What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-11-22 compared with 2020-11-24 · 99 added, 87 removed, 132 unchanged (58% of the section changed)

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Highlights of the Fiscal Year Ended September 30, 2021:

During the fiscal year, our results of operation were severely impacted by COVID-19 as we temporarily shut down virtually all global customer-facing store operations during parts of our second and third fiscal quarters.

Consolidated net sales for the fiscal year decreased $362.1 million, or 9.3%, to $3,514.3 million and included a negative impact from changes in foreign currency exchange rates of $5.6 million, or 0.1% of consolidated net sales;

Consolidated same store sales for the fiscal year decreased 8.1%, while our consolidated e-commerce sales increased by 102.6% compared to the prior fiscal year;

Consolidated gross profit decreased by $194.9 million, or 10.2%, to $1,715.6 million.

Gross margin decreased 50 basis points to 48.8% compared to the prior fiscal year;

Consolidated operating earnings for the fiscal year decreased $199.7 million, or 43.6%, to $258.8 million.

Operating margin decreased 440 basis points to 7.4% compared to the prior fiscal year;

Consolidated net earnings for the fiscal year decreased $158.4 million, or 58.3%, to $113.2 million;

Consolidated net sales for the fiscal year increased $360.7 million, or 10.3%, to $3,875.0 million and included a positive impact from changes in foreign currency exchange rates of $32.9 million, or 0.9% of consolidated net sales;

Consolidated same store sales for the fiscal year increased 10.2%, compared to the prior fiscal year;

Consolidated gross profit increased by $237.7 million, or 13.9%, to $1,953.3 million.

Gross margin increased 160 basis points to 50.4% compared to the prior fiscal year;

Consolidated operating earnings for the fiscal year increased $159.7 million, or 61.7%, to $418.4 million.

Operating margin increased 340 basis points to 10.8% compared to the prior fiscal year;

Consolidated net earnings for the fiscal year increased $126.6 million, or 111.8%, to $239.9 million;

Diluted earnings per share for the fiscal year were $2.10 compared to $0.99 for the prior fiscal year;

Cash provided by operations was $381.9 million for the fiscal year compared to $426.9 million for the prior fiscal year;

In the first half of our fiscal year, we repurchased and retired approximately 4.7 million shares of our common stock at an aggregate cost of $61.4 million;

During the fiscal year, we launched two new private label rewards credit cards branded for SBS and BSG to benefit our retail and professional customer by providing elevated loyalty perks and unique benefits;

Impact of COVID-19 on Our Business and Business Strategy Update

Our results of operations for the fiscal year 2020 were significantly impacted by the effects of COVID-19 as we experienced a rolling shut down of customer-facing operations at all global stores starting in mid-March through mid-April, followed by the rolling restart of store operations from mid-April until the end of June, when almost all stores were re-opened.

Store re-openings were triggered by local regulation;

the adoption of our new COVID-19 related safety protocols involving store cleaning, masks, and gloves;

limiting the number of customers in stores at one time;

in-store social distancing guidelines;

and the recall from furlough of sufficient store staff.

By the end of our third fiscal quarter, we had re-opened substantially all global customer-facing store operations and saw strong consumer and professional demand in our re-opened stores.

However, this demand was below pre-COVID-19 levels as market disruptions, including but not limited to salon closures, customer occupancy restrictions and consumer concerns over safety, persisted due to COVID-19.

The impact of COVID-19 led us to reprioritize our transformation plans to accelerate key digital and supply chain initiatives, and pivot to cash management and expense reduction.

As such, during our third fiscal quarter, we amended our ABL facility to increase the revolving commitment thereunder from $500.0 million to $600.0 million.

Also in our third fiscal quarter, to further strengthen our liquidity, we sold $300.0 million of 8.75% senior secured second-lien notes due 2025 (“Senior Secured Notes”).

During our fourth fiscal quarter, we made significan t progress in the implementation of our new merchandising system and began operations within our new North Texas distribution node.

