What changed in this filing

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Item 1A. Risk Factors

2021-11-22 compared with 2020-11-24 · 82 added, 51 removed, 232 unchanged (36% of the section changed)

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These factors are not intended to be an all-encompassing list of risks and uncertainties and are not the only risks and uncertainties we face.

Additional risks not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or results of operations in future periods.

Additional risks not currently known to us or we currently deem to be immaterial also may materially adversely affect our business, financial condition or results of operations in future periods.

Operational, Strategic and General Business Risks

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Additionally, a large percentage of our SBS product sales come from our owned and exclusive-label brand products.

The development and promotion of these owned and exclusive-label brand products often occur well before these products are sold in our stores.

development and promotion of these owned and exclusive-label brand products often occur well before these products are sold in our stores.

As a result, the success of these owned and exclusive-label brand products is largely dependent on our ability to develop products that meet future consumer preferences at prices that are acceptable to our customers.

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We are continuing the implementation of a significant number of strategic initiatives designed to ‘play to win’ by focusing on our hair color and hair care business, improving our retail fundamentals, enhancing our digital capabilities and balancing our cost structure.

There can be no assurance that these or future strategic initiatives will

be successful.

Furt hermore, we are investing significant resources in these initiatives and the costs of the initiatives may outweigh their benefits.

If these strategic initiatives are not successful, our same store sales will suffer and our growth prospects, financial resul ts, profitability and cash flows will also be adversely impacted.

There can be no assurance that these or future strategic initiatives will be successful.

Furthermore, we are investing significant resources in these initiatives and the costs of the initiatives may outweigh their benefits.

If these strategic initiatives are not successful, our same store sales will suffer and our growth prospects, financial results, profitability and cash flows will also be adversely impacted.

Our restructuring program may not be successful or we may not fully realize the expected cost savings and/or operating efficiencies from our restructuring plans.

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Some of our suppliers may seek to decrease their reliance on distribution intermediaries, including full-service/exclusive and open-line distributors like BSG and SBS, by promoting their own distribution channels.

These suppliers may offer advantages, such as lower prices, when their products are purchased from distribution channels they control.

These suppliers may offer advantages, such as lower prices,

when their products are purchased from distribution channels they control.

If our access to supplier-provided products were to diminish relative to our competitors or we were not able to purchase products at the same prices as our competitors, our business could be materially and adversely affected.

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Manufacturers and owned and exclusive-label brand fillers of beauty supply products are subject to certain risks that could adversely impact their ability to provide us with their products on a timely basis, including inability to procure ingredients, industrial accidents, environmental events, strikes and other labor disputes, union organizing activity, disruptions in logistics or information systems, loss or impairment of key manufacturing sites, product quality control, safety, licensing requirements and other regulatory issues, as well as natural disasters, pandemics and other external factors over which neither they nor we have control.

In addition, we directly source many of our owned and exclusive-label brand products, including, but not limited to, styling tools, salon equipment, sundries and other promotional products, fro m foreign third-party manufacturers and many of our vendors also use overseas sourcing to manufacture some or all of their products.

Any event causing a sudden disruption of manufacturing or imports from such foreign countries, including the imposition of additional or increased import restrictions, duties or tariffs, political instability, local business practices, legal or economic restrictions on overseas suppliers’ ability to produce and deliver products or acts of war or terrorism or pandemics, could m aterially harm our operations to the extent they affect the production, shipment or receipt of merchandise.

Our operating results depend to some extent on the orderly operation of our receiving and distribution processes, which depend on manufacturers’ adh erence to shipping schedules and our effective management of our distribution facilities and capacity.

In addition, we directly source many of our owned and exclusive-label brand products, including, but not limited to, styling tools, salon equipment, sundries and other promotional products, from foreign third-party manufacturers and many of our vendors also use overseas sourcing to manufacture some or all of their products.

Any event causing a sudden disruption of manufacturing or imports from such foreign countries, including the imposition of additional or increased import restrictions, duties or tariffs, political instability, local business practices, legal or economic restrictions on overseas suppliers’ ability to produce and deliver products or acts of war or terrorism or pandemics, could materially harm our operations to the extent they affect the production, shipment or receipt of merchandise.

