FinanceLooker

Excrept from filing document 2024-09-30

The aggregate market value of registrant s common stock held by non affiliates of the registrant based upon the closing price of a share of the registrant s common stock on March 31 2024 was approximately 1 279 396 000 At November 8 2024 there were 101 880 965 shares of the registrant s common stock outstanding
Statements in this Annual Report on Form 10 K and in the documents incorporated by reference herein which are not purely historical facts or which depend upon future events may constitute 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 the Exchange Act Words such as anticipate believe estimate expect intend plan project target can could may should will would might anticipates or similar expressions may also identify such forward looking statements
Readers are cautioned not to place undue reliance on forward looking statements as such statements speak only as of the date they were made and 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 The most important factors which could cause our actual results to differ from our forward looking statements are set forth in our description of risk factors in Item 1A to this Annual Report on Form 10 K which should be read in conjunction with the forward looking statements in this report Forward looking statements speak only as of the date they are made and we do not undertake any obligation to update any forward looking statement
Sally Beauty Holdings Inc is a leading international specialty retailer and distributor of professional beauty supplies As experts in hair color and care we aim to empower our customers to express themselves through their hair and beyond We operate two business segments that offer beauty products in key categories including hair care hair color styling tools and nails
Sally Beauty Supply SBS An omni channel retailer that offers professional quality beauty supplies at attractive prices and provides education to retail consumers and salon professionals throughout North America South America and Europe SBS operates primarily through retail stores generally operating under the Sally Beauty banner and digital platforms including our www sallybeauty com website and a mobile commerce based app
Beauty Systems Group BSG A leading full service omni channel distributor that offers professional beauty supplies exclusively to salons and salon professionals throughout the U S and Canada These salon professionals primarily rely on just in time inventory due to capital constraints and limited warehouse and shelf space BSG operates through company operated stores generally operating under the Cosmo Prof banner franchised stores distributor sales consultants DSCs and digital platforms including our www cosmoprofbeauty com website a mobile commerce based app and chain portals
The breadth depth and professional quality of our hair color and care assortment provides us with a differentiated core business in an industry which is otherwise fragmented Due to our long history brand heritage product and process specific knowledge and training of associates we provide unmatched hair color and care expertise to consumers We also have strong positioning with suppliers given our focus and economies of scale of purchasing By operating in a variety of channels we are able to reach broad diversified geographies and customer segments using a variety of product assortments and tactics
Our operating and growth strategy is guided by our vision to own professional hair color and care for both the do it yourself DIY enthusiast and the professional stylist SBS s differentiation is to offer a vast array of hair color and care solutions for in home use supported by the content and education we provide our customers At BSG we are the largest North American distributor of professional hair color and care offering stylists and salons the most extensive portfolio of third party brands in the market
Our DIY customers and professional stylists value the services education and innovation we provide We continue to build customer centricity through our value added services and concepts including Licensed Colorist on Demand LCOD Happy Beauty Co and digital marketplaces such as Amazon Walmart com DoorDash and Instacart Looking ahead we plan on using technology to expand our role in the stylists ecosystem to create value for stylists and our brands As we gain insights and customer feedback from these concepts we believe there are opportunities for us to expand on these concepts further and to provide growth beyond our core
We believe our focus on growing our owned brands at SBS and innovating will help us attract new customers and keep long term relationships with existing customers During the fiscal year we continued to expand our owned brand portfolio and brought to market many innovative products from new and key vendors At BSG we further expanded our distribution with brands like Amika Color Wow and Moroccanoil and we continue to test new brands Additionally at the end of the fiscal year we expanded our distribution rights and significantly strengthened BSG s position in a strategically important market with the acquisition of Exclusive Beauty Going into next fiscal year we are focused on expanding our owned brand offerings to drive higher sales penetration in Sally increasing our BSG distribution footprint through expanding high profile brands and bringing to market innovation across our key categories of hair care and hair color
During the fiscal year we were able to continue our Fuel for Growth FFG initiative that was initially launched in fiscal year 2023 FFG is a mandate to rethink the way we work generating cost savings and modernizing key parts of our business For example our transition to pooled distribution and ongoing changes to our store shipping frequency have lowered our transportation costs During fiscal 2024 we transitioned select information technology functions to a best cost location which allowed for the consolidation of our vendor base lower costs and the creation of organizational efficiencies
SBS has retail stores in the U S including Puerto Rico Canada Mexico the United Kingdom Ireland Belgium France Germany the Netherlands Spain and Chile Stores are designed to highlight our extensive product offerings and differentiated position in hair color hair care styling tools and nails We apply strong category management processes including store specific planograms to maintain consistent merchandise presentation across our store base In the U S and Canada our average store offers an average of 7 000 beauty products and is approximately 1 700 square feet in size Stores are typically located in strip shopping centers which are occupied by other high traffic retailers such as grocery stores mass merchants and home improvement centers Store formats including average size and product selection vary by marketplace to meet the needs of the local customer
We calibrate store renewals remodels and expansions between new and existing geographies In existing marketplaces we add stores to provide additional coverage and strategically close or relocate underperforming stores as necessary In new marketplaces SBS selects geographic areas and store sites on the basis of demographic information the quality and nature of neighboring tenants store visibility and location accessibility SBS generally seeks to expand in geographically contiguous areas to leverage its expertise and brand recognition
During the fiscal year we continued testing our new Happy Beauty Co store concept Happy Beauty Co is a unique new retail store concept that brings to market an engaging beauty experience with thousands of quality products priced under 10 in an accessible fun and expressive environment Stores feature both third party brands and our owned brands encompassing four key categories cosmetics and facial care bath and body nails and hair The initial pilot stores were opened in the Dallas Ft Worth Texas and Phoenix Arizona markets We currently anticipate opening a small number of additional pilot stores within the same markets during fiscal year 2025
Additionally we have made the decision to move away from services in our Studio by Sally store concept given the solid traction we are seeing with our LCOD online consultation services We are taking the knowledge from the Studio by Sally stores and applying the learnings to the rest of the SBS fleet including piloting a store refresh that reflects modernized branding an expanded assortment as well as new floor plans and fixtures
BSG stores including franchise based Armstrong McCall stores are designed to highlight our extensive product offerings to salons and salon professionals Our stores on average offer approximately 8 000 professional beauty products tailored to the territory and are segmented into distinctive areas arranged by product type with certain areas
SBS carries an extensive selection of leading third party owned and exclusive labeled brand professional beauty products across a variety of categories As leaders in the beauty industry we believe we are uniquely positioned to adapt and innovate within our brands partnerships and product offerings to provide the looks customers want We believe this focus helps us attract new customers and keep long term relationships with existing customers During the fiscal year we continued to focus on our owned brands driving significant growth in our newest brands bondbar Inspired by Nature and Strawberry Leopard Furthermore we expanded our selection of mindful products by adding Xmondo Better Natured and Sauce Beauty that are vegan free cruelty free consciously packaged and provide charitable contributions to communities Lastly we continue to grow our nail category with a large selection of dips gels and press on nails
BSG carries an extensive industry leading selection of third party branded products many of which have exclusive distribution rights with us We are a trusted partner to the licensed stylist community and therefore have competitive prices across a variety of product categories Our assortment and distribution are unique in certain geographies and we continue to pursue the acquisition of additional distribution rights as well as expand our channels of operations with our existing brand portfolio As one of the largest North American distributors of professional hair color and care products carrying an extensive selection of branded merchandise and educating on the latest technology and techniques are critical to maintaining relationships with our community of professional stylists and estheticians
SBS s marketing initiatives are designed to drive customer traffic through added education content and community building We leverage a combination of internal and external influencers content experts to educate and make customers feel confident about DIY hair color hair care nails and other beauty trends Our external influencers consist of content creators and or professional stylists who are DIY experts in their areas of focus and aim to inspire educate and empower beauty enthusiasts Additionally our internal Sally Beauty Associate Affiliate Program encourages our associates to share their unique expertise with customers on social media to curate a community of inspiring diverse creators who are using SBS merchandise for their DIY beauty nails hair and self expression
BSG s marketing programs are designed to promote its extensive selection of brand partners products at competitive prices and to educate motivate and empower existing and potential customers We work closely with our vendors to provide promotional offers for certain products to target existing and potential customers We distribute promotional material through multiple channels including print mail e mail SMS mobile app push notifications social media trade shows educational events virtual education events store personnel and DSCs As of September 30 2024 we had a network of 652 DSCs who personally consult support and sell directly to salons and salon professionals In addition we believe that our digital platforms enhance other efforts intended to promote awareness of our products by salons and salon professionals
In the U S and Canada we have approximately 16 million loyal customers of which a majority are part of our Sally Beauty Rewards Program Our Sally Beauty Rewards Program is designed to earn SBS customer loyalty and was recognized as one of America s Best Loyalty Programs by Newsweek and Statista in recent years The program is free to join and it provides our loyalty customers the ability to earn points on their SBS purchases and to convert those points to Sally Beauty Rewards when certain thresholds are attained Through the program these customers may also receive exclusive savings and personalized marketing offers
In the U S we also offer our SBS customers the opportunity to apply for the Sally Beauty Rewards Credit Card which provides additional benefits to Sally Beauty Rewards members Additionally we offer our SBS professional customers and BSG customers the opportunity to apply for the Cosmo Prof Rewards Credit Card which provides i discounts on Cosmo Prof purchases or ii points through the Sally Beauty Rewards Program on SBS purchases
Through these programs we are able to collect valuable point of sale customer data in order to increase our understanding of customers and enhance our ability to personalize our marketing We will continue to monitor and adjust our Sally Beauty Rewards Program in an effort to further enhance our customer experience and promote repeat sales from both retail customers and salon professionals Outside of the U S and Canada our customer loyalty and marketing programs vary by marketplace
We continue to grow our digital footprint not only through our marketing and customer relationship efforts but also through our digital platforms in each segment We believe we are uniquely positioned to continue expanding our digital sales penetration thanks to our omni channel business model which enables us to meet our customers where they are in store or online or through a hybrid approach such as our buy online pick up in store BOPIS option Additionally our digital strategy of enhancing our customer centricity aims to expand our services ecosystem to
In SBS we offer LCOD to provide our customers with a more engaging shopping experience Our LCOD is a digital focused initiative where customers can live chat with a licensed colorist by text voice or video to learn more about our hair color product offerings and how to use our products to achieve their desired results This online option is available in all 50 states and appears as a chat box when customers are browsing our selection of hair color merchandise on our website As mentioned above we are seeing positive insights and customer feedback around our LCOD initiative Furthermore over the past few years we launched digital marketplaces with Walmart com and Amazon com and this year expanded to other online partners like DoorDash and Instacart to fuel digital sales growth and attract new customers to our Sally brands
We currently receive our merchandise through several distribution centers in the U S and various other countries Our distribution centers service our stores orders from our DSCs and ship to customer orders through various freight carriers We procure our owned brand merchandise through domestic and foreign vendors and work closely with our overseas vendors to fulfill production orders and schedule ocean and freight carriers to deliver to our distribution centers
Over the past several years we have made significant investments in our end to end supply chain systems and processes to build a best in class merchandising and supply chain platform for the future As a result we were recently able to adjust to a new shipping frequency from our distribution centers to a majority of our SBS and BSG stores in the U S and Canada by leveraging investments within our supply chain systems This change has resulted in improved labor productivity and reduced freight costs while allowing us to maintain healthy in stock levels
Additionally customers are looking for more convenient options for receiving merchandise which is helping drive their purchasing decisions As such we have made significant investments to meet them where they are When ordering through our digital platforms our customers can select different fulfillment options including the following BOPIS deliver by common carrier from store or distribution centers 2 hour delivery and fulfilling from certain digital marketplaces
The primary competitive factors in our industry are the price of branded and owned brand products exclusive distribution contracts the quality perceived value brand name recognition packaging and variety of the products sold customer service efficiency of distribution networks and the availability of desirable store locations
SBS competes primarily with beauty product wholesale and retail outlets including local and regional open line beauty supply stores professional only beauty supply stores mass merchandisers online retailers drug stores department stores and supermarkets as well as salons that sell hair care products BSG competes primarily with beauty product wholesale suppliers including online retailers and manufacturers selling their products directly to salons and salon professionals
We face competition from certain manufacturers that use their own sales forces to distribute their professional beauty products directly or that align themselves with our competitors Some of these manufacturers are vertically integrated through the acquisition of distributors and stores We also face competition from authorized and unauthorized retailers as well as internet sites offering professional salon only products that are not brand approved for distribution
We purchase our branded merchandise directly from manufacturers through supply contracts and purchase orders For fiscal year 2024 our five largest suppliers Henkel AG Co KGaA Wella Company the Professional Products Division of L Oreal USA S D Inc John Paul Mitchell Systems and Kao Corporation accounted for approximately
47 of our consolidated merchandise purchases We have developed long standing relationships some of which are exclusive with these suppliers and many others which we believe are core to our competitive advantage We purchase products from these and many other manufacturers on an at will basis or under contracts which can generally be terminated without cause upon 90 days or less notice or that expire without express rights of renewal
In the U S and in other countries where we operate we have registered or legally protected trademarks copyrights internet domain names service marks and trade names that are used to promote and market our business stores digital platforms and products We believe many of these are well recognized and have significant value including but not limited to the following Sally Sally Beauty Cosmo Prof Armstrong McCall ION and Beyond the Zone
As of September 30 2024 we had approximately 27 000 global associates including approximately 12 000 full time associates We believe they are our greatest asset with their combined skills knowledge work life experiences and capabilities At the front line interacting with our customers or behind the scenes supporting our field teams our associates play a major role in our business While we often emphasize our technology based transformations and our wide variety of professional beauty products as key attributes nothing happens or succeeds without our people
Additionally we value our partnerships with suppliers and vendors and understand the impact they can have on our associates Thus SBH has included rules governing their conduct both with respect to expectations while interacting with our associates and for our foreign suppliers assurances that they too are providing a safe and healthy working environment for their associates
We clearly communicate that any concerns related to issues such as discrimination harassment retaliation and other issues such as wage law compliance and fraud should be reported immediately We also communicate the avenues available to our associates to do so through our SBH CARES communications and posters The reporting avenues include options to do so by phone or online through our Employee Concern Line and to do so anonymously if an associate prefers to take that approach