Additionally, due to the evolving COVID-19 pandemic and the related business uncertainty, we continue to defer non-digital c apital investments and address our short-term cost structure.

The effects of the COVID-19 pandemic and related responses had a material impact on our fiscal year 2020 results of operations, cash flows and financial position.

Furthermore, due to the uncertainty over the duration and severity of the economic and operational impacts of COVID-19, the material adverse impact of the pandemic may continue into our fiscal year 2021 and possibly beyond.

COVID-19 restrictions on our global store operations continued to ease over the fiscal year.

However, due to the continued uncertainty over the duration and severity of the economic and operational impacts of COVID-19, the adverse impact of the pandemic will likely continue into fiscal year 2022 and possibly beyond, and it may be material.

Furthermore, we made substantial progress against our key business initiatives, which includes leveraging and optimizing our elevated digital capabilities, growing our customer engagement and loyalty, and implementing the final steps in our successful transformation journey.

Results of Operations

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Restructuring relates to Project Surge and our Transformation Plan.

See Note 19 of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report for more information about our restructuring plans.

The Fiscal Year Ended September 30, 2021 compared to the Fiscal Year Ended September 30, 2020

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

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

Same store sales

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Other consists of non-store sales, which include catalog and internet sales of our Sinelco Group subsidiaries.

The decrease in SBS net sales was a result of lower unit volume caused primarily by the impact of the temporary closure of all our customer-facing store operations due to the effects of COVID-19 during our second and third fiscal quarters, partially offset by strong demand upon re-opening.

The challenges faced by lower unit volume were partially offset by an increase in average unit prices, resulting from the cancellation of most promotional activity.

The decrease in net sales for BSG was driven by the following (in thousands):

The increase in SBS net sales was attributable to improving consumer confidence in the U.S.

and the easing of COVID-19 restrictions across international territories compared to the negative impact COVID-19 had on operations in fiscal year 2020, which included the temporary closure of customer-facing store operations during part of the year.

Additionally, SBS experienced an increase in its average unit prices as a result of a reduction in promotional activity and increased sales of higher-priced products .

SBS total unit volume was slightly down due to fewer units sold in the styling tools and salon supplies and accessories categories, partially offset by growth in our core hair color category.

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

Same store sales

Distributor sales consultants

Sales to franchisees

Stores outside same store sales

Foreign currency exchange

Other consists of stores outside same store sales and sales to our franchisees.

The decrease in BSG net sales was a result of lower unit volume primarily as a result of the temporary closure of all of our customer-facing store operations in the U.S.

and Canada due to the effects of COVID-19 during our second and third fiscal quarters .

The negative impact of the temporary closures were partially offset by an increase in average unit prices resulting primarily from lower promotional activity.

SBS’s gross profit decreased as a result of lower sales and a lower gross margin.

SBS’s gross margin decreased primarily as a result of aggressive inventory clearance actions in the third quarter and lower vendor allowances, partially offset by the positive impact from fewer promotions and favorable product mix.

BSG’s gross profit decreased as a result of lower sales, partially offset by a higher gross margin.

BSG’s gross margin increased primarily from fewer promotions, partially offset by lower vendor allowances.

The increase in BSG net sales was attributable to the easing of COVID-19 restrictions in the U.S.

and Canadian fiscal year 2021, including the reopening of salons in parts of California and Canada compared to the negative impact COVID-19 had on operations in fiscal year 2020, which included the temporary closure of customer-facing store operations during part of the year.

Additionally, BSG had higher unit volume and an increase in average unit prices.

The higher unit volume was primarily due to the impact of reopening of customer-facing store operations in the U.S.

The increase in the average unit price was driven primarily by category mix shift and lower promotional activity.

SBS’s gross profit increased as a result of increased net sales and a higher gross margin.

SBS’s higher gross margin was primarily a result of fewer promotions and the write down of inventory that occurred in the prior year resulting from aggressive inventory clearance actions.

BSG’s gross profit increased as a result of higher net sales, partially offset by a lower gross margin.

