Item 1. Business
ITEM 1. BUSINESS
Our Company
Sally Beauty Holdings is a leading international specialty retailer and distributor of professional beauty supplies. As experts in hair color and care, we aim to empower our customers to express themselves through their hair and beyond. We operate two business segments that offer beauty products in key categories, including hair care, hair color, styling tools and nails.
Sally Beauty Supply (“SBS”) – An omni-channel retailer that offers professional-quality beauty supplies at attractive prices and provides education to retail consumers and salon professionals throughout North America, South America and Europe. SBS operates primarily through retail stores (generally operating under the Sally Beauty banner) and digital platforms, including our www.sallybeauty.com website and a mobile commerce-based app. We believe SBS, with its nationwide network of retail stores, is the largest open-line distributor of beauty products in the U.S.
Beauty Systems Group (“BSG”) – A leading full-service omni-channel distributor that offers professional beauty supplies exclusively to salons and salon professionals throughout the U.S. and Canada. These salon professionals primarily rely on just-in-time inventory due to capital constraints and limited warehouse and shelf space. BSG operates through company-operated stores (generally operating under the Cosmo Prof banner), franchised stores, distributor sales consultants (“DSCs”) and digital platforms, including our www.cosmoprofbeauty.com website, a mobile commerce-based app and chain portals.
The breadth, depth and professional quality of our hair color and care assortment provides us with a differentiated core business in an industry which is otherwise fragmented. Due to our long presence, brand heritage, product and process-specific knowledge and training of associates, we provide unmatched hair color and care expertise to consumers. We also have strong positioning with suppliers given our focus and economies of scale of purchasing. By operating in a variety of channels, we are able to reach broad, diversified geographies and customer segments using a variety of product assortments and tactics.
Operating and Growth Strategy
Our operating and growth strategy is guided by our vision to own professional hair color and care for both the do-it-yourself” (“DIY”) enthusiast and professional stylist. SBS’s differentiation is to offer a vast array of hair color and care solutions for in home use, and this is supported by the content and education we provide our customers. While at BSG, we are the largest North American distributor of professional hair color and care, offering stylists and salons the most extensive portfolio of third party brands in the market.
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:
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Enhancing our customer centricity;
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Growing high margin owned brands at Sally Beauty and amplify innovation; and
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Increase the efficiency of operations and optimize 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.
Store Design and Locations
Sally Beauty Supply
SBS has retail stores in the U.S. (including Puerto Rico), Canada, Mexico, the United Kingdom, Ireland, Belgium, France, Germany, the Netherlands, Spain and Chile. Stores are designed to highlight our extensive product offerings and differentiated position in hair color and care. We apply strong category management processes, including store specific planograms, to maintain consistent merchandise presentation across our store base. In the U.S. and Canada, our average store offers an average of 7,000 beauty products and is approximately 1,700 square feet in size. Stores are typically located in strip shopping centers, which are occupied by other high traffic retailers such as grocery
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stores, mass merchants and home improvement centers. Store formats, including average size and product selection, vary by marketplace to meet the needs of the customer.
We calibrate store renewals, remodels and expansions between new and existing geographies. In existing marketplaces, we add stores to provide additional coverage and strategically close or relocate underperforming stores as necessary. In new marketplaces, SBS selects geographic areas and store sites on the basis of demographic information, the quality and nature of neighboring tenants, store visibility and location accessibility. SBS generally seeks to expand in geographically contiguous areas to leverage its experience.
SBS’s store count for the last three fiscal years is summarized in the following table:
Fiscal Year
2022
2021
2020
Beginning store count
3,549
3,653
3,695
Opened
47
71
64
Closed
(155
)
(168
)
(102
)
Franchises closed
(2
)
(7
)
(4
)
Ending store count
3,439
3,549
3,653
Beauty Systems Group
BSG stores, including franchise-based Armstrong McCall stores, are designed to highlight our extensive product offerings to salons and salon professionals. Our stores on average offer approximately 8,000 professional beauty products tailored to the territory and are segmented into distinctive areas arranged by product type, with certain areas dedicated to leading third-party brands. Our company-operated stores average approximately 2,800 square feet and are located primarily in secondary strip shopping centers, being a destination exclusively for licensed cosmetologists.
