Sally Beauty Holdings Reports Third Quarter Fiscal 2022 Results

Q3 GAAP Diluted EPS of $0.43; Adjusted Diluted EPS of $0.55

Q3 GAAP Operating Margin of 10.3%; Adjusted Operating Margin of 10.5%

Updated Fiscal 2022 Guidance

Sally Beauty Holdings, Inc. (NYSE: SBH) (“the Company”), the leader in professional hair color, today announced financial results for its third quarter ended June 30, 2022. The Company will hold a conference call today at 7:30 a.m. Central Time to discuss these results and its business.

Fiscal 2022 Third Quarter Summary

• Consolidated net sales of $961 million, a decrease of 6.0% compared to the prior year, with a comparable sales decrease of 3.6%;
• Global e-commerce sales of $81 million, representing 8.4% of net sales;
• Gross margin increased 70 basis points to 51.0%;
• GAAP operating earnings of $99 million and GAAP operating margin of 10.3%, Adjusted Operating Earnings of $101 million and Adjusted Operating Margin of 10.5%;
• GAAP diluted net earnings per share of $0.43 and Adjusted Diluted Net Earnings Per Share of $0.55; and
• Completed full repayment of $300 million of 8.75% senior secured notes.

“During the third quarter, we delivered healthy gross margins of 51% and adjusted operating margin of 10.5% despite the challenging macro backdrop,” said Denise Paulonis, president and chief executive officer. “Our teams executed well amidst continued inflationary and supply chain pressures that impacted topline performance. We are pleased that our strong financial position allowed us to continue investing for growth while completing the full repayment of $300 million of our 8.75% senior secured notes in the quarter. With a healthy balance sheet, a strong operating infrastructure and a sticky core customer, we are well positioned to continue navigating the complex macro environment and remain focused on our four key growth pillars.”

Fiscal 2022 Third Quarter Operating Results

Third quarter consolidated net sales were $961.5 million, a decrease of 6.0% compared to the prior year. Comparable sales decreased 3.6%, driven primarily by continued inflationary pressures, supply chain challenges and the difficult comparison to last year. The Company was operating 149 fewer stores at the end of the quarter compared to the prior year. Foreign currency translation had an unfavorable impact of 130 basis points on consolidated net sales for the quarter. Global e-commerce sales were $81 million or 8.4% of consolidated net sales for the quarter.

Consolidated gross profit for the third quarter was $490.2 million compared to $514.4 million in the prior year, a decrease of 4.7%. Consolidated gross margin was 51.0%, an increase of 70 basis points compared to 50.3% in the prior year, driven primarily by higher product margins at both Sally Beauty and Beauty Systems Group, partially offset by higher distribution and freight costs.

Selling, general and administrative (SG&A) expenses totaled $391.0 million, up $4.5 million compared to the prior year period. Adjusted Selling, General and Administrative Expenses, excluding COVID-19 related net expenses in both the 2022 and 2021 quarters, were $389.7 million, up $4.0 million compared to the prior year. Increased labor costs were partially offset by lower accrued bonus, variable, and advertising expenses. As a percentage of sales, Adjusted SG&A expenses were 40.5% compared to 37.7% in the prior year.

GAAP operating earnings and operating margin in the third quarter were $99.2 million and 10.3%, compared to $127.4 million and 12.5%, in the prior year. Adjusted Operating Earnings and Operating Margin, excluding COVID-19 related net expenses and the Company’s previously announced restructuring efforts in both the 2022 and 2021 quarters, were $100.6 million and 10.5%, compared to $128.7 million and 12.6%, in the prior year.

GAAP net earnings in the third quarter were $46.6 million, or $0.43 per diluted share, compared to GAAP net earnings of $76.2 million, or $0.66 per diluted share in the prior year. Adjusted Net Earnings, excluding COVID-19 related net expenses, the Company’s previously announced restructuring efforts and the loss on extinguishment of debt, were $59.8 million, or $0.55 per diluted share, compared to Adjusted Net Earnings of $78.0 million, or $0.68 per diluted share in the prior year. Adjusted EBITDA in the third quarter was $128.3 million, a decrease of 18.0% compared to the prior year, and Adjusted EBITDA Margin was 13.3%, a decrease of 200 basis points compared to the prior year.

Balance Sheet and Cash Flow

As of June 30, 2022, the Company had cash and cash equivalents of $101 million and an outstanding balance of $167 million under its asset-based revolving line of credit. At the end of the quarter, inventory was $1.01 billion, up 8.5% versus a year ago. Third quarter cash flow from operations was $52.0 million. Capital expenditures in the quarter totaled $23.1 million.

In the third quarter, the Company used excess cash and a loan advance under its revolving line of credit to fund the full repayment of $300 million outstanding under its 8.75% senior secured notes. Additionally, the Company ended the quarter with a net debt leverage ratio of 2.2x.

Fiscal 2022 Third Quarter Segment Results

Sally Beauty Supply

• Segment net sales were $551.7 million in the quarter, a decrease of 8.5% compared to the prior year. The segment had an unfavorable impact of 200 basis points from foreign currency translation on reported sales and operated 143 fewer stores at the end of the quarter compared to the prior year. Segment e-commerce sales were $33 million or 6.0% of segment net sales for the quarter.
• Segment comparable sales decreased 5.0% in the third quarter. The Sally Beauty businesses in the U.S. and Canada represented 79% of segment net sales for the quarter and had a comparable sales decrease of 6.3%, primarily reflecting inflationary pressures that impacted consumer behavior and the lapping of last year’s strong reopening demand.
• At the end of the quarter, net store count was 3,468.
• Gross margin increased by 60 basis points to 58.5% compared to the prior year. The increase was primarily driven by pricing leverage partially offset by higher distribution and freight costs.
• GAAP operating earnings were $88.8 million compared to $116.8 million in the prior year, representing a decrease of 24.0%. GAAP operating margin decreased to 16.1% compared to 19.4% in the prior year.