BSG’s gross margin decreased primarily as a result of sales mix shift towards large volume/lower margin full service customers, which have rebounded from the prior year’s impact from COVID-19 disruptions.

Selling, General and Administrative Expenses

SBS’s selling, general and administrative expenses decreased $11.0 million, or 1.2%.

This decrease was driven by lower compensation and compensation-related expense of $51.5 million, primarily as a result of previously announced furloughs related to COVID-19.

This decrease was partially offset by an increase in shipping costs of $34.5 million, resulting primarily from the increase in e-commerce sales volume, and incremental store expense for personal protective equipment.

BSG’s selling, general and administrative expenses decreased $9.8 million, or 2.4%.

This decrease reflects lower compensation and compensation-related expense of $18.2 million, primarily as a result of previously announced furloughs related to COVID-19.

This decrease was partially offset by an increase in shipping costs of $7.9 million, resulting primarily from increased e-commerce volume.

SBS’s selling, general and administrative expenses increased $6.0 million, or 0.7%.

This increase was driven by higher compensation and compensation-related expense of $42.0 million, primarily as a result of the reemployment of a significant number of employees that were furloughed in the prior year and an increase in bonus expenses as a result of improved operating result.

This increase was partially offset by lower delivery expense of $22.6 million due to lower e-commerce volume as stores reopened, lower supplies expense of $6.4 million primarily from a decrease in personal protective equipment purchases, lower advertising expenses of $3.5 million and fewer implementation costs in connection with our private label rewards credit card of $3.3 million.

BSG’s selling, general and administrative expenses increased $40.8 million, or 10.5%.

This increase reflects higher compensation and compensation-related expense of $18.8 million, primarily as a result of the reemployment of a significant number of employees that were furloughed in the prior year.

Additionally, this increase was driven by incremental expenses associated with prior year acquisitions and rent expense of $6.2 million, due to rent abatements in the prior year.

Unallocated selling, general and administrative expenses, which represent certain corporate costs that have not been charged to our reporting segments, increased $40.7 million, or 25.6%.

This increase was primarily from costs associated with specific expert capability builds in areas like marketing, merchandising, e-commerce and digital product, and costs associated with disaster payments in response to COVID-19, partially offset by lower compensation expenses, as a result of previously announced furloughs related to COVID-19.

This increase was primarily due to higher compensation and compensation-related expenses of $35.3 million, primarily as a result of the reemployment of a significant number of employees that were furloughed in the prior year and an increase in bonus expenses as a result of improved operating result .

Additionally, COVID-19 expense was higher in the current year driven by expenses from the donation of personal protective equipment.

Restructuring

For fiscal year 2020, we incurred restructuring charges of $14.0 million in connection with Project Surge and the Transformation Plan.

For fiscal year 2019, restructuring represents gains of $8.4 million in connection with the sale of our secondary headquarters and fulfillment center and our Marinette, Wisconsin fulfillment center, partially offset by expenses incurred in connection with the 2018 Restructuring Plan of $7.7 million.

See Note 19 of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report for more information about our restructuring plans.

For fiscal years 2021 and 2020, we incurred restructuring charges in connection with Project Surge and the Transformation Plan.

As of the end of fiscal year 2021, these restructuring plans have been substantially completed.

Interest Expense

Interest expense was slightly higher as a result of a higher average outstanding balance on our ABL during the second-half of fiscal year 2020 and the incremental interest expense from the issuance of our Senior Secured Notes, partially offset by a lower outstanding principal balances on our term loan B and a lower average interest rate on our term loan B variable tranche.

Interest expense was lower due to the impact of the repayments of our term loan B fixed tranche in January 2021 of $9.9 million and the senior notes due 2023 in April 2021 of $5.4 million, partially offset by the incremental interest on the senior notes issued in April 2020 of $14.8 million and incremental debt extinguishment costs of $4.1 million.