We also emphasize the importance of taking care of our associates in our Company s Code of Business Conduct and Ethics the standard of conduct that applies to all of our associates executive officers and Board of Directors the Board The Code reflects the core principles of conducting our business as a good corporate citizen in compliance with all laws rules and regulations applicable to us and with regard for the welfare of our associates and providing equal opportunity to all associates and job applicants You can review this important document at http investor sallybeautyholdings com
We make significant efforts to ensure our associates are informed engaged and excited about the work they are doing and contributions they are making to our Company and our customers We are committed to providing associates with what they need to thrive and grow their career We significantly invest in our talent processes and set clear expectations around leadership competencies and our cultural values at all levels in the organization At SBH we consider the whole end to end talent cycle of an associate to ensure we select exceptional people to represent our business and best serve our customer This includes robust interviewing processes as well as comprehensive onboarding programs to ensure new hires are set up to succeed in their early stages of joining SBH There is also a strong cadence of completing regular cycles of performance management linked to our Company values and leadership competencies as well as regular reviews of our talent and succession pipelines
Importantly we devote significant effort and resources to the development of our associates including providing almost all of our associates access to state of the art learning management systems We use these platforms to provide specifically designed and interactive award winning e learning courses in sales and service product and hair knowledge compliance training and health and safety
We also place significant value and attention on responding to feedback and input from associates This includes surveys regarding issues such as Diversity Inclusion Belonging and our engagement survey We review our team s input and comments identify common themes and set out action plans to respond We believe listening is crucial but taking action and making commitments are even more important
At SBH we celebrate differences inclusivity and self expression This fundamental aspect of SBH s culture is rooted in our belief that beauty is for everyone and everyone should find their own path to beauty Our associates and our customers care about celebrating diversity and self expression We want our Company and our stores to be places where all of our associates and customers feel valued for who they are and experience a sense of belonging
At the Board Level Our Board s composition leads the Company s commitment to Diversity Inclusion and Belonging Having diverse voices on our Board enhances the Board s expertise broadens its viewpoint and sets the tone to encourage leaders at all levels of the Company to listen to the concerns of our associates and customers alike Our Compensation Talent Committee provides hands on oversight and guidance of our Diversity Inclusion Belonging initiatives Our Board believes listening and responding to diverse voices is crucial to the Company s success and long term sustainability
In Our Workforce Our SBH team in the U S Canada is approximately 90 women and approximately 50 people of color In recent years Newsweek has recognized SBH among America s Greatest Workplaces America s Greatest Workplaces for Diversity and America s Greatest Workplaces for Women We recognize and celebrate the bedrock values of workforce diversity inclusion belonging and engagement within our teams For us these are key drivers of the success of the business as our associates should and do reflect the various qualities of our customers and what they desire and expect from SBH
During the fiscal year we furthered our work with our existing Employee Resource Groups ERGs Our first four ERGs represent our Black Hispanic Women and LGBTQ associates and this year we added two additional ERGs focused on Veterans and Associates with Disabilities Neurodivergent Thinking These ERGS have made a meaningful impact on our team and business and we will continue to connect and engage them on how we do business how we best serve our customers and how we enhance our team and culture
In Our Customer Base Our customers span the entire continuum of gender and ethnic diversity We sell beauty products to treat and style every kind of hair we deliver a tailored assortment of beauty products that serve the local communities where our over 3 500 U S and Canada stores are located Serving the diverse demographics and needs of our customers drives a culture and workforce that embraces and reflects the communities we serve
We are subject to a number of U S federal state and local laws and regulations as well as the laws and regulations applicable in each foreign country or jurisdiction in which we do business These laws and regulations govern among other things the composition packaging labeling and safety of the products we sell the methods we use to sell these products and the methods we use to import these products
For example in the U S most of the products we sell and the content and methods of advertising and marketing that we utilize are subject to both federal and state regulations administered by a host of federal and state agencies including in each case and among other agencies one or more of the following the Food and Drug Administration the FDA the Federal Trade Commission and the Consumer Products Safety Commission The transportation and disposal of many of our products are also subject to federal and state regulation State and local agencies regulate many aspects of our business We also face comprehensive regulation outside the U S focused primarily on product labeling and safety issues such as cosmetic regulations administered by the EU Commission Health Canada Mexico COFEPRIS and Chile ISP We believe we are in material compliance with the laws and regulations to which we are subject although no assurance can be provided that this will remain true going forward or that we will not be required to incur meaningful expenses to comply with such laws and regulations
Our Annual Report on Form 10 K our Quarterly Reports on Form 10 Q our Current Reports on Form 8 K and amendments to such reports are available without charge on our website www sallybeautyholdings com as soon as reasonably possible after they are filed electronically with the Securities and Exchange Commission SEC under the Exchange Act The SEC maintains an internet site that contains our reports proxy and information statements and other information we file electronically with the SEC at www sec gov We will provide copies of such reports to any person without charge upon written request to our Investor Relations Department at our principal office The information found on our website shall not be considered to be part of this or any other report filed with or furnished to the SEC
Important risk factors that could materially affect our business financial condition or results of operations in future periods are described below These factors are not intended to be an all encompassing list of risks and uncertainties and are not the only risks and uncertainties we face Additional risks not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business financial condition or results of operations in future periods
We face significant competition from other beauty stores and outlets salons mass merchandisers online retailers drug stores and supermarkets The primary competitive factors in the beauty products distribution industry are price quality perceived value consumer brand name recognition packaging and variety and availability customer service desirable store locations in stock inventory and with respect to e commerce look and feel of website and delivery times and costs Competitive conditions may limit our ability to maintain prices or may require us to reduce prices to retain business or channel share particularly because customers are able to quickly and conveniently comparison shop and can determine real time product availability using digital tools This behavior can lead to decisions driven solely by price the functionality of the digital tools or a combination of these and other factors Some of our competitors have greater financial and other resources than we do and are less leveraged than our business and may therefore be able to spend more aggressively on advertising and promotional activities and may respond more effectively to changing business and economic conditions Furthermore there are few significant barriers to entry into the marketplace for most of the products we sell making it easy for new market entrants to compete with us We expect existing competitors business partners and new entrants to the beauty products distribution industry to constantly revise or improve their business models in response to challenges from competing businesses including ours If these competitors introduce changes or developments that we cannot address in a timely or cost effective manner our business may be adversely affected
In addition our industry is consolidating which may give our suppliers and our competitors increased negotiating leverage and greater marketing resources For instance we may lose customers if those competitors which have broad geographic reach attract additional salons individual and chain that are currently BSG customers or if professional beauty supply manufacturers align themselves with our competitors or begin selling directly to customers Not only does consolidation in distribution pose risks from competing distributors but it may also place more leverage in the hands of certain manufacturers resulting in smaller margins on products sold through our network
Our success depends in part on our ability and our distributed third party brands ability to anticipate gauge and react in a timely manner to changes in consumer spending patterns and preferences for specific beauty products If we or the brands we distribute do not timely identify and properly respond to evolving trends and changing consumer demands for beauty products in the geographies in which we compete our sales may decline significantly Furthermore we may accumulate additional inventory and be required to mark down unsold inventory to prices that are significantly lower than normal prices which would adversely impact our margins and could further adversely impact our business financial condition and results of operations Additionally a large percentage of our SBS product sales come from our owned and exclusive label brand products The development and promotion of these owned and exclusive label brand products often occur well before these products are sold in our stores As a result the success of these owned and exclusive label brand products is largely dependent on our ability to develop products that meet future consumer preferences at prices that are acceptable to our customers Furthermore we may have to invest significant amounts on the advertising and marketing of our owned and exclusive label brands to drive customer awareness of these brands There can be no assurance that any new owned or exclusive label brand will meet consumer preferences gain acceptance among our customer base or generate sales to become profitable or to cover the costs of its development and promotion
We expect continuously changing fashion related trends and consumer tastes to influence future demand for beauty products Changes in consumer tastes fashion trends and brand reputation can have an impact on our financial performance If we or third party brands we distribute are unable to anticipate and respond to trends in the marketplace for beauty products and changing consumer demands and or maintain a strong brand reputation our business could suffer
We are continuing the implementation of a significant number of strategic initiatives designed to enhance our customer centricity increase our owned brand sales penetration improve operational efficiencies and optimize our capabilities including through the closure of underperforming stores and the consolidation of distribution centers There can be no assurance that these or future strategic initiatives will be successful Furthermore we are investing significant resources in these initiatives and the costs of the initiatives may outweigh their benefits If these strategic initiatives are not successful our comparative sales will suffer and our growth prospects financial results profitability and cash flows will also be adversely impacted
Because we purchase products from many manufacturers and fillers pursuant to at will contracts and contracts which can be terminated without cause upon 90 days notice or less or which expire without express rights of renewal manufacturers and fillers could discontinue sales to us immediately or upon short notice Some of our contracts with manufacturers may be terminated if we fail to meet specified minimum purchase requirements If minimum purchase requirements are not met we do not have contractual assurances of continued supply In lieu of termination a manufacturer may also change the terms upon which it sells for example by raising prices or broadening distribution to third parties For these and other reasons we may not be able to acquire desired merchandise in sufficient quantities or on acceptable terms in the future
Changes in SBS s and BSG s relationships with suppliers occur often and could positively or negatively impact the net sales and operating earnings of both business segments Some of our suppliers may seek to decrease their reliance on distribution intermediaries including full service exclusive and open line distributors like BSG and SBS by promoting their own distribution channels These suppliers may offer advantages such as lower prices when their products are purchased from distribution channels they control If our access to supplier provided products were to diminish relative to our competitors or if we were not able to purchase products at the same prices as our competitors our business could be materially and adversely affected Further consolidation among suppliers may increase suppliers negotiating leverage thereby providing them with competitive advantages that may increase our costs and reduce our revenues adversely affecting our business financial condition and results of operations There can be no assurance that the impact of these developments if they were to occur would not adversely impact revenue or margins or that our efforts to mitigate the impact of these developments would be successful
Furthermore from time to time our suppliers ship products to us that fail to conform to our quality control standards Suppliers failure to comply with our quality control program may result in diminished inventory levels and product quality which in turn may result in increased order cancellations and product returns decreased consumer demand for our products or product recalls any of which may have a material adverse effect on our results of operations and financial condition
Any unexpected significant interruption in manufacturers and fillers supply of products or disruptions in our supply chain infrastructure could disrupt our ability to deliver merchandise to our stores and customers in a timely manner which could have a material adverse effect on our business financial condition and results of operations
Manufacturers and owned and exclusive label brand fillers of beauty supply products are subject to certain risks that could adversely impact their ability to provide us with their products on a timely basis Such risks include the following inability to procure ingredients industrial accidents environmental events strikes and other labor disputes union organizing activity disruptions in logistics or information systems loss or impairment of key manufacturing sites product quality control safety licensing requirements and other regulatory issues and natural disasters pandemics and other external factors over which neither they nor we have control
In addition we directly source many of our owned and exclusive label brand products including but not limited to styling tools salon equipment sundries and other promotional products from foreign third party manufacturers and many of our vendors also use overseas sourcing to manufacture some or all of their products Any event causing a sudden disruption of manufacturing or imports from such foreign countries including the imposition of additional or increased import restrictions duties or tariffs political instability local business practices legal or economic restrictions on overseas suppliers ability to produce and deliver products or acts of war or terrorism or pandemics could materially harm our operations to the extent they affect the production shipment or receipt of merchandise Our operating results depend on the orderly operation of our receiving and distribution processes which depend on manufacturers adherence to shipping schedules and our effective management of our distribution facilities and capacity
We have exclusive and non exclusive distribution rights with several key vendors for well known brands in certain geographies If key vendors ceased granting us exclusive distribution rights or decided to utilize other distribution channels for their products therefore widening the availability of these products in other channels the revenue we earn from the sale of such products could be negatively impacted which could have a material adverse effect on our business financial condition and results of operations
Our suppliers frequently attempt to pass on higher production costs which have generally increased as a result of inflation over the past few years which may impact our ability to maintain or grow our margins The price and availability of raw materials may be impacted by inflation demand regulation weather and other factors Additionally manufacturers have and may continue to experience increases in other manufacturing costs such as transportation labor and benefit costs These increases in production costs result in higher merchandise costs to us We may not always be able to pass on those cost increases to our customers which could have a material adverse effect on our business financial condition and results of operations
We offer many of our beauty products for sale through our e commerce businesses in the U S such as www sallybeauty com www cosmoprofbeauty com www cosmoprofequipment com and mobile commerce based apps and abroad We have undertaken a number of initiatives to significantly advance our digital commerce capabilities and grow our e commerce businesses As a result we are more susceptible to risks and difficulties frequently experienced by internet based businesses including risks related to our ability to attract and retain customers on a cost effective basis and our ability to operate support expand and develop our e commerce operations websites and software and other related operational systems Furthermore our e commerce businesses face significant competition from larger retailers with more established e commerce platforms as well as online retailers including Amazon and online store e commerce platforms such as Shopify
Although we believe our participation in both e commerce and physical store sales is a distinct advantage for us due to synergies and the potential for new customers supporting product offerings through both of these channels could create issues that have the potential to adversely affect our results of operations For example growth in our e commerce business relative to in store sales may result in dilution of operating margin and profit due to higher delivery expenses incurred in our e commerce sales Furthermore as our e commerce businesses successfully grow they may
