What changed in this filing

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Item 1. Financial Statements

2023-05-04 compared with 2023-02-02 · 99 added, 44 removed, 316 unchanged (31% of the section changed)

12 unchanged sentences

Property and equipment, net of accumulated depreciation of $ 841,760 at

December 31, 2022, and $ 820,811 at September 30, 2022

March 31, 2023, and $ 820,811 at September 30, 2022

Operating lease assets

Intangible assets, excluding goodwill, net of accumulated amortization of

$ 28,820 at December 31, 2022, and $ 26,794 at September 30, 2022

$ 29,921 at March 31, 2023, and $ 26,794 at September 30, 2022

Liabilities and Stockholders’ Equity

15 unchanged sentences

107,024 shares issued and 107,549 and 106,970 shares outstanding at

December 31, 2022, and September 30, 2022, respectively

March 31, 2023, and September 30, 2022, respectively

Preferred stock, $ 0.01 par value.

11 unchanged sentences

Three Months Ended

Six Months Ended

Cost of goods sold

13 unchanged sentences

Three Months Ended

Six Months Ended

Other comprehensive income (loss):

18 unchanged sentences

Balance at December 31, 2022

Other comprehensive income

Share-based compensation

Stock issued for equity awards

Employee withholding taxes paid

related to net share settlement

Balance at March 31, 2023

Comprehensive

8 unchanged sentences

Balance at December 31, 2021

Other comprehensive loss

Share-based compensation

Stock issued for equity awards

Employee withholding taxes paid

related to net share settlement

Repurchases and cancellations of

Balance at March 31, 2022

The accompanying notes are an integral part of these condensed consolidated financial statements.

3 unchanged sentences

(In thousands)

Three Months Ended December 31,

Six Months Ended March 31,

Cash Flows from Operating Activities:

4 unchanged sentences

Amortization of deferred financing costs

Loss on early extinguishment of debt

Impairment of long-lived assets, including operating lease assets

16 unchanged sentences

Proceeds from issuance of long-term debt

Repayments of long-term debt, including prepayment costs

Repayments of long-term debt

Payments for common stock repurchased

Proceeds from equity awards

Debt issuance costs

Employee withholding taxes paid related to net share settlement of equity awards

1 unchanged sentence

Effect of foreign exchange rate changes on cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

Net decrease in cash and cash equivalents

Cash and cash equivalents, beginning of period

14 unchanged sentences

These condensed consolidated interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022.

In the opinion of management, these unaudited condensed consolidated interim financial statements reflect all adjustments that are of a normal recurring nature and which are necessary to present fairly our consolidated financial position as of December 31, 2022, and September 30, 2022, and our consolidated results of operations, consolidated comprehensive income, consolidated cash flows and consolidated statements of stockholders’ equity for the three months ended December 31, 2022 and 2021.

In the opinion of management, these unaudited condensed consolidated interim financial statements reflect all adjustments that are of a normal recurring nature and which are necessary to present fairly our consolidated financial position as of March 31, 2023, and September 30, 2022, our consolidated results of operations, consolidated comprehensive income and consolidated statements of stockholders’ equity for the three and six months ended March 31, 2023 and 2022 and our consolidated cash flows for the for the six months ended March 31, 2023 and 2022 .

Principles of Consolidation

18 unchanged sentences

Changes to our contract liabilities, which are included in accrued liabilities in our condensed consolidated balance sheets, for the periods were as follows (in thousands):

Three Months Ended December 31,

Six Months Ended March 31,

Beginning Balance

34 unchanged sentences

The carrying amounts of cash equivalents, trade and other accounts receivable and accounts payable and borrowing under our ABL facility approximate their respective fair values due to the short-term nature of these financial instruments.

Carrying amounts and the related estimated fair value of our long-term debt, excluding capital lease obligations and debt issuance costs, are as follows:

December 31, 2022

Carrying amounts and the related estimated fair value of our long-term debt, excluding finance lease obligations, debt issuance costs and original issue discounts, are as follows:

March 31, 2023

September 30, 2022

4 unchanged sentences

Long-term debt, excluding capital leases

Term loan B due 2024

Term loan B due 2030

Total long-term debt

The fair value of term loan B was measured using quoted market prices for similar debt securities in active markets or widely accepted valuation techniques, such as discounted cash flow analyses, using observable inputs, such as market interest rates.

