5 million was available as of June 30, 2020.

See additional discussion under Financing Arrangements.

See additional discussion under Financing Arrangements and Note 8 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K.

The Company closely manages its liquidity and capital resources.

The Company's liquidity requirements depend on key variables, including the level of investment needed to support its business strategies, the performance of the business, capital expenditures, credit facilities and borrowing arrangements and working capital management.

The Company's liquidity requirements depend on key variables, including the performance of the business, the level of investment needed to support its business strategies, capital expenditures, credit facilities and borrowing arrangements and working capital management.

Capital expenditures are a component of the Company's cash flow and capital management strategy, which can be adjusted in response to economic and other changes to the Company's business environment.

The Company has a disciplined approach to capital allocation, which focuses on investing in key priorities to support the Company's multi-year strategic plan as discussed within Part I, Item 1.

The Company has a disciplined approach to capital allocation, which focuses on investing in key priorities to support the Company's response to the COVID-19 pandemic, as well as its multi-year strategic plan as discussed within Part I, Item 1.

Cash Flows (Used In) Provided by Operating Activities

During fiscal year 2019 , cash used in operating activities was $17.5 million primarily a result of a decline in Company-owned operating margin, strategic investment in new retail product lines and planned strategic G&A investments to enhance the Company's franchisor capabilities and support the increase in volume and cadence of transactions and conversions into the Franchise portfolio, partially offset by the elimination of certain general and administrative costs.

During fiscal year 2020, cash used in operating activities was $86.4 million.

Cash from operations declined due to lower revenues and margins and the refunding of the cooperative advertising funds to Franchisees as a direct result of the COVID-19 pandemic, as well as lower same-store sales, partially offset by the elimination of certain general and administrative costs.

During fiscal year 2019, cash used in operating activities was $17.5 million, primarily as a result of a decline in Company-owned operating margin, strategic investment in new retail product lines and planned strategic G&A investments to enhance the Company's franchisor capabilities and support the increase in volume and cadence of transactions and conversions into the Franchise portfolio, partially offset by the elimination of certain general and administrative costs.

During fiscal year 2018, cash provided by operating activities was $2.6 million, primarily due to operating margin, partially offset by the payment of lease termination and other related closure costs associated with the Company's January 2018 SmartStyle portfolio restructures.

During fiscal year 2017 , cash provided by operating activities of $58.3 million was primarily due to cash provided by salon operations.

Cash Flows from Investing Activities

During fiscal year 2019 , cash provided by investing activities of $87.8 million , was primarily from cash proceeds from sale of salon assets of $94.8 million and proceeds from company-owned life insurance policies of $24.6 million , partially offset by

capital expenditures of $31.6 million .

During fiscal year 2018 , cash used in investing activities of $1.1 million , was primarily from capital expenditures of $30.7 million , partly offset by cash proceeds from company-owned life insurance policies of $18.1 million and

cash proceeds from the sale of salon assets of $11.6 million .

During fiscal year 2017 , cash used in investing activities of $30.2 million , was primarily from $33.8 million for capital expenditures, partly offset by cash proceeds from sale of salon assets of $2.3 million , cash proceeds from company-owned life insurance policies of $0.9 million and cash proceeds from the sale of the Company's ownership interest in MyStyle of $0.5 million .

During fiscal year 2020, cash provided by investing activities of $61.0 million was primarily from cash proceeds from sale of salon assets of $91.6 million and the sale of the Company's headquarters of $9.0 million, partially offset by capital expenditures of $37.5 million.

During fiscal year 2019, cash provided by investing activities of $87.8 million was primarily from cash proceeds from sale of salon assets of $94.8 million and proceeds from company-owned life insurance policies of $24.6 million, partially offset by capital expenditures of $31.6 million.

During fiscal year 2018, cash used in investing activities of $1.1 million was primarily from capital expenditures of $30.7 million, partially offset by cash proceeds from company-owned life insurance policies of $18.1 million and cash proceeds from sale of salon assets of $11.6 million.

Cash Flows from Financing Activities

During fiscal year 2019 , cash used in financing activities of $126.7 million was primarily for repurchase of common stock of $152.7 million and employee taxes paid for shares withheld of $2.5 million , partly offset by proceeds from the sale and lease back of the Company's distribution centers of $28.8 million.