do so in part by attracting existing customers rather than new customers who choose to purchase products from us online rather than from our physical stores thereby reducing the financial performance of our stores In addition offering different products through each channel could cause conflicts and cause some of our current or potential internet customers to consider competing distributors of beauty products In addition offering products through our e commerce channels particularly directly to consumers through our professional business could cause some of our current or potential vendors to consider utilizing competitive internet offerings of their products either directly or through competing distributors As we continue to grow our e commerce businesses the impact of attracting existing rather than new customers of experiencing conflicts between product offerings online and through our stores and of opening up our channels to increased internet competition could have a material adverse impact on our business financial condition and results of operations including operating margin profit future growth and comparative sales Furthermore our recent initiatives to upgrade our e commerce platforms may not be successful in driving traffic to our websites and increasing our online sales in the long term which could adversely impact our net sales
The majority of the products that BSG sells including those sold by our Armstrong McCall franchisees are meant to be used exclusively by salons and individual salon professionals or sold exclusively to their retail consumers However despite our efforts to prevent diversion incidents of product diversion occur whereby our products are sold by these purchasers and possibly by other bulk purchasers such as franchisees to wholesalers and ultimately to general merchandise retailers among others These retailers in turn sell such products to consumers The diverted product may be old tainted or damaged and sold through unapproved outlets all of which could diminish the value of the particular brand In addition such diversion may result in lower net sales for BSG should consumers choose to purchase diverted products from retailers rather than purchasing from our customers or choose to purchase other products altogether because of the perceived loss of brand prestige Furthermore in many instances BSG is subject to certain anti diversion obligations under these manufacturers contracts that if violated may result in the termination of such contracts In addition our investigation and enforcement of these anti diversion obligations may require us to cease selling to customers suspected of diversion which could impact BSG s net sales
BSG receives revenue from its sale of products to Armstrong McCall franchisees Accordingly a portion of BSG s financial results is dependent upon the operational and financial success of these franchisees including their implementation of BSG s strategic plans If sales trends or economic conditions worsen for Armstrong McCall s franchisees their financial results may worsen Additionally the failure of Armstrong McCall franchisees to renew their franchise agreements any requirement that Armstrong McCall restructure its franchise agreements in connection with such renewals or any failure of Armstrong McCall to meet its obligations under its franchise agreements could result in decreased revenues for BSG or create legal issues with our franchisees or with manufacturers
Our future growth strategy depends in part on our ability to optimize and profitably operate our stores in existing and additional geographic areas including in international geographies and to close underperforming stores While the capital requirements to open an SBS or BSG store excluding inventory vary from geography to geography such capital requirements have historically been relatively low in the U S and Canada Despite these relatively low opening costs we may not be able to open all the new stores we plan to open and we may be unable to optimize our store base either of which could have a material adverse impact on our business financial condition and results of operations Furthermore we may incur costs associated with the closure of underperforming stores and such store closures may adversely impact our revenues
In addition as we continue to open new stores our management as well as our financial distribution and information systems and other resources will be subject to greater demands If our personnel and systems are unable to successfully manage this increased burden our business financial condition and results of operations may be materially affected
We may from time to time seek to develop and introduce new store concepts Our ability to succeed in the early stages of new concepts could require significant capital expenditures and management attention Additionally any new concept is subject to certain risks including customer acceptance competition product differentiation challenges relating to economies of scale in merchandise sourcing and the ability to attract and retain qualified personnel including management and designers There can be no assurance that we will be able to develop and grow these or any other new concepts to a point where they will become profitable or generate positive cash flow If we cannot successfully develop and grow these new concepts our financial condition and results of operations may be adversely impacted
Customer traffic and demand for our merchandise are influenced by our advertising marketing and promotional activities We use marketing advertising and promotional programs to attract customers through various media including social media Instagram TikTok Facebook YouTube websites mobile applications e mail and print Our future growth and profitability will depend in part upon the effectiveness and efficiency of our advertising and marketing programs Further disruption to certain media channels could have a material adverse effect on our results of operations and financial condition
In particular there has been a substantial increase in the use of social media platforms including blogs social media websites and other forms of digital communications and the influence of social medial influencers in the beauty products industry Furthermore social media advertising and marketing continues to increase in importance as consumers are paying less attention to more traditional media As a result the success of our marketing and advertising programs are increasingly dependent on the effectiveness of industry influencers that we engage to promote our products Furthermore actions taken by these individuals could harm our brand image and reputation Our social media marketing efforts may not ultimately be successful and the availability of these platforms may make it easier for smaller competitors to compete with us
Negative commentary regarding us or the products we sell may also be posted on social media platforms or other electronic means at any time and may be adverse to our reputation or business Customers value readily available information and often act on such information without further investigation and without regard to its accuracy Any harm to us or the products we sell may be immediate without allowing us an opportunity for redress or correction
Our success has depended and will continue to depend in large part on our ability to attract and retain senior executives who possess extensive knowledge experience and managerial skill applicable to our business Significant leadership changes or executive management transitions involve inherent risk and any failure to ensure the effective transfer of knowledge and a smooth transition could hinder our strategic planning execution and future performance In addition from time to time key executive personnel leave our Company and we may not be successful in attracting integrating and retaining the replacement personnel required to continue to grow and operate our business profitably While we strive to mitigate the negative impact associated with the loss of a key executive employee an unsuccessful transition or loss could significantly disrupt our operations and could have a material adverse effect on our business financial condition and results of operations We may similarly rely on other non executive personnel and associates across our business including those working in our corporate functions to facilitate our ongoing operations and support our strategic initiatives The recruitment and retention of qualified individuals in these roles are vital elements of the success of our business
We are also dependent on recruiting training motivating managing and retaining our store employees that interact with our customers on a daily basis Many team members are in entry level or part time positions with historically high turnover rates Competition for these types of qualified employees especially in light of recent labor shortages among entry level workers is intense and the failure to attract retain and properly train qualified and motivated employees could result in decreased customer satisfaction loss of customers and lower sales In addition our ability to meet our labor needs while controlling labor costs is subject to numerous external factors including market pressures with respect to prevailing wage rates unemployment levels and health and other insurance costs the impact of legislation or regulations governing labor relations immigration minimum wage and healthcare benefits changing demographics and our reputation within the labor market Our inability to control our labor costs could affect our results of operations and could result in lower margins in our two segments
We are in the early stages of integrating AI in our business including machine learning AI and generative AI tools that collect and analyze data to support our business operations and customer facing interactions We also use products and services from third parties that use integrated AI technology The use of AI tools and technology presents many challenges and risks to our business Data sets used by AI may be overbroad insufficient or contain flawed or otherwise biased information AI tools that we use may include flaws in algorithms which may create biased or inaccurate outcomes and may generate offensive illegal malicious or otherwise harmful content that could adversely impact our brand reputation business or customers Since we use AI in customer facing interactions any inaccuracies in AI responses could affect customer satisfaction lead to misinformation and harm our brand s reputation Unintended use of AI may lead to regulatory issues reputational or financial harm and operational disruptions The use of AI may also increase the risks to us of data breaches malware ransomware data loss and theft or the improper handling of sensitive information which could result in adverse financial and regulatory consequences The rapid development and adoption of AI and AI adjacent technology and of AI s competitive use cases may make it more difficult for us to compete in our industry Our competitors may have greater success implementing and using AI technology than us which could harm our ability to compete effectively and could adversely affect our results of operations Further we may become increasingly reliant on AI technology and tools in the future The legal regulatory and compliance environment surrounding the design and use of AI technology involving federal state and foreign regulators is evolving and complex Our obligation to comply with the evolving regulatory landscape could entail significant costs and negatively affect our business In addition there has been a significant increase in AI related litigation and government regulatory actions targeting the design deployment and other uses of AI and claiming liability under numerous areas of the law such as consumer protection product liability privacy intellectual property securities and defamation Any of these risks could have an adverse effect on our business reputation and results of operations
Our results of operations may be materially affected by conditions in the global capital markets and the economy and regulatory environment generally both in the U S and internationally Concerns over inflation rising interest rates labor shortages energy costs geopolitical issues and conflicts and wars as well as uncertainty with respect to elections terrorism civil unrest the availability and cost of credit the mortgage market and the real estate and other financial markets in the U S and Europe have contributed to increased volatility and diminished expectations for the U S and certain foreign economies We appeal to a wide demographic consumer profile and offer an extensive selection of beauty products sold directly to retail consumers and salons and salon professionals Continued uncertainty in the economy could adversely impact consumer purchases of discretionary items such as beauty products as well as adversely impact the frequency of salon services performed by professionals using products purchased from us Factors that could affect consumers willingness to make such discretionary purchases include the following inflation general business conditions levels of employment interest rates tax rates the availability of consumer credit and consumer confidence in future economic conditions A prolonged economic downturn or acute recession can adversely affect consumer spending habits and result in lower than expected net sales The economic climate could also adversely affect our vendors The occurrence of any of these events could have a material adverse effect on our business financial condition and results of operations
In addition the disruption to the global economy and to our business along with any sustained decline in our stock price could lead to triggering events that may indicate that the carrying value of certain assets including inventories accounts receivable long lived assets intangibles and goodwill may not be recoverable which could lead to impairment or other asset write downs in the future
The occurrence of natural disasters the severity and frequency of which may be exacerbated by climate change acts of violence conflicts wars terrorism or civil unrest or global health crises including epidemics and pandemics could result in physical damage to our properties the temporary closure of stores or distribution centers the temporary lack of an adequate work force the temporary or long term disruption in the supply of products or a substantial increase in the cost of those products from domestic or foreign suppliers the temporary disruption in the delivery of goods to our distribution centers or a substantial increase in the cost of those deliveries the temporary reduction in the availability of products in our stores and or the temporary reduction in visits to stores by customers If one or more natural disasters or acts of violence conflicts wars or terrorism were to impact our business we could among other things incur significantly higher costs and longer lead times associated with distributing products Furthermore insurance costs associated with our business may rise significantly in the event of a large scale catastrophe or crisis
Many of our products are sold outside of the United States As a result we conduct transactions in various currencies which increases our exposure to fluctuations in foreign currency exchange rates relative to the U S dollar Recently these foreign currencies have weakened significantly against the U S dollar Our international revenues and expenses are generally derived from sales and operations in foreign currencies and these revenues and expenses could be affected by currency fluctuations including amounts recorded in foreign currencies and translated into U S dollars for consolidated financial reporting Currency exchange rate fluctuations could also disrupt the business of the independent manufacturers that produce our products by making their purchases of raw materials transportation and freight more expensive and more difficult to finance Foreign currency fluctuations could similarly have an adverse effect on our results of operations and financial condition
We operate on a global basis and approximately 19 of our net revenues from continuing operations in fiscal year 2024 were generated outside the U S Our non U S operations are subject to many risks and uncertainties including those resulting from ongoing instability or changes in a country s or region s economic regulatory or political conditions including inflation recession interest rate fluctuations sovereign default risk and actual or anticipated military or political conflicts labor market disruptions sanctions boycotts new or increased tariffs quotas exchange or price controls trade barriers or other restrictions on foreign businesses our failure to effectively and timely implement processes and policies across our diverse operations and employee base and difficulties and costs associated with complying with a wide variety of complex and potentially conflicting regulations across multiple jurisdictions The presence of non U S operations also increases the risk of non compliance with U S laws and regulations applicable to such non U S operations such as those laws and regulations relating to sanctions boycotts and improper payments
In addition sudden disruptions in business conditions as a consequence of the occurrence or threat of large scale international events such as terrorist attacks war or other military action including the wars in Ukraine and in the Middle East pandemics or other crises or vulnerabilities or as a result of adverse weather conditions or climate changes may have an impact on consumer spending which could have a material adverse effect on our business prospects financial condition results of operations and cash flows as well as the trading price of our securities
As a result of our real estate strategy most of our SBS stores are located in strip shopping centers These strip shopping centers are occupied by other high traffic retailers such as grocery stores mass merchants and home improvement centers Because most of our SBS stores are located in strip shopping centers our sales are derived in part from the volume of traffic generated by the nearby high traffic retailers A reduction in customer traffic to these strip shopping centers including as a result of the closure of stores in the strip shopping center a regional or global economic
downturn an outbreak of flu or other viruses such as COVID 19 a general downturn in the local area where our SBS store is located or a decline in the desirability of the shopping environment of a particular strip shopping center could reduce our sales and leave us with excess inventory which could have a material adverse effect on our business financial condition profitability and cash flows
From time to time we are a party to claims litigation including single plaintiff and class action litigation and other legal proceedings that arise in the ordinary course of our business including matters involving employment premises real estate and product litigation These matters could ultimately result in losses or liabilities to our business Liabilities for loss contingencies including those arising from such proceedings are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated There is inherent uncertainty in the assessment of the potential outcomes of these matters and the ultimate resolution of these matters could differ from our predictions Such outcomes may have a material adverse impact on our consolidated financial position results of operations or cash flows See Note 10 in the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report for more information on litigation and other legal proceedings
If products sold by us are found to be defective in labeling or content our credibility and that of the brands we sell may be harmed marketplace acceptance of our products may decrease and we may be exposed to liability that exceeds our products liability insurance coverage and manufacturer indemnities
We do not control the production process for the products we sell We may not be able to identify a defect in a product we purchase from a manufacturer or owned and exclusive label brand filler before we offer such product for resale In many cases we rely on manufactures and fillers representations regarding the composition manufacture and safety of the products we purchase from them as well as on the compliance of our product labels with government regulations Our sale of certain products exposes us to potential product liability claims recalls or other regulatory or enforcement actions initiated by federal state or foreign regulatory authorities or through private causes of action Such claims recalls or actions could be based on allegations that among other things the products sold by us are misbranded contain contaminants or impermissible ingredients provide inadequate instructions regarding their use or misuse include inadequate warnings concerning flammability or interactions with other substances or that we knew or should have known of an alleged defect For example numerous cases continue to be filed against beauty product manufacturers and distributors alleging harm from chemical hair straighteners and hair relaxer products which could have a material adverse effect on the Company s business financial condition and results of operations Claims against us could also arise as a result of the misuse by purchasers of such products or as a result of their use in a manner different than the intended use We may be required to pay for losses or injuries actually or allegedly caused by the products we sell and to recall any product we sell that is alleged to be or is found to be defective Furthermore such claims could have an adverse impact on our reputation