The fair value of the term loan B was measured using quoted market prices for similar debt securities in active markets or widely accepted valuation techniques, such as discounted cash flow analyses, using observable inputs, such as market interest rates.

Stockholders’ Equity

2 unchanged sentences

In July 2021, our Board approved a term extension of the share repurchase program for the four-year period ending September 30, 2025 .

As of December 31, 2022, we had authorization of approximately $ 595.8 million of additional potential share repurchases remaining under our share repurchase program.

For the three months ended December 31, 2022, we did no t repurchase shares under our share repurchase program.

For the three months ended December 31, 2021, we repurchased 3.7 million shares of common stock at a total cost of $ 75.0 million.

As of March 31, 2023, we had authorization of approximately $ 595.8 million of additional potential share repurchases remaining under our share repurchase program.

For the three and six months ended March 31, 2023, we did no t repurchase shares under our share repurchase program.

For the three and six months ended March 31, 2022, we repurchased 3.1 million and 6.8 million shares of common stock, respectively, at a total cost of $ 55.0 million and $ 130.3 million, respectively.

Accumulated Other Comprehensive Income (Loss)

4 unchanged sentences

Balance at September 30, 2022

Other comprehensive income (loss) before

Other comprehensive loss before

reclassification, net of tax

Reclassification to net earnings, net of tax

Balance at December 31, 2022

Balance at March 31, 2023

The tax impact for the changes in other comprehensive loss and the reclassifications to net earnings was not material.

2 unchanged sentences

Three Months Ended

Six Months Ended

Weighted-average basic shares

4 unchanged sentences

Goodwill and Intangible Assets

W e considered potential triggering events and determined there were none for the three months ended December 31, 2022.

No material impairment losses were recognized in the current or prior periods presented in connection with our goodwill and other intangible assets.

During the three months ended March 31, 2023, we completed our annual assessments for impairment of goodwill and indefinite-lived intangible assets.

For our goodwill testing, we performed a qualitative analysis and determined that there was no indication of impairment requiring further quantitative testing.

No material impairment losses were recognized in the current or prior periods presented in connection with our goodwill and intangible assets.

Three Months Ended

Six Months Ended

(in thousands)

Intangible assets amortization expense

Additionally, during the three months ended December 31, 2022, the changes in goodwill and other intangibles were primarily from the effects of foreign currency exchange rates of $ 6.4 million and $ 1.7 million, respectively.

During the three months ended December 31, 2021, the changes in goodwill were primarily from the effects of foreign currency exchange rates of $ 0.9 million.

Additionally, during the six months ended March 31, 2023, the changes in goodwill and other intangibles included effects of foreign currency exchange rates of $ 8.2 million and $ 2.1 million, respectively.

Accrued Liabilities

10 unchanged sentences

Short-term Borrowings and Long-term Debt

At December 31, 2022, our ABL facility had $ 65.0 million in outstanding borrowings and $ 417.7 million available for borrowing, including the Canadian sub-facility, subject to the conditions contained therein.

At March 31, 2023, our ABL facility had $ 34.0 million in outstanding borrowings and $ 448.7 million available for borrowing, including the Canadian sub-facility, subject to borrowing base limitation, as reduced by outstanding letters of credit .

On February 28, 2023, we announced that our wholly-owned subsidiaries, Sally Holdings LLC (“Sally Holdings”) and Sally Capital, Inc.

(“Sally Capital” and, together with Sally Holdings, the “Borrowers”), and certain of our other direct and indirect subsidiaries entered into a credit agreement with Bank of America, N.A., as Administrative Agent and Collateral Agent, and the lenders and other parties thereto providing for a term loan B facility (“TLB 2030”) in an aggregate principal amount equal to $ 400.0 million, the net proceeds of which were used to repay an existing term loan B facility (“TLB 2024”).

