Sally Beauty Holdings, Inc. 10-Q

Item 1. Financial Statements. SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (In thousands, except par value data) March 31, 2023 September 30, 2022 (Unaudited) Assets Current assets: Cash and cash equivalents $ 61,620 $ 70,558 Trade accounts receivable, net 30,540 34,102 Accounts receivable, other 45,123 38,175 Inventory 1,023,656 936,374 Other current assets 48,072 53,192 Total current assets 1,209,011 1,132,401 Property and equipment, net of accumulated depreciation of $ 841,760 at March 31, 2023, and $ 820,811 at September 30, 2022 283,356 297,876 Operating lease assets 562,336 532,177 Goodwill 534,218 526,066 Intangible assets, excluding goodwill, net of accumulated amortization of $ 29,921 at March 31, 2023, and $ 26,794 at September 30, 2022 50,533 50,315 Other assets 35,660 38,032 Total assets $ 2,675,114 $ 2,576,867 Liabilities and Stockholders’ Equity Current liabilities: Current maturities of long-term debt $ 38,175 $ 68,658 Accounts payable 265,075 275,717 Accrued liabilities 168,187 161,065 Current operating lease liabilities 154,255 157,734 Income taxes payable 4,949 4,740 Total current liabilities 630,641 667,914 Long-term debt 1,065,439 1,083,043 Long-term operating lease liabilities 444,819 424,762 Other liabilities 22,044 22,427 Deferred income tax liabilities, net 86,283 85,085 Total liabilities 2,249,226 2,283,231 Stockholders’ equity: Common stock, $ 0.01 par value. Authorized 500,000 shares; 107,556 and 107,024 shares issued and 107,549 and 106,970 shares outstanding at March 31, 2023, and September 30, 2022, respectively 1,076 1,070 Preferred stock, $ 0.01 par value. Authorized 50,000 shares; none issued — — Additional paid-in capital 13,790 4,241 Accumulated earnings 531,370 440,172 Accumulated other comprehensive loss, net of tax ( 120,348 ) ( 151,847 ) Total stockholders’ equity 425,888 293,636 Total liabilities and stockholders’ equity $ 2,675,114 $ 2,576,867 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Earnings (In thousands, except per share data) (Unaudited) Three Months Ended Six Months Ended March 31, March 31, 2023 2022 2023 2022 Net sales $ 918,712 $ 911,387 $ 1,875,767 $ 1,891,638 Cost of goods sold 450,373 446,055 918,854 926,177 Gross profit 468,339 465,332 956,913 965,461 Selling, general and administrative expenses 389,657 378,871 781,237 765,121 Restructuring 7,274 — 17,680 1,099 Operating earnings 71,408 86,461 157,996 199,241 Interest expense 16,685 19,896 34,608 40,137 Earnings before provision for income taxes 54,723 66,565 123,388 159,104 Provision for income taxes 13,862 19,757 32,190 43,458 Net earnings $ 40,861 $ 46,808 $ 91,198 $ 115,646 Earnings per share: Basic $ 0.38 $ 0.43 $ 0.85 $ 1.05 Diluted $ 0.37 $ 0.42 $ 0.83 $ 1.03 Weighted-average shares: Basic 107,453 108,743 107,294 110,387 Diluted 109,706 110,540 109,499 112,207 The accompanying notes are an integral part of these condensed consolidated financial statements. 5 SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Comprehensive Income (In thousands) (Unaudited) Three Months Ended Six Months Ended March 31, March 31, 2023 2022 2023 2022 Net earnings $ 40,861 $ 46,808 $ 91,198 $ 115,646 Other comprehensive income (loss): Foreign currency translation adjustments 9,445 ( 2,752 ) 35,386 ( 7,261 ) Interest rate caps, net of tax ( 2,163 ) — ( 1,960 ) 278 Foreign exchange contracts, net of tax ( 1,017 ) ( 324 ) ( 1,927 ) 156 Other comprehensive income (loss), net of tax 6,265 ( 3,076 ) 31,499 ( 6,827 ) Total comprehensive income $ 47,126 $ 43,732 $ 122,697 $ 108,819 The accompanying notes are an integral part of these condensed consolidated financial statements. 