What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-11-17 compared with 2021-11-22 · 143 added, 97 removed, 134 unchanged (64% of the section changed)

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See “Cautionary Notice Regarding Forward-Looking Statements” and “Risk Factors” for a discussion of the uncertainties, risks and assumptions associated with these forward-looking statements that could cause results to differ materially from those reflected in such forward-looking statements.

Highlights of the Fiscal Year Ended September 30, 2021:

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;

Executive Summary

Fiscal 2022 was a successful year, delivering strong gross margins and positive net earnings amidst a highly dynamic and challenging macro environment.

Our Company navigated inflationary pressures and supply chain headwinds, while remaining focused on serving our customers.

For fiscal 2023, we will be leveraging and building upon the modern retail infrastructure we’ve built in recent years and focusing on three key strategic initiatives to drive growth and profitability:

Enhancing our customer centricity;

Growing high margin owned brands at Sally Beauty and amplifying innovation;

Increasing the efficiency of our operations and optimizing our capabilities.

We believe focusing in these areas will position our company for future growth and further enhance our ability to meet our customers where they are.

Financial Results Summary of the Fiscal Year Ended September 30, 2022:

Consolidated net sales for the fiscal year decreased $59.4 million, or 1.5%, to $3,815.6 million and included a negative impact from changes in foreign currency exchange rates of $34.3 million, or 3.5% of consolidated net sales;

Consolidated comparable sales for the fiscal year increased 0.6%, compared to the prior fiscal year;

Consolidated gross profit decreased by $34.2 million, or 1.7%, to $1,919.2 million.

Gross margin decreased 10 basis points to 50.3% compared to the prior fiscal year;

Consolidated operating earnings for the fiscal year decreased $80.8 million, or 19.3%, to $337.6 million.

Operating margin decreased 200 basis points to 8.8% compared to the prior fiscal year;

Consolidated net earnings for the fiscal year decreased $56.3 million, or 23.5%, to $183.6 million;

Diluted earnings per share for the fiscal year were $1.66 compared to $2.10 for the prior fiscal year;

Cash provided by operations was $156.5 million for the fiscal year compared to $381.9 million for the prior fiscal year;

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

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.

Reduction of $231.0 million in debt resulting mostly from the early redemption of our 8.75% senior notes due 2025 (“2025 Senior Notes”);

In the fourth quarter of the fiscal year, our Board approved t he planned closure of 330 SBS and 35 BSG stores mostly over the next fiscal year and two BSG distribution centers in Clackamas, Oregon and Pottsville, Pennsylvania during the first fiscal quarter of fiscal year 2023, as part of our Distribution Center Consolidation and Store Optimization Plan.

Distribution Center Consolidation and Store Optimization Plan

The Distribution Center Consolidation and Store Optimization Plan’s core strategy is accelerating store closures in various markets where we believe we can successfully recapture sales and improve profitability.

By optimizing our large store portfolio, we can further focus on our customers’ shopping experience and our product offerings, while returning value to our shareholders.

In addition, the Company will also be optimizing its supply chain by closing two small distribution centers in Oregon and Pennsylvania and transferring the volumes to larger distribution centers, effective in December 2022.

Trends Impacting Our Business

Inflationary pressures started to impact consumer spending behavior in fiscal 2022 as cautious shoppers stalled discretionary spending due to the higher cost for products and services.

Moreover, there was still volatility in the global supply chain, as freight carriers passed higher fuel prices to customers.

During the fiscal year, these headwinds resulted in lower traffic and conversion in our business and increases in certain operating costs, including inbound freight and delivery expenses.

Additionally, due to general labor shortages in the U.S.

during the year, especially among retail and hourly employees, we experienced an increase in our compensation costs in order to attract and retain associates.

We continue to monitor these challenges and implement measures to help mitigate their impacts, including managing our inventory levels to reduce out-of-stock items, adjusting our promotional activities, optimizing our store base through our Distribution Center Consolidation and Store Optimization Plan (see Note 16 , Restructuring ) and expanding our partnerships with delivery service providers.

Although these initiatives have helped mitigate ongoing macro-headwinds we cannot reasonably predict the long-term effects of inflation and supply chain disruptions.

Furthermore, in a measure to curb inflation, the U.S.