Any actual defects or allegations of defects in products sold by us could result in adverse publicity and could harm our credibility or the credibility of the manufacturer which could adversely affect our business financial condition and results of operations Although we may have both indemnification rights against the manufacturers of many of the products we distribute and rights as an additional insured under the manufacturers insurance policies it is not certain that any manufacturer or insurer will be financially solvent and capable of making payment to any party suffering loss or injury caused by products sold by us or that all losses would be covered by such indemnification rights or insurance policies If we are forced to expend significant resources and time to resolve such claims or to pay material amounts to satisfy such claims there could be an adverse effect on our business financial condition and results of operations
We are subject to a number of federal state and local laws and regulations in the U S as well as applicable laws and regulations in each foreign marketplace in which we do business These laws and regulations govern among other things the composition packaging labeling and safety of the products we sell as well as the methods we use to sell
and import these products Non compliance with applicable laws and regulations of governmental authorities including the FDA and similar authorities in other jurisdictions by us or the manufacturers and fillers of the products sold by us could result in fines product recalls and enforcement actions and could otherwise restrict our ability to market certain products which could adversely affect our business financial condition and results of operations
In addition the laws and regulations applicable to us or manufacturers of the products sold by us may become more stringent Failure to comply with these new and existing regulations could result in significant fines or damages in addition to costs and expenses necessary to defend claims related thereto Manufacturers may try to recover some or all of any increased cost of compliance by increasing the prices at which we purchase products and we may not be able to recover some or all of such increased cost in our own prices to our customers We are also subject to state and local laws and regulations that affect our franchisor franchisee relationships Increased compliance costs and the loss of sales of certain products due to more stringent or new laws and regulations could adversely affect our business financial condition and results of operations
Climatologists predict that the long term effects of climate change and global warming will result in the increased frequency intensity and duration of weather events which could significantly disrupt supply chains potentially impacting our vendors raw material costs and the production of products we sell These weather events could also lead to an increased rate of temporary store closures and reduced customer traffic at our stores
Lastly there is increased focus including by governmental and non governmental organizations investors customers and consumers on these and other environmental sustainability matters including deforestation land use climate impact and recyclability or recoverability of packaging including plastic Our reputation could be damaged if we or others in our industry do not act or are perceived not to act responsibly with respect to our impact on the environment
Expectations from investors customers team members government agencies and other third parties concerning ESG reporting have increased and our ability to meet those evolving expectations is dependent on a variety of factors many of which are outside of our control including i cooperation from and access to sourcing vendors and other third parties that meet our standards ii access to consistent and reliable data iii evolving regulatory requirements affecting ESG standards or disclosures and iv the availability and cost of raw materials that meet and further our sustainability and ESG goals Negative customer perceptions regarding the safety and sourcing of the products we sell and the sufficiency and transparency of our reporting on ESG matters and events that give rise to actual potential or perceived compliance and social responsibility concerns could hurt our reputation result in lost sales cause our customers to seek alternative sources for their needs and make it difficult and costly for us to regain the confidence of our customers Furthermore costs associated with ESG initiatives may have an adverse impact on our business financial condition and operating results Our competitors ability to develop effective ESG practices and initiatives and any perceived failure or inadequacy of our own such initiatives may also have an adverse impact on our business financial condition and results of operations
We rely upon trade secrets and know how to develop and maintain our competitive position Our trademarks certain of which are material to our business are registered or legally protected in the U S Canada and other countries in which we operate The success of our business depends to a certain extent upon the value associated with our intellectual property rights We protect our intellectual property rights through a variety of methods including but not limited to applying for and obtaining trademark protection in the U S Canada and other countries throughout the world in which our business operates We also rely on trade secret laws in addition to confidentiality agreements with vendors employees consultants and others who have access to our proprietary information While we intend to vigorously protect our trademarks against infringement we may not be successful In addition the laws of certain
Furthermore the industry in which we operate is characterized by the need for a large number of copyrights trade secrets and trademarks and by frequent litigation based on allegations of infringement or other violations of intellectual property rights A third party may at any time assert that our products violate such party s intellectual property rights Successful intellectual property claims against us could result in significant financial liabilities and or prevent us from selling certain of our products In addition the resolution of infringement claims may require us to redesign our products to obtain licenses to use intellectual property belonging to third parties which may not be attainable on reasonable terms or to cease using the intellectual property altogether
Our operations are dependent upon our information technology systems which encompass all of our major business functions A substantial disruption in our information technology systems for any prolonged time period arising from for example system capacity limits from unexpected increases in our volume of business outages or delays in our service could result in delays in receiving inventory and supplies or filling customer orders and could adversely affect our customer service and relationships In addition our information technology systems may be vulnerable to damage or interruption from circumstances beyond our control including without limitation fire natural disasters power outages systems disruptions systems conversions security breaches cyberattacks phishing attacks viruses and or human error In any such event we could be required to make a significant investment to fix or replace our information technology systems and we could experience interruptions in our ability to service customers Such delays problems or costs may have a material adverse effect on our business financial condition and results of operations
We continuously need to improve and upgrade our systems and infrastructure while maintaining their reliability and integrity The expansion of our systems and infrastructure will require us to commit substantial financial operational and technical resources before the volume of our business increases with no assurance that the volume of business will increase The development and implementation of new systems and any other future upgrades to our systems and information technology may require significant costs and could divert our management s attention and other resources from our core business There are also no assurances that these new systems and upgrades will provide us with the anticipated benefits and efficiencies Some of our systems are proprietary and as a result our options are limited in seeking third party help with the operation and upgrade of those systems There can be no assurance that the time and resources our management will need to devote to operations and upgrades any delays due to the installation of any upgrade and customer issues therewith any resulting service outages or the impact on the reliability of our data from any upgrade or any legacy system will not have a material adverse effect on our business financial condition control environment or results of operations
As part of our operations we together with third parties acting on our behalf receive process and maintain sensitive and confidential information about our customers employees and other third parties Processing maintenance and transmission of information is a critical part of our business operations We have physical technical and procedural safeguards in place that are designed to protect information and protect against security and data breaches fraudulent transactions and other disruptive activities We believe that our security safeguards follow appropriate practices for prevention of security and data breaches and the mitigation of cybersecurity risks Despite these safeguards and our other security processes and protections our systems and processes may be vulnerable to security breaches and cyber attacks which are evolving and increasingly sophisticated such as denial of service ransomware phishing supply chain and social engineering attacks as well as to physical breach vandalism sabotage user malfeasance viruses misplaced or lost data and inadvertent data disclosure by third parties or us
A significant data security breach including misappropriation of our customers or employees confidential information could result in significant costs to us which may include among others potential liabilities to payment card networks for reimbursements of credit card fraud and card reissuance costs including fines and penalties potential liabilities from governmental or third party investigations proceedings or litigation legal forensic and consulting fees and expenses costs and diversion of management attention required for investigation and remediation actions and the negative impact on our reputation and loss of confidence of our customers suppliers and others any of which could have a material adverse impact on our business financial condition and operating results Relatedly
if our third party suppliers or vendors are subject to cyber attacks data breaches other security incidents or disruption of information technology systems or software such events could expose us to liability damage our reputation and have a material adverse effect on our business While we carry insurance that would mitigate losses in connection with security breaches and cyber incidents insurance may be insufficient to fully compensate us for potentially significant losses
We understand that the techniques used by criminals to obtain unauthorized access to sensitive data change frequently and often are not recognized until launched against a target accordingly we may be unable to anticipate these techniques or implement adequate preventative measures The failure to promptly detect determine the extent of and appropriately respond to a significant data security breach could have a material adverse impact on our business financial condition and operating results
We are subject to an evolving body of federal state and non U S laws rules regulations guidelines and principles regarding data privacy and security the scope and impact of which are uncertain Several governments as well as the European Union EU have regulations dealing with the collection and use of personal information obtained from their citizens regulators are also globally imposing greater monetary fines for privacy violations and there is an increase in private rights of action In 2023 the California Privacy Rights Act CPRA expanded consumer privacy rights and extended application of the California Consumer Privacy Act to our California employees A number of other U S states have enacted consumer privacy laws that are expected to take effect in 2024 and beyond or have revived existing state laws with new meaning potentially subjecting retailers to privacy based class action lawsuits
We also expect to see rapid changes and corresponding regulator and private rights of action related to the use of text messaging to communicate with customers the collection and use of biometric data and dark patterns We continue to monitor our compliance with the General Data Protection Regulation GDPR of both the EU which regulates how organizations handle the personal data of both EU citizens and individuals residing in the EU and the UK the latter of which has been applicable post Brexit Data privacy is and may continue to be a rapidly evolving area of law Any potential inability to comply with such laws rules regulations guidelines and principles or to quickly adapt our practices to reflect them as they develop could potentially subject us to significant fines damages liabilities and reputational harm which could have a material adverse effect on our business prospects results of operations financial condition and cash flows
Outstanding borrowings under our 500 million asset based senior secured loan facility ABL facility and our term loan B facility term loan B are subject to variable rates of interest and therefore expose us to interest rate risk If interest rates were to increase our debt service obligations on any variable rate indebtedness would increase even if the principal amount borrowed remained the same and our net earnings and cash flows would correspondingly decrease We are currently party to and may enter into in the future additional derivative instruments such as interest rate caps and swaps to reduce our exposure to changes in interest rates on our term loan B We may not maintain derivative instruments with respect to all of our variable rate indebtedness however and any instruments we enter into may not fully mitigate our interest rate risk
Each of our ABL facility term loan B and senior notes contain certain covenants and restrictions with which we are required to comply Our ability to comply with these covenants and restrictions may be affected by economic financial and industry conditions beyond our control The breach of any of these covenants and restrictions could result in a default under the relevant governing instruments which could permit the applicable lenders or senior note holders as the case may be to declare all amounts outstanding thereunder to be due and payable together with accrued and unpaid interest If we are unable to repay debt lenders holding secured obligations such as the lenders under the ABL
facility could proceed against the collateral that secures such unpaid debt In any such case our subsidiaries may be unable to borrow under the ABL facility and may not be able to repay the amounts due under the senior notes and the term loan B This could result in serious consequences to our financial condition and results of operations and could cause us to become bankrupt or insolvent
In addition we and our subsidiaries may incur substantial additional indebtedness in the future As of September 30 2024 our ABL facility provided us commitments for additional borrowings of up to approximately 482 5 million subject to borrowing base limitations outstanding letters of credit and limitations on cash hoarding above certain balances once utilized If new debt is added to our current debt levels the related risks we face would increase and we may not be able to meet all our debt obligations
Our Company is committed to protecting the privacy and security of customer information and the integrity of our information technology systems We have developed and implemented a cybersecurity risk management program Cybersecurity Program that is tailored to address specific risks in the retail industry using a flexible approach informed by our deep understanding of attacker methodologies targeted assets and industry best practices The Cybersecurity Program is intended to protect the confidentiality availability and integrity of our information and critical systems by continually monitoring assessing identifying and mitigating cybersecurity risks The Cybersecurity Program is part of our integrated risk management process and includes but is not limited to the following features
In addition we have a written cybersecurity incident response plan Response Plan that is reviewed and updated if necessary at least annually The Response Plan includes a cross functional incident response team comprised of various key executive representatives from different departments in our organization such as our Chief Information Security Officer CISO and General Counsel that are tasked with assessing the scope nature and potential impact of incidents Findings are reported to the Chief Executive Officer CEO Chief Financial Officer CFO our Board and the Disclosure Committee the latter of which is comprised of senior representatives from our finance accounting internal audit and legal departments under the supervision of the CEO and CFO
We also regularly engage third parties to perform assessments on the Cybersecurity Program including an annual self assessed risk review facilitated by an independent third party where we evaluate various cybersecurity domains and control areas and benchmark our program against industry peers Additionally we conduct annual third party penetration tests focused on our highest risk areas globally providing insights into potential vulnerabilities These
From time to time we experience cybersecurity threats and incidents As of the date of this Annual Report we have not identified any instances that have occurred in the current year or in prior years that would have a material impact on our Company or on our results of operation or financial position For more information related to our cybersecurity risks see Item 1A Risk Factors Regulatory Legal and Cybersecurity Risks within this annual report
Our Board understands the critical importance of managing evolving risks associated with cybersecurity threats The Board has responsibility for overseeing risks related to the cybersecurity threat landscape including data protection and security breach readiness Our CISO reports directly to the Chief Information Officer and is responsible for the operation of our Cybersecurity Program Our CISO brings over 26 years of experience in information security including the last 12 years as a Chief Information Security Officer in the retail industry With a diverse background in both industry and consulting our CISO has led major security programs implementing practical strategies to protect critical data and systems
On at least a quarterly basis the CISO delivers a detailed report to the full Board including Board member Erin Nealy Cox on data protection and cybersecurity matters Topics covered by these reports include but are not limited to risk identification and management strategies cybersecurity strategy and governance structure consumer data protection the Company s ongoing risk mitigation activities learnings from data security incidents of peer companies results of third party assessments and testing updates on annual associate training and other specific training initiatives Ms Nealy Cox is an independent member of our Board a cybersecurity expert and a former federal prosecutor with deep expertise in information security issues and board governance She is a partner at Kirkland Ellis LLP in its Government Regulatory and Internal Investigations Group and was executive managing director at Stroz Friedberg a cybersecurity and investigation consulting firm where she ultimately led the firm s incident response business from 2003 2016 In 2017 she served briefly as senior advisor to McKinsey Company in the firm s cybersecurity and risk practice
Substantially all of our stores and a number of our warehouse and remote office locations are leased while our corporate headquarters in Denton Texas see below for more information and three of our warehouses distribution centers are owned The average store lease is for a term of five years with customary renewal options The following table provides the number of stores per state in the U S and certain international locations as of September 30 2024
We are involved from time to time in various claims administrative proceedings and lawsuits incidental or related to the conduct of our business which may range from single plaintiff to class action litigation We carry insurance coverage in such amounts in excess of our self insured retention as we believe to be reasonable under the circumstances and may or may not cover any or all of our liabilities in respect of these matters Although the ultimate disposition of these claims and proceedings cannot be predicted with certainty we do not currently believe the ultimate resolution of these matters will have a material adverse impact on our consolidated financial position cash flows or results of operations However there can be no assurances that future adverse judgments and costs would not be material to our financial position cash flows or results of operations for a particular period See Note 10 in the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report for additional information on legal proceedings
We have not declared or paid dividends at any time during the two fiscal years prior to the date of this Annual Report We currently anticipate we will retain future earnings to support investments in our business to repay outstanding debt or to return capital to shareholders through share repurchases Any determination to pay dividends will be made at the discretion of our Board and will depend on our financial condition results of operations contractual restrictions including under our debt agreements and instruments cash requirements and other factors our Board deems relevant
The following graph illustrates the five year comparative total return among Sally Beauty Holdings Inc the S P 500 Index S P 500 and the Dow Jones U S Specialty Retailers Index DJ US Specialty Retailers assuming 100 was invested on September 30 2019 and dividends if any were reinvested The DJ US Specialty Retailers is a non managed index and provides a comprehensive view of issuers including our common stock that are primarily in the U S retail sector
The following section discusses management s view of Sally Beauty s financial condition and results of operations for fiscal year 2024 compared to fiscal year 2023 See Item 7 Management s Discussion and Analysis of Financial Condition and Results of Operations in Part II of our Annual Report on Form 10 K for the fiscal year ended September 30 2023 for a discussion of the financial condition and results of operations for fiscal year 2023 compared to fiscal year 2022 This section should be read in conjunction with the audited consolidated financial statements of Sally Beauty and the related notes included elsewhere in this Annual Report This Management s Discussion and Analysis of Financial Condition and Results of Operations section may contain forward looking statements See Cautionary Notice Regarding Forward Looking Statements and Risk Factors for a discussion of the uncertainties risks and assumptions associated with these forward looking statements that could cause results to differ materially from those reflected in such forward looking statements
Recent global inflationary pressures have slowed from the highs experienced in the past few years but they continue to influence consumer and stylist shopping behavior as well as the cost for products and services While inflation eased our customers have inflation fatigue and remain price sensitive Inflationary pressures have also impacted wages especially among retail and hourly employees as we have experienced an increase in our labor costs in order to attract and retain associates Within our SBS business we adapted our promotional strategy to be more focused on the promotions that matter to the customer and we saw improvements in customer frequency Within our BSG business we saw our stylists respond to big promotional events but also to newness and innovation in the assortment
We continue to monitor inflationary challenges and implement measures to help mitigate their impacts including managing our inventory levels to reduce out of stock items adjusting our promotional activities optimizing our store base and expanding our partnerships with delivery service providers including with DoorDash and Instacart marketplaces Although these initiatives have helped mitigate ongoing macro headwinds we cannot reasonably predict the long term effects of inflation
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 from e commerce revenue Additionally comparable sales include sales to franchisees and full service sales Our comparable sales amounts exclude the effect of changes in foreign exchange rates and sales from stores relocated until 14 months after the relocation Revenue from acquired stores is 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
SBS s net sales decrease was primarily driven by lower comparable sales and the impact of store closures pursuant to the Plan Comparable sales decreased 23 8 million resulting from store closures under the Plan however a significant portion of those lost sales were recaptured at other SBS locations These decreases were partially offset by a favorable impact from foreign currency exchange rates SBS s comparable sales decline was a result of fewer transactions partially offset by growth in our average unit retail driven by inflationary impacts and pricing leverage
SBS SBS s gross profit decrease was driven by lower net sales partially offset by a higher gross margin SBS s gross margin improvement was primarily due to lower distribution and freight costs from supply chain efficiencies and higher product margins partially offset by unfavorable fixed cost absorption
SBS SBS s SG A expenses increased 16 4 million or 1 8 to 923 6 million for fiscal year 2024 which includes the unfavorable impact from foreign exchange rates of 3 8 million due to the weakening of the U S Dollar compared to currencies in our foreign operations As a percentage of SBS net sales SG A for fiscal year 2024 was 43 8 compared to 42 4 for fiscal year 2023 This increase as a percentage of sales was primarily due to higher labor and other compensation related expenses rent expense depreciation expense and advertising expense
BSG BSG s SG A expenses increased 2 8 million or 0 6 to 454 0 million for fiscal year 2024 and includes a favorable impact from foreign exchange rates of 2 5 million As a percentage of BSG net sales SG A for fiscal year 2024 was 28 2 compared to 28 4 for fiscal year 2023 This decrease was driven primarily by higher net sales and lower delivery expense
The decrease in restructuring expenses was primarily due to the lapping of expenses that were incurred in connection with the Plan in the prior year totaling 17 2 million See Note 17 in the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report for more information on our restructuring plans
The increase in interest expense was primarily due to the impacts of higher interest rates and debt extinguishment costs partially offset by lower average outstanding borrowings on our ABL facility during the current year Additionally our interest rate swap helped mitigate some of the impacts from higher interest rates on a portion of our term loan B
For fiscal years 2024 and 2023 our effective tax rate was 25 6 and 26 8 respectively The decrease in our effective tax rate was primarily due to additional taxes and interest recorded in the prior fiscal year in connection with the one time transition tax on unrepatriated foreign earnings Repatriation Tax related to fiscal year 2018 See Note 15 Income Taxes for more information on our effective tax rate
Our principal sources of liquidity are cash from operations cash and cash equivalents and borrowings under our ABL facility A substantial portion of our liquidity needs arise from funding the costs of our operations working capital capital expenditures and debt servicing Additionally under our share repurchase program see below for more details we will from time to time repurchase shares of our common stock on the open market to return value to our shareholders At September 30 2024 we had 590 5 million in our liquidity pool which includes amounts available for borrowings under our ABL facility of 482 5 million and cash and cash equivalents of 108 0 million Based upon the current level of operations and anticipated growth we anticipate existing cash balances excluding certain amounts permanently invested in connection with foreign operations as well as cash expected to be generated by operations and funds available under the ABL facility will be sufficient to fund working capital requirements potential acquisitions anticipated capital expenditures including information technology investments and store projects and service our debt obligations over the next 12 months and beyond
Our working capital current assets less current liabilities increased 63 9 million to 712 6 million at September 30 2024 compared to 648 7 million at September 30 2023 The increase in our working capital was driven by higher inventory balances as a result of expanded distribution rights in BSG and vendor price increases the impacts of assets held for sale and the timing of account payables income tax payables and vendor receivables included in accounts receivable other These impacts were partially offset by a decrease in cash and cash equivalents and timing of lease renewals The ratio of current assets to current liabilities was 2 20 to 1 00 at September 30 2024 compared to 2 12 to 1 00 at September 30 2023
During the fiscal years 2024 and 2023 we repurchased and subsequently retired approximately 5 1 million shares and 1 5 million shares of our common stock under our share repurchase program at a cost of 60 0 million and 15 0 million respectively excluding the impact of excise taxes on share repurchases Share repurchases are funded primarily with cash from operations and occasionally with borrowings under the ABL facility As of September 30 2024 we had approximately 520 8 million of additional share repurchase authorization remaining under our Share Repurchase Program which expires September 30 2025
The slight decrease in net cash provided by operating activities for fiscal year 2024 compared to fiscal year 2023 was primarily driven by higher inventory purchases fewer cash receipts from customers and the timing of vendor and manufacturing allowances partially offset by the timing of tax and interest payments and the impact of lease contract termination and severance payments in connection with the Plan in the prior year
The increase in net cash used by investing activities for fiscal year 2024 compared to fiscal year 2023 was primarily due to higher capital expenditures partially offset by lower cash used for acquisitions During fiscal year 2024 we had total capital expenditures of approximately 94 7 million excluding amounts paid in connection with the prior year primarily in connection with investments in technology and store leasehold improvements
At September 30 2024 we had 994 0 million in outstanding debt excluding finance lease obligations unamortized debt issuance costs and discounts in the aggregate of 8 7 million Our debt consists of 600 0 million in 2032 Senior Notes outstanding and 394 0 million remaining on our term loan B At September 30 2024 there were no outstanding borrowings under our ABL facility 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 debt servicing and occasionally share repurchases Amounts drawn on our ABL facility are generally paid down with cash provided by our operating activities During fiscal year 2024 the weighted average interest rate on our borrowings under the ABL facility was 7 25
Our 2032 Senior Notes were issued by our wholly owned subsidiaries Sally Holdings LLC and Sally Capital Inc the Issuers The notes are unsecured debt instruments guaranteed by us and certain of our wholly owned domestic subsidiaries together the Guarantors and have certain restrictions on the ability of our subsidiaries to make certain restrictive payments to Sally Beauty The guarantees are joint and several and full and unconditional Certain other subsidiaries including our foreign subsidiaries do not serve as guarantors
The information contained in the table above with regards to our long term debt obligations is based on the current terms of such debt obligations and does not reflect any assumptions about our ability or intent to refinance any of our debt either on or before their maturity In the event we refinance some or all of the debt either on or before maturity actual payments for some of the periods shown may differ materially from the amounts reported herein In addition other future events including potential increases in interest rates could cause actual payments to differ materially from these amounts
The preparation of our consolidated financial statements in accordance with generally accepted accounting principles in the United States GAAP requires us to make estimates judgments and assumptions that affect the reported amounts of assets liabilities revenues expenses and disclosures Actual results could differ from the estimates and assumptions used which could have a material impact on financial statements We believe the following are our most critical accounting estimates that require subjective judgments estimates and assumptions
We deem cash consideration received from a vendor to be a reduction of the cost of goods sold unless it is in exchange for an asset or service or a reimbursement of a specific incremental identifiable cost incurred by us in selling the vendor s products The majority of cash consideration we receive is considered to be a reduction of the cost of inventory and a subsequent reduction in cost of goods sold as the related products are sold We consider the facts and circumstances of the various contractual agreements with vendors in order to determine the appropriate classification of amounts received in our consolidated statements of earnings We record cash consideration expected to be received from vendors in accounts receivables other when earned and at the amount we believe will be collected These receivables could be significantly affected if the actual amounts subsequently collected differ from our expectations Historically adjustments between the amount recorded and the amount collected have not had a material impact on our results of operations
We record income tax provisions in our consolidated financial statements based on an estimate of current income tax liabilities The development of these provisions requires judgments about tax positions potential outcomes and timing If we prevail in tax matters for which provisions have been established or are required to settle matters in excess of established provisions our effective tax rate for a particular period could be significantly affected
Additionally deferred income taxes are recognized for the future tax consequences attributable to differences between our financial statement carrying amounts of assets and liabilities and their respective tax bases Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are estimated to be recovered or settled We believe it is more likely than not that our results of operations in the future will generate sufficient taxable income to realize our deferred tax assets net of the valuation allowance currently recorded We have recorded a valuation allowance to account for uncertainties regarding the recoverability of certain deferred tax assets primarily foreign loss carryforwards and tax credit carryforwards In the future if we determine certain deferred tax assets will not be realizable the related adjustments could significantly affect our effective tax rate at that time An estimated tax benefit related to an uncertain tax position is recorded in our consolidated financial statements only after determining a more likely than not probability that the uncertain tax position will withstand challenge if any from applicable taxing authorities
We review long lived assets including operating lease assets for impairment whenever events or circumstances indicate the carrying amount of an asset may not be fully recoverable based on estimated undiscounted future cash flows Long lived assets are reviewed at the lowest level of identifiable cash flows which typically is at the store level In assessing for impairment we determine the fair value of each individual store by discounting projected future cash flows There are certain estimates and assumptions used to arrive at estimated future cash flows including projected earnings and growth rates The carrying amount of a long lived asset or asset group is considered impaired
When we commit to an exit plan of scale that we believe will result in the disposal of long lived assets prior to the end of their useful lives the approval of such plan may be considered a triggering event and therefore require a reassessment of asset carrying values for recoverability based on projected cash flows If the carrying values are not recoverable write downs or impairment charges may be required to bring carrying values of certain long lived assets including operating lease asset to fair value In connection with facility and store closures we typically will also incur charges for employee severance disposal costs and other expenses incurred with closures These charges are accrued and estimated based on facts and circumstances at the time Actual cash flows and expected payments could be significantly different from our estimates
We review goodwill and intangible assets for impairment annually or when events or circumstances indicate it is more likely than not that the value of the asset may be impaired In assessing these types of assets for impairment there are significant estimates and assumptions used to determine the fair value including relevant market and economic conditions anticipated future revenues and cash flows royalty rates and discount rates
When assessing goodwill for impairment we may perform a qualitative assessment which evaluates macro economic conditions current and projected cash flows and other events or changes in circumstances to determine if a quantitative assessment is necessary During quantitative assessment we use a discounted cash flow model to determine an estimated fair value If it is determined that the fair value of a reporting unit is less than its carrying value an impairment charge will be recorded to bring the carrying value down to its fair value
During fiscal year 2024 we determined that no triggering events had occurred as both internal and external facts and circumstances including revenues in fiscal year 2024 versus prior projections and prior weighted average cost of capital continued to see improvement from the end of September 2023 At the end of September 2023 we determined that a triggering event had occurred due to the decline in the Company s share price and market capitalization at the end of fiscal year 2023 among other factors As a result we conducted a quantitative assessment at September 30 2023 and determined that no impairment existed for our SBS or BSG reporting units
Like goodwill our indefinite lived intangible assets are tested for impairment by comparing the fair value of each asset to its carrying value but only if a triggering event exists As of September 30 2024 our indefinite lived assets were comprised of only trade names To determine the fair value of each trade name we use the relief from royalty method which estimates what a third party would be willing to pay in royalties to receive a benefit from the use of the asset If it is determined the asset s fair value is less than its carrying value then an impairment charge is recorded to reduce the carrying value down to its fair value No impairment losses were recognized in fiscal years 2024 2023 or 2022
As a multinational corporation we are subject to certain market risks including risks resulting from our exposure to foreign currency fluctuations changes in interest rates and government actions We consider a variety of practices to manage these market risks including when deemed appropriate the use of derivative financial instruments Currently we do not purchase or hold and are restricted by our debt and credit agreements from engaging in any derivative instruments for speculative or trading purposes
We are exposed to potential gains or losses from foreign currency fluctuations affecting net investments in subsidiaries including intercompany balances not permanently invested and earnings denominated in foreign currencies as well as exposure resulting from the purchase of merchandise by certain of our subsidiaries in a currency other than their functional currency and from the sale of products and services among the parent company and subsidiaries with a functional currency different from the parent or among subsidiaries with different functional currencies Our primary exposures are to changes in exchange rates for the U S dollar versus the Euro the British pound sterling the Canadian dollar and the Mexican peso In addition we currently have exposure to the currencies of certain countries located in South America and from time to time we may have exposure to changes in the exchange rate for the British pound sterling versus the Euro in connection with the sale of products and services among certain of our European subsidiaries For each of the fiscal years 2024 2023 and 2022 less than 20 of our consolidated net sales were made in currencies other than the U S dollar
A 10 increase or decrease in the exchange rates for the U S dollar versus the foreign currencies to which we have exposure would have impacted our consolidated net sales by approximately 1 8 in the fiscal year 2024 and it would have impacted our consolidated net assets by approximately 2 2 at September 30 2024
We are sensitive to interest rate fluctuations as a result of borrowings under our ABL facility and term loan B At September 30 2024 there were no outstanding borrowings under the ABL facility and the term loan B had 394 0 million in outstanding principal balance Additionally at September 30 2024 we held 200 million of SOFR denominated interest hedged under an interest rate swap agreement to help mitigate a portion of our interest rate risk At September 30 2024 a 1 0 percentage point interest rate increase would negatively impact our annual interest expense and cash flows by 1 9 million
We are exposed to credit risk in connection with certain assets primarily accounts receivable We provide credit to customers in the ordinary course of business and perform ongoing credit evaluations We believe our exposure of credit risk with respect to trade receivables is largely mitigated by our broad customer base and that our allowance for doubtful accounts is sufficient to cover customer credit risks at September 30 2024
Our derivative instruments expose us to credit risk in the event of default by a counterparty We believe such exposure is mitigated by the substantial resources and strong creditworthiness of the counterparties to our derivative instruments at September 30 2024 In the event a counterparty defaults in its obligation under our derivative instruments we could incur substantial financial losses However at the present time no such losses are deemed probable
Background Attached as exhibits to this Annual Report on Form 10 K are certifications of our CEO and our CFO which are required in accordance with Rule 13a 14 of the Exchange Act This Controls and Procedures section includes information concerning the controls and controls evaluation referred to in the certifications Part II Item 8 Financial Statements and Supplementary Data of this Annual Report on Form 10 K sets forth the attestation report of KPMG LLP our independent registered public accounting firm regarding its audit of our internal control over financial reporting This section should be read in conjunction with the certifications and the KPMG attestation report for a more complete understanding of the topics presented
Controls Evaluation and Related CEO and CFO Certifications Our management with the participation of our CEO and CFO conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Annual Report The controls evaluation was conducted by our Disclosure Committee comprised of senior representatives from our finance accounting IT security internal audit and legal departments under the supervision of our CEO and CFO
Certifications of our CEO and our CFO which are required in accordance with Rule 13a 14 of the Exchange Act are attached as exhibits to this Annual Report This Controls and Procedures section includes the information concerning the controls evaluation referred to in the certifications and it should be read in conjunction with the certifications for a more complete understanding of the topics presented
Limitations on the Effectiveness of Controls We do not expect our disclosure controls and procedures will prevent all errors and all fraud A system of controls and procedures no matter how well conceived and operated can provide only reasonable not absolute assurance that the objectives of the system are met Because of the limitations in all such systems no evaluation can provide absolute assurance that all control issues and instances of fraud if any within the Company have been detected Furthermore the design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions regardless of how unlikely Because of these inherent limitations in a cost effective system of controls and procedures misstatements or omissions due to error or fraud may occur and may not be detected
Scope of the Controls Evaluation The evaluation of our disclosure controls and procedures included a review of their objectives and design our implementation of the controls and procedures and the effect of the controls and procedures on the information generated for use in this Annual Report In the course of the evaluation we sought to identify whether we had any data errors control problems or acts of fraud and to confirm appropriate corrective action including process improvements was being undertaken if needed This type of evaluation is performed on a quarterly basis so conclusions concerning the effectiveness of our disclosure controls and procedures can be reported in our Quarterly Reports on Form 10 Q and our Annual Reports on Form 10 K Many of the components of our disclosure controls and procedures are also evaluated by our internal audit department by our legal department and by personnel in our finance organization The overall goals of these various evaluation activities are to monitor our disclosure controls and procedures on an ongoing basis and to maintain them as dynamic systems that change as conditions warrant
Conclusions regarding Disclosure Controls Based on the required evaluation of our disclosure controls and procedures our CEO and CFO have concluded that as of September 30 2024 we maintain disclosure controls and procedures that are effective in providing reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded processed summarized and reported within the time periods specified in the SEC s rules and forms and such information is accumulated and communicated to our management including our CEO and CFO as appropriate to allow timely decisions regarding required disclosure
Management of the Company including the CEO and CFO is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a 15 f under the Exchange Act Our internal control system was designed to provide reasonable assurance to management and our Board of Directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles
Management assessed the effectiveness of our internal control over financial reporting as of September 30 2024 using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission COSO in Internal Control Integrated Framework 2013 Based on this assessment management has concluded that as of September 30 2024 our internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles based on such criteria
The Board of Directors has adopted i Corporate Governance Guidelines and ii a Code of Business Conduct and Ethics that apply to directors officers and employees Copies of these documents and the committee charters are available on our website at www sallybeautyholdings com and are available in print to any person without charge upon written request to our Vice President of Investor Relations We intend to disclose on our website at www sallybeautyholdings com any substantive amendment to or waiver from a provision of the Code of Business Conduct and Ethics that applies to these individuals or persons performing similar functions
The additional information required by Item 10 of this Annual Report on Form 10 K is incorporated herein by reference from our Proxy Statement related to the 2025 Annual Meeting of Stockholders under the headings Proposal 1 Election of Directors Executive Officers Corporate Governance the Board and Its Committees and Report of the Audit Committee
The information required by Item 11 of this Annual Report on Form 10 K is incorporated herein by reference from our Proxy Statement related to the 2025 Annual Meeting of Stockholders under the headings Directors Compensation and Benefits Narrative Discussion of Director Compensation Table Compensation Discussion and Analysis Compensation and Talent Committee Report Executive Compensation and Compensation Committee Interlocks and Insider Participation
The information required by Item 13 of this Annual Report on Form 10 K is incorporated herein by reference from our Proxy Statement related to the 2025 Annual Meeting of Stockholders under the headings Corporate Governance the Board and Its Committees Compensation Committee Interlocks and Insider Participation and Related Party Transactions
Amended and Restated Credit Agreement dated July 6 2017 among the Borrowers the Guarantors the Lenders party thereto the Administrative Agent the Collateral Agent the Syndication Agent and the Documentation Agent as such terms are defined therein which is incorporated herein by reference from Exhibit 4 2 to the Company s Current Report on Form 8 K filed on July 6 2017
First Amendment to Amended and Restated Credit Agreement dated April 15 2020 among the Borrowers the Parent Guarantors the Administrative Agent the Syndication Agent the Documentation Agent and the Lenders party thereto as such terms are defined therein which is incorporated herein by reference from Exhibit 4 1 to the Company s Current Report on Form 8 K filed on April 16 2020
Second Amendment to Amended and Restated Credit Agreement dated September 2 2020 among the Borrowers the Guarantors the Administrative Agent the Collateral Agent the Canadian Agent and the Lenders party thereto as such terms are defined therein which is incorporated herein by reference from Exhibit 4 1 to the Company s Current Report on Form 8 K filed on September 3 2020
Third Amendment to Amended and Restated Credit Agreement dated May 11 2021 among the Borrowers the Guarantors the Administrative Agent the Collateral Agent the Canadian Agent and the Lenders party thereto as such terms are defined therein which is incorporated herein by reference from Exhibit 4 13 to the Company s Annual Report on Form 10 K A filed on December 8 2021
Fourth Amendment to Amended and Restated Credit Agreement dated April 19 2023 among the Borrowers the Parent Guarantors the Administrative Agent the Syndication Agent the Documentation Agent and the Lenders party thereto as such terms are defined therein which is incorporated herein by reference from Exhibit 10 2 to the Company s Quarterly Report on Form 10 Q filed on August 3 2023
Credit Agreement dated as of February 28 2023 by and among Sally Holdings LLC Sally Capital Inc Bank of America N A as Administrative Agent and Collateral Agent and the lenders and other parties which is incorporated herein by reference from Exhibit 4 1 to the Company s Current Report on Form 8 K filed on March 1 2023
First Refinancing Amendment to Credit Agreement dated as of September 13 2023 by and among Sally Holdings LLC Sally Capital Inc Bank of America N A as Administrative Agent and Collateral Agent and the lenders and other parties which is incorporated herein by reference from Exhibit 4 9 to the Company s Annual Report on Form 10 K filed on November 16 2023
Fifth Supplemental Indenture dated as of February 27 2024 by and among Sally Holdings LLC Sally Capital Inc the guarantors listed therein and Computershare Trust Company N A which is incorporated herein by reference from Exhibit 4 2 from the Company s Current Report on Form 8 K filed on February 27 2024
Second Refinancing Amendment to Credit Agreement dated as of June 14 2024 by and among Sally Holdings LLC Sally Capital Inc Sally Beauty Holdings Inc Sally Investment Holdings LLC Bank of America N A as Administrative Agent and Collateral Agent and the lenders and other parties thereto which is incorporated by reference from Exhibit 4 2 from the Company s Quarterly Report on Form 10 Q filed on August 8 2024
Tax Sharing Agreement dated as of November 16 2006 made and entered into by and among Sally Beauty Holdings Inc Sally Investment Holdings LLC and Sally Holdings LLC which is incorporated herein by reference from Exhibit 10 14 of the Quarterly Report on Form 10 Q of Sally Holdings LLC and Sally Capital Inc filed on August 29 2007
Form of Severance Agreement between each of Mark G Spinks and the Company effective July 31 2015 Scott C Sherman and the Company effective October 1 2017 Marlo Cormier and the Company effective April 9 2020 and Denise Paulonis and the Company effective October 1 2021 which is incorporated herein by reference from Exhibit 10 3 to the Company s Current Report on Form 8 K filed on November 5 2012
2023 Form of Performance Unit Award Agreement in connection to FY24 FY25 and FY26 Adjusted Operating Income pursuant to the Sally Beauty Holdings Inc 2019 Omnibus Incentive Plan which is incorporated herein by reference from Exhibit 10 20 to the Company s Annual Report on Form 10 K filed on November 16 2023
The following financial information from our Annual Report on Form 10 K for the fiscal year ended September 30 2024 formatted in iXBRL Inline Extensible Business Reporting Language i the Consolidated Balance Sheets ii the Consolidated Statements of Earnings iii the Consolidated Statements of Comprehensive Income iv the Consolidated Statements of Cash Flows v Consolidated Statements of Stockholders Equity and vi the Notes to Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Sally Beauty Holdings Inc and subsidiaries the Company as of September 30 2024 and 2023 the related consolidated statements of earnings comprehensive income stockholders equity and cash flows for each of the years in the three year period ended September 30 2024 and the related notes collectively the consolidated financial statements We also have audited the Company s internal control over financial reporting as of September 30 2024 based on criteria established in Internal Control Integrated Framework 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission
In our opinion the consolidated financial statements referred to above present fairly in all material respects the financial position of the Company as of September 30 2024 and 2023 and the results of its operations and its cash flows for each of the years in the three year period ended September 30 2024 in conformity with U S generally accepted accounting principles Also in our opinion the Company maintained in all material respects effective internal control over financial reporting as of September 30 2024 based on criteria established in Internal Control Integrated Framework 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission
The Company s management is responsible for these consolidated financial statements for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management s Annual Report on Internal Control over Financial Reporting Our responsibility is to express an opinion on the Company s consolidated financial statements and an opinion on the Company s internal control over financial reporting based on our audits We are a public accounting firm registered with the Public Company Accounting Oversight Board United States PCAOB and are required to be independent with respect to the Company in accordance with the U S federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB
We conducted our audits in accordance with the standards of the PCAOB Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement whether due to error or fraud and whether effective internal control over financial reporting was maintained in all material respects
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements whether due to error or fraud and performing procedures that respond to those risks Such procedures included examining on a test basis evidence regarding the amounts and disclosures in the consolidated financial statements Our audits also included evaluating the accounting principles used and significant estimates made by management as well as evaluating the overall presentation of the consolidated financial statements Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting assessing the risk that a material weakness exists and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk Our audits also included performing such other procedures as we considered necessary in the circumstances We believe that our audits provide a reasonable basis for our opinions
A company s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles A company s internal control over financial reporting includes those policies and procedures that 1 pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company 2 provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company and 3 provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition use or disposition of the company s assets that could have a material effect on the financial statements
Because of its inherent limitations internal control over financial reporting may not prevent or detect misstatements Also projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that 1 relates to accounts or disclosures that are material to the consolidated financial statements and 2 involved our especially challenging subjective or complex judgments The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements taken as a whole and we are not by communicating the critical audit matter below providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates
As discussed in Note 1 to the consolidated financial statements accounts receivable other consists primarily of amounts due from the Company s vendors under contractual agreements collectively referred to as vendor rebates and concessions These agreements are often specific to a particular product or promotion for a specified period of time which results in a high volume of agreements each with potentially non standardized terms and conditions governing how the rebate is earned and calculated Therefore the inputs used to calculate the vendor rebates and concessions which can include financial and non financial data from multiple sources will vary depending on the specific terms of the agreements Accounts receivable other was 58 6 million as of September 30 2024
The following are the primary procedures we performed to address this critical audit matter We evaluated the design and tested the operating effectiveness of certain internal controls over the Company s process to calculate vendor rebates and concessions This included controls over the derivation of key inputs and the evaluation of the contractual terms of the agreements For a sample of the vendor rebates and concessions we evaluated the nature and source of the inputs used and the terms of the contractual agreements We recalculated the amount of the receivable based on the inputs and the terms of the agreements We also confirmed outstanding vendor receivables directly with the Company s vendors and compared the confirmed amount to the amount previously recognized by the Company for a sample of vendor rebates and concessions
In order to present our financial statements in conformity with GAAP we are required to make certain estimates and assumptions that impact our financial statements and supplementary disclosures These estimates may use forecasted financial information based on reasonable information available however they 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