6 SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Stockholders’ Equity (In thousands) (Unaudited) Accumulated Additional Other Total Common Stock Paid-in Accumulated Comprehensive Stockholders’ Shares Amount Capital Earnings Loss Equity Balance at September 30, 2022 106,970 $ 1,070 $ 4,241 $ 440,172 $ ( 151,847 ) $ 293,636 Net earnings — — — 50,337 — 50,337 Other comprehensive income — — — — 25,234 25,234 Share-based compensation — — 5,135 — — 5,135 Stock issued for equity awards 404 4 78 — — 82 Employee withholding taxes paid related to net share settlement ( 90 ) ( 1 ) ( 1,125 ) — — ( 1,126 ) Balance at December 31, 2022 107,284 $ 1,073 $ 8,329 $ 490,509 $ ( 126,613 ) $ 373,298 Net earnings — — — 40,861 — 40,861 Other comprehensive income — — — — 6,265 6,265 Share-based compensation — — 3,838 — — 3,838 Stock issued for equity awards 266 3 1,638 — — 1,641 Employee withholding taxes paid related to net share settlement ( 1 ) — ( 15 ) — — ( 15 ) Balance at March 31, 2023 107,549 $ 1,076 $ 13,790 $ 531,370 $ ( 120,348 ) $ 425,888 Accumulated Additional Other Total Common Stock Paid-in Accumulated Comprehensive Stockholders’ Shares Amount Capital Earnings Loss Equity Balance at September 30, 2021 112,913 $ 1,129 $ 17,286 $ 356,967 $ ( 94,641 ) $ 280,741 Net earnings — — — 68,838 — 68,838 Other comprehensive loss — — — — ( 3,751 ) ( 3,751 ) Share-based compensation — — 3,958 — — 3,958 Stock issued for equity awards 795 8 7,364 — — 7,372 Employee withholding taxes paid related to net share settlement ( 56 ) ( 1 ) ( 1,136 ) — — ( 1,137 ) Repurchases and cancellations of common stock ( 3,675 ) ( 36 ) ( 27,472 ) ( 47,492 ) — ( 75,000 ) Balance at December 31, 2021 109,977 $ 1,100 $ — $ 378,313 $ ( 98,392 ) $ 281,021 Net earnings — — — 46,808 — 46,808 Other comprehensive loss — — — — ( 3,076 ) ( 3,076 ) Share-based compensation — — 2,032 — — 2,032 Stock issued for equity awards 111 1 423 — — 424 Employee withholding taxes paid related to net share settlement ( 1 ) — ( 15 ) — — ( 15 ) Repurchases and cancellations of common stock ( 3,157 ) ( 32 ) ( 2,440 ) ( 52,856 ) — ( 55,328 ) Balance at March 31, 2022 106,930 $ 1,069 $ — $ 372,265 $ ( 101,468 ) $ 271,866 The accompanying notes are an integral part of these condensed consolidated financial statements. 7 SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (In thousands) (Unaudited) Six Months Ended March 31, 2023 2022 Cash Flows from Operating Activities: Net earnings $ 91,198 $ 115,646 Adjustments to reconcile net earnings to net cash provided (used) by operating activities: Depreciation and amortization 50,347 48,471 Share-based compensation expense 8,973 5,990 Amortization of deferred financing costs 1,311 1,865 Loss on early extinguishment of debt 601 — Impairment of long-lived assets, including operating lease assets 1,765 — Loss on disposal of equipment and other property 2 80 Deferred income taxes 862 6,507 Changes in (exclusive of effects of acquisitions): Trade accounts receivable 4,632 3,800 Accounts receivable, other ( 5,805 ) 2,108 Inventory ( 68,355 ) ( 95,468 ) Other current assets 6,053 ( 6,273 ) Other assets 2,201 1,979 Operating leases, net ( 14,286 ) 3,657 Accounts payable and accrued liabilities 108 ( 70,217 ) Income taxes payable 434 ( 8,393 ) Other liabilities ( 393 ) ( 12,525 ) Net cash provided (used) by operating activities 79,648 ( 2,773 ) Cash Flows from Investing Activities: Payments for property and equipment, net of proceeds ( 42,181 ) ( 44,109 ) Acquisitions, net of cash acquired — ( 318 ) Net cash used by investing activities ( 42,181 ) ( 44,427 ) Cash Flows from Financing Activities: Proceeds from issuance of long-term debt 853,000 — Repayments of long-term debt ( 898,093 ) ( 2,841 ) Payments for common stock repurchased — ( 130,328 ) Proceeds from equity awards 1,723 7,796 Debt issuance costs ( 4,726 ) — Employee withholding taxes paid related to net share settlement of equity awards ( 1,141 ) ( 1,151 ) Net cash used by financing activities ( 49,237 ) ( 126,524 ) Effect of foreign exchange rate changes on cash and cash equivalents 2,832 178 Net decrease in cash and cash equivalents ( 8,938 ) ( 173,546 ) Cash and cash equivalents, beginning of period 70,558 400,959 Cash and cash equivalents, end of period $ 61,620 $ 227,413 Supplemental Cash Flow Information: Interest paid $ 35,191 $ 37,809 Income taxes paid $ 32,077 $ 56,701 Capital expenditures incurred but not paid $ 5,466 $ 3,205 The accompanying notes are an integral part of these condensed consolidated financial statements. 8 Sally Beauty Holdings, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) 1. Significant Accounting Policies Basis of Presentation The unaudited condensed consolidated interim financial statements of Sally Beauty Holdings, Inc. and its subsidiaries included herein have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and pursuant to the rules and regulations of the SEC. Accordingly, certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC, although we believe that the disclosures included herein are adequate for the interim period presented. 