BSG’s store count for the last three fiscal years is summarized in the following table:
Fiscal Year
2022
2021
2020
Beginning store count
1,362
1,385
1,366
Opened
54
59
85
Closed
(61
)
(80
)
(54
)
Franchises opened
2
1
4
Franchises closed
(2
)
(3
)
(16
)
Ending store count
1,355
1,362
1,385
In fiscal 2022, the Board approved t he planned closure of 330 SBS and 35 BSG stores mostly over the next fiscal year, which was the result of a strategic evaluation that included a market analysis of certain locations where we believe we are able to recapture demand and improve profitability. For more information on the Distribution Center Consolidation and Store Optimization Plan, see Note 16, Restructuring , in t he Notes to Consolidated Financial Statements in Item 8 contained in this Annual Report .
Merchandise
We believe our product offerings, led by our hair color and care categories, provides us a competitive advantage. During the last three fiscal years, our hair color and care products made up between 60% and 70% of our total consolidated sales. Key products included within our sales categories are as follows:
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Hair Color – Developer/lightener, semi-permanent/demi-permanent/permanent hair color, toner
•
Hair Care – Shampoo and conditioner, hair gels and creams, hair spray
•
Styling Tools – Hair Dryer, irons, curling rods/rollers/pins, brushes/combs, clippers/trimmers/accessories, shears, razors, salon accessories
•
Nails – Polish/gel/acrylics/dips, nail accessories & supplies
•
Skin and Cosmetics – Cosmetics, cosmetic accessories, hair removal, skincare, jewelry
•
Other Beauty Products – Salon chairs/dryers/basics
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Additionally, as a top destination to shop for professional color and care, our goal is to be in stock in these core categories at every opportunity. To accomplish this, we have made great strides in fiscal 2022 toward increasing speed to market and improving our in-stock levels - notwithstanding macro-related supply chain disruptions.
Sally Beauty Supply
SBS carries an extensive selection of leading third-party, owned and exclusive-labeled brand professional beauty supplies across a variety of product categories. As leaders in the beauty industry, we believe we are uniquely positioned to adapt and innovate within our brands, partnerships and product offerings to provide the looks customers want. We believe this focus helps us attract new customers and keep long-term relationships with existing customers. During fiscal year 2022, we launched Strawberry Leopard, a new exclusive vivid color line, which resonates to a growing Gen Z customer base. Additionally, in the beginning of fiscal year 2023, we will be launching bondbar, a new owned brand hair repair line, to meet the demand for powerful hair repair solutions at an accessible price . Furthermore, we continue to expand our selection of textured hair products, including over 50 Black-founded brands, and offer innovation in the nails category that we believe further differentiates us from our competitors.
We believe that our owned and exclusive-labeled brands, available only at SBS, offer equal or better quality than higher-priced leading third-party brands. During the last three fiscal years, our owned and exclusive-labeled brands accounted for approximately 45% of our U.S. and Canada product sales.
Beauty Systems Group
BSG carries an extensive selection of leading third-party branded products, many of which are under exclusive distributions rights, at competitive prices across a variety of product categories. We have exclusive and non-exclusive distribution rights with several key vendors for well-known brands in certain geographies and continue to pursue the acquisition of additional distribution rights. As the largest North American distributor of professional hair color and care, carrying an extensive selection of branded merchandise is critical to maintaining relationships with our professional customers.
During the fiscal year, a large wholesale competitor, continued to transform their business to a third-party distribution model. In connection with their transformation, we acquired certain inventories and began servicing a large number of their storefronts.
Marketing and Advertising
Sally Beauty Supply
We target existing and potential customers through an integrated marketing approach designed to reach the customer through a variety of media channels, including digital advertising, e-mail, social media, text messaging, mobile app push notifications, direct mail and print advertising.
