What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-02-02 compared with 2022-08-04 · 114 added, 138 removed, 66 unchanged (79% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

This section should be read in conjunction with the information contained in our Annual Report on Form 10-K for the fiscal year ended September 30, 2021.

This section discusses management’s view of the financial condition, results of operations and cash flows of Sally Beauty.

This section should be read in conjunction with the information contained in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022, including the Risk Factors sections therein, and information contained elsewhere in this Quarterly Report, including the condensed consolidated interim financial statements and notes to those financial statements.

Executive Overview

In the third quarter of fiscal year 2022, we delivered solid gross margin growth in both segments compared to the same period last year.

Additionally during the quarter, we repaid the entire $300 million dollar balance on our 8.75% Senior Notes and continued to invest for growth through many of our initiatives, despite volatile market conditions and its impact on our topline performance.

With a healthy balance sheet, a strong operating infrastructure and the loyalty of our core customers, we believe we are well positioned to continue navigating the macro-environment and remain focused on our four strategic pillars:

leveraging our digital platform, driving loyalty and personalization, delivering product innovation and optimizing our supply chain.

Financial Summary for the Three Months Ended June 30, 2022

Consolidated net sales for the three months ended June 30, 2022, decreased $60.9 million, or 6.0%, to $961.5 million, compared to the three months ended June 30, 2021.

For fiscal 2023, we are 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.

Enhancing our customer centricity

During the quarter, BSG launched a new strategic partnership with Salon HQ.

Salon HQ is a customizable digital storefront platform that gives stylists the ability to curate a product selection from thousands of BSG merchandise choices and enables their clients to purchase directly from their shops without the stylists having to finance and carry inventory.

In addition, SBS has identified the locations for its initial Studio by Sally pilot stores that we expect to open this fiscal year.

The Studio by Sally pilot store program will have a digital-first focus, from digital check-in to digital education throughout the store and beyond, including personalized appointments at our in-store salons with licensed stylists who will train and educate consumers on how to color their own hair and achieve their desired results.

We believe that we will be able to expand the Studio by Sally concept to 100 locations throughout the U.S.

over the next three to four fiscal years if successful.

Growing high margin owned brands at Sally Beauty and amplifying innovation

We believe growing our SBS owned-brands, through innovation and marketing, will provide improved margins, strengthen our long-term relationships with existing customers and help attract new customers.

During the quarter, we invested more into marketing of our owned-brands and launched the first phase of our new owned-branded hair repair product line – bondbar.

These initiatives delivered an increase in our owned-brands sales penetration, resulting in increased SBS profit margins.

Furthermore, we look forward to providing salons and stylists with new innovations from our BSG vendors as they are launched over the next two fiscal quarters.

Increasing the efficiency of our operations and optimizing our capabilities

In the fourth quarter of fiscal year 2022, we announced our plan to close 330 SBS stores, 35 BSG stores and two BSG distribution centers.

Based on our strategic evaluation, we believe that we will able to recapture demand of closed stores in other nearby store locations and improve overall profitability.

During the quarter, we completed the closure of our two BSG distributions centers and the majority of our planned store closures.

Additionally, we re-optimized our store supply chain network based on our new store fleet.

As of December 31, 2022, we have closed 327 SBS stores and 14 BSG stores as part of the Plan and are currently meeting our sales recapture expectations.

See Note 11, Restructuring , in Item 1 of this quarterly report for more information on the Plan.

Financial Summary for the Three Months Ended December 31, 2022

Consolidated net sales for the three months ended December 31, 2022, decreased $23.2 million, or 2.4%, to $957.1 million, compared to the three months ended December 31, 2021.

Consolidated net sales included a negative impact from changes in foreign currency exchange rates of $14.4 million;

Consolidated comparable sales decreased 3.6% for the three months ended June 30, 2022, compared to the three months ended June 30, 2021;

Consolidated gross profit for the three months ended June 30, 2022, decreased $24.2 million, or 4.7%, to $490.2 million, compared to the three months ended June 30, 2021.

Gross margin increased 70 basis points to 51.0% for the three months ended June 30, 2022, compared to the three months ended June 30, 2021;

Consolidated operating earnings for the three months ended June 30, 2022, decreased $28.2 million, or 22.1%, to $99.2 million, compared to the three months ended June 30, 2021.