Our operating results depend to some extent on the orderly operation of our receiving and distribution processes, which depend on manufacturers’ adherence to shipping schedules and our effective management of our distribution facilities and capacity.

We distribute products to our stores without supplementing such deliveries with direct-to-store arrangements from vendors or wholesalers.

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We may not always be able to pass on those cost increases to our customers, which could have a material adverse effect on our business, financial condition and results of operations.

Our e-commerce businesses may be unsuccessful or, if successful, may divert sales from our stores.

Our e-commerce businesses may be unsuccessful or, if successful, may redirect sales from our stores.

We offer many of our beauty products for sale through our e-commerce businesses in the U.S.

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We have recently undertaken a number of initiatives, including as part of our Transformation Plan and in response to COVID-19, to significantly advance our digital commerce capabilities and grow our e-commerce businesses.

As a result, we are more susceptible to risks and difficulties frequently experienced by internet-based businesses, including risks related to our ability to attract and retain customers on a cost-effective basis and our ability to operate, support, expand and develop our e-commerce operations, websites and software and other related operational systems.

Although we believe that our participation in both e-commerce and physical store sales is a distinct advantage for us due to synergies and the potential for new customers, supporting product offerings through both of these channels could create issues that have the potential to adversely affect our results of operations.

ability to operate, support, expand and develop our e-commerce operations, websites and software and other related operational systems.

Although we believe our participation in both e-commerce and physical store sales is a distinct advantage for us due to synergies and the potential for new customers, supporting product offerings through both of these channels could create issues that have the potential to adversely affect our results of operations.

For example, growth in our e-commerce business relative to in-store sales may result in dilution of operating margin and profit due to higher delivery expenses incurred in our e-commerce sales.

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Furthermore, our recent initiatives to upgrade our e-commerce platforms may not be successful in driving traffic to our websites and increasing our online sales in the long term, which could adversely impact our net sales.

Diversion of professional products sold by BSG could have an adverse imp act on our revenues.

Diversion of professional products sold by BSG could have an adverse impact on our revenues.

The majority of the products that BSG sells, including those sold by our Armstrong McCall franchisees, are meant to be used exclusively by salons and individual salon professionals or sold exclusively to their retail consumers.

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In the past several years, we have completed multiple acquisitions and we intend to pursue additional acquisitions in the future.

We actively review acquisition prospects that we believe would complement our existing lines of business, increase the size and geographic scope of our operations or otherwise offer profitable growth and operating efficiency opportunities.

There can be no assurance that we will continue to identify suitable acquisition candidates.

We actively review acquisition prospects we believe would complement our existing lines of business, increase the size and geographic scope of our operations or otherwise offer profitable growth and operating efficiency opportunities.

There can be no assurance we will continue to identify suitable acquisition candidates.

Furthermore, due to, among other things, increasing competition for suitable acquisition candidates, our ability to reach agreement with acquisition candidates or finance such acquisitions on favorable terms, we may not be able to consummate such acquisitions on favorable terms or at all.

Any acquisitions that we do make may be difficult to integrate profitably into our business and may entail numerous risks, including:

Any acquisitions we do make may be difficult to integrate profitably into our business and may entail numerous risks, including:

difficulties in assimilating acquired operations, stores or products, including the loss of key employees from acquired businesses;

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As a result, we may not realize the anticipated benefits of our acquisitions.

If we are unable to optimize our store base by profitably opening and operating new stores and closing less profitable stores, our business, financial conditi on and results of operations may be adversely affected.

If we are unable to optimize our store base by profitably opening and operating new stores and closing less profitable stores, our business, financial condition and results of operations may be adversely affected.

Our future growth strategy depends in part on our ability to optimize and profitably operate our stores in existing and additional geographic areas, including in international geographies, and to close underperforming stores.

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For example, we maintain Facebook, Twitter, Instagram and Pinterest accounts.

As laws and regulations rapidly evolve to govern the use of these platforms and devices, the failure by us, our employees, or third parties acting at our direction to abide by applicable laws and regulations in the use of these platforms and devices could adversely impact our business, financial condition, profitability, and cash flows.

In addition, we have agreements with a variety of industry influencers, and we feature industry influencers in our advertising and marketing efforts and may include them in some of our branding.