SBS’s marketing initiatives are designed to drive customer traffic through added education, content and community building. In recent years, we revealed “Sally Crew” and launched “DIY University by Sally Beauty” to educate customers on a wide range of topics from the latest trends in hair color, textured hair, hair styling and nails and to make customers feel confident about mastering DIY hair color, hair care and nails. Our Sally Crew Ambassadors consist of content creators and/or professional stylists who are DIY experts in their areas of focus and aim to inspire, educate and empower beauty enthusiasts. This year, we expanded our DIY University content to provide easy-to-follow tutorials with convenient access to different product assortments discussed. Additionally, we launched the Sally Beauty Associate Affiliate Program to encourage our associates to share their unique expertise with customers on social media to curate a community of inspiring, diverse creators who are using SBS merchandise for their DIY beauty, nails, hair and self-expression.
Beauty Systems Group
BSG’s marketing programs are designed to promote its extensive selection of brand name products at competitive prices and to educate, motivate and empower existing and potential customers. We typically work closely with our vendors to provide customers promotional offers for certain products to target existing and potential customers. We distribute promotional material through multiple channels, including print mail, e-mail, SMS, mobile app push notifications, social media, trade shows, educational events, store personnel and DSCs. As of September 30, 2022, we had a network of 718 DSCs which personally consults, supports and sells directly to salons and salon
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professionals. In addition, we believe that our digital platforms enhance other efforts intended to promote awareness of our products by salons and salon professionals.
Customer Loyalty
In the U.S. and Canada, our Sally Beauty Rewards Program is driven to earn SBS customer loyalty and was recognized as one of “2022 America’s Best Loyalty Programs” by Newsweek & Statista. The program is free to join, and it provides our loyalty customers the ability to earn points on their SBS purchases, that convert to Sally Beauty Rewards when certain thresholds are attained. Through the program, these customers may also receive exclusive savings and personalized marketing offers.
Fiscal Year
2022
2021
2020
Sally Beauty Reward members
16.3 million
15.9 million
13.5 million
% of Sales
75.7%
72.5%
64.9%
In the U.S., we also offer our SBS customers the opportunity to apply for the Sally Beauty Rewards Credit Card that provides additional benefits to being a Sally Beauty Rewards member. Additionally, we offer our SBS professional-customers and BSG customers the opportunity to apply for the Cosmo Prof Rewards Credit Card, which provides discounts on Cosmo Prof purchases or points through the Sally Beauty Rewards Program on SBS purchases.
Through these programs, we are able to collect valuable point-of-sale customer data as a means of increasing our understanding of customers and enhancing our ability to personalize our marketing. We will continue to monitor and evolve our Sally Beauty Rewards Program in an effort to further enhance the customer experience and promote repeat sales from both retail customers and salon professionals. Outside the U.S. and Canada, our customer loyalty and marketing programs vary by marketplace.
Digital Strategy
We continue to grow our digital footprint not only through our marketing and customer relationship efforts, but also through our digital platforms in each segment. We believe we are uniquely positioned to continue expanding our digital sales penetration thanks to our omni-channel business model, which enables us meet our customers where they are; in store or online, or through a hybrid approach such as our “buy online, pick up in store” (BOPIS) option. Additionally, our digital strategy of enhancing our customer centricity aims to expand our services ecosystem to support professional stylists as well as increase education and expertise to inspire and support all of our customers. To that end, we are excited to continue our digital expansion through new initiatives such as a stylist platform powered by Salon HQ and Studio by Sally. The stylist platform is a BSG initiative with a customizable digital storefront platform that gives our stylists the ability to curate a product selection from thousands of choices and enable clients to purchase directly from their shops without having to hold inventory. Whereas Studio by Sally, a pilot store program set to kick off in fiscal 2023, will have a digital-first focus, from virtual check-in and digital education throughout the store, to DIY demos streaming at the store-front and take-home videos from individual salon sessions. Studio by Sally will allow for personalized appointments with a licensed stylist who will train and educate the consumer on how to color their own hair and achieve their desired results.
Distribution
We currently receive our merchandise through nine U.S. distribution centers and several distribution centers in various other countries. Our distribution centers service our stores, orders from our DSCs and ship-to-customer orders through various freight carriers. We procure our owned-branded merchandise through domestic and foreign vendors. We work closely with our overseas vendors to fulfill production orders and schedule ocean and freight carriers to deliver to our distribution centers.