Additionally, the lower outstanding principal balance on our ABL facility resulted in lower interest expense of $5.4 million and the lower interest rates on our term loan B variable tranche of $4.1 million.

Provision for Income Taxes

For fiscal year 2021 and 2020, our effective tax rate was 26.2% and 29.2%, respectively.

The increase in the effective tax rate was primarily driven by the establishment of a valuation allowance in a foreign subsidiary and increased foreign losses, as compared to the prior period, which cannot be tax benefitted.

The decrease in the effective tax rate was primarily due to greater losses in the prior year from foreign subsidiaries for which a tax benefit could not be recognized and the establishment of a valuation allowance in a foreign subsidiary in the prior year.

See Note 15, Income Tax , for more information on our effective tax rate.

Our effective tax rate may fluctuate on a quarterly and/or annual basis due to various factors, including but not limited to, total earnings and the mix of earnings by jurisdiction, new tax laws, as well as changes in valuation allowances and uncertain tax positions.

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At September 30, 2021, cash and cash equivalents were $401.0 million.

Based upon the current level of operations and anticipated growth, we anticipate that existing cash balances (excluding certain amounts permanently invested in connection with foreign operations), funds expected to be generated by operations and funds available under the ABL facility will be sufficient to fund working capital requirements, potential acquisitions, finance anticipated capital expenditures, including information technology upgrades and store remodels and debt repayments over the next 12 months.

Due to the impact of COVID-19, we have shifted our focus to being proactive in maintaining our financial flexibility.

Working capital (current assets less current liabilities) increased $162.2 million to $869.7 million at September 30, 2020, compared to $707.5 million at September 30, 2019, resulting primarily from the increase in our cash and cash equivalents, partially offset by the reduction in our inventory, as a result of the impact of COVID-19 and aggressive inventory clearance actions during the year, and the impact of the adoption of the new lease standard.

Based upon the current level of operations and anticipated growth, we anticipate existing cash balances (excluding certain amounts permanently invested in connection with foreign operations), funds expected to be generated by operations and funds available under the ABL facility will be sufficient to fund working capital requirements, potential acquisitions, finance anticipated capital expenditures, including information technology upgrades and store remodels and debt repayments over the next 12 months.

Working capital (current assets less current liabilities) decreased $151.0 million to $718.7 million at September 30, 2021, compared to $869.7 million at September 30, 2020, resulting primarily from the decrease in our cash and cash equivalents and the increases in accounts payable and accrued liabilities, partially offset by an increase in inventory.

The increase in inventory and accounts payable is a result of improving COVID-19 conditions.

The ratio of current assets to current liabilities was 2.08 to 1.00 at September 30, 2021, compared to 2.54 to 1.00 at September 30, 2020.

We utilize our ABL facility for the issuance of letters of credit, for certain working capital and liquidity needs and to manage normal fluctuations in our operational cash flow.

In that regard, we may from time to time draw funds under the ABL facility for general corporate purposes including funding of capital expenditures, acquisitions, interest payments due on our indebtedness, paying down other debt and share repurchases.

During the fiscal year ended September 30, 2020, the weighted average interest rate on our borrowings under the ABL facility was 3.4%.

During the fiscal year ended September 30, 2021, we did not borrow on our ABL facility.

The amounts drawn are generally paid down with cash provided by our operating activities.

As of September 30, 2020, Sally Holdings had $435.0 million available for borrowings under the ABL facility, subject to borrowing base limitations and outstanding letters of credit of $18.6 million.

As of September 30, 2021, we had $468.5 million available for borrowings under the ABL facility, subject to borrowing base limitations and outstanding letters of credit of $18.3 million.

Share Repurchase Programs

During the fiscal years 2020, 2019 and 2018, we repurchased and subsequently retired approximately 4.7 million shares, 3.6 million shares and 10.0 million shares, respectively, of our common stock under the 2017 Share Repurchase Program or the 2014 Share Repurchase Program at a cost of $61.4 million, $46.6 million and $165.9 million, respectively.