The TLB 2030 will bear interest at a floating rate equal to, at the Borrowers option, either the Adjusted Term SOFR Rate from time to time in effect plus 2.50 % or an adjusted base rate plus 1.50 %, payable quarterly on March 31, June 30, September 30 and December 31 of each year.

The TLB 2030 matures on the earlier of (i) February 28, 2030 and (ii) the date that is 91 days prior to the stated maturity of the Borrowers’ 2025 Senior Unsecured Notes (the “2025 Senior Unsecured Notes”) unless all amounts exceeding $ 200.0 million of the 2025 Senior Unsecured Notes are refinanced or repaid according to certain conditions (the “Maturity Date”).

The principal of the TLB 2030 is repayable in quarterly installments equal to 0.25 % of the original principal amount of the TLB 2030, with a final installment equal to the entire remaining outstanding principal amount due on the Maturity Date .

TLB 2030 was issued at a discount of 0.75 % and we incurred $ 4.7 million in issuance costs;

both of which are being amortized using the effective interest method.

The TLB 2030 is secured by a first-priority lien in and upon substantially all of the assets of the Company and its domestic subsidiaries other than the accounts, inventory (and the proceeds thereof) and other assets that secure Sally Holdings’ existing ABL facility on a first-priority basis (the “ABL Priority Collateral”).

Additionally, the TLB 2030 is secured by a second-priority lien in and upon the ABL Priority Collateral.

The TLB 2030 does not contain any financial maintenance covenants and is subject to a covenant package that is substantially consistent with the covenant package governing the 2025 Senior Unsecured Notes.

The TLB 2030 is subject to customary asset sale mandatory prepayment provisions and excess cash flow mandatory prepayment provisions.

The TLB 2030 is subject to a prepayment premium of 1.0 % of the principal amount thereof upon any refinancing or amendment thereof that results in a reduced effective yield (subject to certain exceptions) within six months following the closing.

Thereafter, the TLB 2030 may be prepaid without penalty or premium, other than customary breakage costs for prepayments that are made prior to the last date of an interest period.

The repayment of our TLB 2024, in the aggregate outstanding principal amount of $ 406.1 million, was made pursuant to the terms of the indenture dated February 28, 2017 , at par plus interest accrued but unpaid up to, though not including, the repayment date.

In connection with the repayment, we recognized a loss on the extinguishment of debt of $ 0.6 million within interest expense, which included the write-off of unamortized discount and deferred financing costs of $ 0.2 million and $ 0.4 million, respectively.

Derivative Instruments and Hedging Activities

During the three months ended December 31, 2022, we did no t purchase or hold any derivative instruments for trading or speculative purposes.

During the six months ended March 31, 2023, we did no t purchase or hold any derivative instruments for trading or speculative purposes.

See Note 3, Fair Value Measurements , for the classification and fair value of our derivative instruments.

3 unchanged sentences

dollars by our foreign subsidiaries.

At December 31, 2022, we held forwards, which expire ratably through September 30, 2023 , with a notional amount, based upon exchange rates at December 31, 2022, as follows (in thousands):

At March 31, 2023, we held forwards, which expire ratably through September 30, 2023 , with a notional amount, based upon exchange rates at March 31, 2023, as follows (in thousands):

Notional Currency

3 unchanged sentences

As the forwards are exercised, the realized value is recognized into cost of goods sold, based on inventory turns, in our condensed consolidated statements of earnings.

For the three months ended December 31, 2022 and 2021, we recognized a gain of $ 0.3 million and a loss of $ 0.3 million, respectively.

Based on December 31, 2022, valuations and exchange rates, we expect to reclassify losses of approximately $ 1.6 million into cost of goods sold over the next 12 months.

For the three months ended March 31, 2023 and 2022, we recognized losses of $ 0.2 million and $ 0.1 million, respectively.

For the six months ended March 31, 2023 and 2022, we recognized a gain of $ 0.1 million and a loss of $ 0.4 million, respectively.

Based on March 31, 2023, valuations and exchange rates, we expect to reclassify losses of approximately $ 3.1 million into cost of goods sold over the next 12 months.