Over the past several years, we have made significant investments in our end-to-end supply chain systems and processes to build a best-in-class merchandising and supply chain platform for the future. As we leverage these new systems and processes, we expect to more effectively and efficiently manage and forecast our inventory to ensure appropriate in-stock levels.
Additionally, customers are looking for more convenient options for receiving merchandise and it is helping drive their purchasing decisions. As such, we have made significant investments to “meet them where they are.” When ordering through our digital platforms, our customers can select different fulfillment options, including: BOPIS;
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deliver by common carrier (from-store or distribution centers); and 2-hour delivery. During the fiscal year, we expanded our partnership with DoorDash for both SBS and BSG, and we added a 2-hour delivery option to the Sally and BSG mobile apps.
Seasonality
Our business is generally not seasonal, but typically has higher sales in our first quarter related to the holiday sales period.
Our Competition
The primary competitive factors in our industry are: the price of branded and owned-brand products; exclusive distribution contracts; the quality, perceived value, brand name recognition, packaging and variety of the products sold; customer service; efficiency of distribution networks; and the availability of desirable store locations.
SBS competes primarily with beauty product wholesale and retail outlets, including local and regional open-line beauty supply stores, professional-only beauty supply stores, mass merchandisers, online retailers, drug stores, department stores and supermarkets as well as salons that sell hair care products. BSG competes primarily with beauty product wholesale suppliers, including online retailers and manufacturers selling their products directly to salons and salon professionals.
We face competition from certain manufacturers that use their own sales forces to distribute their professional beauty products directly or that align themselves with our competitors. Some of these manufacturers are vertically integrated through the acquisition of distributors and stores. We also face competition from authorized and unauthorized retailers as well as internet sites offering professional salon-only products.
Our Suppliers
We purchase our merchandise directly from manufacturers through supply contracts and purchase orders. For fiscal year 2022, our five largest suppliers – Henkel AG & Co. KGaA, Wella Company, the Professional Products Division of L'Oreal USA S/D, Inc., or L’Oreal, John Paul Mitchell Systems, and Olaplex Inc. – accounted for approximately 42% of our consolidated merchandise purchases. We have developed a long-standing, mutually beneficial relationship, some exclusive, with these suppliers and many others, which we believe is core to our competitive advantage. We purchase products from these and many other manufacturers on an at-will basis or under contracts which can generally be terminated without cause upon 90 days or less notice or expire without express rights of renewal.
Intellectual Property
In the U.S. and in other countries where we operate, we have registered or legally protected trademarks, copyrights, internet domain names, service marks and tradenames that are used to promote and market our business, stores, digital platforms and products. We believe many of these are well recognized and have significant value, including but not limited to: Sally®, Sally Beauty®, Cosmo Prof®, Armstrong McCall®, ION® and Beyond the Zone®.
Our Company Purpose & Values
Our Company Purpose & Values are intended to establish our rallying cry and focus our teams on the impact we intend to have in the world.
Our Purpose: TO INSPIRE A MORE COLORFUL, CONFIDENT AND WELCOMING WORLD
Our Values:
•
BE YOURSELF. Come as you are—everyone is welcome here.
•
BE AN INSPIRATION. Share your passion and knowledge with your team, your customers, the world.
•
BE BOLD. Dive in. Move fast. Say yes.
•
BE AN OWNER. Drive growth. Create your future.
•
BE PART OF SOMETHING BIGGER. Take care of each other, our community and our planet.
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More information on our Purpose & Values can be found at: https://www.sallybeautyholdings.com/our-company/purpose-and-values .
Human Capital Management
As of September 30, 2022, we had approximately 29,000 global associates, including approximately 13,000 full-time associates. We believe they are our greatest asset with their combined skills, knowledge, work/life experiences and capabilities. At the front line interacting with our customers or behind-the-scenes supporting our field teams, our associates play a major role in our business. While we often emphasize our technology-based transformations and our wide variety of professional beauty products as key attributes, nothing happens or succeeds without our people.