Federal Reserve has continued to increase the federal funds effective rate.

In turn, these increases have raised the cost of debt borrowings.

We currently have approximately $476.0 million in variable rate debt, with $407.5 million hedged with interest rate caps to help mitigate the impact of rising rates.

Future increases in the federal funds effective rate could have a material adverse impact to our cost of debt, including any future changes in our debt structure.

Impact of COVID-19 on Our Business

During the fiscal year, we experienced disruptions to our business as a result of the COVID-19 pandemic and we took certain actions in order to protect our customers and associates.

In particular, our store operations faced challenges and disruptions related to COVID-19 surges and variants.

While we have seen signs of stabilization, we cannot reasonably predict the effects of new variants or expect improving trends to continue.

Therefore, our future performance may partially depend on impacts of COVID-19 such as decreased customer in-store traffic, temporary store closures, and continued labor and supply chain disruptions.

Refer to Item 1A.

“Risk Factors,” for further discussion on the risks and uncertainties created by COVID-19.

Comparable Sales

The Company’s initiative to invest in our digital platforms support our omni-channel strategy to provide customers an enhanced shopping experience.

As such, we believe that comparable sales is an appropriate performance indicator to measure our sales growth compared to the prior period.

O ur comparable sales include sales from stores that have been operating for 14 months or longer as of the last day of a month and e-commerce revenue.

Additionally, comparable sales include sales to franchisees and full service sales.

Our comparable sales excludes the effect of changes in foreign exchange rates and sales from stores relocated until 14 months after the relocation.

Revenue from acquisitions are excluded from our comparable sales calculation until 14 months after the acquisition.

Our calculation of comparable sales might not be the same as other retailers as the calculation varies across the retail industry.

Results of Operations

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Number of stores at end-of-period (including franchises):

Same store sales growth (decline)

Unallocated expenses represent certain corporate costs (such as payroll, share-based compensation, employee benefits and travel expense for corporate staff, certain professional fees and corporate governance expenses) that have not been charged to our segments and are included in selling, general and administrative expenses in our consolidated statements of earnings.

Restructuring relates to Project Surge and our Transformation Plan.

Comparable sales growth (decline)

Unallocated expenses represent certain corporate costs (such as payroll, share-based compensation, employee benefits and travel expense for corporate staff, certain professional fees and corporate governance expenses) that have not been charged to our segments and are included in SG&A expenses in our consolidated statements of earnings.

Restructuring primarily relates to our Distribution Center Consolidation and Store Optimization and Transformation Plans.

The Fiscal Year Ended September 30, 2022, compared to the Fiscal Year Ended September 30, 2021

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

Same store sales

Stores outside same store sales

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

Comparable sales

Sales outside comparable sales (a)

Foreign currency exchange

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

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.

Includes stores opened for less than 14 months, net of stores closures.

The decrease in SBS’s net sales was driven by the impact of store closures, the unfavorable impact of foreign exchange rates and lower comparable sales.

SBS’s comparable sales were lower due to fewer transactions, impacted by lower traffic, partially offset by a higher average ticket.

The average ticket increase resulted from higher average unit retail prices, led by our hair color and care categories, partially offset by lower average unit volume.

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

Comparable sales

Sales outside comparable sales (a)

Foreign currency exchange

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.

Includes stores opened for less than 14 months, net of stores closures.

The increase in BSG’s net sales was driven by higher comparable sales, partially offset by the impact of closed stores and the unfavorable impact of foreign exchange rates.

BSG’s comparable sales increase was driven by a higher average ticket, partially offset by lower traffic.

The higher average ticket resulted a from higher average unit retail prices, led by color, care and styling tools categories, partially offset by lower average unit volume.

SBS’s gross profit decrease was driven by a decrease in sales, partially offset by a higher gross margin.

SBS’s gross margin increase was driven by improvement of pricing leverage and the impact of fewer write-downs of obsolete personal-protective equipment.

This improvement to margins was partially offset by the impact of inventory write-downs resulting from our Distribution Center Consolidation and Store Optimization Plan, higher distribution and freight costs and an unfavorable sales mix shift between the U.S.

and international markets, resulting from the temporary closing of certain international operations in the prior year due to COVID-19.