Operating margin decreased 220 bps to 10.3% for the three months ended June 30, 2022, compared to the three months ended June 30, 2021;

For the three months ended June 30, 2022, our consolidated net earnings decreased $29.6 million, or 38.9%, to $46.6 million, compared to the three months ended June 30, 2021;

For the three months ended June 30, 2022, our diluted earnings per share was $0.43 compared to $0.66 for the three months ended June 30, 2021;

Cash provided by operations was $52.0 million for the three months ended June 30, 2022, compared to $86.2 million for the three months ended June 30, 2021;

During the period, we redeemed the entire outstanding principal amount of our 8.75% Senior Notes at a redemption price equal to 104.375%.

As a result, we recorded a loss on debt extinguishment of $16.4 million within interest expense on our condensed consolidated statements of earnings.

Consolidated comparable sales increased 1.1% for the three months ended December 31, 2022, compared to the three months ended December 31, 2021;

Consolidated gross profit for the three months ended December 31, 2022, decreased $11.6 million, or 2.3%, to $488.6 million, compared to the three months ended December 31, 2021.

Gross margin was unchanged at 51.0% for the three months ended December 31, 2022, compared to the three months ended December 31, 2021;

Consolidated operating earnings for the three months ended December 31, 2022 , decreased $26.2 million , or 23.2% , to $ 86.6 million , compared to the three months ended December 31, 2021 .

Operating margin decreased 250 bps to 9.0% for the three months ended December 31, 2022 , compared to the three months ended December 31, 2021 ;

For the three months ended December 31, 2022, our consolidated net earnings decreased $18.5 million, or 26.9%, to $50.3 million, compared to the three months ended December 31, 2021;

For the three months ended December 31, 2022, our diluted earnings per share was $0.46 compared to $0.60 for the three months ended December 31, 2021;

Cash provided by operations was $55.0 million for the three months ended December 31, 2022, compared to cash used by operations of $5.7 million for the three months ended December 31, 2021.

Trends Impacting Our Business

Global inflationary pressures continue to impact consumer spending behavior and the cost for products and services.

Moreover, there is still volatility in the global supply chain, while freight carriers are faced with higher fuel prices.

During the current quarter and fiscal year, these headwinds have 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 have experienced an increase in our compensation costs in order to attract and retain associates.

Global inflationary pressures continue to influence consumer and stylist behavior along with the cost for products and services.

and Canada, we are seeing our SBS customers color their hair less frequently and reduce the size of their basket when they shop with us, while at BSG we are seeing stylists purchasing closer to the time they use products.

Additionally, inflationary pressures have impacted wages, especially among retail and hourly employees, as we have experienced an increase in our labor costs in order to attract and retain associates.

During the current quarter, these headwinds have resulted in lower traffic and conversion in our business and increases in certain operating costs.

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 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.

In a measure to curb inflation, the U.S.

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

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

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

Federal Reserve has increased the federal funds effective rate.

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

We currently have approximately $575.9 million in variable rate debt, with $408.9 million hedged with interest rate caps to help mitigate the impact of raising 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.

We currently have $471.1 million in variable rate debt outstanding, of which $406.1 million is hedged with interest rate caps to help mitigate the impact of raising rates.

Future increases in the federal funds effective rate could have a material adverse impact to our cost of borrowing, 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 continue to take certain actions in order to protect our customers and associates.

In particular, our store operations continue to face challenges and disruptions related to COVID-19 surges and spikes in infection levels.

While the situation has shown 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.

While we have seen signs of stabilization from the impacts of the COVID-19 virus, 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 labor and supply chain disruptions.

Refer to Item 1A.

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Comparable Sales

The Company’s initiative to invest in our digital platforms support our omni-channel strategies 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.

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.

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Three Months Ended

Nine Months Ended

Increase (Decrease)

Gross profit:

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Provision for income taxes

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

Comparable sales growth (decline) (b) :

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

Comparable sales growth (decline):

Unallocated expenses consist of corporate and shared costs and are included in selling, general and administrative expenses in our condensed consolidated statements of earnings.

Our 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, our 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.

Prior to fiscal year 2022, we reported Same Store Sales.

For fiscal year 2022, we are reporting Comparable Sales, which includes sales to franchisees and full service sales.

We have recast prior year amounts to conform to the change.

See “Comparable Sales” discussion above for further information.

