This section discusses management's view of the financial condition, results of
operations and cash flows of
Executive Overview
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 atSally Beauty and amplifying innovation; and • 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
Growing high margin owned brands at
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
See Note 11, Restructuring, in Item 1 of this quarterly report for more information on the Plan.
Financial Summary for the Three Months Ended
• Consolidated net sales for the three months endedDecember 31, 2022 , decreased$23.2 million , or 2.4%, to$957.1 million , compared to the three months endedDecember 31, 2021 . Consolidated net sales included a negative impact from changes in foreign currency exchange rates of$14.4 million ; • Consolidated comparable sales increased 1.1% for the three months endedDecember 31, 2022 , compared to the three months endedDecember 31, 2021 ; • Consolidated gross profit for the three months endedDecember 31, 2022 , decreased$11.6 million , or 2.3%, to$488.6 million , compared to the three months endedDecember 31, 2021 . Gross margin was unchanged at 51.0% for the three months endedDecember 31, 2022 , compared to the three months endedDecember 31, 2021 ; 16
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• Consolidated operating earnings for the three months endedDecember 31, 2022 , decreased$26.2 million , or 23.2%, to$86.6 million , compared to the three months endedDecember 31, 2021 . Operating margin decreased 250 bps to 9.0% for the three months endedDecember 31, 2022 , compared to the three months endedDecember 31, 2021 ; • For the three months endedDecember 31, 2022 , our consolidated net earnings decreased$18.5 million , or 26.9%, to$50.3 million , compared to the three months endedDecember 31, 2021 ; • For the three months endedDecember 31, 2022 , our diluted earnings per share was$0.46 compared to$0.60 for the three months endedDecember 31, 2021 ; and • Cash provided by operations was$55.0 million for the three months endedDecember 31, 2022 , compared to cash used by operations of$5.7 million for the three months endedDecember 31, 2021 .
Trends Impacting Our Business
Global inflationary pressures continue to influence consumer and stylist
behavior along with the cost for products and services. In the
Furthermore, in a measure to curb inflation, the
Impact of COVID-19 on Our Business
While we have seen signs of stabilization from the impacts of the COVID-19 virus, we cannot reasonably predict the effects of new variants or expect improving trends to continue. Therefore, our future performance may partially depend on impacts of COVID-19, such as decreased customer in-store traffic, temporary store closures, and labor and supply chain disruptions.
Refer to Item 1A. "Risk Factors" in our Form 10-K for the fiscal year ended
Comparable Sales
We believe that comparable sales is an appropriate performance indicator to measure our sales growth compared to the prior period. Our comparable sales include sales from stores that have been operating for 14 months or longer as of the last day of a month and e-commerce revenue. Additionally, comparable sales include sales to franchisees and full service sales. Our comparable sales excludes the effect of changes in foreign exchange rates and sales from stores relocated until 14 months after the relocation. Revenue from acquisitions are excluded from our comparable sales calculation until 14 months after the acquisition. Our calculation of comparable sales might not be the same as other retailers as the calculation varies across the retail industry.
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Overview Key Operating Metrics The following table sets forth, for the periods indicated, information concerning key measures we rely on to evaluate our operating performance (dollars in thousands): Three Months Ended December 31, 2022 2021 Increase (Decrease) Net sales: SBS$ 549,472 $ 561,530 $ (12,058 ) (2.1 )% BSG 407,583 418,721 (11,138 ) (2.7 )% Consolidated$ 957,055 $ 980,251 $ (23,196 ) (2.4 )% Gross profit: SBS$ 323,475 $ 328,172 $ (4,697 ) (1.4 )% BSG 165,099 171,957 (6,858 ) (4.0 )% Consolidated$ 488,574 $ 500,129 $ (11,555 ) (2.3 )% Segment gross margin: SBS 58.9 % 58.4 % 50 bps BSG 40.5 % 41.1 % (60) bps Consolidated 51.0 % 51.0 % - bps Net earnings: Segment operating earnings: SBS$ 99,174 $ 100,623 $ (1,449 ) (1.4 )% BSG 49,647 58,546 (8,899 ) (15.2 )% Segment operating earnings 148,821 159,169 (10,348 ) (6.5 )% Unallocated expenses and restructuring (a) 62,233 46,389 15,844 34.2 % Consolidated operating earnings 86,588 112,780 (26,192 ) (23.2 )% Interest expense 17,923 20,241 (2,318 ) (11.5 )% Earnings before provision for income taxes 68,665 92,539 (23,874 ) (25.8 )% Provision for income taxes 18,328 23,701 (5,373 ) (22.7 )% Net earnings$ 50,337 $ 68,838 $ (18,501 ) (26.9 )% .