All the fiscal year 2020 shares repurchases occurred during the first half of the fiscal year.

During the fiscal year 2021, we did not repurchase any of our common stock.

During the fiscal years 2020 and 2019, we repurchased and subsequently retired approximately 4.7 million shares and 3.6 million shares, respectively, of our common stock under a share repurchase program a cost of $61.4 million and $46.6 million, respectively.

We funded these share repurchases with cash from operations and borrowings under the ABL facility.

As of September 30, 2020, we had approximately $726.1 million of additional share repurchase authorization remaining under the 2017 Share Repurchase Program .

As of September 30, 2021, we had approximately $726.1 million of additional share repurchase authorization remaining under our Share Repurchase Program .

In July 2021, the Board approved a term extension of the program through September 30, 2025.

Historical Cash Flows

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Net cash used by investing activities

Net cash provided (used) by financing activities

Net cash (used) provided by financing activities

Effect of foreign currency exchange rate changes on cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

Net (decrease) increase in cash and cash equivalents

Net Cash Provided by Operating Activities

Net cash provided by operating activities increased for fiscal year 2020, compared to fiscal year 2019, primarily due to a reduction in our inventory balance, driven by fewer inventory purchases due to the impact of COVID-19 and a concerted merchandising effort to rationalize our assortment during the third and fourth quarters.

Additionally, we experienced a reduction in vendor receivables resulting from fewer vendor co-op arrangements due to the impact of COVID-19 and a concerted effort to reduce the collection time.

Net cash provided by operating activities decreased for fiscal year 2021, compared to fiscal year 2020, primarily due to increased inventory as a result of restocking to new levels of demand and an increase in vendor co-op receivables driven by the increase in net sales.

These were partially offset by higher net income for the fiscal year and an increase in accounts payable resulting from the increased inventory purchases.

Net Cash Used by Investing Activities

Net cash used by investing activities was higher for fiscal year 2020, compared to fiscal year 2019, primarily due to cash proceeds in the prior year from the sale our secondary headquarters and fulfillment center in Denton, Texas and our fulfillment center in Marinette, Wisconsin, an increase in capital expenditures primarily from investments in our information technology systems and the acquisition of La Maison Ami-Co (1981) Inc.

Net Cash provided (Used) by Financing Activities

We had net cash provided by financing activity for fiscal year 2020, compared to net cash used in fiscal year 2019, primarily as a result of the issuance of our Senior Secured Notes during our third fiscal quarter.

Net cash used by investing activities was lower for fiscal year 2021, compared to fiscal year 2020, primarily due to our focus on reduced capital expenditures and the impact of opening our North Texas warehouse in the prior fiscal year.

Net Cash (Used) Provided by Financing Activities

For fiscal year 2021, we had a concerted effort to reduce our outstanding debt as conditions around COVID-19 improved.

As a result, we repaid our term loan B fixed tranche, senior notes due 2023 and a portion of the term loan B variable tranche.

For fiscal year 2020, our focus was on maintaining cash flexibility and liquidity needs as a result of COVID-19 and issued $300.0 million in senior notes .

Long-Term Debt

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

Guarantor Financial Information

We are providing the following information in compliance with Rule 13-01 of Regulation S-X for guaranteed issued securities that have been registered under such regulation.

Currently, our issued securities consist of the 5.625% Senior Notes due 2025.

This debt instrument was issued by our wholly-owned subsidiaries, Sally Holdings LLC and Sally Capital Inc.

(the “Issuers”), under a shelf registration statement.

The notes are unsecured debt instruments guaranteed by us and certain of our wholly-owned domestic subsidiaries (together, the “Guarantors”) and have certain restrictions on the ability to pay restrictive payments to Sally Beauty.

The guarantees are joint and several, and full and unconditional.

Certain other subsidiaries, including our foreign subsidiaries, do not serve as guarantors.

The following summarized consolidating financial information represents financial information for the Issuers and the Guarantors on a combined basis.

All transactions and intercompany balances between these combined entities has been eliminated.