Our December 31, 2022 store count was impacted by the closure of 327 SBS store and 14 BSG store from the Plan.

See Note 11, Restructuring , in Item 1 of this quarterly report for more information on the Plan.

Results of Operations

The Three Months Ended June 30, 2022, compared to the Three Months Ended June 30, 2021

The Three Months Ended December 31, 2022, compared to the Three Months Ended December 31, 2021

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

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Foreign currency exchange

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

The decrease in SBS’s net sales was driven by lower comparable sales, the negative impact from foreign exchange rates and the impact of closed stores.

SBS’s comparable sales decrease was driven by fewer transactions as a result of lower store traffic, while the average ticket was relatively unchanged, resulting from lower average unit volume offset by higher average unit retail prices, led by our color and care categories.

Includes stores opened for less than 14 months, net of stores closures, including stores closed under the Plan

The decrease in SBS’s net sales was driven by the negative impact from foreign exchange rates and the impact of store closures in the prior twelve months, including stores closed under the Plan, partially offset by an increase in our comparable sales.

SBS’s comparable sales increase was driven by a growth in average ticket, primarily from inflationary impacts and pricing leverage, and partially offset by fewer transactions.

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

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Foreign currency exchange

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

Includes stores opened for less than 14 months, net of stores closures, including from the Plan

The decrease in BSG’s net sales was primarily due to lower comparable sales, the impact of closed stores and the negative impact from the Canadian foreign exchange rate.

BSG’s comparable sales was driven by fewer transactions as a result of lower store traffic, partially offset by an increase in average ticket, resulting from higher average unit retail prices, led by color, care and styling tools categories, partially offset by lower unit volume.

SBS’s gross profit decreased for the three months ended June 30, 2022, as a result of a decrease in net sales, partially offset by a higher gross margin.

SBS’s gross margin increased primarily as a result of an improvement in pricing leverage, partially offset by higher distribution and freight costs.

BSG’s gross profit increased for the three months ended June 30, 2022, driven by an improvement in pricing leverage, partially offset by higher distribution and freight costs.

Selling, General and Administrative Expenses

SBS’s selling, general and administrative expenses increased $1.6 million, or 0.7%, for the three months ended June 30, 2022.

The increase was driven by higher compensation and compensation-related expenses of $5.4 million, resulting from higher wages within general labor markets, and higher information technology expenses of $1.2 million, partially offset by the favorable impact of foreign exchange rates of $4.6 million.

BSG’s selling, general and administrative expenses increased $1.4 million, or 1.2%, for the three months ended June 30, 2022.

The increase was driven primarily by higher delivery expense of $1.3 million as a result of increased fuel prices

Unallocated selling, general and administrative expenses, which represent certain corporate costs that have not been charged to our reporting segments, increased $1.5 million, or 3.4%, for the three months ended June 30, 2022, primarily due to higher information technology expense.

Interest Expense

The increase in interest expense is primarily due to the repayment of our 8.75% Senior Notes, which resulted in a loss from debt extinguishment of $16.4 million from an early call premium of $13.1 million and the write-off of unamortized debt issuance costs of $3.3 million in the current quarter.

This increase was partially offset by the interest savings of $2.3 million from the repayment of the 8.75% Senior Notes.

See “Liquidity and Capital Resources” below for additional information.

Provision for Income Taxes

The effective tax rates were 26.3% and 26.7%, for the three months ended June 30, 2022, and 2021, respectively.

The Nine Months Ended June 30, 2022, compared to the Nine Months Ended June 30, 2021

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

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 negative impact of foreign exchange rates and lower comparable sales.

SBS’s comparable sales were lower due to fewer transactions, impacted by lower traffic, and a lower average ticket, resulting from lower average unit volume, partially offset by higher average unit retail prices, led by our color and care categories.

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

Comparable sales

Sales outside comparable sales (a)

Foreign currency exchange

Includes stores opened or acquired 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.

BSG’s comparable sales increase was driven by a higher average ticket, resulting 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 decreased for the nine months ended June 30, 2022, 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 fewer write-downs of obsolete personal-protective equipment, partially offset by higher distribution and freight costs and an unfavorable sales mix shift between the U.S.

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

BSG’s gross profit increased for the nine months ended June 30, 2022, driven by an increase in sales and a higher gross margin.