Interest Rate Caps

In July 2017, we purchased two interest rate caps with an initial aggregate notional amount of $ 550 million (the “interest rate caps”) to mitigate the exposure to higher interest rates in connection with our term loan B.

The interest rate caps are comprised of individual caplets that expire ratably through June 30, 2023 , and are designated as cash flow hedges.

Accordingly, changes in fair value of the interest rate caps are recorded quarterly, net of income tax, and are included in AOCL.

For the three months ended December 31, 2022 and 2021, we recognized expense of $ 0.1 million and $ 0.4 million, respectively, into interest expense on our condensed consolidated statements of earnings.

Over the next 12 months, we expect to reclassify gains of

approximately $ 2.6 million into interest expense, which represents estimated interest rate settlements less the original value of the expiring caplets.

The interest rate caps were comprised of individual caplets that were expiring ratably through June 30, 2023 , and were designated as cash flow hedges.

Accordingly, the changes in fair value of the interest rate caps were recorded quarterly, net of income tax, and included in AOCL.

During the three months ended March 31, 2023, we early settled both interest rate caps due to the forecasted transactions being hedged no longer occurring as a result of the repayment of our TLB 2024.

In connection with the early settlement, we received approximately $ 2.7 million, which represented the fair value at the time of settlement.

Furthermore, we released the remaining AOCL balances related to the interest rate caps into interest expense.

For the three months ended March 31, 2023, we recognized income of $ 2.8 million into interest expense on our condensed consolidated statements of earnings related to the caps.

The effects of our interest rate caps on our condensed consolidated statements of earnings were not material for the three months ended March 31, 2022.

For the six months ended March 31, 2023 and 2022, we recognized income of $ 2.8 million and expense of $ 0.4 million, respectively, into interest expense on our condensed consolidated statements of earnings related to the caps.

Non-Designated Derivative Instruments

We also use foreign exchange contracts to mitigate our exposure to exchange rate changes in connection with certain intercompany balances not permanently invested.

At December 31, 2022, we held forwards, which expire on various dates in the first month of both the second and third fiscal quarters of fiscal year 2023, with a notional amount, based upon exchange rates at December 31, 2022, as follows (in thousands):

At March 31, 2023, we held forwards, which expire on various dates in the first month of both the third and fourth fiscal quarters of fiscal year 2023, with a notional amount, based upon exchange rates at March 31, 2023, as follows (in thousands):

Notional Currency

3 unchanged sentences

We record changes in fair value and realized gains or losses related to these foreign currency forwards into selling, general and administrative expenses.

For the three months ended December 31, 2022 and 2021, the effects of these foreign exchange contracts on our condensed consolidated financial statements were gains of $ 0.4 million in both years.

For the three months ended March 31, 2023 and 2022, the effects of these foreign exchange contracts on our condensed consolidated financial statements were losses of $ 1.5 million and $ 0.2 million, respectively.

For the six months ended March 31, 2023 and 2022, the effects of these foreign exchange contracts on our condensed consolidated financial statements were a loss of $ 1.1 million and a gain of $ 0.1 million, respectively.

Segment Reporting

Segment data for the three months ended December 31, 2022 and 2021, is as follows (in thousands):

Segment data for the three and six months ended March 31, 2023 and 2022, is as follows (in thousands):

Three Months Ended

Six Months Ended

Sally Beauty Supply ("SBS")

9 unchanged sentences

for income taxes

Sales between segments, which are eliminated in consolidation, were not material during the three months ended December 31, 2022 and 2021.

Sales between segments, which are eliminated in consolidation, were not material during the three and six months ended March 31, 2023 and 2022.