During fiscal year 2018 , cash used in financing activities of $62.2 million was primarily for repayments of long-term debt relating to the 5.5% senior term notes of $124.2 million , repurchase of common stock of $24.8 million, employee taxes paid for shares withheld of $2.4 million and settlement of equity awards of $0.8 million , partly offset by borrowings on the revolving credit facility of $90.0 million.

During fiscal year 2017 , cash used in financing activities of $6.8 million was primarily for employee taxes paid for shares withheld of $3.7 million .

and settlement of equity awards of $3.2 million .

During fiscal year 2020, cash provided by financing activities of $56.2 million was primarily due to the net $87.5 million draw on the Company's line of credit and the repurchase of common stock of $28.2 million.

During fiscal year 2019, cash used in financing activities of $126.7 million was primarily for repurchase of common stock of $152.7 million and employee taxes paid for shares withheld of $2.5 million, partially offset by proceeds from the sale and leaseback of the Company's distribution centers of $28.8 million.

During fiscal year 2018, cash used in financing activities of $62.2 million was primarily for repayments of long-term debt relating to the 5.5% senior term notes of $124.2 million, repurchase of common stock of $24.8 million, employee taxes paid for shares withheld of $2.4 million and settlement of equity awards of $0.8 million, partially offset by borrowings on the revolving credit facility of $90.0 million.

Financing Arrangements

Financing activities are discussed in Note 7 to the Consolidated Financial Statements.

Financing activities are discussed in Note 8 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K.

Derivative activities are discussed in Part II, Item 7A, "Quantitative and Qualitative Disclosures about Market Risk."

The Company's financing arrangements consists of the following:

Interest rate %

Maturity Dates 2020 2019 2020 2019

(fiscal year)

(Dollars in thousands)

(Fiscal year) (Interest rate %) (Dollars in thousands)

Revolving credit facility 2023 5.50% 3.65% $ 177,500 $ 90,000

Long-term lease liability

As of June 30, 2019 and 2018, the Company had $90.0 million of outstanding borrowings under a $295.0 million revolving credit facility.

The unsecured five -year revolving credit facility expires in March 2023 and includes, among other things, a maximum consolidated net leverage ratio covenant, a minimum fixed charge coverage ratio covenant, and certain restrictions on liens, investments and other indebtedness.

The revolving credit facility includes a $30.0 million subfacility for the issuance of letters of credit and a $30.0 million sublimit for swingline loans.

Long-term financing lease liability 2034 3.30% 3.30% 16,773 17,354

Long-term financing lease liability 2034 3.70% 3.70% 11,208 11,556

$ 205,481 $ 118,910

As of June 30, 2020 and 2019, the Company had $177.5 and $90 million, respectively, of outstanding borrowings under a $295.0 million revolving credit facility.

The five-year revolving credit facility expires in March 2023 and includes a minimum liquidity covenant of not less than $75.0 million, provides the Company's lenders security in substantially all of the Company's assets, adds additional guarantors and grants a first priority lien and security interest to the lenders in substantially all of the Company’s and the guarantors’ existing and future property.

The revolving credit facility includes a $30.0 million sub-facility for the issuance of letters of credit and a $30.0 million sublimit for swingline loans.

The Company may request an increase in revolving credit commitments under the facility of up to $115.0 million under certain circumstances.

The revolving credit facility has variable interest rates tied to LIBOR plus 1.25% to 1.85% and includes a facility fee of 0.25% to 0.40% .

Both the LIBOR credit spread and the facility fee are based on the Company's consolidated net leverage ratio.

In connection with entering into the Credit Agreement, the Company terminated its previous $200.0 million revolving credit facility.

In March 2018, the Company redeemed all of its 5.5% senior term notes that were due December 2019 (Senior Term Notes) for $124.2 million, which included a $1.2 million premium.

The Company utilized $90.0 million under the Revolving Credit Facility and cash on hand of $34.2 million to repay the Senior Term Notes.

The applicable margin for loans bearing interest at LIBOR ranges from 3.75%-4.25%, the applicable margin for loans bearing interest at the base rate ranges from 2.75%-3.25% and the facility fee ranges from 0.5%-0.75%, each depending on average utilization of the revolving line of credit.

