Sally Beauty Holdings, Inc. Announces Second Quarter Results

  • Strategic Transformation Milestones Reached; Transformation Plan on
    Track
  • Consolidated Same Store Sales Decreased 0.5%
  • Global E-Commerce Sales Increased by 30.3% versus Prior Year
  • GAAP Diluted EPS of $0.54; Growth of 10.2% versus Prior Year
  • Adjusted Diluted EPS of $0.51; Decrease of 5.6% versus Prior Year
  • Strong Cash Flow from Operations Used to Reduce Indebtedness;
    Repurchased $60 Million of Senior Notes
  • Fiscal Year 2019 Guidance Maintained

DENTON, Texas–(BUSINESS WIRE)–Sally Beauty Holdings, Inc. (NYSE: SBH) (“the Company”) today announced
financial results for its second quarter ended March 31, 2019. The
Company will hold a conference call today at 7:30 a.m. Central Time to
discuss these results.

Fiscal 2019 Second Quarter Overview

Consolidated same store sales decreased 0.5% in the quarter.
Consolidated net sales were $945.9 million in the second quarter, a
decrease of 3.0% compared to the prior year, partially driven by 69
fewer stores as compared to the prior year. Foreign currency translation
had an unfavorable impact of approximately 110 basis points on reported
sales.

GAAP diluted earnings per share in the second quarter were $0.54
compared to $0.49 in the prior year, an increase of 10.2%, driven
primarily by reduced selling, general and administrative expenses, the
gain recorded on the sale of the secondary headquarters and fulfillment
center in Texas and a reduced share count. Adjusted diluted
earnings per share, excluding charges related to the Company’s
transformation efforts in both years, the gain from the sale of the
headquarters and fulfillment center and the loss on extinguishment of
debt from the prior year, were $0.51 in the second quarter compared to
$0.54 in the prior year, a decrease of 5.6%.

During the quarter, we made solid progress on our transformation plan
as we completed the launch of Sally Beauty’s new mobile-first e-commerce
platform, launched new brands, had success against our supply chain
modernization plans and reduced our debt levels, all as promised,” said
Chris Brickman, president and chief executive officer.

We continued to see good momentum in our largest business, Sally Beauty
Supply’s U.S. and Canadian retail business, which is on the leading edge
of many of our transformation efforts. While the second quarter was
impacted by an Easter calendar shift and cautious retail consumers in
February, we are still on track with our transformation plan for the
year and are maintaining our full-year guidance based on the performance
of recent brand launches and our expectation of improved vendor supply
chain execution compared to the prior year,” Brickman concluded.

Update on Transformation Plan

During the second quarter and so far this quarter, we have:

  • Deployed the new sallybeauty.com mobile-first e-commerce platform;
  • Enabled sales transactions on the refreshed Beauty Systems Group app
    in advance of an e-commerce platform relaunch later this year;
  • Completed the testing and triggered the national rollout of the new
    Oracle based point-of-sale systems at both Sally Beauty Supply and
    Beauty Systems Group;
  • Launched the first four modules of the JDA merchandising and supply
    chain platform, which includes SKU setup, space planning, EDI, and
    demand planning;
  • Repurchased $60 million of senior notes through the Company’s debt
    tender offer;
  • Sold our second Denton, Texas headquarters and fulfillment center and
    used the proceeds to fund part of our debt repurchase;
  • Enhanced assortment differentiation with the launch of further
    exclusive brands, such as Maria Nila within Beauty Systems
    Group, and developed additional influencer-partner brands such as MoKnowsHair
    within Sally Beauty Supply; and
  • Completed the build-out of our ‘new concept stores’ in Las Vegas for
    Sally Beauty Supply and initiated the build-out for CosmoProf with
    most stores in that city remodeled to reflect better technology, and
    improved focus and customer experience, supported by better retail
    fundamentals.