In return for what they do for us, among many other things, we strive to:
•
Ensure our associates work in a safe, healthy environment;
•
Provide competitive compensation and benefits packages that attract and retain talent in every facet of our business – stores, direct sales, distribution centers and corporate headquarters. Our benefits range from medical, dental and vision care – including options for our part-time associates – to 401(k), short and long-term disability and a robust Employee Assistance Program. Starting fiscal year 2023, we will be providing six weeks of paid parental leave for mothers, fathers or partners upon the birth or placement of a child;
•
Provide meaningful, engaging learning and development that grows our associates’ knowledge and capability with respect to our business and skills that will help them in business and life; and
•
Create an environment and culture where everyone can bring their true self to work, because our differences are what make us beautiful. At SBH, we believe our focus on Diversity, Inclusion & Belonging are crucial to improving how we interact with and influence our associates, customer environments and broader communities. We are committed to being a force for change.
Associate Health & Safety
We strive to create a safe and healthy work environment for all associates
We place a high value on the health and safety of our associates, customers, suppliers and vendors. This commitment is evidenced, in part, by our background check policy for new hires, training and policy implementations related to handling both associate and customer incidents, partnerships to maintain the stores and make necessary repairs, recent actions taken to protect our customers and associates against COVID-19 as well as ongoing support in the field and at the support center.
Additionally, we value our partnerships with suppliers and vendors and understand the impact they can have on our associates. Thus, SBH has included rules governing their conduct, both with respect to expectations while interacting with our associates and, with our foreign suppliers, assurances that they too are providing a safe and healthy working environment for their associates.
Labor Practices
We provide competitive wages and benefits in a positive work environment where we focus on doing what is right
We are an Equal Opportunity Employer with up-to-date policies, procedures and practices with respect to such important issues as safety, discrimination, harassment and retaliation. We provide focused training on these issues to our associates and managers.
We clearly communicate that any concerns related to issues such as discrimination, harassment, retaliation – and other issues such as wage law compliance and fraud – should be reported immediately. We also communicate the avenues available to our associates to do so through our “SBH CARES” communications and posters. The reporting avenues include options to do so by phone or online through our “Employee Concern Line” and to do so anonymously if an associate prefers to take that approach.
We ensure compliance with other important labor and employment law issues through a variety of processes and procedures, using both internal and external expertise and resources.
We also emphasize the importance of taking care of our associates in our Company’s Code of Business Conduct and Ethics, the standard of conduct that applies to all of our associates, executive officers and Board of Directors. The Code reflects the core principles of conducting our business as a good corporate citizen in compliance with all laws, rules and regulations applicable to us and the conduct business with regard for the welfare of our associates and providing equal opportunity to all associates and job applicants. You can review this important document at http://investor.sallybeautyholdings.com .
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Associate Engagement, Development and Culture
We live our values, listen to our associates and take action
We make significant efforts to ensure our associates are informed, engaged and excited about the work they are doing and contributions they are making to our Company and our customers. We are committed to providing associates with what they need to thrive and grow their career. We significantly invest in our talent processes and set clear expectations around leadership competencies and our cultural values at all levels in the organization. At SBH, we consider the whole end-to-end talent cycle of an associate to ensure we select exceptional people to represent our business and best serve our customer. This includes robust interviewing processes as well as comprehensive onboarding programs to ensure new hires are set up to succeed in their early stages of joining SBH. There is also a strong cadence on completing regular cycles of performance management, linked to our Company values and leadership competencies, as well as regular reviews of our talent and succession pipelines.
Importantly, we devote significant effort and resources to the development of our associates, including providing almost all of our associates access to state-of-the-art learning management systems. We use these platforms to provide specifically designed and interactive award-winning e-learning courses in sales and service, product and hair knowledge, compliance training, and health and safety.
We also place significant value and attention on responding to feedback and input from associates. This includes surveys regarding issues such as Diversity, Inclusion & Belonging and our annual engagement survey. We review our team’s input and comments, identify common themes and set out action plans to respond. We believe listening is crucial, but taking action and making commitments are even more important.
A core focus of our associate engagement and culture are our efforts focused on Diversity, Inclusion & Belonging, discussed below.
Diversity, Inclusion & Belonging
At Sally Beauty we celebrate differences, inclusivity and self-expression. This fundamental aspect of SBH’s culture is rooted in our belief that beauty is for everyone and everyone should find their own path to beauty. Our associates and our customers care about celebrating diversity and self-expression. We want our Company and our stores to be places where all of our associates and customers feel valued for who they are and experience a sense of belonging.