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While we strive to mitigate the negative impact associated with the loss of a key executive employee, an unsuccessful transition or loss could significantly disrupt our operations and could have a material adverse effect on our business, financial condition and results of operations.

We are also dependent on training, motivating and managing our store employees that interact with our customers on a daily basis.

We are also dependent on recruiting, training, motivating and managing our store employees that interact with our customers on a daily basis.

Competition for these types of qualified employees is intense and the failure to attract, retain and properly train qualified and motivated employees could result in decreased customer satisfaction, loss of customers, and lower sales.

In addition, our ability to meet our labor needs while controlling labor costs is subject to numerous external factors, including market pressures with respect to prevailing wage rates, unemployment levels, and health and other insurance costs;

the impact of legislation or regulations governing labor relations, immigration, minimum wage, and healthcare benefits;

changing demographics;

and our reputation within the labor market.

Our inability to control our labor costs could affect our results of operations and result in lower margins in our two segments.

Our associates or others may engage in misconduct or other improper activities, including noncompliance with our policies and procedures.

We are exposed to the risk of misconduct or other improper activities by our associates and third parties such as independent contractors or agents.

Misconduct by associates, independent contractors, or agents could include inadvertent or intentional failures to comply with our policies and procedures, the laws and regulations to which we are subject, and/or ethical, social, product, labor, and environmental standards.

Our current and former associates or independent contractors may also become subject to allegations of sexual harassment, racial and gender discrimination, or other similar misconduct, which, regardless of the ultimate outcome, may result in adverse publicity that could significantly harm our brand, reputation, and operations.

Associate misconduct could also involve improper use of information obtained in the course of the associate’s prior or current employment, which could result in legal or regulatory action and harm to our reputation.

Regulatory, Legal and Cybersecurity Risks

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Increased compliance costs and the loss of sales of certain products due to more stringent or new laws and regulations could adversely affect our business, financial condition and results of operations.

The risks associated with climate change and other environmental impacts and increased focus by stakeholders on environmental issues, including those associated with climate change, could adversely affect our business, financial condition, and operating results.

Climatologists predict the long-term effects of climate change and global warming will result in the increased frequency, intensity, and duration of weather events, which could significantly disrupt supply chains, potentially impacting our vendors’ raw material costs and the production of products sold at our stores.

These weather events could also lead to an increased rate of temporary store closures and reduced customer traffic at our stores.

In addition, concern over climate change may result in new or increased regional, federal or global legal and regulatory requirements to reduce or mitigate the effects of greenhouse gases.

These requirements may lead to an increase in tax, transportation, and utility expenses.

Lastly, there is increased focus, including by governmental and non-governmental organizations, investors, customers and consumers on these and other environmental sustainability matters, including deforestation, land use, climate impact and recyclability or recoverability of packaging, including plastic.

Our reputation could be damaged if we or others in our industry do not act, or are perceived not to act, responsibly with respect to our impact on the environment.

If we fail to protect our intellectual property rights or if our products are found to infringe on the intellectual property rights of others, it could materially and negatively impact our business.

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Our trademarks, certain of which are material to our business, are registered or legally protected in the U.S., Canada and other countries in which we operate.

The success of our business depends to a certain extent upon the value associated

with our intellectual property rights.

We protect our intellectual property rights through a variety of methods, including, but not limited to, applying for and obtaining trademark pro tection in the U.S., Canada and other countries throughout the world in which our business operates.

We also rely on trade secret laws, in addition to confidentiality agreements with vendors, employees, consultants and others who have access to our proprie tary information.

The success of our business depends to a certain extent upon the value associated with our intellectual property rights.

We protect our intellectual property rights through a variety of methods, including, but not limited to, applying for and obtaining trademark protection in the U.S., Canada and other

countries throughout the world in which our business operates.

We also rely on trade secret laws, in addition to confidentiality agreements with vendors, employees, consultants and others who have access to our proprietary information.

While we intend to vigorously protect our trademarks against infringement, we may not be successful.

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Furthermore, the industry in which we operate is characterized by the need for a large number of copyrights, trade secrets and trademarks and by frequent litigation based on allegations of infringement or other violations of intellectual property rights.