As we move into the second half of fiscal year 2019, we will continue
our transformation efforts by:

  • Launching the Sally Beauty integrated app nationwide;
  • Launching new e-commerce and mobile commerce capabilities for Beauty
    Systems Group;
  • Launching a new order management system in connection with our
    e-commerce efforts to facilitate ‘buy online, pick up in store’ and
    ‘ship from store’ capabilities to better leverage our inventory
    positions;
  • Continuing to build momentum and awareness of successful launches of
    key brands like Pravana, Maria Nila and Arctic Fox
    while adding new, innovative brands to the pipeline;
  • Accelerating the national rollout of the new Oracle based
    point-of-sale systems at both Sally Beauty Supply and Beauty Systems
    Group to exceed 1,400 stores by the end of the fiscal year; and
  • Expanding distribution rights for existing and new brands within
    Beauty Systems Group.

Fiscal 2019 Second Quarter Financial Detail

Gross margin for the second quarter was 49.5%, a decrease of 40 basis
points compared to the prior year, with increases in the North American
business of Sally Beauty Supply offset by challenges in Europe and
within Beauty Systems Group. Selling, general and administrative
expenses, after adjusting for restructuring charges in both years and
the gain from the sale of the secondary headquarters and fulfillment
center in the current year, dropped by $6.8 million, resulting in 38.2%
as a percentage of sales, with the increase of 40 basis points driven by
the deleveraging impact of lower sales, notwithstanding the lower
absolute expense.

GAAP operating earnings and operating margin in the second quarter were
$112.5 million and 11.9%, respectively, compared to $111.1 million and
11.4%, respectively, in the prior year. Adjusted operating earnings and
operating margin (excluding charges related to the Company’s
transformation efforts in both years and the gain from the sale of the
secondary headquarters and fulfillment center) were $106.7 million and
11.3%, respectively, compared to $117.9 million and 12.1%, respectively,
in the prior year.

GAAP net earnings in the second quarter were $65.7 million, an increase
of $4.4 million, or 7.1%, from the prior year. Adjusted EBITDA in the
second quarter was $136.0 million, a decrease of $11.5 million, or 7.8%,
from the prior year, and adjusted EBITDA margin was 14.4%, a decline of
approximately 70 basis points from the prior year.

At the end of the quarter, inventory was $953.0 million, up 1.9% from
the prior year. The increase was driven primarily by the impact of new
product launches, the expansion of distribution rights for Beauty
Systems Group, and safety stock to deal with vendor conversions,
partially offset by a stronger U.S. dollar on reported inventory levels.

Capital expenditures in the quarter, excluding the proceeds from the
sale of the secondary headquarters and fulfillment center in Texas,
totaled $22.7 million, primarily for information technology projects
related to the launch of the new Sally Beauty e-commerce platform, the
new Oracle based point-of-sale system and the JDA merchandising and
supply chain platform as well as store remodels and maintenance.

As a result of the Company’s tender offer for a portion of its senior
notes, which was completed in March, the outstanding principal amount of
the senior notes declined by approximately $60 million. At the end of
the quarter, the outstanding balance on the asset-based revolving line
of credit remained at zero and the Company’s leverage ratio was 2.8.

Fiscal 2019 Second Quarter Segment Results

Sally Beauty Supply

  • Same store sales decreased by 0.3% for the quarter. Net sales were
    $565.6 million in the quarter, a decrease of 2.5% compared to the
    prior year, driven primarily by 64 fewer stores as compared to the
    prior year, Europe’s continued uncertainty surrounding Brexit and
    civil protests, an Easter shift into the third quarter of the fiscal
    year and the North American retail business experiencing a challenging
    February related in part to delayed tax refunds and store closures
    from extreme weather. Foreign currency translation had an unfavorable
    impact on the segment’s revenue growth in the quarter by approximately
    150 basis points.
  • At the end of the quarter, net store count was 3,718, a decrease of 64
    from the prior year.
  • Gross margin was flat at 55.6% in the quarter, with significant
    improvements in the U.S. and Canada offset by weakness in Europe.
  • GAAP operating earnings were $86.7 million in the quarter, a decrease
    of 4.0% versus the prior year. GAAP operating margin was 15.3% versus
    15.6% in the year prior.