BSG’s gross profit increased due to the increase in sales in the current fiscal year.

BSG’s gross margin was flat when compared to the prior year, however, BSG’s gross margin includes improvements from pricing leverage and fewer write-downs of personal-protective equipment, offset by the impact of inventory write-downs resulting from our Distribution Center Consolidation and Store Optimization Plan and higher distribution and freight costs.

Selling, General and Administrative Expenses

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 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.

SBS’s SG&A expenses increased $22.1 million, or 2.5%, to $923.0 million for fiscal year 2022, which includes the unfavorable impact from foreign exchange rates of $13.2 million due to the strengthening of the U.S.

Dollar compared to currencies in our foreign operations .

As a percentage of SBS net sales, SG&A for fiscal year 2022 was 42.1% compared to 39.5% for fiscal year 2021.

The increase as a percentage of sales was driven by higher wage expenses, as a result of higher wages within general labor markets and store re-openings in certain international markets.

BSG’s SG&A expenses increased $22.1 million, or 5.1%, to $451.9 million for fiscal year 2022.

As a percentage of BSG net sales, SG&A for fiscal year 2022 was 27.9% compared to 26.9% for fiscal year 2021.

The increase as a percentage of sales was driven primarily by higher delivery expense, advertising expense and depreciation expenses.

Unallocated SG&A expenses, which represent certain corporate costs that have not been charged to our reporting segments, decreased $20.6 million, or 10.3%, to $179.1 million.

This decrease was as a result of lower COVID-19 expenses of $26.3 million, including the impact of $31.2 million in donation expense in the prior year, partially offset by higher information technology expense of $6.7 million.

Restructuring

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.

For fiscal year 2022, we incurred $27.6 million in restructuring charges, which includes $24.8 million in asset impairments related to our Distribution Center Consolidation and Store Optimization Plan and other expenses in connection to our Transformation Plan.

For fiscal year 2021, we incurred $4.6 million in restructuring charges related to our Transformation Plan and Project Surge.

See Note 16, Restructuring , for more information on our restructuring plans.

Interest Expense

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.

Interest expense was flat due to the interest savings from the repayment of our 2025 Senior Notes in fiscal year 2022 offset by the impact of debt extinguishment cost, including a redemption premium of $ 13.1 million in connection with repayment of the 2025 Senior Notes, higher interest rates on our variable debt and increased borrowings on our ABL facility during the current fiscal year.

Provision for Income Taxes

For fiscal year 2022 and 2021, our effective tax rate was 24.8% and 26.2%, respectively.

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.

The decrease in the effective tax rate was primarily due to the release of $19.9 million of valuation allowance against foreign subsidiary net operating losses, offset by $7 million in expense arising from uncertain tax positions.

See Note 14 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.

Liquidity and Capital Resources

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

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.

At September 30, 2022, we had $483.5 million in our liquidity pool, which includes amounts available for borrowings under our ABL facility and cash and cash equivalents of $70.6 million.

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) as well as cash expected to be generated by operations and funds available under the ABL facility will be sufficient to fund working capital requirements, potential acquisitions, anticipated capital expenditures (including information technology investments and store projects) and debt repayments over the next 12 months.

Working capital (current assets less current liabilities) decreased $254.2 million to $464.5 million at September 30, 2022, compared to $718.7 million at September 30, 2021.

This decrease was driven by the repayment of our 8.75% Senior Notes through the use of excess cash and additional borrowing on our ABL facility.

Additionally, cash was further reduced by stock repurchases during the fiscal year.

The decrease to working capital was partially offset by higher inventory as a result of inflationary cost increases and additional inventory purchases related to BSG's growth through distribution partnerships, partially offset by the inventory mark-downs in connection with our Distribution Center Consolidation and Store Optimization Plan .

The ratio of current assets to current liabilities was 1.70 to 1.00 at September 30, 2022, compared to 2.08 to 1.00 at September 30, 2021.

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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 opportunistic share repurchases.

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, 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.

As of September 30, 2022, we had $68.5 million outstanding and $412.9 million available for borrowings under the ABL facility, subject to borrowing base limitations and outstanding letters of credit of $18.6 million.

During the fiscal year ended September 30, 2022, the weighted average interest rate on our borrowings under the ABL facility was 3.5% .