A third-party may at any time assert that our products violate such party’s intellectual property rights.

A third-party may at any time assert our products violate such party’s intellectual property rights.

Successful intellectual property claims against us could result in significant financial liabilities and/or prevent us from selling certain of our products.

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A substantial disruption in our information technology systems for any prolonged time period (arising from, for example, system capacity limits from unexpected increases in our volume of business, outages or delays in our service) could result in delays in receiving inventory and supplies or filling customer orders and adversely affect our customer service and relationships.

In addition, our information technology systems may be vulnerable to damage or interruption from circumstances beyond our control, including, without limitation, fire, natural disasters, power outages, systems disruptions, system conversions, security breaches, cyberattacks, phishing attacks, viruses and/or human error.

In any such event, we could be required to make a significant investment to fix or replace our information technology systems, and we could experience interruptions in our ability to service customers.

Such delays, problems or costs may have a material adverse effect on our business, financial condition and results of operations.

We continuously need to improve and upgrade our systems and infrastructure while maintaining their reliability and integrity.

The expansion of our systems and infrastructure will require us to commit substantial financial, operational and technical resources before the volume of our business increases, with no assurance that the volume of business will increase.

The development and implementation of new systems and any other future upgrades to our systems and information technology may require significant costs and divert our management’s attention and other resources from our core business.

There are also no assurances that these new systems and upgrades will provide us with the anticipated benefits and efficiencies.

There are also no assurances these new systems and upgrades will provide us with the anticipated benefits and efficiencies.

Many of our systems are proprietary, and as a result our options are limited in seeking third-party help with the operation and upgrade of those systems.

There can be no assurance that the time and resources our management will need to devote to operations and upgrades, any delays due to the installation of any upgrade (and customer issues therewith), any resulting service outages, or the impact on the reliability of our data from any upgrade or any legacy system, will not have a material adverse effect on our business, financial condition or results of operations.

There can be no assurance the time and resources our management will need to devote to operations and upgrades, any delays due to the installation of any upgrade (and customer issues therewith), any resulting service outages, or the impact on the reliability of our data from any upgrade or any legacy system, will not have a material adverse effect on our business, financial condition, control environment or results of operations.

Unauthorized access to confidential information and data on our information technology systems and security and data breaches could materially adversely affect our business, financial condition and operating results.

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Despite these safeguards and our other security processes and protections, we cannot be assured that all of our systems and processes are free from vulnerability to security breaches (through cyber-attacks, which are evolving and becoming increasingly sophisticated, physical breach or other means) or inadvertent data disclosure by third parties or us.

A significant data security breach, including misappropriation of our customers’ or employees’ confidential information, could result in significant costs to us, which may include, among others, potential liabilities to payment card networks for reimbursements of credit card fraud and card reissuance costs, including fines and penalties, potential liabilities from governmental or third-party investigations, proceedings or litigation, legal, forensic and consulting fees and expenses, costs and diversion of management attention required for investigation and remediation actions, and the negative impact on our reputation and loss of confidence of our customers, suppliers and others, any of which could have a material adverse impact on our business, financial condition and operating results.

In response to prior data security incidents, we have taken and are continuing to take actions to further strengthen the security of our information technology systems, including adopting payment terminals with end-to-end

encryption technology in order to enhance the security of our credit card payment system s.

Nevertheless, there can be no assurance that our security upgrades will be effective, that we will not suffer a similar criminal attack in the future, that unauthorized parties will not gain access to confidential information, or that any such incident will be discovered promptly.

and others, any of which could have a material adverse impact on our business, financial condition and operating results.

Further, we are subject to an evolving body of federal, state and non-U.S.

laws, rules, regulations, guidelines and principles regarding data privacy and security.

Several governments, including the EU, have regulations dealing with the collection and use of personal information obtained from their citizens, and regulators globally are also imposing greater monetary fines for privacy violations.

As of May 2018, the European privacy regulation General Data Protection Regulation (“GDPR”) went into effect, strengthening and expanding the rules pertaining to how organizations are required to handle the personal data of individuals located in the EU at the time the data is collected.

GDPR establishes new requirements regarding the handling of personal data, and non-compliance with the GDPR may result in significant monetary penalty.