Beauty Systems Group

  • Same store sales declined 0.9%. Net sales were $380.2 million in the
    quarter, a decrease of 3.8% compared to the prior year, driven
    primarily by the continued impact of brand life-cycle transition
    impacting the full service business. Foreign currency translation
    decreased the segment’s revenue growth in the quarter by approximately
    40 basis points.
  • At the end of the quarter, net store count was 1,388, a decrease of 5
    from the prior year.
  • Gross margin decreased 100 basis points to 40.4% in the quarter,
    driven primarily by continued challenges attributed to the ongoing
    merchandising transformation.
  • GAAP operating earnings were $56.5 million in the quarter, a decrease
    of 5.7% versus the prior year. GAAP operating margin in the quarter
    was 14.9% versus 15.2% in the prior year.
  • At the end of the quarter, total distributor sales consultants were
    798 compared to 859 in the prior year.

Fiscal Year 2019 Guidance

The Company remains on track with its transformation plan for the
remainder of the fiscal year and is maintaining its full-year financial
guidance.

Conference Call and Where You Can Find Additional Information

The Company will hold a conference call and audio webcast today to
discuss its financial results and its business at approximately 7:30
a.m. Central Time. During the conference call, the Company may discuss
and answer one or more questions concerning business and financial
matters and trends affecting the Company. The Company’s responses to
these questions, as well as other matters discussed during the
conference call, may contain or constitute material information that has
not been previously disclosed. Simultaneous to the conference call, an
audio webcast of the call will be available via a link on the Company’s
website, investor.sallybeautyholdings.com. The conference call can be
accessed by dialing (800) 230-1059 (International: (612) 288-0329). The
teleconference will be held in a “listen-only” mode for all participants
other than the Company’s current sell-side and buy-side investment
professionals. A replay of the earnings conference call will be
available starting at 9:30 a.m. Central Time, May 1, 2019, through May
8, 2019, by dialing (800) 475-6701 or if international, dial (320)
365-3844 and reference the conference ID number 465851. Also, a website
replay will be available on investor.sallybeautyholdings.com

About Sally Beauty Holdings, Inc.

Sally Beauty Holdings, Inc. (NYSE: SBH) is an international specialty
retailer and distributor of professional beauty supplies with revenues
of approximately $3.9 billion annually. Through the Sally Beauty Supply
and Beauty Systems Group businesses, the Company sells and distributes
through 5,106 stores, including 180 franchised units, and has operations
throughout the United States, Puerto Rico, Canada, Mexico, Chile, Peru,
the United Kingdom, Ireland, Belgium, France, the Netherlands, Spain and
Germany. Sally Beauty Supply stores offer up to 8,000 products for hair
color, hair care, skin care, and nails through proprietary brands such
as Ion®, Generic Value Products®, Beyond the Zone®
and Silk Elements® as well as professional lines such as Wella®,
Clairol®, OPI®, Conair® and Hot Shot
Tools®. Beauty Systems Group stores, branded as CosmoProf or
Armstrong McCall stores, along with its outside sales consultants, sell
up to 10,500 professionally branded products including Paul Mitchell®,
Wella®, Matrix®, Schwarzkopf®, Kenra®,
Goldwell®, Joico® and CHI®, intended
for use in salons and for resale by salons to retail consumers. For more
information about Sally Beauty Holdings, Inc., please visit
sallybeautyholdings.com.

Cautionary Notice Regarding Forward-Looking Statements

Statements in this news release and the schedules hereto which are not
purely historical facts or which depend upon future events may be
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Forward-looking statements, as that
term is defined in the Private Securities Litigation Reform Act of 1995,
can be identified by the use of forward-looking terminology such as
“believes,” “projects,” “expects,” “can,” “may,” “estimates,” “should,”
“plans,” “targets,” “intends,” “could,” “will,” “would,” “anticipates,”
“potential,” “confident,” “optimistic,” or the negative thereof, or
other variations thereon, or comparable terminology, or by discussions
of strategy, objectives, estimates, guidance, expectations and future
plans. Forward-looking statements can also be identified by the fact
these statements do not relate strictly to historical or current matters.