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 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 The unaudited condensed consolidated interim financial statements include all accounts of Sally Beauty Holdings, Inc. and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. All amounts are in U.S. Dollars. Accounting Policies We adhere to the same accounting policies in the preparation of our condensed consolidated interim financial statements as we do in the preparation of our full year consolidated financial statements. As permitted under GAAP, interim accounting for certain expenses, including income taxes, is based on full-year assumptions. For interim financial reporting purposes, income taxes are recorded based upon our estimated annual effective income tax. Use of Estimates In order to present our financial statements in conformity with GAAP, we are required to make certain estimates and assumptions that impact our interim financial statements and supplementary disclosures. These estimates may use forecasted financial information based on reasonable information available, however are subject to change in the future. Significant estimates and assumptions are part of our accounting for sales allowances, deferred revenue, valuation of inventory, amortization and depreciation, intangibles and goodwill, and other reserves. We believe these estimates and assumptions are reasonable; however, they are based on management’s current knowledge of events and actions, and changes in facts and circumstances may result in revised estimates and impact actual results. 2. Revenue Recognition Substantially all of our revenue is derived through the sale of merchandise at the point-of-sale. Revenue is recognized net of estimated sales returns and sales taxes. We estimate sales returns based on historical data. 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): Six Months Ended March 31, 2023 2022 Beginning Balance $ 13,460 $ 16,744 Loyalty points and gift cards issued but not redeemed, net of estimated breakage 9,327 6,214 Revenue recognized from beginning liability ( 8,370 ) ( 6,316 ) Ending Balance $ 14,417 $ 16,642 See Note 10, Segment Reporting , for additional information regarding the disaggregation of our sales revenue. 9 3. Fair Value Measurements We measure on a recurring basis and disclose the fair value of our financial instruments under the provisions of ASC Topic 820, Fair Value Measurement, as amended (“ASC 820”). We define “fair value” as the price that would be received to sell an asset or paid to transfer a liability (i.e., the exit price) in an orderly transaction between market participants at the measurement date. ASC 820 establishes a three-level hierarchy for measuring fair value and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. This valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability on the measurement date. The three levels of that hierarchy are defined as follows: Level 1 - Quoted prices are available in active markets for identical assets or liabilities; Level 2 - Pricing inputs are other than quoted prices in active markets, included in Level 1, that are either directly or indirectly observable; and Level 3 - Unobservable pricing inputs in which little or no market activity exists, therefore requiring an entity to develop its own model with estimates and assumptions. Financial instruments measured at fair value on recurring basis Consistent with the fair value hierarchy, we categorized our financial assets and liabilities as follow: (in thousands) Classification Fair Value Hierarchy Level March 31, 2023 September 30, 2022 Financial Assets: Foreign exchange contracts Non-designated cash flow hedges Other current assets Level 2 $ 327 $ 294 Interest rate caps Other current assets Level 2 — 3,860 Total assets $ 327 $ 4,154 . Financial Liabilities: Foreign exchange contracts Designated cash flow hedges Accrued liabilities Level 2 $ 2,300 $ — Non-designated cash flow hedges Accrued liabilities Level 2 1,887 79 Total liabilities $ 4,187 $ 79 The fair value