Disaggregation of net sales by segment

2 unchanged sentences

Three Months Ended

Six Months Ended

Styling tools and supplies

2 unchanged sentences

Three Months Ended

Six Months Ended

Styling tools and supplies

3 unchanged sentences

Three Months Ended

Six Months Ended

Company-operated stores

Three Months Ended

Six Months Ended

Company-operated stores

2 unchanged sentences

Restructuring

Restructuring expenses, included in Cost of Goods Sold (“COGS”) and Restructuring for the three months ended December 31, 2022 and 2021 are as follows (in thousands):

Restructuring expenses, included in Cost of Goods Sold (“COGS”) and Restructuring for the three and six months ended March 31, 2023 and 2022 are as follows (in thousands):

Three Months Ended

Included in COGS

Six Months Ended

Included in COGS (a)

Distribution Center Consolidation

and Store Optimization Plan

Included in Restructuring

Included in Restructuring (b)

Distribution Center Consolidation

4 unchanged sentences

Amounts included within COGS are related to adjustments to our expected obsolescence reserve related to the Plan (as defined below).

Amounts included within Restructuring (SG&A) are related to stores and distribution centers closed during the quarter in accordance with the Plan (as defined below).

Amounts included within Restructuring for the current year are related to stores and distribution centers closed during the period in accordance with the Plan (as defined below).

Distribution Center Consolidation and Store Optimization Plan

In the fourth quarter of fiscal year 2022, our Board approved the Distribution Center Consolidation and Store Optimization Plan authorizing the closure of 330 SBS stores and 35 BSG stores, and the closure of two BSG distribution centers in Clackamas, Oregon and Pottsville, Pennsylvania (“the Plan”).

During the three months ended December 31, 2022, we completed the closure of the two BSG distributions centers.

In the fourth quarter of fiscal year 2022, our Board approved the Distribution Center Consolidation and Store Optimization Plan (“the Plan”) authorizing the closure of 330 SBS stores and 35 BSG stores, and the closure of two BSG distribution centers in Clackamas, Oregon and Pottsville, Pennsylvania.

We believe that consolidating the operation of these two distribution centers into our larger distribution centers will increase product availability, shorten delivery times and reduce overall costs.

As of December 31, 2022, we have closed 327 SBS stores and 14 BSG stores as part of the Plan.

Stores identified for early closure were part of a strategic evaluation which included a market analysis of certain locations where we believe we will be able to recapture demand at other nearby store locations and improve overall profitability.

By optimizing our store base, we are further focusing on our customers’ shopping experience and our product offerings.

As of March 31, 2023, we have closed 329 SBS stores and 28 BSG stores as part of the Plan and closed the two BSG distributions centers.

The Plan will continue to be executed throughout fiscal year 2023 and into the first half of fiscal year 2024, and therefore it may include future charges related to store closures such as exit costs, lease negotiation penalties, termination benefits and adjustments to estimates.

The liability related to the Plan, which is included in accrued liabilities on our consolidated balance sheets, is as follows:

The liability related to the Plan, which is included in accounts payable and accrued liabilities on our consolidated balance sheets, is as follows:

(in thousands)

7 unchanged sentences

Impairment - operating lease assets (c)

Lease-related closing costs include contract terminations costs as well as other rental obligations associated with closing stores.

Other closure costs (d)

Lease-related closing costs include contract terminations costs, repairs, maintenance, and other rental obligations associated with closing stores.

Payroll-related closing costs include one-time termination benefits related to the closure of our distribution centers as well as other payroll expenses associated with closing stores.

Remaining carrying value for the long-lived assets, including operating lease assets, were not material and approximate their fair value.

Other closure costs predominantly consist of exit costs associated with shutting down of operations at various locations.

Subsequent Event

In April 2023, we entered into an interest rate swap transaction to help mitigate the risk of our floating rate debt.

The notional amount of the swap is $ 200 million with an effective date of April 28, 2023 and a termination date of April 30, 2026 .

Under the terms of the swap, we will pay a fixed rate of interest of 3.705 % and will receive a floating rate of interest equal to one-month SOFR.

The floating rate will be reset monthly and net settlements of interest due to/from the counterparty will also occur monthly.

To the extent the floating rate of interest exceeds the fixed rate of interest, we will receive net interest settlements, which will be recorded as a reduction to interest expense.

If the fixed rate of interest exceeds the floating rate of interest, we will be required to pay net settlements to the counterparty and will record those net payments in interest expense .

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 1. Financial Statements