In addition, the State of California recently enacted a data privacy law applicable to entities serving or employing California residents (the “CCPA”) that required compliance by January 2020.

Any potential inability to comply with such laws, rules, regulations, guidelines and principles or to quickly adapt our practices to reflect them as they develop, could potentially subject us to significant fines, damages, liabilities and reputational harm, which could have a material adverse effect on our business, prospects, results of operations, financial condition and cash flows.

Nevertheless, there can be no assurance our security upgrades will be effective, we will not suffer a similar criminal attack in the future, unauthorized parties will not gain access to confidential information, or any such incident will be discovered promptly.

In particular, we understand that the techniques used by criminals to obtain unauthorized access to sensitive data change frequently and often are not recognized until launched against a target;

accordingly, we may be unable to anticipate these techniques or implement adequate preventative measures.

The failure to promptly detect, determine the extent of and appropriately respond to a significant data security breach could have a material adverse impact on our business, financia l condition and operating results.

General Economic, Market and Foreign Risks

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The occurrence of natural disasters or acts of violence or terrorism could adversely affect our operations and financial performance.

The occurrence of natural disasters or acts of violence, terrorism or civil unrest could result in physical damage to our properties, the temporary closure of stores or distribution centers, the temporary lack of an adequate work force, the temporary or long-term disruption in the supply of products (or a substantial increase in the cost of those products) from domestic or foreign suppliers, the temporary disruption in the delivery of goods to our distribution centers (or a substantial increase in the cost of those deliveries), the temporary reduction in the availability of products in our stores, and/or the temporary reduction in visits to stores by customers.

products in our stores, and/or the temporary reduction in visits to stores by customers.

If one or more natural disasters or acts of violence or terrorism were to impact our business, we could, among other things, incur significantly higher costs and longer lead times associated with distributing products.

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dollars for consolidated financial reporting.

Currency exchange rate fluctuations could also disrupt the business of the independent manufacturers that produce our products by making their purchases of raw materials more expensive and more difficult to finance.

Currency exchange rate fluctuations could also disrupt the business of the independent manufacturers that produce our products by making their purchases of raw materials, as well as transportation and freight, more expensive and more difficult to finance.

Foreign currency fluctuations could have an adverse effect on our results of operations and financial condition.

The COVID-19 pandemic has had and is expected to continue to have an adverse effect on our business and results of operations.

In March 2020, the World Health Organization declared COVID-19 a global pandemic, and governmental authorities around the world implemented measures to reduce the spread of COVID-19.

These measures adversely affected workforces, customers, consumer sentiment, economies, and financial markets, and, along with decreased consumer spending, have led to a severe economic downturn in many of our markets.

As a result of COVID-19 and these measures, we temporarily closed all U.S.

and Canadian retail and wholesale store fronts to customers during the end of our second quarter and for a portion of our third quarter.

We also transitioned certain stores to a contactless curbside service model, or to a ship-from-store model and also furloughed a significant number of employees due to these store closures.

We also temporarily idled a number of our distribution centers.

As many of the shelter-in-place orders, quarantines and similar orders were lifted in the U.S.

and Canada, we were able to re-open our stores during our third quarter.

While our stores have largely remained open since re-opening in the third quarter, there is no guarantee that we will not have to close stores in the future as a result of COVID-19 or measures designed to reduce the spread of COVID-19.

These store closures have had a material and adverse effect on our results of operations.

The COVID-19 pandemic has had and may continue to have an adverse effect on our business and results of operations.

In March 2020, the World Health Organization declared COVID-19 a global pandemic, and governmental authorities around the world implemented various measures to reduce the spread of COVID-19, including shelter-in-place and quarantine orders.

As a result of COVID-19 and these measures, for part of fiscal year 2020 we temporarily closed all U.S.

and Canadian retail and wholesale store fronts to customers and temporarily idled a number of our distribution centers.

While our stores have remained open for fiscal year 2021, there is no guarantee that we will not have to close stores in the future as a result of COVID-19 or its variants, or measures designed to reduce the spread of COVID-19, and any such store closures or related business disruptions may have a material and adverse effect on our results of operations.

We have taken and continue to take decisive actions across our businesses to help protect employees, customers, and others in the communities we serve in response to the impact of COVID-19.