for interest rate caps and foreign exchange contracts were measured using widely accepted valuation techniques, such as discounted cash flow analyses and observable inputs, such as market interest rates and foreign exchange rates. Other fair value disclosures 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 finance lease obligations, debt issuance costs and original issue discounts, are as follows: March 31, 2023 September 30, 2022 (in thousands) Fair Value Hierarchy Level Carrying Value Fair Value Carrying Value Fair Value Long-term debt, excluding capital leases Senior notes Level 1 $ 679,961 $ 668,062 $ 679,961 $ 639,163 Term loan B due 2024 Level 2 — — 407,500 398,331 Term loan B due 2030 Level 2 400,000 398,500 — — Total long-term debt $ 1,079,961 $ 1,066,562 $ 1,087,461 $ 1,037,494 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. 10 4. Stockholders’ Equity Share Repurchases In August 2017, our Board of Directors (“Board”) approved a share repurchase program authorizing us to repurchase up to $ 1.0 billion of its common stock, subject to certain limitations governed by our debt agreements. 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 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) The change in accumulated other comprehensive loss (“AOCL”) was as follows (in thousands): Foreign Currency Translation Adjustments Interest Rate Caps Foreign Exchange Contracts Total Balance at September 30, 2022 $ ( 153,128 ) $ 1,960 $ ( 679 ) $ ( 151,847 ) Other comprehensive loss before reclassification, net of tax 35,386 817 ( 1,815 ) 34,388 Reclassification to net earnings, net of tax — ( 2,777 ) ( 112 ) ( 2,889 ) Balance at March 31, 2023 $ ( 117,742 ) $ — $ ( 2,606 ) $ ( 120,348 ) The tax impact for the changes in other comprehensive loss and the reclassifications to net earnings was not material. 5. Weighted-Average Shares The following table sets forth the reconciliation of basic and diluted weighted-average shares (in thousands): Three Months Ended March 31, Six Months Ended March 31, 2023 2022 2023 2022 Weighted-average basic shares 107,453 108,743 107,294 110,387 Dilutive securities: Stock option and stock award programs 2,253 1,797 2,205 1,820 Weighted-average diluted shares 109,706 110,540 109,499 112,207 Anti-dilutive options excluded from our computation of diluted shares 1,964 2,534 1,964 2,169 6. Goodwill and 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 March 31, Six Months Ended March 31, (in thousands) 2023 2022 2023 2022 Intangible assets amortization expense $ 866 $ 999 $ 1,875 $ 2,070 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. 11 7. Accrued Liabilities Accrued liabilities consist of the following (in thousands): March 31, 2023 September 30, 2022 Compensation and benefits $ 66,868 $ 58,693 Deferred revenue 18,980 18,810 Rental obligations 12,766 10,701 Insurance reserves 6,111 5,742 Property and other taxes 3,022 4,161 Interest payable 13,699 13,445 Operating accruals and other 46,741 49,513 Total accrued liabilities $ 168,187 $ 161,065 8. Short-term Borrowings and Long-term Debt 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. 12 9. Derivative Instruments and Hedging Activities 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. Designated Cash Flow Hedges Foreign Currency Forwards We regularly enter into foreign currency forwards to mitigate our exposure to exchange rate changes on forecasted inventory purchases in U.S. dollars by our foreign subsidiaries. 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 Notional Amount Mexican Peso $ 12,846 Euro 7,699 Canadian Dollar 6,284 Total $ 26,829 Quarterly, the changes in fair value related to these foreign currency forwards are recorded into AOCL. 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 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 TLB 2024. 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 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 Notional Amount British Pound $ 51,936 Canadian Dollar 13,491 Euro 21,173 Mexican Peso 26,175 Total $ 112,775 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 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. 