Trade accounts receivable consist of credit extended directly to certain customers who meet our credit requirements in the ordinary course of business and are stated at their carrying values net of an allowance for doubtful accounts Our allowance is determined by estimating expected credit losses based on historical trends At September 30 2024 and 2023 our allowance for doubtful accounts was 0 8 million and 1 1 million respectively Our allowance for doubtful accounts is regularly reviewed on the basis of our historical collection data and current customer information Customer account balances are written off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote
Inventory is stated at the lower of weighted average cost or net realizable value Inventory cost reflects actual product costs the cost of transportation to our distribution centers buying costs and certain shipping and handling costs such as freight from the distribution centers to the stores and handling costs incurred at the distribution centers When assessing the net realizable value of inventory we consider several factors including estimates of future demand for our products historical turn over rates the age and sales history of the inventory and historic and anticipated changes in stock keeping units
Physical inventory counts are performed at substantially all stores and significant distribution centers at least annually Upon completion of physical inventory counts our consolidated financial statements are adjusted to reflect actual quantities on hand Between physical counts we estimate inventory shrinkage based on our historical experience We have policies and processes in place that are intended to minimize inventory shrinkage
Cost of goods sold includes actual product costs the cost of transportation to our distribution centers operating costs associated with our distribution centers including employee compensation expense depreciation and amortization rent and other occupancy related expenses vendor rebates and allowances inventory shrinkage and certain shipping and handling costs such as freight from the distribution centers to the stores All other shipping and handling costs
We deem cash consideration received from a supplier to be a reduction of the cost of inventory purchased unless it is in exchange for an asset or service or a reimbursement of a specific incremental identifiable cost incurred by us in selling the vendor s products The majority of cash consideration we receive is considered to be a reduction of inventory and a subsequent reduction in cost of goods sold as the related products are sold
Substantially all of our leases are operating leases and relate primarily to retail stores and warehousing properties with lease terms typically five to ten years Some of our leases include options to extend the agreement by a certain number of years typically five years At the lease commencement date an operating lease liability and related operating lease asset are recognized and typically do not assume renewals unless we are reasonably certain that we will exercise the option
The operating lease liabilities are calculated using the present value of lease payments The discount rate used is either the rate implicit in the lease when known or our estimated incremental borrowing rate Our incremental borrowing rate for a lease is the rate of interest we would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms Because we do not generally borrow on a collateralized basis we derive an appropriate incremental borrowing rate using the interest rate we pay on our non collateralized borrowings adjusted for the amount of the lease payments the lease term and the effect of designating specific collateral with a value equal to the unpaid lease payments for that lease We apply the incremental borrowing rate on a portfolio basis given the impact of applying it on a lease by lease basis would be immaterial
Operating lease assets are valued based on the initial operating lease liabilities plus any prepaid rent and direct costs from executing the leases reduced by tenant improvement allowances and any rent abatement Operating lease assets are tested for impairment in the same manner as our long lived assets No material impairment losses were recorded during fiscal years 2024 or 2023 For fiscal year 2022 we recognized impairment loss in connection with our operating leases assets of 21 6 million in connection with the Plan and are included within restructuring on our consolidated statements of earnings Please see Note 17 Restructuring for more information on the Plan
Property and equipment are recorded at cost and depreciated using the straight line method over the estimated useful lives of the assets Leasehold improvements are depreciated over the lesser of the estimated useful lives of the assets or the term of the related lease including renewals considered reasonably assured Expenditures for maintenance and repairs are included in selling general and administrative expenses when incurred while expenditures for major renewals and improvements that substantially extend the useful life of an asset are capitalized
Depreciation expense for the fiscal years 2024 2023 and 2022 was 106 6 million 99 0 million and 95 9 million respectively and is included in selling general and administrative expenses or cost of goods sold if associated with our distribution centers in our consolidated statements of earnings No material impairments were recorded for fiscal years 2024 or 2023 During fiscal year 2022 we recognized an impairment loss of 3 3 million within restructuring on our consolidated statements of earnings in connection with the Plan See Note 17 Restructuring for more information on the Plan
In August 2024 our Board approved the sale of our corporate headquarters in Denton Texas At the end of September 30 2024 we had entered into an agreement with Denton County Texas to sell our corporate headquarters including furniture fixtures and some equipment currently on the premise In connection with the sale of the office we evaluated the disposal of these assets and determined these assets should be classified as held for sale As of September 30 2024 we reclassified the following amounts out of property and equipment net disposal group into other current assets on our consolidated balance sheets for fiscal year 2024 dollars in thousands
Long lived assets including operating lease assets and property and equipment and purchased intangibles subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be fully recoverable The recoverability of long lived assets and intangible assets subject to amortization is assessed by comparing the net carrying amount of each asset to the total estimated undiscounted future cash flows expected to be generated by the asset If the carrying amount of an asset exceeds its undiscounted future cash flows an impairment charge may be recognized for the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset using a discounted cash flow approach
When we commit to an exit plan of scale that we believe will result in the disposal of long lived assets prior to the end their useful lives the approval of such plan may be considered a triggering event and therefore require a reassessment of asset carrying values for recoverability based on projected cash flows If the carrying values are not recoverable write downs or impairment charges may be required to bring carrying values of certain long lived assets including operating lease asset to fair value
Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in a business combination Goodwill is tested for impairment at least annually as of January 31st and whenever events or changes in circumstances indicate its carrying amount may be less than its recoverable amount to determine whether or not it is more likely than not that the fair value of a reporting unit is less than its carrying amount Furthermore we considered potential triggering events each quarter including fluctuations of our stock price and borrowing rates in the debt markets
Components within the same operating segment are aggregated and deemed a single reporting unit if the components have similar economic characteristics As of September 30 2024 and 2023 our reporting units consisted of SBS and BSG We assign goodwill to the reporting unit which consolidates the acquisition
When assessing goodwill for impairment we may perform a qualitative assessment which evaluates macro economic conditions current and projected cash flows and other events or changes in circumstances to determine if a quantitative assessment is necessary In fiscal year 2023 we performed a quantitative assessment which indicated no impairment existed In fiscal year 2024 we performed a qualitative assessment We have not recorded any impairment charges related to goodwill in the current or prior fiscal years presented
Our intangible assets with indefinite lives consist of trade names acquired in business combinations or asset purchases Upon acquisition of these identifiable intangible assets we base our valuation on the information and assumptions available to us at the time of acquisition using income and market approaches to determine fair value These assets
are evaluated for impairment annually as of January 31st and whenever events or changes in circumstances indicate the asset s carrying amount may be less than its recoverable amount to determine whether or not it is more likely than not that the fair value of an indefinite lived intangible asset is less than its carrying amount When assessing intangible assets with indefinite lives for impairment we compare the fair value of each asset against its carrying value Fair value is based on the relief from royalty method We have not recorded any impairment charges related to indefinite lived intangibles in the current or prior fiscal years presented
We record an estimated liability for the ultimate cost of claims incurred and unpaid as of the balance sheet date which includes claims filed and estimated losses incurred but not yet reported We estimate the ultimate cost based on an analysis of our historical data and actuarial estimates These estimates are reviewed on a regular basis to ensure the recorded liability is adequate The current and long term portions of these liabilities are recorded at their present value and included in accrued liabilities and other liabilities in our consolidated balance sheets respectively
Substantially all of our revenue is derived through the sale of merchandise Revenue is recognized net of estimated sales returns and sales taxes We estimate sales returns based on historical data Additionally we have assessed all revenue streams for principal versus agent considerations and have concluded we are the principal for the vast majority of all our transactions
We sell merchandise through our company operated stores digital platforms to our franchisees and by using DSCs These sales generally have one single performance obligation and revenue is recognized at the point of sale or upon shipment of the merchandise whenever control of items sold transfers to the customer Shipping fees charged through digital channels are considered a separate performance obligation and are recognized in net sales while the related shipping cost is recognized in selling general and administrative expenses
The revenue from the sale of our gift cards is recognized at the time the gift card is used to purchase merchandise which is generally within one year from the date of purchase Our gift cards do not carry expiration dates or impose post sale fees Based on historical experience a certain amount of our gift cards will not be redeemed also referred to as gift card breakage We recognize revenue related to gift card breakage within net sales in our consolidated statements of earnings over time proportionately to historical redemption patterns The gift cards are issued and represent liabilities of either of our operating entities Sally Beauty Supply LLC or Beauty Systems Group LLC which are both limited liability companies formed in the state of Virginia
Our Sally Beauty Rewards Program in the U S and Canada enables customers to earn points based on their status for every dollar spent on qualifying SBS purchases The program is free to join and it provides our loyalty customers the ability to earn points on their SBS purchases that convert to Sally Beauty Rewards certificates when select thresholds are attained Points earned expire after twelve months of inactivity and certificates issued expire 30 days after earned Certificates generated from our rewards loyalty program provide a material right to customers and represent a separate performance obligation As such we defer revenue for future rewards on a standalone value per point net of estimated breakage based on historical data within accrued liabilities on our consolidated balance sheets
We have a multi year agreement with a third party bank the Bank to provide our customers a private label credit card program in the U S Under the agreement the Bank manages our customer s credit approval and credit card accounts while we facilitate credit applications and provide licensing to our brand and marketing services The Bank accepts all customer default risks associated with these accounts In connection with signing the agreement we received a refundable payment from the Bank that we recorded as deferred revenue within other liabilities on our consolidated balance sheets and is being recognize on a straight line basis over the initial term of the agreement into net sales in our consolidated statements of earnings
Pursuant to the agreement the Bank will contribute funding for the program marketing expenses and are recognized in net sales in our consolidated statements of earnings In addition we earn other immaterial amounts from the Bank including incentive payments for achieving performance targets and the activation of credit cards
Advertising costs relate mainly to digital and web advertising in store and traditional print advertisements customer relationship management trade shows and product education for salon professionals Advertising costs incurred in connection with print advertisements are expensed the first time the advertisement is run Other advertising costs are expensed when incurred Advertising costs were 68 4 million 65 4 million and 69 8 million for the fiscal years 2024 2023 and 2022 respectively and are included in selling general and administrative expenses in our consolidated statements of earnings
We measure the cost of services received from certain of our employees and Board of Directors in exchange for an award of equity instruments based on the fair value of the award on the date of grant which are expensed ratably over the vesting period except for awards issued to retirement eligible participants which are expensed on an accelerated basis We recognize the impact of forfeitures as they occur Share based compensation expense is included in selling general and administrative expenses in our consolidated statements of earnings
We recognize deferred income taxes for the estimated future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are anticipated to be recovered or settled The effect on deferred taxes of a change in income tax rates is recognized in the consolidated statements of earnings in the period of enactment A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets to the amount expected to be realized unless it is more likely than not that such assets will be realized in full The estimated tax benefit of an uncertain tax position is recorded in our consolidated financial statements only after determining a more likely than not probability that the uncertain tax position will withstand challenge if any from applicable taxing authorities
The functional currency of each of our foreign operations is generally the respective local currency Balance sheet accounts are translated into U S dollars our reporting currency at the rates of exchange in effect at the balance sheet date while the results of operations and cash flows are generally translated using average exchange rates for the periods presented Individually material transactions if any are translated using the actual rate of exchange on the transaction date The resulting translation adjustments are recorded as a component of accumulated other comprehensive loss in our consolidated balance sheets
Foreign currency transaction gains or losses including changes in the fair value i e marked to market adjustments of certain foreign exchange contracts we hold are included in selling general and administrative expenses in our consolidated statements of earnings when incurred and were not significant in any of the periods presented in the accompanying consolidated financial statements
In November 2023 the Financial Accounting Standards Board FASB issued accounting standards update ASU No 2023 07 Segment Reporting Topic 280 Improvements to Reportable Segment Disclosures to enhance segment disclosures for annual and interim consolidated financial statements including significant segment expenses that are regularly provided to the chief operating decision maker CODM For public companies the amendments in the update are effective for fiscal years beginning after December 15 2023 and interim periods within fiscal years beginning after December 15 2024 Early adoption is permitted The Company is currently evaluating the impact of the adoption on its financial statement disclosures
In December 2023 the FASB issued ASU No 2023 09 Income Taxes Topic 740 Improvements to Income Tax Disclosures to expand disclosures in an entity s income tax rate reconciliation table and the disaggregation of taxes paid in U S and foreign jurisdictions For public business entities the amendments in this update are effective for annual periods beginning after December 15 2024 Early adoption is permitted We are currently evaluating the impact of this update but we do not expect the update to impact our consolidated results of operations or financial position
Our financial instruments consist of cash equivalents trade and other accounts receivable accounts payable derivative instruments including foreign exchange contracts and interest rate caps and debt The carrying amounts of cash equivalents trade and other accounts receivable and accounts payable approximate their respective fair values due to the short term nature of these financial instruments
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
Level 2 Unadjusted quoted prices in active markets for similar assets or liabilities or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active or inputs other than quoted prices that are observable for the asset or liability or inputs that are derived principally from or corroborated by observable market data and
We reduced common stock and additional paid in capital in the aggregate by these amounts However as required by GAAP to the extent share repurchase amounts exceeded the balance of additional paid in capital prior to such repurchases we recorded the excess in accumulated stockholders equity on our consolidated balance sheets Share repurchases are typically funded from either cash from operations or borrowings under the ABL facility as appropriate
Our Sally Beauty Holdings Inc 2019 Omnibus Incentive Plan the Omnibus Plan allows us to grant awards to its employees up to 8 0 million shares of our common stock plus an additional number of shares based on the number of shares outstanding as of the beginning of the current plan that have subsequently been terminated expired unexercised cash settled cancelled forfeited or lapsed for any reason Currently we have awarded grants to employees and non employee directors under the terms of the Omnibus Plan
Performance based awards Our performance awards vest over three years upon the satisfaction of the employee service condition and our level of achievement with respect to a mix of certain specified performance targets For fiscal years 2024 2023 and 2022 we issued performance awards with a financial performance target based on the growth on adjusted consolidated operating income AOI for each of the next three years