Share Repurchase Programs

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.

During fiscal year 2022, we repurchased and subsequently retired approximately 6.8 million shares of our common stock under a share repurchase program a cost of $130.3 million.

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

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

As of September 30, 2022, we had approximately $595.8 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.

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

Historical Cash Flows

For the fiscal years 2022 and 2021, our primary sources of cash have been funds provided by operating activities and when necessary, borrowings under our ABL facility, as appropriate.

The primary non-operating uses of cash during the past three years were for share repurchases, debt service and capital expenditures.

The primary non-operating uses of cash during the past two years were for share repurchases, debt repayments and capital expenditures.

The following table shows our sources and uses of cash for the periods presented (in thousands):

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Net cash used by investing activities

Net cash (used) provided by financing activities

Net cash used by financing activities

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

Net (decrease) increase in cash and cash equivalents

Net decrease in cash and cash equivalents

Net Cash Provided by Operating Activities

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 provided by operating activities decreased for fiscal year 2022, compared to fiscal year 2021, primarily due to the reduction in our accounts payable and accrued liabilities, which was mostly attributable to the timing of payments for inventory, personal-protective equipment donations in the prior year and the impact of a lower bonus accrual for the current year.

Additionally, the decrease in our operating activities was driven by lower net earnings and the increase in our inventory balance for fiscal year 2022 .

Net Cash Used by Investing Activities

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

At September 30, 2021, we have $1,393.0 million in outstanding principal under a term loan B and senior notes, not including capital leases, unamortized debt issuance costs or debt discounts, in the aggregate, of $11.6 million.

There were no outstanding balances under the ABL facility at September 30, 2021.

Net cash used by investing activities was higher for fiscal year 2022, compared to fiscal year 2021, primarily due to investments in technology and store leasehold improvements.

Net Cash Used by Financing Activities

Net cash used by financing activities decreased as a result of fewer debt repayments during the fiscal year, compared to prior fiscal year, partially offset by share repurchases .

Debt and Guarantor Financial Information

At September 30, 2022, we had $1,087.5 million in outstanding principal under a term loan B and senior notes, not including finance leases, unamortized debt issuance costs or debt discounts, in the aggregate, of $4.3 million.

Additionally, there was an outstanding balance of $68.5 million under our ABL facility at September 30, 2022.

See Note 11 of the Notes to Consolidated Financial Statements in Item 8 contained in this Annual Report for additional information about our debt.

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Current liabilities

Intercompany payable

Total liabilities

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

The following table presents the summarized statement of earnings information for fiscal year 2022 (in thousands):

Earnings before provision for income taxes

Capital Requirements

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.

During the fiscal year ended 2022, we had total capital expenditures of approximately $95.1 million, excluding amounts paid in connection with the prior year, primarily in connection with our information technology projects and store improvements.

Contractual Obligations

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Obligations under operating leases (b)

Obligations under finance leases

Purchase obligations (c)

Other long-term obligations (d)(e)

Long-term debt obligations include obligations under capital leases and future interest payments on our debt outstanding as of September 30, 2021.

The amounts shown above do not include unamortized discount or deferred debt issuance costs reflected in our consolidated balance sheets since those amounts do not represent contractual obligations.

Long-term debt obligations include future interest payments on our debt outstanding as of September 30, 2022.

The amounts shown above do not include deferred debt issuance costs reflected in our consolidated balance sheets, nor do they include the impact of any interest received from the impact of our interest rate caps.

The amounts reported for operating leases do not include common area maintenance (CAM), property taxes or other executory costs.

The amounts shown above do not include immaterial contingent liabilities for operating leases for which we are liable in the event of default by a franchisee.

Purchase obligations reflect legally binding non-cancellable agreements that are entered into by us to purchase goods or services, that specify minimum quantities to be purchased and with fixed or variable price provisions.

Purchase obligations reflect legally binding agreements that are entered into by us to purchase goods or services, that specify minimum quantities to be purchased and with fixed or variable price provisions.

Amounts shown do not reflect open purchase orders, mainly for merchandise, to be fulfilled within one year, which are generally cancellable or contracts that tend to be reoccurring in nature and similar in amount year over year.