In fiscal year 2019, the Company sold its Salt Lake City and Chattanooga Distribution Centers to an unrelated party.

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Our debt to capitalization ratio, calculated as the principal amount of debt as a percentage of the principal amount of debt and shareholders' equity at fiscal year-end, was as follows:

As of June 30,

Capitalization

As of June 30, Debt to

Capitalization Basis Point

Increase (Decrease)(1)

2020 62.0 % 3,520

Represents the basis point change in debt to capitalization as compared to prior fiscal year-end (June 30).

2019 26.8 % 1,120

2018 15.6 % (400)

_______________________________________________________________________________

(1) Represents the basis point change in debt to capitalization as compared to prior fiscal year-end.

The basis point increase in the debt to capitalization ratio as of June 30, 2020 compared to June 30, 2019 was primarily due to the increase in the Company's borrowings.

The basis point increase in the debt to capitalization ratio as of June 30, 2019 compared to June 30, 2018 was primarily due to the repurchase of $8.6 million shares of common stock for $152.7 million.

The basis point decrease in the debt to capitalization ratio as of June 30, 2018 compared to June 30, 2017 was primarily due to the net decrease in the principal amount of debt from the redemption of the 5.5% Senior Term Notes, partly offset by utilizing $90.0 million of the Revolving Credit Facility and the repurchase of 1.5 million shares of common stock for $24.8 million.

Contractual Obligations and Commercial Commitments

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Payments due by period

Contractual Obligations

Contractual Obligations Total Within

1 year 1 - 3 years 3 - 5 years More than

(Dollars in thousands)

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Debt obligations $ 177,500 $ — $ 177,500 $ — $ —

Lease liabilities (a)

Finance lease liabilities (1) 29,235 1,974 4,028 4,136 19,097

Other long-term liabilities 7,014 1,114 1,707 1,329 2,864

Total on-balance sheet

Off-balance sheet(b):

Operating lease obligations (1)(2) 933,115 166,635 283,019 224,856 258,605

Total off-balance sheet

Total $ 1,146,864 $ 169,723 $ 466,254 $ 230,321 $ 280,566

_______________________________________________________________________________

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Therefore, the total payments do not equal the liability.

In accordance with accounting principles generally accepted in the United States of America as of June 30, 2019, these obligations are not reflected in the Consolidated Balance Sheet.

See Note 1 new lease accounting standard discussion.

(2) Upon adoption of ASC 842 in fiscal year 2020, the operating leases were recorded on the balance sheet so there are no off-balance sheet liabilities.

On-Balance Sheet Obligations

Our debt obligations are primarily composed of our revolving credit facility at June 30, 2020.

Lease liabilities are related to sale and leaseback transactions for two distribution centers at June 30, 2019 .

Other long-term liabilities of $8.6 million include $5.8 million related to a Nonqualified Deferred Salary Plan and a salary deferral program of $2.8 million related to established contractual payment obligations under retirement and severance agreements for a small number of employees.

Finance lease liabilities are related to sale and leaseback transactions for two distribution centers at June 30, 2020.

Other long-term liabilities of $7.0 million include $4.4 million related to a Non-qualified Deferred Salary Plan and a salary deferral program of $2.6 million related to established contractual payment obligations under retirement and severance agreements for a small number of employees.

Operating leases primarily represent long-term obligations for the rental of salons, including leases for company-owned locations, as well as salon franchisee lease obligations, which are reimbursed to the Company by franchisees.

Regarding franchisee subleases, we generally retain the right to the related salon assets, net of any outstanding obligations, in the event of a default by a franchise owner.

The Company has not experienced any material losses as a result from these arrangements;

however, the COVID-19 pandemic may result in an increase in defaults which may be material.

This table excludes short-term liabilities disclosed on our balance sheet as the amounts recorded for these items will be paid in the next year.

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Because we cannot predict the timing or amount of future payments related to these contracts, such amounts were not included in the table above.

See Note 10 to the Consolidated Financial Statements.

See Note 11 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K.

As of June 30, 2020, we have liabilities for uncertain tax positions.

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however, at this time, we do not expect a significant payment related to these obligations within the next fiscal year.