Number of stores at end-of-period (including franchises) (b): SBS
3,146 3,529 (383 ) BSG 1,352 1,364 (12 ) Consolidated 4,498 4,893 (395 ) Comparable sales growth (decline): SBS 3.0 % 4.4 % (140) bps BSG (1.5 )% 8.6 % (1,010) bps Consolidated 1.1 % 6.1 % (500) bps (a) Unallocated expenses consist of corporate and shared costs and are included in selling, general and administrative expenses in our condensed consolidated statements of earnings. (b) OurDecember 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. 18
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Results of Operations
The Three Months Ended
SBS. The decrease in net sales for SBS was primarily driven by the following (in thousands):
Comparable sales$ 15,954 Sales outside comparable sales (a) (16,220 ) Foreign currency exchange (11,792 ) Total$ (12,058 ) (a) 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.
BSG. The decrease in net sales for BSG was primarily driven by the following (in thousands):
Comparable sales$ (6,109 ) Sales outside comparable sales (a) (2,396 ) Foreign currency exchange (2,633 ) Total$ (11,138 ) (a) 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 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.
Gross Profit
SBS. SBS's gross profit decreased for the three months ended
BSG. BSG's gross profit decreased for the three months ended
Selling, General and Administrative Expenses
SBS. SBS's selling, general and administrative expenses decreased
BSG. BSG's selling, general and administrative expenses increased
Unallocated. Unallocated selling, general and administrative expenses, which
represent certain corporate costs that have not been charged to our reporting
segments, increased
Restructuring
For the three months ended
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Interest Expense
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 26.7% and 25.6%, for the three months ended
Liquidity and Capital Resources
Overview
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
Working capital (current assets less current liabilities) increased
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.
Cash Flows Three Months Ended December 31, (in thousands) 2022 2021 Net cash provided (used) by operating activities 54,951 (5,685 ) Net cash used by investing activities (25,007 ) (26,709 ) Net cash used by financing activities (5,992 ) (70,185 )
Net Cash Provided (Used) by Operating Activities
The change in net cash provided by operating activities for the three months
ended
The decrease in net cash used by investing activities for the three months ended
The decrease in net cash used by financing activities for the three months ended
Debt and Guarantor Financial Information
At
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. Amounts
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drawn on our ABL facility are generally paid down with cash provided by our
operating activities. During the three months ended
We are currently in compliance with the agreements and instruments governing our debt, including our financial covenants.
Guarantor Financial Information
Our 2025 Senior Notes were issued by our wholly-owned subsidiaries,
The following summarized consolidating financial information represents financial information for the Issuers and the Guarantors on a combined basis. 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 ofDecember 31, 2022 , andSeptember 30, 2022 : (in thousands) December 31, 2022 September 30, 2022 Inventory $ 742,642 $ 714,477 Intercompany receivable $ 394 $ - Current assets $ 882,858 $ 827,155 Total assets $ 2,032,279 $ 1,982,982 Current liabilities $ 550,883 $ 549,415 Intercompany payable $ - $ 4,431 Total liabilities $ 2,084,606 $ 2,085,169
The following table presents the summarized statement of earnings information
for the Issuers and the Guarantors for three months ended
Net sales$ 775,768 Gross profit$ 399,794 Earnings before provision for income taxes$ 52,383 Net Earnings$ 38,413 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
Contractual Obligations
There have been no material changes outside the ordinary course of our business
in any of our contractual obligations since
Off-Balance Sheet Financing Arrangements
At
Critical Accounting Estimates
There have been no material changes to our critical accounting estimates or
assumptions since
Recent Accounting Pronouncements
There have been no recent accounting pronouncements issued that will have a material impact to our business.
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