13 10. Segment Reporting Segment data for the three and six months ended March 31, 2023 and 2022, is as follows (in thousands): Three Months Ended March 31, Six Months Ended March 31, 2023 2022 2023 2022 Net sales: Sally Beauty Supply ("SBS") $ 530,246 $ 525,785 $ 1,079,718 $ 1,087,315 Beauty Systems Group ("BSG") 388,466 385,602 796,049 804,323 Total $ 918,712 $ 911,387 $ 1,875,767 $ 1,891,638 Earnings before provision for income taxes: Segment operating earnings: SBS $ 92,134 $ 80,940 $ 191,308 $ 181,563 BSG 37,260 46,008 86,907 104,554 Segment operating earnings 129,394 126,948 278,215 286,117 Unallocated expenses 50,712 40,487 102,539 85,777 Restructuring 7,274 — 17,680 1,099 Consolidated operating earnings 71,408 86,461 157,996 199,241 Interest expense 16,685 19,896 34,608 40,137 Earnings before provision for income taxes $ 54,723 $ 66,565 $ 123,388 $ 159,104 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 The following tables disaggregate our segment revenues by merchandise category. We have reclassified certain prior year amounts within BSG to conform to current year presentation. Three Months Ended March 31, Six Months Ended March 31, SBS 2023 2022 2023 2022 Hair color 39.8 % 38.1 % 39.2 % 37.4 % Hair care 24.3 % 24.1 % 23.9 % 24.0 % Styling tools and supplies 17.9 % 19.2 % 18.7 % 19.7 % Nail 10.0 % 10.6 % 10.2 % 10.5 % Skin and cosmetics 7.5 % 7.4 % 7.4 % 7.7 % Other beauty items 0.5 % 0.6 % 0.6 % 0.7 % Total 100.0 % 100.0 % 100.0 % 100.0 % Three Months Ended March 31, Six Months Ended March 31, BSG 2023 2022 2023 2022 Hair care 42.0 % 43.1 % 42.8 % 43.3 % Hair color 40.6 % 39.5 % 39.4 % 38.9 % Styling tools and supplies 10.8 % 11.2 % 10.8 % 11.3 % Skin and cosmetics 3.7 % 3.5 % 4.1 % 3.9 % Nail 2.7 % 2.3 % 2.7 % 2.2 % Other beauty items 0.2 % 0.4 % 0.2 % 0.4 % Total 100.0 % 100.0 % 100.0 % 100.0 % 14 The following tables disaggregate our segment revenue by sales channels: Three Months Ended March 31, Six Months Ended March 31, SBS 2023 2022 2023 2022 Company-operated stores 93.6 % 93.7 % 93.6 % 94.0 % E-commerce 6.4 % 6.3 % 6.4 % 6.0 % Total 100.0 % 100.0 % 100.0 % 100.0 % Three Months Ended March 31, Six Months Ended March 31, BSG 2023 2022 2023 2022 Company-operated stores 67.5 % 66.6 % 66.9 % 67.1 % E-commerce 13.7 % 12.4 % 13.7 % 12.0 % Distributor sales consultants 11.4 % 14.0 % 12.0 % 13.8 % Franchise stores 7.4 % 7.0 % 7.4 % 7.1 % Total 100.0 % 100.0 % 100.0 % 100.0 % 11. Restructuring 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 March 31, Six Months Ended March 31, 2023 2022 2023 2022 Included in COGS (a) Distribution Center Consolidation and Store Optimization Plan $ ( 2,362 ) $ — $ ( 5,042 ) $ — Included in Restructuring (b) Distribution Center Consolidation and Store Optimization Plan $ 7,274 $ — $ 17,680 $ — Transformation Plan — — — 1,099 Total in Restructuring 7,274 — 17,680 1,099 Total Restructuring Expenses $ 4,912 $ — $ 12,638 $ 1,099 (a) Amounts included within COGS are related to adjustments to our expected obsolescence reserve related to the Plan (as defined below). (b) 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 (“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. 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. 15 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) Liability at September 30, 2022 SBS Expense BSG Expense Cash Payments Non-Cash Amounts Liability at March 31, 2023 Closing costs - leases (a) $ — $ 7,389 $ 1,307 $ ( 5,463 ) $ ( 1,043 ) $ 2,190 Closing costs - payroll expenses (b) — 1,540 979 ( 2,458 ) — 61 Impairment - property and equipment (c) — 1,276 193 — ( 1,469 ) — Inventory transfer costs — 1,158 322 ( 1,372 ) — 108 Impairment - operating lease assets (c) — 350 244 — ( 594 ) — Other closure costs (d) 1,291 2,978 ( 56 ) ( 2,659 ) — 1,554 Total $ 1,291 $ 14,691 $ 2,989 $ ( 11,952 ) $ ( 3,106 ) $ 3,913 (a) Lease-related closing costs include contract terminations costs, repairs, maintenance, and other rental obligations associated with closing stores. (b) 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. (c) Remaining carrying value for the long-lived assets, including operating lease assets, were not material and approximate their fair value. (d) Other closure costs predominantly consist of exit costs associated with shutting down of operations at various locations. 12. 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 . 16