BSG’s gross margin increase was driven by improvement of pricing leverage and fewer write-downs of personal-protective equipment during the current year, partially offset by higher distribution and freight costs.

BSG’s comparable sales faced headwinds from elevated demand in the prior year from the easing of COVID-19 restrictions and the impacts of the current economic environment which resulted in fewer transactions, but was partially offset by growth in average ticket.

SBS’s gross profit decreased for the three months ended December 31, 2022, as a result of lower net sales, partially offset by a higher gross margin.

SBS’s gross margin grew as a result of pricing leverage and increased penetration of our owned-brand products.

BSG’s gross profit decreased for the three months ended December 31, 2022, as a result of lower net sales and a lower gross margin.

BSG’s gross margin decline was driven by lower product margin resulting from an unfavorable sales channel mix between stores and lower-margin Regis e-commerce sales, partially offset by adjustments to our expected obsolescence reserve related to the Plan.

Selling, General and Administrative Expenses

SBS’s selling, general and administrative expenses increased $19.7 million, or 2.9%, for the nine months ended June 30, 2022.

The increase was driven by higher compensation and compensation-related expenses of $17.5 million, as a result of higher wages within general labor markets and store re-openings in certain international markets, and the unfavorable impact from foreign exchange rates of $7.1 million.

These headwinds were partially offset by lower delivery expenses of $2.9 million, as a result of lower e-commerce sales, and lower facility costs of $2.2 million, as a result of operating fewer stores.

BSG’s selling, general and administrative expenses increased $16.3 million, or 5.1%, for the nine months ended June 30, 2022.

The increase was driven by higher delivery expense of $3.8 million, depreciation and amortization of $3.5 million, advertising expense of $2.1 million, credit card fees of $1.4 million, utility expenses of $1.0 million and compensation and compensation-related expenses of $0.9 million.

Unallocated selling, general and administrative expenses, which represent certain corporate costs that have not been charged to our reporting segments, decreased $23.6 million, or 15.3%, for the nine months ended June 30, 2022, as a result of lower COVID-19 expenses of $26.4 million, including the impact of $31.2 million in donation expense in the prior year, partially offset by higher information technology expense of $3.4 million.

SBS’s selling, general and administrative expenses decreased $3.2 million, or 1.4%, for the three months ended December 31, 2022 and included a favorable impact from foreign exchange rates of $4.6 million.

As a percentage of SBS net sales, SG&A for the three months ended December 31, 2022 was 40.8% compared to 40.5% for the three months ended December 31, 2021.

The increase as a percentage of sales was driven by deleveraging as a result of lower net sales.

BSG’s selling, general and administrative expenses increased $2.0 million, or 1.8%, for the three months ended December 31, 2022.

As a percentage of BSG net sales, SG&A for the three months ended December 31, 2022 was 28.3% compared to 27.1% for the three months ended December 31, 2021.

The increase as a percentage of sales was driven primarily by deleveraging as a result of lower net sales as well as increases in labor and personnel costs and depreciation expenses.

Unallocated selling, general and administrative expenses, which represent certain corporate costs that have not been charged to our reporting segments, increased $6.5 million, or 14.4%, for the three months ended December 31, 2022, primarily due to increased labor and personnel costs of $4.6 million and information technology expense of $2.9 million .

Restructuring

For the three months ended December 31, 2022, we incurred $10.4 million in restructuring charges related to our Distribution Center Consolidation and Store Optimization Plan.

For the three months ended December 31, 2021, restructuring charges in connection with our previously communicated Transformation Plan were immaterial .

See Note 11, Restructuring , in Item 1 of this quarterly report for more information on the Plan.

Interest Expense

The increase in interest expense is primarily due to the repayment of our 8.75% Senior Notes, which resulted in a loss from debt extinguishment of $16.4 million during the nine months ended June 30, 2022, compared to loss from debt extinguishment of $4.3 million related to our repayment of our senior notes due 2023 and our term loan B fixed tranche during the prior period.

This was partially offset by the interest savings in connection with these repayments for $10.2 million during the fiscal year.

See “Liquidity and Capital Resources” below for additional information.

The decrease in interest expense is due to the interest savings from the repayment of our 8.75% Senior Notes due 2025 during fiscal year 2022, partially offset by higher interest expense on our variable rate debt resulting from the increase in borrowing rates and outstanding amounts under our ABL facility .