See Note 9 to the Consolidated Financial Statements.

See Note 10 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K.

Off-Balance Sheet Arrangements

Regarding franchisee subleases, we generally retain the right to the related salon assets, net of any outstanding obligations, in the event of a default by a franchise owner.

Management has not experienced and does not expect any material loss to result from these arrangements.

Interest payments on long-term debt are calculated based on the revolving credit facility's rates tied to a LIBOR credit spread and a quarterly facility fee on the average daily amount of the facility (whether used or unused).

Both the LIBOR credit spread and the facility fee are based on the Company's debt to EBITDA ratio at the end of each fiscal quarter.

Interest payments on long-term debt are calculated based on the revolving credit facility's rates.

We are a party to a variety of contractual agreements under which we may be obligated to indemnify the other party for certain matters, which indemnities may be secured by operation of law or otherwise, in the ordinary course of business.

These contracts primarily relate to our commercial contracts, operating leases and other real estate contracts, financial agreements, agreements to provide services and agreements to indemnify officers, directors and employees in the performance of their work.

While our aggregate indemnification obligation could result in a material liability, we are not aware of any current matter that we expect to result in a material liability.

While our aggregate indemnification obligation could result in a material liability, we are not aware of any current matter that we expect will result in a material liability.

We do not have other unconditional purchase obligations or significant other commercial commitments such as standby repurchase obligations or other commercial commitments.

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The timing and amounts of any repurchases depends on many factors, including the market price of the common stock and overall market conditions.

During fiscal year 2020, the Company repurchased 1.5 million shares for $26.4 million.

As of June 30, 2020, 30.0 million shares have been cumulatively repurchased for $595.4 million, and $54.6 million remained outstanding under the approved stock repurchase program.

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Changes in these estimates could have a material effect on our Consolidated Financial Statements.

Our significant accounting policies can be found in Note 1 to the Consolidated Financial Statements.

Our significant accounting policies can be found in Note 1 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K.

We believe the following accounting policies are most critical to aid in fully understanding and evaluating our reported financial condition and results of operations.

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Allocations are generally based on the number of salons in each reporting unit as a percent of total company-owned salons or expenses of the reporting unit as a percentage of total company expenses.

The Company calculates estimated fair values of the reporting units based on discounted future cash flows utilizing estimates in annual revenue, service and product margins, fixed expense rates, allocated corporate overhead, corporate-owned and franchise salon counts, proceeds from the sale of Company-owned salons to franchisees and long-term growth rates for determining terminal value.

The Company calculates estimated fair values of the reporting units based on discounted cash flows utilizing estimates in annual revenue, service and product margins, fixed expense rates, allocated corporate overhead, corporate-owned and franchise salon counts, proceeds from the sale of company-owned salons to franchisees and long-term growth rates for determining terminal value.

Where available and as appropriate, comparative market multiples are used in conjunction with the results of the discounted cash flows.

The Company engages third-party valuation consultants to assist in evaluating the Company's estimated fair value calculations.

See Note 1 to the Consolidated Financial Statements.

See Note 1 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K

Long-Lived Assets, Excluding Goodwill

The Company assesses impairment of long-lived assets at the individual salon level, as this is the lowest level for which identifiable cash flows are largely independent of other groups of assets and liabilities, when events or changes in circumstances indicate the carrying value of the assets or the asset grouping may not be recoverable.

The Company assesses impairment of long-lived salon and right of use assets at the individual salon level, as this is the lowest level for which identifiable cash flows are largely independent of other groups of assets and liabilities, when events or changes in circumstances indicate the carrying value of the assets or the asset grouping may not be recoverable.

Factors considered in deciding when to perform an impairment review include significant under-performance of an individual salon in relation to expectations, significant economic or geographic trends, and significant changes or planned changes in our use of the assets.

Impairment is evaluated based on the sum of undiscounted estimated future cash flows expected to result from use of the long-lived assets.

If the undiscounted estimated cash flows are less than the carrying value of the assets, the Company calculates an impairment charge based on the estimated fair value of the assets.

The fair value of the long-lived assets is estimated using a discounted cash flow model based on the best information available, including salon level revenues and expenses.