Beauty Systems Group

• Segment net sales were $409.7 million in the quarter, a decrease of 2.4% compared to the prior year. The segment operated 6 fewer stores at the end of the quarter compared to the prior year and had an unfavorable impact of 30 basis points on reported sales from foreign currency translation.Segment e-commerce sales were $48 million or 11.6% of segment net sales for the quarter.
• Segment comparable sales decreased 1.6% in the third quarter, primarily reflecting continued supply chain challenges and the lapping of last year’s strong reopening demand.
• At the end of the quarter, net store count was 1,361.
• Gross margin increased 150 basis points to 40.9% in the quarter compared to the prior year, driven primarily by pricing leverage partially offset by higher distribution and freight costs.
• GAAP operating earnings were $56.1 million in the quarter, an increase of 1.5% compared to $55.3 million in the prior year. GAAP operating margin in the quarter was 13.7% compared to 13.2% in the prior year.
• At the end of the quarter, there were 700 distributor sales consultants compared to 724 in the prior year.

Fiscal Year 2022 Guidance

The Company is updating its full year guidance to reflect continued inflationary pressures and the unfavorable impact from foreign currency exchange rates. For full year fiscal 2022, the Company is providing the following guidance:

• Net sales are expected to decline by approximately 2% compared to the prior year. This includes an unfavorable impact from foreign currency exchange rates of approximately 70 basis points on full year guidance and reflects incremental impact in the third quarter and anticipated impact in the fourth quarter compared to prior net sales guidance;
• Net store count is expected to decrease by 90 stores, reflecting the Company’s focus on optimizing its store portfolio;
• GAAP gross margin is expected to expand by approximately 70 basis points compared to the prior year;
• Adjusted Gross Margin is expected to expand by approximately 50 basis points compared to the prior year;
• GAAP operating margin is expected to be approximately 10.3%; and
• Adjusted Operating Margin is expected to be approximately 10.5%.

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 today, August 4, 2022. 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, sallybeautyholdings.com/investor-relations. The conference call can be accessed by dialing (844) 867-6169 (International: (409) 207-6975) and referencing the access code 3091820#. 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. In addition, a supplemental slide presentation may be viewed during the call at the following link SBH Q3 Earnings Presentation and entering the event password K74WrAU6Mnz. A replay of the earnings conference call will be available starting at 10:30 a.m. Central Time, August 4, 2022, through August 18, 2022, by dialing (866) 207-1041 (International: (402) 970-0847) and referencing access code 2354020#. Also, a website replay will be available on sallybeautyholdings.com/investor-relations.

About Sally Beauty Holdings, Inc.

Sally Beauty Holdings, Inc. (NYSE: SBH), as the leader in professional hair color, sells and distributes professional beauty supplies globally through its Sally Beauty Supply and Beauty Systems Group businesses. Sally Beauty Supply stores offer up to 7,000 products for hair color, hair care, nails, and skin care 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 L’Oreal®. Beauty Systems Group stores, branded as CosmoProf® or Armstrong McCall® stores, along with its outside sales consultants, sell up to 10,000 professionally branded products including Paul Mitchell®, Wella®, Matrix®, Schwarzkopf®, Kenra®, Goldwell®, Joico® and Olaplex®, intended for use in salons and for resale by salons to retail consumers. For more information about Sally Beauty Holdings, Inc., please visit https://www.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 that 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 related to COVID-19, and its continuing impact on the economy and those described in our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended September 30, 2021. 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 Gross Margin; (2) Adjusted Selling, General and Administrative Expenses; (3) Adjusted EBITDA and EBITDA Margin; (4) Adjusted Operating Earnings and Operating Margin; (5) Adjusted Net Earnings; (6) Adjusted Diluted Net Earnings Per Share; and (7) 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 Gross Margin – We define the measure Adjusted Gross Margin as GAAP gross margin excluding the write-down of COVID-19 related personal protective equipment inventory for the relevant time periods as indicated in the accompanying non-GAAP reconciliations to the comparable GAAP financial measures.

Adjusted Selling, General and Administrative Expenses – We define the measure Adjusted Selling, General and Administrative Expenses as GAAP selling, general and administrative expenses excluding COVID-19 net expenses and other adjustments for the relevant time periods as indicated in the accompanying non-GAAP reconciliations 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, costs related to the Company’s previously announced restructuring plans, COVID-19 related net expenses and other adjustments 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, net expenses related to COVID-19 and other adjustments 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 Net Earnings – Adjusted net earnings is GAAP net earnings that exclude tax-effected costs related to the Company’s previously announced restructuring plans, tax-effected net expenses related to COVID-19, tax-effected expenses related to the loss on debt extinguishment, and tax-effected other adjustments for the relevant time periods as indicated in the accompanying non-GAAP reconciliations to the comparable GAAP financial measures.

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, tax-effected net expenses related to COVID-19, tax-effected expenses related to the loss on debt extinguishment and tax-effected other adjustments 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.

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