The following table presents the summarized balance sheets information for the Issuers and the Guarantors as of September 30, 2021 and 2020 (in thousands):

September 30, 2021

September 30, 2020

Intercompany receivable

Current assets

Current liabilities

Total liabilities

The following table presents the summarized statement of income information for fiscal year 2021 (in thousands):

Earnings before provision for income taxes

Capital Requirements

During fiscal year ended 2020, we had total capital expenditures of approximately $94.4 million, excluding amounts paid in connection with the prior year, primarily in connection with information technology projects, new store openings, store maintenance and the build out of our new North Texas distribution node.

During fiscal year ended 2021, we had total capital expenditures of approximately $84.1 million, excluding amounts paid in connection with the prior year, primarily in connection with information technology projects, new store openings and store maintenance.

Contractual Obligations

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The information contained in the table above with regards to our long-term debt obligations is based on the current terms of such debt obligations and does not reflect any assumptions about our ability or intent to refinance any of our debt either on or before their maturity.

In the event that we refinance some or all of debt either on or before their maturity, actual payments for some of the periods shown may differ materially from the amounts reported herein.

In the event we refinance some or all of debt either on or before their maturity, actual payments for some of the periods shown may differ materially from the amounts reported herein.

In addition, other future events, including potential increases in interest rates, could cause actual payments to differ materially from these amounts.

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Actual results could differ from the estimates and assumptions used, which could have a material impact to financial statements.

We believe the following are our most critical accounting estimates that require subjective judgement, estimates and assumptions:

We believe the following are our most critical accounting estimates that require subjective judgments, estimates and assumptions:

Valuation of Inventory

During fiscal year 2020, we changed how we value our inventory.

See Note 3 of the Notes to Consolidated Financial Statements in Item 8 contained in this Annual Report for more information related to the change in our valuation method.

At September 30, 2020, inventory is stated at the lower of weighted average cost or net realizable value.

At September 30, 2019, inventory was stated at the lower of cost using first-in first-out (“FIFO”) or net realizable value.

In assessing the net realizable value of inventory, we will adjust the carrying value of inventory for estimated shrinkage, damage and obsolescence using consider several key factors including estimates of the future demand for our products, historical turn-over rates, the age and sales history of the inventory, and historic as well as anticipated changes in SKUs.

Our inventory is stated at the lower of weighted average cost or net realizable value.

In assessing the net realizable value of inventory, we will adjust the carrying value of inventory for estimated shrinkage, damage and obsolescence using several key factors including estimates of the future demand for our products, historical turn-over rates, the age and sales history of the inventory, and historic as well as anticipated changes in SKUs.

We estimate inventory shrinkage between physical counts and product damage based upon our historical experience.

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These receivables could be significantly affected if the actual amounts subsequently collected differ from our expectations.

Historically, adjustments between the amount recorded and the amount collected have not had a material impact to our results of operations.

We retain a substantial portion of the risk related to employee health (primarily in the U.S.), workers’ compensation, general and product liability.

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If we prevail in tax matters for which provisions have been established or are required to settle matters in excess of established provisions, our effective tax rate for a particular period could be significantly affected.

Additionally, deferred in come taxes are recognized for the future tax consequences attributable to differences between our financial statement carrying amounts of assets and liabilities and their respective tax bases.

Additionally, deferred income taxes are recognized for the future tax consequences attributable to differences between our financial statement carrying amounts of assets and liabilities and their respective tax bases.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are estimated to be recovered or settled.

We believe that it is more-likely-than-not that our results of operations in the future will generate sufficient taxable inc ome to realize our deferred tax assets, net of the valuation allowance currently recorded.

We believe it is more-likely-than-not that our results of operations in the future will generate sufficient taxable income to realize our deferred tax assets, net of the valuation allowance currently recorded.

We have recorded a valuation allowance to account for uncertainties regarding the recoverability of certain deferred tax assets, primarily foreign loss carryforwards.