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These obligations are included in accrued liabilities and other liabilities, as appropriate, in our consolidated balance sheets.

The table above does not include an estimated $2.1 million of unrecognized tax benefits due to uncertainty regarding the realization and timing of the related future cash flows, if any.

The table above does not include above does not include an estimated $9.2 million of unrecognized tax benefits due to uncertainty regarding the realization and timing of the related future cash flows, if any.

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.

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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.

During fiscal year 2022, we estimated $19.4 million in obsolete inventory reserves in connection with our Distribution Center Consolidation and Store Optimization Plan.

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

Actual results differing from these estimates could significantly affect our carrying value of inventory and cost of goods sold.

Inventory shrinkage, in the aggregate, averaged less than 1.0% of consolidated net sales in fiscal years 2021, 2020 and 2019.

A 10% increase or decrease in our estimate of inventory shrinkage and obsolescence reserves at September 30, 2021, would impact net earnings by approximately $3.1 million.

Inventory shrinkage, in the aggregate, has remained less than 1.0% of consolidated net sales over the past two fiscal years.

A 10% change in our estimate of inventory shrinkage and obsolescence reserves at September 30, 2022, would impact net earnings by approximately $4.1 million.

Vendor Rebates and Concessions

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We consider the facts and circumstances of the various contractual agreements with vendors in order to determine the appropriate classification of amounts received in our consolidated statements of earnings.

We record cash consideration expected to be received from vendors in accounts receivables, other at the amount we believe will be collected.

We record cash consideration expected to be received from vendors in accounts receivables, other when earned and at the amount we believe will be collected.

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.

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

However, we maintain stop-loss coverage to limit the exposure related to certain insurance risks.

We base our health insurance liability estimate on trends in claim payment history, historical trends in claims incurred but not yet reported, and other components such as expected increases in medical costs, projected premium costs and the number of plan participants.

We base our health insurance liability estimate on trends in claim payment history, historical trends in claims

incurred but not yet reported and other components such as expected increases in medical costs, projected premium costs and the number of plan participants.

Additionally, we base our estimates for workers’ compensation, general and product liability on an actuarial analysis performed by an independent third-party actuary.

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Our liabilities could be significantly affected if actual results differ from our expectations or prior actuarial analyses.

A 10% increase or decrease in our insurance liabilities at September 30, 2021, would impact net earnings by approximately $1.5 million.

A 10% adjustment in our insurance liabilities at September 30, 2022, would impact net earnings by approximately $1.5 million.

The changes in our insurance liabilities were as follows (in thousands):

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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.

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

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 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.

In assessing for impairment, we determine the fair value of each individual store by discounting projected future cash flows over the remaining lease term.

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 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 Long-Lived Assets for Impairment and Restructuring

We review long-lived assets, including operating lease 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 typically is at the store level.

In assessing for impairment, we determine the fair value of each individual store by discounting projected future cash flows.

There are certain estimates and assumptions used to arrive at estimated future cash flows, including projected earnings and growth rates.

The carrying amount of a long-lived asset or asset group is considered impaired when the carrying value of the asset or asset group exceeds the expected future cash flows from the asset or asset group.

The impairment loss recognized is the excess of the carrying value of the asset or asset group over its fair value.

When we commit to an exit plan of scale that we believe will result in the disposal of long-lived assets prior to the end their useful lives, the approval of such plan may be considered a triggering event and therefore require a reassessment of asset carrying values for recoverability, based on projected cash flows.

If the carrying values are not recoverable, write-downs or impairment charges may be required to bring carrying values of certain long-lived assets, including operating lease asset, to fair value.

In connection with facility and store closures, we typically will also incur charges for employee severance, disposal costs and other expenses incurred with closures.

These charges are accrued and estimated based on facts and circumstances at the time.

Actual cash flows and expected payments could be significantly different from our estimates.

For fiscal year 2022, we recognized an impairment loss of $24.8 million in connection with our Distribution Center Consolidation and Store Optimization Plan within restructuring.

No material impairment losses were recognized in fiscal year 2021.

Assessment of Goodwill and Intangible Assets for Impairment

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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.

During quantitative assessment, 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.

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.

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

For fiscal year 2022, we completed a qualitative assessment and determined that 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.

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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