Readers are cautioned not to place undue reliance on forward-looking
statements as such statements speak only as of the date they were made.
Any forward-looking statements involve risks and uncertainties that
could cause actual events or results to differ materially from the
events or results described in the forward-looking statements,
including, but not limited to, the risks and uncertainties described in
our filings with the Securities and Exchange Commission, including our
most recent Annual Report on Form 10-K for the year ended September 30,
2018, as filed with the Securities and Exchange Commission.
Consequently, all forward-looking statements in this release are
qualified by the factors, risks and uncertainties contained therein. We
assume no obligation to publicly update or revise any forward-looking
statements.

Use of Non-GAAP Financial Measures

This news release and the schedules hereto include the following
financial measures that have not been calculated in accordance with
accounting principles generally accepted in the United States, or GAAP,
and are therefore referred to as non-GAAP financial measures: (1)
Adjusted EBITDA and EBITDA Margin; (2) Adjusted Operating Earnings and
Operating Margin; (3) Adjusted Diluted Net Earnings Per Share; and (4)
Operating Free Cash Flow. We have provided definitions below for these
non-GAAP financial measures and have provided tables in the schedules
hereto to reconcile these non-GAAP financial measures to the comparable
GAAP financial measures.

Adjusted EBITDA and EBITDA Margin – We define the measure
Adjusted EBITDA as GAAP net earnings before depreciation and
amortization, interest expense, income taxes, share-based compensation
and costs related to the Company’s previously announced restructuring
plans for the relevant time periods as indicated in the accompanying
non-GAAP reconciliations to the comparable GAAP financial measures.
Adjusted EBITDA Margin is Adjusted EBITDA as a percentage of net sales.

Adjusted Operating Earnings and Operating Margin – Adjusted
operating earnings are GAAP operating earnings that exclude costs
related to the Company’s previously announced restructuring plans for
the relevant time periods as indicated in the accompanying non-GAAP
reconciliations to the comparable GAAP financial measures. Adjusted
Operating Margin is Adjusted Operating Earnings as a percentage of net
sales.

Adjusted Diluted Net Earnings Per Share – Adjusted diluted net
earnings per share is GAAP diluted earnings per share that exclude
tax-effected costs related to the Company’s previously announced
restructuring plans and the loss on extinguishment of debt for the
relevant time periods as indicated in the accompanying non-GAAP
reconciliations to the comparable GAAP financial measures.

Operating Free Cash Flow – We define the measure Operating Free
Cash Flow as GAAP net cash provided by operating activities less
payments for capital expenditures (net). We believe Operating Free Cash
Flow is an important liquidity measure that provides useful information
to investors about the amount of cash generated from operations after
taking into account payments for capital expenditures (net).

We believe that these non-GAAP financial measures provide valuable
information regarding our earnings and business trends by excluding
specific items that we believe are not indicative of the ongoing
operating results of our businesses; providing a useful way for
investors to make a comparison of our performance over time and against
other companies in our industry.

We have provided these non-GAAP financial measures as supplemental
information to our GAAP financial measures and believe these non-GAAP
measures provide investors with additional meaningful financial
information regarding our operating performance and cash flows. Our
management and Board of Directors also use these non-GAAP measures as
supplemental measures to evaluate our businesses and the performance of
management, including the determination of performance-based
compensation, to make operating and strategic decisions, and to allocate
financial resources. We believe that these non-GAAP measures also
provide meaningful information for investors and securities analysts to
evaluate our historical and prospective financial performance. These
non-GAAP measures should not be considered a substitute for or superior
to GAAP results. Furthermore, the non-GAAP measures presented by us may
not be comparable to similarly titled measures of other companies.