We come together to create a culture for “One & All”
Diversity, Inclusion & Belonging are at the heart of who we are as a Company – at the Board level, throughout our global workforce and in our shared commitment to serving a diverse customer base and their communities.
Our Diversity, Inclusion & Belonging Mission Statement:
We find beauty in YOU!
Finding beauty in diversity is in our DNA because our differences are what make us beautiful. Our diversity, inclusivity and self-expression are what fuel our innovation and growth.
At SBH, we come together to create a culture for ONE & ALL.
At the Board Level : Our Board’s composition leads the Company’s commitment to Diversity, Inclusion and Belonging. Having diverse voices on our Board enhances the Board’s expertise, broadens its viewpoint and sets the tone to encourage leaders at all levels of the Company to listen to the concerns of our associates and customers alike. Our Compensation & Talent Committee provides hands-on oversight and guidance of our Diversity, Inclusion & Belonging initiatives. Our Board believes listening and responding to diverse voices is crucial to the Company’s success and long-term sustainability.
In Our Workforce : Our SBH Team in the U.S. & Canada is over 90% women and over 48% people of color. In 2019 and 2020, Forbes named our Company one of America’s Best Employers for Diversity. In 2021, Forbes named SBH as one of America’s Best Employers for Women. We recognize and celebrate the bedrock values of workforce diversity, inclusion, belonging and engagement within our teams. For us, these are key drivers of the success of the business, as our associates should – and do – reflect the various qualities of our customers and what they desire and expect from SBH.
During the fiscal year, we proudly launched our first Employee Resource Groups (ERGs), starting with four groups that represent out Black, Hispanic, Women and LGBTQ+ associates. These ERGs are off to a strong start, and we look forward to embedding our ERGs within how we do business, both internally and externally, then expanding to other groups and focus areas in the future.
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In Our Customer Base : Our customers span the entire continuum of gender and ethnic diversity. We sell beauty products to treat and style every kind of hair; we deliver a tailored assortment of beauty products that serve the local communities where our over 4,000 U.S. and Canada stores are located. Serving the diverse demographics and needs of our customers drives a culture and workforce that embraces and reflects the communities we serve.
We will continue to develop and evolve how we enhance Diversity, Inclusion & Belonging throughout SBH. We recognize the value these initiatives bring to our Company, our associates, our customers and the communities we serve.
More information on our approach to Diversity, Inclusion & Belonging can be found at: https://www.sallybeautyholdings.com/our-company/diversity-inclusion-and-belonging .
Regulation
We are subject to a wide variety of laws and regulations, which historically have not had a material effect on our business. For example, in the U.S., most of the products sold and the content and methods of advertising and marketing utilized are subject to both federal and state regulations administered by a host of federal and state agencies, including, in each case, one or more of the following: the Food and Drug Administration, or FDA, the Federal Trade Commission and the Consumer Products Safety Commission. The transportation and disposal of many of our products are also subject to federal and state regulation. State and local agencies regulate many aspects of our business. We also face comprehensive regulation outside the U.S., focused primarily on product labeling and safety issues.
As of September 30, 2022, we supplied franchised stores primarily located in the U.S. As a result of these franchisor-franchisee relationships, we are subject to regulation when offering and selling franchises. The applicable laws and regulations affect our business practices, as franchisor, in a number of ways, including restrictions placed upon the offering, renewal, termination and disapproval of assignment of franchises. To date, these laws and regulations have not had a material effect upon our operations.
Access to Public Filings
Our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and amendments to such reports are available, without charge, on our website, www.sallybeautyholdings.com , as soon as reasonably possible after they are filed electronically with the Securities and Exchange Commission, or SEC, under the Exchange Act. The SEC maintains an internet site that contains our reports, proxy and information statements, and other information we file electronically with the SEC at www.sec.gov. We will provide copies of such reports to any person, without charge, upon written request to our Investor Relations Department at our principal office. The information found on our website shall not be considered to be part of this or any other report filed with or furnished to the SEC.