See Note 9, Derivatives , in Item 1 of this quarterly report for more information on our interest rate caps used to help mitigate raising interest rates.

Provision for Income Taxes

The effective tax rates were 27.0% and 26.6%, for the nine months ended June 30, 2022 and 2021, respectively.

The effective tax rates were 26.7% and 25.6%, for the three months ended December 31, 2022, and 2021, respectively.

The increase in the effective tax rate was primarily due to the tax impact of share-based compensation which was detrimental in the current year quarter, but beneficial in the prior year quarter.

Liquidity and Capital Resources

Our capital structure contains a mix of debt and equity, and a substantial portion of our liquidity needs arise from our outstanding indebtedness and from funding the costs of our operations, working capital, capital expenditures, debt repayment and share repurchases.

Working capital (current assets less current liabilities) decreased $250.5 million, to $468.2 million at June 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 the inflationary cost increases on our purchases and additional inventory relating to BSG's distribution partnership with Regis to service their salons account.

At June 30, 2022, cash and cash equivalents were $101.3 million.

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

We have continued to focus on reducing our debt levels and shares outstanding through repurchases, while also being proactive in maintaining our financial flexibility.

We utilize our ABL facility for the issuance of letters of credit, 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 nine months ended June 30, 2022, the weighted average interest rate on our borrowings under the ABL facility was 2.9%.

As of June 30, 2022, we had $167.0 million outstanding and $314.2 million available for borrowings under our ABL facility, subject to borrowing base limitations, as reduced by outstanding letters of credit.

Amounts drawn on our ABL facility are generally paid down with cash provided by our operating activities.

Share Repurchase Programs

During the nine months ended June 30, 2022, we repurchased 6.8 million shares of our common stock for $130.3 million with existing cash balances.

As of June 30, 2022, we had authorization of approximately $595.8 million of additional potential share repurchases remaining under our share repurchase program.

Historically, our primary source of cash has been net funds provided by operating activities and, when necessary, borrowings under our ABL facility.

Historically, the primary uses of cash have been for share repurchases, capital expenditures, repayments and servicing of long-term debt and acquisitions.

Net Cash Provided by Operating Activities

Net cash provided by operating activities during the nine months ended June 30, 2022, decreased $168.5 million to $49.2 million, compared to the nine months ended June 30, 2021.

This decrease was driven by the reduction in our accrued liabilities, primarily due to the timing of personal-protective equipment donations and a lower bonus accrual, as well as higher inventory purchases compared to the nine months ended June 30, 2021.

Our principal sources of liquidity are from cash and cash equivalents, cash from operations and our ABL facility.

A substantial portion of our liquidity needs arise from funding the costs of our operations, working capital, capital expenditures, debt interest and principal payment.

Additionally, under our share repurchase program, see below for more details, we will repurchase shares of our common stock on the open market to return value to our shareholders.

At December 31, 2022, we had $440.8 million in our liquidity pool, which includes $417.7 million available for borrowings under our ABL facility and cash and cash equivalents of $99.1 million.

Working capital (current assets less current liabilities) increased $77.4 million, to $541.9 million at December 31, 2022, compared to $464.5 million at September 30, 2022.

This increase was driven by higher inventory balances, resulting from inflationary cost increases and the impact of foreign exchange rates of $12.7 million, and an increase in cash and cash equivalents.

We anticipate that existing cash balances (excluding certain amounts permanently invested in connection with foreign operations), cash expected to be generated by operations, and funds available under our ABL facility will be sufficient to fund our working capital and capital expenditure requirements over the next twelve months.

Three Months Ended December 31,

(in thousands)

Net cash provided (used) by operating activities

Net cash used by investing activities

Net cash used by investing activities during the nine months ended June 30, 2022, increased $20.7 million to $67.9 million, compared to the nine months ended June 30, 2021.

This was driven by additional investments in technology and store leasehold improvements.

Net cash used by financing activities

Net cash used by financing activities for the nine months ended June 30, 2022, decreased $142.7 million to $273.8 million, as a result of lower net debt repayments during the fiscal year, compared to prior fiscal year, partially offset by share repurchases during the nine months ended June 30, 2022.

Net Cash Provided (Used) by Operating Activities

The change in net cash provided by operating activities for the three months ended December 31, 2022, compared to the net cash used by operating activities three months ended December 31, 2021, was driven by the timing of inventory purchases, primarily from the impact of global supply chain issues in the prior year.