In the future, if we determine that certain deferred tax assets will not be realizable, the related adjustments could significantly affect our effective tax rate at that time.

An estimated tax benefit related to an uncertain tax position is recorded in o ur consolidated financial statements only after determining a more-likely-than-not probability that the uncertain tax position will withstand challenge, if any, from applicable taxing authorities.

In the future, if we determine certain deferred tax assets will not be realizable, the related adjustments could significantly affect our effective tax rate at that time.

An estimated tax benefit related to an uncertain tax position is recorded in our consolidated financial statements only after determining a more-likely-than-not probability that the uncertain tax position will withstand challenge, if any, from applicable taxing authorities.

Assessment of Long-Lived Assets for Impairment

We review long-lived assets for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be fully recoverable based on estimated undiscounted future cash flows.

We review long-lived assets for impairment whenever events or circumstances indicate the carrying amount of an asset may not be fully recoverable based on estimated undiscounted future cash flows.

Long-lived assets are reviewed at the lowest level of identifiable cash flows, which is at the store level.

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There are significant estimates and assumptions used to arrive at estimated future cash flows, including local market conditions and growth rates.

If the carrying amount of the store, which includes the operating lease asset, asset exceeds the sum of its undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the estimated fair value of the store.

Based on our assessments and after considering potential triggering events, including COVID-19, we recognized an impairment loss of $4.1 million in the fiscal year ended September 30, 2020, in connection with our long-lived assets.

If the carrying amount of the store asset, which includes the operating lease asset, exceeds the sum of its undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the estimated fair value of the store.

No material impairment losses were recognized in fiscal years 2021 or 2019.

For fiscal year 2020, we recognized an impairment loss of $4.1 million, due to the impact of COVID-19.

Assessment of Goodwill and Intangible Assets for Impairment

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In assessing these types of assets for impairment, there are significant estimates and assumptions used to determine the fair value, including relevant market and economic conditions, anticipated future revenues and cash flows, royalty rates and discount rates .

Goodwill is tested for impairment by comparing the fair value of each reporting unit to its carrying value.

In determining the fair value of a reporting unit, we use a discounted cash flow model.

When assessing goodwill for impairment, we may perform a qualitative assessment which evaluates macro-economic conditions, current and projected cash flows, and other events or changes in circumstances to determine if a quantitative assessment is necessary.

If we need to complete a quantitative assessment, which last occurred in fiscal year 2020 as a result of COVID-19, we use a discounted cash flow model to determine an estimated fair value.

If it is determined that the fair value of a reporting unit is less than its carrying value, an impairment charge will be recorded to bring the carrying value down to its fair value.

At March 31, 2020, the date of our annual impairment test, a 10% decrease in either reporting unit’s fair value would not have resulted in an impairment.

As of the date of our last quantitative impairment test, March 31, 2020, a 10% decrease in either reporting unit’s fair value would not have resulted in an impairment.

For fiscal year 2021, we completed a qualitative assessment and determined that while COVID-19 had a macro-economic impact, there were no material impacts to the reporting units to require a quantitative assessment.

Like goodwill, our indefinite-lived intangible assets are tested for impairment by comparing the fair value of each asset to its carrying value.

As of September 30, 2020, our indefinite-lived assets comprised of only tradenames.

To determine the fair value of each tradename, we use the relief-from-royalty method, which estimates what a third-party would be willing to pay in royalties to receive a benefit from the use of the asset.

It if is determined that the asset’s fair value is less than its carrying value, then an impairment charge is recorded to reduce the carrying value down to its fair value.

As of September 30, 2021, our indefinite-lived assets were comprised of only trade names.

To determine the fair value of each trade name, we use the relief-from-royalty method, which estimates what a third-party would be willing to pay in royalties to receive a benefit from the use of the asset.

If it is determined the asset’s fair value is less than its carrying value, then an impairment charge is recorded to reduce the carrying value down to its fair value.

No impairment losses were recognized in fiscal years 2021, 2020 or 2019.

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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