 
Supplemental Schedules

 

Segment Information     1
Non-GAAP Financial Measures Reconciliations 2-3
Non-GAAP Financial Measures Reconciliations; Adjusted EBITDA and
Operating Free Cash Flow 4
Store Count and Same Store Sales 5
 
 
SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings
(In thousands, except per share data)
(Unaudited)
 
    Three Months Ended March 31,     Six Months Ended March 31,
        Percentage         Percentage
  2019         2018       Change   2019         2018       Change
 

Net sales

$ 945,852 $ 975,321 -3.0 % $ 1,935,305 $ 1,970,286 -1.8 %
Cost of products sold   477,528         488,999       -2.3 %   986,275         997,335       -1.1 %
Gross profit 468,324 486,322 -3.7 % 949,030 972,951 -2.5 %
Selling, general and administrative expenses 361,626 368,461 -1.9 % 728,614 739,748 -1.5 %
Restructuring   (5,814 )       6,759       -186.0 %   (1,834 )       11,969       -115.3 %
Operating earnings 112,512 111,102 1.3 % 222,250 221,234 0.5 %
Interest expense   23,821         25,262       -5.7 %   48,310         49,277       -2.0 %
Earnings before provision for income taxes 88,691 85,840 3.3 % 173,940 171,957 1.2 %
Provision for income taxes   22,966         24,469       -6.1 %   42,488         27,322       55.5 %
Net earnings $ 65,725       $ 61,371       7.1 % $ 131,452       $ 144,635       -9.1 %
 
Earnings per share:
Basic $ 0.55 $ 0.49 12.2 % $ 1.10 $ 1.15 -4.3 %
Diluted $ 0.54       $ 0.49       10.2 % $ 1.09       $ 1.14       -4.4 %
 
Weighted average shares:
Basic 120,077 124,270 120,033 126,046
Diluted   120,991         125,057     120,949         126,834  
Basis Point Basis Point
Change Change

Comparison as a percentage of net sales:

Consolidated gross margin 49.5 % 49.9 % (40 ) 49.0 % 49.4 % (40 )
Selling, general and administrative expenses 38.2 % 37.8 % 40 37.6 % 37.5 % 10
Consolidated operating margin 11.9 % 11.4 % 50 11.5 % 11.2 % 30
 

Effective tax rate

  25.9 %       28.5 %     (260 )   24.4 %       15.9 %     850  
 
 
SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands)
(Unaudited)
 
    March 31,     September 30,
2019 2018
 
Cash and cash equivalents $ 89,777 $ 77,295
Trade and other accounts receivable 91,427 90,490
Inventory 953,043 944,338
Other current assets   39,895     42,960  
Total current assets 1,174,142 1,155,083
Property and equipment, net 297,124 308,357
Goodwill and other intangible assets 601,936 608,623
Other assets   19,412     25,351  
Total assets $ 2,092,614   $ 2,097,414  
 
Current maturities of long-term debt $ 5,503 $ 5,501
Accounts payable 252,470 303,241
Accrued liabilities 156,490 180,287
Income taxes payable   6,280     2,144  
Total current liabilities 420,743 491,173
Long-term debt, including capital leases 1,708,421 1,768,808
Other liabilities 25,917 30,022
Deferred income tax liabilities   82,608     75,967  
Total liabilities 2,237,689 2,365,970
Total stockholders’ deficit   (145,075 )   (268,556 )
Total liabilities and stockholders’ deficit $ 2,092,614   $ 2,097,414  
 
 
Supplemental Schedule 1

 

SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES
Segment Information
(In thousands)
(Unaudited)
 
    Three Months Ended March 31,     Six Months Ended March 31,
        Percentage         Percentage
  2019         2018       Change   2019         2018       Change
Net sales:
Sally Beauty Supply (“SBS”) $ 565,604 $ 580,114 -2.5 % $ 1,146,213 $ 1,165,689 -1.7 %
Beauty Systems Group (“BSG”)   380,248         395,207       -3.8 %   789,092         804,597       -1.9 %
Total net sales $ 945,852       $ 975,321       -3.0 % $ 1,935,305       $ 1,970,286       -1.8 %
 
Operating earnings:
SBS $ 86,715 $ 90,328 -4.0 % $ 176,706 $ 176,922 -0.1 %
BSG   56,518         59,949       -5.7 %   118,849         124,514       -4.5 %
Segment operating earnings 143,233 150,277 -4.7 % 295,555 301,436 -2.0 %
 
Unallocated expenses (1) (36,535 ) (32,416 ) 12.7 % (75,139 ) (68,233 ) 10.1 %
Restructuring 5,814 (6,759 ) -186.0 % 1,834 (11,969 ) -115.3 %
Interest expense   (23,821 )       (25,262 )     -5.7 %   (48,310 )       (49,277 )     -2.0 %
Earnings before provision for income taxes $ 88,691       $ 85,840       3.3 % $ 173,940       $ 171,957       1.2 %
 
Segment gross margin: Basis Point Basis Point
  2019         2018       Change   2019         2018       Change
SBS 55.6 % 55.6 % 55.1 % 55.1 %
BSG 40.4 % 41.4 % (100 ) 40.2 % 41.1 % (90 )
 
Segment operating margin:
SBS 15.3 % 15.6 % (30 ) 15.4 % 15.2 % 20
BSG 14.9 % 15.2 % (30 ) 15.1 % 15.5 % (40 )
Consolidated operating margin   11.9 %       11.4 %     50     11.5 %       11.2 %     30  
 
(1) Unallocated expenses, including share-based compensation
expense, consist of corporate and shared costs and are included in
selling, general and administrative expenses.
 
 
Supplemental Schedule 2
 
SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES
Non-GAAP Financial Measures Reconciliations, Continued
(In thousands, except per share data)
(Unaudited)
 
    Three Months Ended March 31, 2019
As Reported             As Adjusted
(GAAP)    

Restructuring (1)

          (Non-GAAP)
 
Operating earnings $ 112,512 $ (5,814 ) $ 106,698
Operating margin 11.9 % 11.3 %
Earnings before provision for income taxes 88,691 (5,814 ) 82,877
Provision for income taxes (3)   22,966         (1,494 )             21,472  
Net earnings $ 65,725       $ (4,320 )           $ 61,405  
 
Earnings per share:
Basic $ 0.55 $ (0.04 ) $ 0.51
Diluted $ 0.54       $ (0.04 )           $ 0.51  
 
Three Months Ended March 31, 2018
Loss on
As Reported Extinguishment of As Adjusted
(GAAP)    

Restructuring (1)

   

Debt (2)

    (Non-GAAP)
 
Operating earnings $ 111,102 $ 6,759 $ $ 117,861
Operating margin 11.4 % 12.1 %
Earnings before provision for income taxes 85,840 6,759 876 93,475
Provision for income taxes (3)   24,469         1,555         254       26,278  
Net earnings $ 61,371       $ 5,204       $ 622     $ 67,197  
 
Earnings per share:
Basic $ 0.49 $ 0.04 $ 0.01 $ 0.54
Diluted $ 0.49       $ 0.04       $ 0.00     $ 0.54  
 
(1) For the three months ended March 31, 2019, restructuring
represents a $6.6 million gain from the sale of our secondary
headquarters and fulfillment center and expenses incurred in
connection with the supply chain modernization plan. For the three
months ended March 31, 2018, restructuring represents costs and
expenses incurred in connection with the 2018 Restructuring Plan.
 
(2) For the three months ended March 31, 2018, interest expense
reflects a loss on extinguishment of debt in connection with a
repricing of the variable-rate tranche of our term loan B, resulting
in a lower effective interest rate.
 
(3) The income tax provision associated with restructuring for the
three months ended March 31, 2019 and 2018, was calculated using a
25.7% and 23.0% tax rate, respectively. The income tax provision
associated with other charges for the three months ended March 31,
2018 was calculated using a 29.0% tax rate.

Contacts

Jeff Harkins
Investor Relations
940-297-3877

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