Additionally, it was driven by the timing of income taxes and a decrease in net sales.

Net Cash Used by Investing Activities

The decrease in net cash used by investing activities for the three months ended December 31, 2022, compared to the three months ended December 31, 2021, was driven by fewer capital expenditures related to store improvements and information technology.

Net Cash Used by Financing Activities

The decrease in net cash used by financing activities for the three months ended December 31, 2022, compared to the three months ended December 31, 2021, was a result of share repurchases in the prior year and lower cash proceeds from employees exercising equity awards.

Debt and Guarantor Financial Information

At June 30, 2022, we had $1,255.8 million in debt, not including capital leases, unamortized debt issuance costs and debt discounts, in the aggregate, of $4.7 million.

Our debt consisted of $680.0 million in senior notes outstanding, $408.9 million remaining on our term loan and $167.0 million in outstanding borrowings under our ABL facility.

During the fiscal year, we called and redeemed our 8.75%

Senior Notes, at a redemption price equal to 104.375% of the principal amount , through a combination of excess cash and borrowings under our ABL facility .

At December 31, 2022, we had $1,151.1 million in debt, not including capital leases, unamortized debt issuance costs and debt discounts, in the aggregate, of $3.7 million.

Our debt consists of $680.0 million in 5.625% Senior Notes due 2025 (“2025 Senior Notes”) outstanding, $406.1 million remaining on our term loan and $65.0 million in outstanding borrowings under our ABL facility.

We utilize our ABL facility for the issuance of letters of credit, 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, paying down other debt and share repurchases.

drawn on our ABL facility are generally paid down with cash provided by our operating activities.

During the three months ended December 31, 2022 , the weighted average interest rate on our borrowings under the ABL facility was 5.2%.

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

Guarantor Financial Information

We currently have 5.625% Senior Notes due 2025 outstanding .

These notes were issued by our wholly-owned subsidiaries, Sally Holdings LLC and Sally Capital Inc.

(the “Issuers”), and registered with the Securities and Exchange Commission under a shelf registration statement.

Our 2025 Senior Notes were issued by our wholly-owned subsidiaries, Sally Holdings LLC and Sally Capital Inc.

(the “Issuers”).

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.

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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 June 30, 2022, and September 30, 2021 (in thousands):

June 30, 2022

The following table presents the summarized balance sheets information for the Issuers and the Guarantors as of December 31, 2022, and September 30, 2022:

(in thousands)

December 31, 2022

September 30, 2022

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Current assets

Intercompany payable

Current liabilities

Intercompany payable

Total liabilities

The following table presents the summarized statement of income information for nine months ended June 30, 2022 (in thousands):

The following table presents the summarized statement of earnings information for the Issuers and the Guarantors for three months ended December 31, 2022 (in thousands):

Earnings before provision for income taxes

Share Repurchase Programs

Under our current share repurchase program, we may from time-to-time repurchase our common stock on the open market.

During the three months ended December 31, 2022, no shares were repurchased in connection with our share repurchase program.

During three months ended December 31, 2021, we repurchased 3.7 million shares of our common stock for $75.0 million under our share repurchase program.

See Note 5, Stockholders’ Equity , for more information about our share repurchase program.

Contractual Obligations

There have been no material changes outside the ordinary course of our business in any of our contractual obligations since September 30, 2021, except for the repayment of our 8.75% Senior Notes and the additional ABL borrowings.

In connection with these events, our contractual obligations contained in our Annual Report on Form 10-K for the fiscal year ended September 30, 2021, should be adjusted as follows (in thousands):

Payments Due by Period

Less than 1 year

More than 5 years

Long-term debt obligations, including interest

There have been no material changes outside the ordinary course of our business in any of our contractual obligations since September 30, 2022.

Off-Balance Sheet Financing Arrangements

At June 30, 2022, and September 30, 2021, we had no off-balance sheet financing arrangements other than outstanding letters of credit related to inventory purchases and self-insurance programs.

At December 31, 2022 and September 30, 2022, we had no off-balance sheet financing arrangements other than outstanding letters of credit related to inventory purchases and self-insurance programs.

Critical Accounting Estimates

3 unchanged sentences

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-Q

Item 2. Management’s Discussion and Analysis