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Consumer fears about becoming ill with COVID-19 will continue in the near-term and consumer behavior may fundamentally change as a result of COVID-19 in both the near and long term.

As a result, traffic in retail stores, including our stores, in the short term has been and in the long term may be materially and adversely affected for the long-term with more consumers relying on e-commerce to purchase beauty products.

As a result, traffic in retail stores, including our stores, in the short term has been and in the long term may be materially and adversely affected with more consumers relying on e-commerce to purchase beauty products.

Consumer spending may also be negatively impacted by general macroeconomic conditions and consumer confidence, including the impacts of the recession which resulted from the COVID-19 pandemic.

All of this could materially and adversely impact sales at our retail stores.

While we have accelerated the roll-out of our digital programs in response to the temporary closure of our stores and potential changes in consumer behavior, there is no guarantee that we will be successful in growing our e-commerce sales or materially offsetting lower sales at our retail stores.

We have expended and plan to continue to expend significant resources to strengthen our digital platforms and we are re-designing our supply chain to focus more on e-commerce sales and fulfillment in the future, each of which have resulted in additional unexpected capital expenditures, business disruption and lower margin sales.

While we have accelerated the roll-out of our digital programs in response to the temporary closure of our stores and potential changes in consumer behavior, there is no guarantee we will be successful in growing our e-commerce sales or materially offsetting lower sales at our retail stores.

We have expended and plan to continue to expend significant resources to strengthen our digital platforms and we are re-designing our supply chain to focus

more on e-commerce sales and fulfillment in the future, each of which have resulted in additional unexpected capital expenditures, business disruption and lower margin sales.

A reduction in traffic to, or the closing of, other retailers in shopping areas where our SBS stores are located could significantly reduce our sales and leave us with excess inventory, which could have a material adverse effect on our business, financial condition, profitability, and cash flows.

As a result of our real estate strategy, most of our SBS stores are located in strip shopping centers.

These strip shopping centers are occupied by other high traffic retailers such as grocery stores, mass merchants and home improvement centers.

As a consequence of most of our SBS stores being located in strip shopping centers, our sales are derived, in part, from the volume of traffic generated by the other high traffic retailers where our stores are located.

Customer traffic to these strip shopping centers may be adversely affected by the closing of stores in the strip shopping center, or by a reduction in traffic to such stores resulting from a regional or global economic downturn, an outbreak of flu or other viruses (such as COVID-19), a general downturn in the local area where our SBS store is located, or a decline in the desirability of the shopping environment of a particular strip shopping center.

Such a reduction in customer traffic could reduce our sales and leave us with excess inventory, which could have a material adverse effect on our business, financial condition, profitability, and cash flows.

Financial Risks

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In addition, amounts drawn under our ABL facility and the variable portion of our term loan B may bear interest rates in relation to the London Interbank Offered Rate (“LIBOR”).

It is unclear if LIBOR will cease to exist at the end of 2021, when it is intended to be phased out, or if new methods of calculating LIBOR will be established such that it continues to exist after 2021.

It is unclear if LIBOR will cease to exist at the

end of 2021, when it is intended to be phased out, or if new methods of calculating LIBOR will be established such that it continues to exist after 2021.

While both the ABL facility and the variable portion of our term loan B contain “fallback” provisions providing for alternative rate calculations in the event LIBOR is unavailable, these “fallback” provisions may not adequately address the actual changes to LIBOR or successor rates.

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In addition, we and our subsidiaries may incur substantial additional indebtedness in the future.

As of September 30, 2020, our ABL facility provided us commitments for additional borrowings of up to approximately $435.0 million, subject to borrowing base limitations, and limitations on cash hoarding above certain balances, once utilized.

If new debt is added to our current debt levels, the related risks that we face would increase, and we may not be able to meet all our debt obligations.

As of September 30, 2021, our ABL facility provided us commitments for additional borrowings of up to approximately $468.5 million, subject to borrowing base limitations, outstanding letters of credit and limitations on cash hoarding above certain balances, once utilized.

If new debt is added to our current debt levels, the related risks we face would increase, and we may not be able to meet all our debt obligations.

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 1A. Risk Factors