Long-lived asset impairment charges related to continuing operations of $4.6 million , $11.1 million and $7.9 million for fiscal years 2019, 2018 and 2017, respectively have been recorded within depreciation and amortization in the Consolidated Statement of Operations.

Judgments made by management related to the expected useful lives of long-lived assets and the ability to realize undiscounted cash flows in excess of the carrying amounts of such assets are affected by factors such as the ongoing maintenance and improvement of the assets, changes in economic conditions and changes in operating performance.

The first step is to assess recoverability and in doing that the undiscounted cash flows are compared to the carrying value.

If the undiscounted estimated cash flows are less than the carrying value of the assets, the Company calculates an impairment charge based on the difference between the carrying value of the asset group and its fair value.

The fair value of the salon long-lived asset group are estimated using a market participant model based on the best information available, including salon level revenues and expenses.

The fair value of the right of use asset is estimated by determining what a market participant would pay over the life of the primary asset in the group, discounted back to June 30, 2020.

The impairment is allocated to long-lived assets based on relative carrying value, but not impaired below fair value.

Long-lived property and equipment asset impairment charges related to continuing operations of $3.9, $4.6 and $11.1 million were recorded during fiscal years 2020, 2019 and 2018, respectively in Depreciation and Amortization in the Consolidated Statement of Operations.

A long-lived asset, including right of use and salon property and equipment, impairment charge of $22.6 million was recorded during fiscal year 2020 and is separately stated on Consolidated Statement of Operations.

Of the total $22.6 million long-lived asset impairment charge, $17.4 million was allocated to the right of use asset and $5.2 million was allocated to salon property and equipment.

Judgments made by management related to the expected useful lives of salon long-lived assets and the ability to realize undiscounted cash flows in excess of the carrying amounts of such assets are affected by factors, such as the ongoing maintenance and improvement of the assets, changes in economic conditions and changes in operating performance.

Right of use asset values are impacted by market rent rates.

As the ongoing expected cash flows and carrying amounts of long-lived assets are assessed, these factors could cause the Company to realize material impairment charges.

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Deferred income tax assets and liabilities are determined based on the differences between the financial statement and tax basis of assets and liabilities using currently enacted tax rates in effect for the years in which the differences are expected to reverse.

A valuation allowance is established for any portion of deferred tax assets that are not considered more likely than not to be realized.

We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized.

The Company evaluates all evidence, including recent financial performance, the existence of cumulative year losses and our forecast of future taxable income, to assess the need for a valuation allowance against our deferred tax assets.

While the determination of whether or not to record a valuation allowance is not fully governed by a specific objective test, accounting guidance places significant weight on recent financial performance.

The Company has a partial valuation allowance on its deferred tax assets amounting to $70.7 and $68.6 million at June 30, 2019 and 2018, respectively.

The Company assesses the realizability of its deferred tax assets on a quarterly basis and will reverse the valuation allowance and record a tax benefit when the Company generates sufficient sustainable pretax earnings to make the realizability of the deferred tax assets more likely than not.

The Company has a valuation allowance on its deferred tax assets amounting to $122.4 and $70.7 million at June 30, 2020 and 2019, respectively.

If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make necessary adjustments to the deferred tax asset valuation, which would reduce the provision for income taxes.

Significant components of the valuation allowance which occurred during fiscal year 2020 are as follows:

• In connection with the Coronavirus Aid, Relief and Economic Security Act (CARES Act), Net Operating Losses (NOLs) resulting from accounting periods which straddled December 31, 2017 are now considered definite-lived NOLs.

Therefore, the Company established a valuation allowance against the U.S.

NOLs generated during its fiscal year 2018 and recorded a net tax expense of $14.7 million.

• The Company determined that it no longer had sufficient U.S.

indefinite-lived taxable temporary differences to support realization of its U.S.

indefinite-lived NOLs and its existing U.S.

deferred tax assets that upon reversal are expected to generate indefinite-lived NOLs.

As a result, the Company recorded an additional $17.0 million valuation allowance on its U.S.

federal indefinite-lived deferred tax assets.

• The Company recognized a capital loss and established a corresponding valuation allowance of $14.9 million on investment outside basis previously impaired for financial accounting purposes.

The Company reserves for unrecognized tax benefits, interest and penalties related to anticipated tax audit positions in the U.S.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis