Sally Beauty(SBH) - 2021 Q2 - Quarterly Report

PART I — FINANCIAL INFORMATION Item 1. Financial Statements Condensed consolidated financial statements and notes are presented, highlighting significant improvements in net earnings and operating cash flow Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets (in thousands) | Metric | March 31, 2021 (Unaudited) | September 30, 2020 | | :----------------------------- | :-------------------------- | :------------------- | | Cash and cash equivalents | $408,321 | $514,151 | | Inventory | $949,695 | $814,503 | | Total current assets | $1,466,450 | $1,433,097 | | Total assets | $2,909,572 | $2,895,147 | | Current maturities of long-term debt | $197,596 | $180 | | Long-term debt | $1,389,545 | $1,796,897 | | Total liabilities | $2,774,739 | $2,879,704 | | Total stockholders' equity | $134,833 | $15,443 | - Total stockholders' equity significantly increased from $15.4 million at September 30, 2020, to $134.8 million at March 31, 2021[19] - Current maturities of long-term debt increased substantially from $180 thousand to $197.6 million, while long-term debt decreased from $1.80 billion to $1.39 billion[19] Condensed Consolidated Statements of Earnings Condensed Consolidated Statements of Earnings (in thousands) | Metric (in thousands) | 3 Months Ended Mar 31, 2021 | 3 Months Ended Mar 31, 2020 | 6 Months Ended Mar 31, 2021 | 6 Months Ended Mar 31, 2020 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net sales | $926,328 | $871,023 | $1,862,350 | $1,851,231 | | Gross profit | $467,229 | $429,757 | $937,953 | $904,605 | | Operating earnings | $75,511 | $43,265 | $179,833 | $137,652 | | Net earnings | $38,312 | $13,368 | $95,503 | $66,583 | | Basic EPS | $0.34 | $0.12 | $0.85 | $0.58 | | Diluted EPS | $0.34 | $0.12 | $0.84 | $0.57 | - Net earnings for the three months ended March 31, 2021, increased by 186.6% to $38.3 million from $13.4 million in the prior year[22] - Diluted EPS for the three months ended March 31, 2021, rose to $0.34 from $0.12 in the same period last year[22] Condensed Consolidated Statements of Comprehensive Income (Loss) Condensed Consolidated Statements of Comprehensive Income (Loss) (in thousands) | Metric (in thousands) | 3 Months Ended Mar 31, 2021 | 3 Months Ended Mar 31, 2020 | 6 Months Ended Mar 31, 2021 | 6 Months Ended Mar 31, 2020 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net earnings | $38,312 | $13,368 | $95,503 | $66,583 | | Other comprehensive income (loss), net of tax | $(7,316) | $(21,826) | $16,272 | $(6,956) | | Total comprehensive income (loss) | $30,996 | $(8,458) | $111,775 | $59,627 | - Total comprehensive income for the three months ended March 31, 2021, was $31.0 million, a significant improvement from a loss of $8.5 million in the prior year[25] Condensed Consolidated Statements of Stockholders' Equity (Deficit) Condensed Consolidated Statements of Stockholders' Equity (Deficit) (in thousands) | Metric (in thousands) | Balance at Sep 30, 2020 | Balance at Mar 31, 2021 | | :-------------------- | :---------------------- | :---------------------- | | Common Stock Amount | $1,124 | $1,127 | | Additional Paid-in Capital | $1,913 | $9,525 | | Accumulated Earnings | $117,109 | $212,612 | | Accumulated Other Comprehensive Loss | $(104,703) | $(88,431) | | Total Stockholders' Equity | $15,443 | $134,833 | - Total stockholders' equity increased from $15.4 million at September 30, 2020, to $134.8 million at March 31, 2021, primarily driven by net earnings and other comprehensive income[28] Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity (in thousands) | 6 Months Ended Mar 31, 2021 | 6 Months Ended Mar 31, 2020 | | :-------------------------------- | :-------------------------- | :-------------------------- | | Net cash provided by operating activities | $131,556 | $76,131 | | Net cash used by investing activities | $(29,340) | $(73,904) | | Net cash (used) provided by financing activities | $(211,198) | $291,529 | | Net (decrease) increase in cash and cash equivalents | $(105,830) | $292,919 | | Cash and cash equivalents, end of period | $408,321 | $364,414 | - Net cash provided by operating activities increased by $55.4 million to $131.6 million for the six months ended March 31, 2021, compared to the prior year[31][97] - Net cash used by investing activities decreased by $44.6 million to $29.3 million, reflecting a focus on reduced capital expenditures[31][98] - Net cash used by financing activities was $211.2 million, primarily due to the paydown of term loan B fixed tranche, contrasting with cash provided by financing activities in the prior year[31][99] Notes to Condensed Consolidated Financial Statements - The condensed consolidated interim financial statements are prepared in accordance with GAAP and SEC rules, with certain information condensed or omitted[33] - The company is evaluating ASU No. 2019-12 for income taxes but does not expect a material impact on results or financial position[36] - Goodwill increased by $4.6 million during the six months ended March 31, 2021, primarily due to foreign currency exchange rates[42] - The company paid the remaining $213.2 million of its term loan B fixed tranche during the three months ended March 31, 2021, recognizing a $1.4 million loss on extinguishment of debt[44] - The company was in compliance with all debt covenants as of March 31, 2021[45] - Effective tax rates were 25.8% and 26.5% for the three and six months ended March 31, 2021, respectively, a decrease from the prior year primarily due to a valuation allowance in a foreign subsidiary in the prior year[52][53] - On April 1, 2021, the company called the entire outstanding balance of $197.4 million on its 5.50% senior notes due 2023, incurring $2.8 million in losses on extinguishment of debt[54] Item 2. Management's Discussion And Analysis Of Financial Condition And Results Of Operations Management discusses financial performance, highlighting significant increases in net sales, gross profit, and net earnings, driven by improved market conditions and strategic initiatives - Consolidated net sales for the three months ended March 31, 2021, increased by $55.3 million, or 6.3%, to $926.3 million[60] - Consolidated same store sales increased 6.5% for the three months ended March 31, 2021, and global e-commerce sales increased 56%[60] - Consolidated net earnings for the three months ended March 31, 2021, increased by $24.9 million, or 186.6%, to $38.3 million[60] - Cash provided by operations was $92.6 million for the three months ended March 31, 2021, up from $13.8 million in the prior year[60] - The company continues to make progress on key business initiatives, including leveraging digital capabilities, growing customer engagement, and completing its transformation journey by year-end[59] Overview Overview (in thousands) | Metric (in thousands) | 3 Months Ended Mar 31, 2021 | 3 Months Ended Mar 31, 2020 | Change ($) | Change (%) | 6 Months Ended Mar 31, 2021 | 6 Months Ended Mar 31, 2020 | Change ($) | Change (%) | | :-------------------- | :-------------------------- | :-------------------------- | :--------- | :--------- | :-------------------------- | :-------------------------- | :--------- | :--------- | | Net Sales: | | | | | | | | | | SBS | $542,664 | $519,509 | $23,155 | 4.5% | $1,090,334 | $1,088,657 | $1,677 | 0.2% | | BSG | $383,664 | $351,514 | $32,150 | 9.1% | $772,016 | $762,574 | $9,442 | 1.2% | | Consolidated | $926,328 | $871,023 | $55,305 | 6.3% | $1,862,350 | $1,851,231 | $11,119 | 0.6% | | Gross Profit: | | | | | | | | | | SBS | $317,161 | $289,067 | $28,094 | 9.7% | $632,973 | $598,057 | $34,916 | 5.8% | | BSG | $150,068 | $140,690 | $9,378 | 6.7% | $304,980 | $306,548 | $(1,568) | (0.5)% | | Consolidated | $467,229 | $429,757 | $37,472 | 8.7% | $937,953 | $904,605 | $33,348 | 3.7% | | Segment Gross Margin: | | | | | | | | | | SBS | 58.4% | 55.6% | 280 bps | | 58.1% | 54.9% | 320 bps | | | BSG | 39.1% | 40.0% | (90) bps | | 39.5% | 40.2% | (70) bps | | | Consolidated | 50.4% | 49.3% | 110 bps | | 50.4% | 48.9% | 150 bps | | | Net Earnings: | | | | | | | | | | Consolidated Operating Earnings | $75,511 | $43,265 | $32,246 | 74.5% | $179,833 | $137,652 | $42,181 | 30.6% | | Net Earnings | $38,312 | $13,368 | $24,944 | 186.6% | $95,503 | $66,583 | $28,920 | 43.4% | | Same Store Sales Growth (Decline): | | | | | | | | | | SBS | 4.9% | (7.0)% | 1,190 bps | | 0.7% | (4.0)% | 470 bps | | | BSG | 9.9% | (7.4)% | 1,730 bps | | 2.1% | (3.0)% | 510 bps | | | Consolidated | 6.5% | (7.1)% | 1,360 bps | | 1.2% | (3.6)% | 480 bps | | Results of Operations - SBS net sales increased by $23.2 million (4.5%) for the three months ended March 31, 2021, driven by same store sales growth of $24.3 million and a positive foreign currency exchange impact of $5.6 million[63] - BSG net sales increased by $32.2 million (9.1%) for the three months ended March 31, 2021, primarily due to same store sales growth of $23.8 million and increased distributor sales consultants[65] - Consolidated gross profit increased by $37.5 million (8.7%) for the three months ended March 31, 2021, with gross margin increasing by 110 basis points to 50.4%[60][67] - SBS's gross margin increased due to fewer promotions, partially offset by personal-protective equipment inventory write-downs[68] - Consolidated selling, general and administrative expenses, as a percentage of net sales, decreased 180 basis points to 42.2% for the three months ended March 31, 2021[70] - Unallocated SG&A expenses increased by $20.8 million (40.8%) for the three months, mainly due to $31.2 million in COVID-19 related donation expenses for personal-protective equipment inventory[74] - Interest expense increased primarily from incremental interest on senior notes issued in April 2020, partially offset by lower interest rates on term loan B and its repayment[76][90] Liquidity and Capital Resources - Working capital decreased by $278.3 million to $591.4 million at March 31, 2021, primarily due to the reclassification of 2023 Senior Notes to current maturities of long-term debt[92] - Cash and cash equivalents were $408.3 million at March 31, 2021[93] - The company had $496.9 million available for borrowing under its ABL facility as of March 31, 2021, with no outstanding borrowings[94] - No common stock was repurchased during the six months ended March 31, 2021, with $726.1 million remaining under the 2017 Share Repurchase Program authorization[95] - At March 31, 2021, total debt was $1.60 billion, consisting of $1.18 billion in senior notes and a $422.6 million term loan[100] Summarized Balance Sheet (in thousands) | Summarized Balance Sheet (in thousands) | March 31, 2021 | September 30, 2020 | | :-------------------------------------- | :------------- | :----------------- | | Inventory | $736,497 | $615,092 | | Intercompany receivable | $72,845 | $75,892 | | Current assets | $1,177,328 | $1,166,250 | | Total assets | $2,272,374 | $2,281,896 | | Current liabilities | $438,933 | $325,380 | | Total liabilities | $2,550,861 | $2,657,033 | Summarized Statement of Income (in thousands) | Summarized Statement of Income (in thousands) | Six Months Ended March 31, 2021 | | :-------------------------------------------- | :------------------------------ | | Net sales | $1,553,633 | | Gross profit | $787,895 | | Earnings before provision for income taxes | $114,872 | | Net earnings | $85,546 | Item 3. Quantitative And Qualitative Disclosures About Market Risk The company is exposed to market risks including foreign currency fluctuations, interest rates, and government actions, with no material changes since September 30, 2020 - The company is subject to market risks from foreign currency fluctuations, interest rates, and government actions[109] - No material changes to market risks have occurred since September 30, 2020[109] Item 4. Controls And Procedures Management, including the CEO and CFO, evaluated the effectiveness of disclosure controls and procedures as of March 31, 2021, concluding they are effective with no material changes to internal control over financial reporting - The CEO and CFO concluded that disclosure controls and procedures were effective as of March 31, 2021, providing reasonable assurance for timely and accurate information disclosure[110][115] - No material changes in internal control over financial reporting occurred during the most recent fiscal quarter[116] PART II — OTHER INFORMATION Item 1. Legal Proceedings The company is involved in routine legal claims and lawsuits, but does not anticipate a material adverse impact on its financial position, cash flows, or results of operations, and believes it is in material compliance with applicable laws - The company is involved in various routine legal claims and lawsuits[119] - The ultimate resolution of these matters is not expected to have a material adverse impact on the company's financial position, cash flows, or results of operations[119] - The company believes it is in material compliance with relevant U.S. and international laws and regulations[120] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the fiscal year ended September 30, 2020 - No material changes to the risk factors disclosed in the Annual Report on Form 10-K for the fiscal year ended September 30, 2020[121] Item 6. Exhibits This section lists the exhibits filed with the Quarterly Report, including corporate organizational documents, certifications from the CEO and CFO, and financial information formatted in iXBRL - Exhibits include the Third Restated Certificate of Incorporation, Amended and Restated Bylaws, List of Subsidiary Guarantors, CEO and CFO certifications (Rule 13a-14(a)/15d-14(a) and Section 1350), and financial information in iXBRL format[122]