For each performance award a grantee may earn from 0 to 200 of the original awarded amount Fair value of our performance awards related to the achievement of financial performance targets are based on our stock price on the date of grant During the fiscal years ended September 30 2024 2023 and 2022 the fair value of our performance awards was 8 49 12 04 and 17 40 respectively Expense is determined upon issuance and recognized based on projections of future performance and actual results
Market based awards In fiscal years 2024 2023 and 2022 we issued market based awards that vest over three years and are dependent on the level of achievement of relative total shareholder return rTSR against a group of peer companies measured over a three year period For each rTSR a grantee may earn from 0 to 200 of the original awarded amount The fair value was determined by using the Monte Carlo simulation model due to the award being subject to a market condition During fiscal years 2024 2023 and 2022 the fair value of our market based awards was 11 02 15 54 and 23 39 respectively Expense is determined upon issuance and is recognized regardless of whether the market performance target is achieved
Restricted stock Restricted stock awards RSA and restricted stock units RSU are valued using the closing market price of our common stock on the date of grant Expense is recognized ratably over the vesting period generally three years for RSAs and RSUs issued to employees and one year for RSUs issued to our independent directors An RSA award is an award of our shares that have full voting rights and dividend rights but are restricted with regard to sale or transfer These restrictions lapse over the vesting period RSUs are awarded to our independent directors who may elect upon receipt of such award to defer until a later date delivery of the shares of our common stock that would otherwise be issued on the vesting date RSUs granted to independent directors prior to the fiscal year 2012 are generally retained by the Company as deferred stock units that are not distributed until six months after the independent director s service as a director terminates
The expected life of options awarded represents the period of time such options are expected to be outstanding and is based on our historical experience The risk free interest rate is based on the zero coupon U S Treasury notes with a term comparable to the expected life of an award at the date of the grant Since we did not currently expect to pay dividends the dividend yield used for this purpose was 0
The weighted average fair value per share at the date of grant of the stock options awarded during the fiscal year 2022 was 8 12 No stock options were awarded during the fiscal years 2024 or 2023 The aggregate fair value of stock options vested during the fiscal years 2024 2023 and 2022 was 1 9 million 3 2 million and 2 5 million respectively
The aggregate intrinsic value of options exercised during the fiscal years 2024 2023 and 2022 was 0 7 million 1 4 million and 4 0 million respectively The total cash received during the fiscal years 2024 2023 and 2022 from option exercises was 1 8 million 1 9 million and 8 1 million respectively and the tax benefit realized for the tax deductions from these option exercises was 0 1 million 0 2 million and 0 8 million respectively
The following table reflects our other intangible assets excluding goodwill on our consolidated balance sheets Once an intangible becomes fully amortized the original cost and accumulated amortization is removed in the subsequent period As of September 30 2024 and 2023 we had the following in thousands
Our definite lived intangible assets are amortized on a straight line basis over the period that we expected an economic benefit typically over periods of three to ten years For fiscal years 2024 2023 and 2022 amortization expense related to intangible assets totaled 3 2 million 3 4 million and 4 1 million respectively and are included within selling general and administrative expenses on our consolidated statements of earnings
From time to time we are involved in various claims and lawsuits incidental to the conduct of our business in the ordinary course We do not believe that the ultimate resolution of these matters will have a material adverse impact on our consolidated financial position results of operations or cash flows
Liabilities for loss contingencies arising from claims assessments litigation fines penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated We have no significant liabilities for loss contingencies at September 30 2024 and 2023
In fiscal year 2023 we entered into a fourth amendment to our five year asset based senior secured loan facility the ABL facility with a syndicate of banks which has a revolving commitment of 500 0 million and a maturity date of the earlier of i May 11 2026 or ii the date which is ninety one 91 days prior to the maturity date of any indebtedness arising under the TLB 2030 as defined below and any refinancing thereof The interest rate on the ABL facility is variable and determined at our option as i prime plus 0 25 or 0 50 or ii Secured Overnight Financing Rate SOFR plus 1 25 or 1 50 In addition the terms of the ABL facility contain a commitment fee of 0 20 on the unused portion of the facility Borrowings under the ABL facility are secured by a first priority lien in and upon the accounts and inventory and the proceeds thereof of the Company and its guarantor subsidiaries Furthermore
In fiscal year 2023 we entered into a credit agreement 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 our term loan B due 2024 TLB 2024 The TLB 2030 bears interest at a floating rate equal to at our option either the Adjusted Term SOFR Rate plus 1 75 or an adjusted base rate plus 0 75 see below for additional information Interest on the TLB 2030 is payable quarterly on March 31 June 30 September 30 and December 31 of each year The TLB 2030 matures on February 28 2030 the Maturity Date but 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 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 The 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 based on the effective interest rates at the time of issuance
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 but is subject to a covenant package that is substantially consistent with the covenant package governing our senior notes The TLB 2030 is subject to customary asset sale mandatory prepayment provisions and excess cash flow mandatory prepayment provisions
amended In connection with each repricing we evaluated the fair value of the debt before and after the amendment for each syndicate loan and accounted for each transaction as both a partial extinguishment of debt and a modification As a result we recognized losses on extinguishment of debt of 1 7 million and 1 8 million in fiscal years 2024 and 2023 respectively within interest expense In connection with the repricing we incurred additional immaterial costs of which the majority was recorded to interest expense Furthermore the extinguishment of debt and subsequent issuance of new debt with existing creditors resulted in non cash financing activities of 20 5 million and 7 9 million for fiscal year 2024 and 2023 respectively
On February 27 2024 we issued a public offering of 6 75 senior notes due 2032 2032 Senior Notes pursuant to a shelf registration statement on Form S 3 filed with the SEC on May 10 2021 As a result we received 594 0 million in cash proceeds net of underwriter fees which were used towards the repayment of the outstanding 680 0 million principal balance on the 5 625 senior notes due 2025 the 2025 Senior Notes The 2032 Senior Notes were issued at par and bear interest at a fixed interest rate of 6 75 Interest is paid semi annually during our second and fourth fiscal quarters The 2032 Senior Notes mature on April 1 2032 The 2032 Senior Notes are prepayable beginning March 1 2027 at a price of 103 375 at a price of 101 688 after March 1 2028 and at par after March 1 2029 The 2032 Senior Notes are guaranteed on a senior unsecured basis by the guarantors who have guaranteed obligations under our ABL facility and our existing term loan In connection with the issuance we incurred approximately 8 5 million in debt issuance costs that are being amortized using the effective interest rate method through the life of the notes
Additionally on February 12 2024 we issued a notice to redeem the entire 680 0 million aggregate outstanding principal amount of the 2025 Senior Notes that remained outstanding on March 13 2024 at a redemption price equal to 100 00 of the principal amount of the 2025 Senior Notes plus accrued and unpaid interest to but not including the redemption date On March 13 2024 we redeemed the 2025 Senior Notes with the proceeds from our 2032 Senior Notes cash on hand and borrowings under our ABL facility In connection with this redemption we recognized a 2 0 million loss on the extinguishment of debt within interest expense related to unamortized debt issuance costs
The agreements governing our debt contain a customary covenant package that places restrictions on the disposition of assets the granting of liens and security interests the prepayment of certain indebtedness and other matters and customary events of default including customary cross default and or cross acceleration provisions
During fiscal year 2024 we entered into foreign currency forwards to mitigate the exposure to exchange rate changes on inventory purchases in USD by our foreign subsidiaries As of September 30 2024 all of our foreign currency forward derivatives instruments had settled We record net of income tax the changes in fair value related to the foreign currency forwards into AOCL and recognize realized gain or loss into cost of goods sold based on inventory turns As of September 30 2024 we expect to reclassify approximately 0 1 million in net losses into cost of goods sold over the next 12 months
In April 2023 we entered into a three year interest rate swap with an initial notional amount of 200 million the interest rate swap to mitigate the exposure to higher interest rates in connection with our TLB 2030 The interest rate swap involves fixed monthly payments at the contract rate of 3 705 and in return we will receive a floating
For fiscal years 2024 and 2023 we recognized income of 3 3 million and 1 3 million respectively into interest expense on our condensed consolidated statements of earnings related to the interest rate swap At September 30 2024 we expect to reclassify gains of approximately 0 1 million out of AOCL and into interest expense over the next 12 months
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 prior term loan due 2024 The interest rate caps were comprised of individual caplets 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 fiscal year 2023 we early settled both interest rate caps due to the forecasted transactions which were being hedged no longer occurring as a result of the repayment of our prior term loan For fiscal years 2023 and 2022 we recognized income of 2 8 million and expense of 1 7 million respectively into interest expense on our condensed consolidated statements of earnings related to the caps
We also use foreign exchange contracts to mitigate our exposure to exchange rate changes in connection with certain intercompany balances not permanently invested At September 30 2024 we held forwards which expire on various dates during the first four months of fiscal year 2025 with a notional amount based upon exchange rates at September 30 2024 as follows in thousands
We record changes in fair value and realized gains or losses related to the foreign currency forwards into selling general and administrative expenses The effects of these foreign exchange contracts on our condensed consolidated financial statements were losses of 1 1 million 2 2 million and 9 6 million for fiscal years 2024 2023 and 2022 respectively
On September 20 2024 we acquired certain assets and business operations from Exclusive Beauty Supply Inc Exclusive Beauty a distributor of professional beauty products operating in the State of Florida for approximately 7 5 million subject to certain holdback adjustments related to inventory Under the terms of the agreement we acquired the operations of three stores and a direct sales force inventory and non exclusive product distribution rights As part of BSG s growth strategies this acquisition complements its existing lines of business and increases the size and geographic scope of operations
This acquisition was accounted for using the acquisition method of accounting for business combinations and funded with cash from operations As of September 30 2024 the purchase price of the acquisition has been allocated to all assets acquired based on their estimated fair values at the date of acquisition Based on our fair value estimates we recorded 6 4 million in intangible assets subject to amortization 0 8 million for inventory preliminary and 0 3 million in goodwill which has been allocated to BSG and is expected to be deductible for tax purposes Subsequent to the acquisition date all operating results were included in BSG and were not material to the consolidated results of operations Pro forma information has not been provided as the effects were not material to our consolidated results of operations
On September 22 2023 we acquired certain assets and business operations from Goldwell of NY Inc Goldwell of NY a distributor of professional beauty products operating in the State of New York for approximately 9 0 million Under the terms of the agreement we acquired the operations of five stores and a direct sales force inventory and exclusive and non exclusive product distribution rights
This acquisition was accounted for using the acquisition method of accounting for business combinations and funded with cash from operations As of September 30 2023 the purchase price of the acquisition was allocated to all assets acquired based on their estimated fair values at the date of acquisition We recorded 6 6 million in intangible assets subject to amortization 1 7 million in inventory and 0 6 million in goodwill which has been allocated to BSG and is expected to be deductible for tax purposes Subsequent of the acquisition date all operating results were included in BSG and were not material to the consolidated results of operations In fiscal year 2024 we finalized the purchase accounting and no material adjustments were made Pro forma information has not been provided as the effects were not material to our consolidated results of operations
We offer 401 k Plans to our U S and Puerto Rico employees who meet certain eligibility requirements The U S 401 k Plan allows employees to contribute immediately upon hire while the Puerto Rico 401 k Plan allows employees to contribute after one year of employment Under the terms of each 401 k Plan employees may contribute a percentage of their annual compensation up to certain maximums as defined by each 401 k Plan and by statutory limitations We currently match a portion of employee contributions as defined by each 401 k Plan We recognized expense of 7 6 million 7 3 million and 6 8 million in the fiscal years ended September 30 2024 2023 and 2022 respectively related to such matching contributions and these amounts are included in selling general and administrative expenses in our consolidated statements of earnings
In addition pursuant to the 401 k Plans we may elect to make voluntary profit sharing contributions to the accounts of eligible employees as determined by the Compensation Committee of the Board During the fiscal years ended September 30 2024 2023 and 2022 we did not make a profit sharing contribution to the 401 k Plans
We believe that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets net of the valuation allowance During fiscal year 2024 existing valuation allowances were decreased by approximately 1 6 million primarily for net operating loss carry forwards of various members of the affiliated group in foreign jurisdictions and foreign tax credits We continue to record a valuation allowance to account for uncertainties regarding recoverability of certain deferred tax assets primarily foreign loss carry forwards and tax credit carry forwards
Domestic earnings before provision for income taxes were 175 2 million 217 7 million and 205 2 million in the fiscal years 2024 2023 and 2022 respectively Foreign earnings before provision for income taxes of 31 1 million 34 4 million and 38 9 million in the fiscal years 2024 2023 and 2022 respectively
Tax reserves are evaluated and adjusted as appropriate while taking into account the progress of audits by various taxing jurisdictions and other changes in relevant facts and circumstances evident at each balance sheet date We do not expect the outcome of current or future tax audits to have a material adverse effect on our consolidated financial condition results of operations or cash flow
Applicable deferred tax liabilities have been provided for undistributed foreign earnings in excess of foreign working capital and cash requirements As a result of U S Tax Reform the repatriation of cash to the U S is generally no longer taxable for federal income tax purposes but could be subject to foreign withholding taxes and state income taxes If undistributed earnings of our foreign operations were not considered permanently reinvested as of September 30 2024 an immaterial amount of additional deferred taxes would have been provided
At September 30 2024 and 2023 we had total operating loss carry forwards of 106 6 million and 119 4 million respectively of which 52 5 million and 62 7 million respectively are subject to a valuation allowance At September 30 2024 operating loss carry forwards of 106 6 million have no expiration date At September 30 2024 and 2023 we had tax credit carry forwards of 15 2 million and 15 5 million respectively This includes a U S foreign tax credit carry forward of 13 3 million primarily as a result of the deemed repatriation tax under U S Tax Reform This credit expires in 2028 We do not believe the realization of the U S foreign tax credit is more likely than not so a valuation allowance has been recorded against its full value Of the remaining tax credit carry forwards at September 30 2024 0 3 million expire between 2025 and 2029 0 3 million expire between 2033 and 2037 and 1 3 million have no expiration date Total tax credit carry forwards of 14 8 million and 14 2 million are subject to a valuation allowance at September 30 2024 and 2023 respectively
On December 22 2017 the Tax Cuts and Jobs Act TCJA enacted comprehensive amendments to the Internal Revenue Code of 1986 Among other things TCJA provided for a deemed repatriation of undistributed foreign earnings by U S taxpayers giving rise to a one time transition tax on those earnings Repatriation Tax The U S Treasury Department issued final regulations Regulations addressing certain aspects of how the Repatriation Tax is calculated In our view certain guidance included in the Regulations is inconsistent with our interpretation of the statutory language contained in the TCJA In fiscal year 2023 we remitted 4 3 million in tax and interest to the IRS Income tax expense of 2 7 million was recorded in fiscal year 2023 related to the payments Previously 1 6 million had been reserved for this issue We maintain our tax positions are fully supportable
Because existing tax positions will continue to generate increased liabilities for unrecognized tax benefits over the next 12 months and the fact that from time to time our tax returns are routinely under audit by various taxing authorities it is reasonably possible that the amount of unrecognized tax benefits will change during the next 12 months An estimate of the amount of such change or a range thereof cannot reasonably be made at this time However we do not expect the change if any to have a material effect on our consolidated financial condition or results of operations within the next 12 months
Our consolidated federal income tax return for the fiscal years 2022 and 2023 are currently under IRS examination Our statute remains open for the fiscal year ended September 30 2021 forward Our U S state income tax returns are impacted by various statutes of limitations and are generally open for the fiscal year ended September 30 2021 and future years Our foreign income tax returns are impacted by various statutes of limitations which are generally open from 2019 forward
In December of 2021 the Organization for Economic Cooperation and Development OECD established a framework referred to as Pillar 2 designed to ensure large multinational enterprises pay a minimum 15 percent level of tax on the income arising in each jurisdiction in which they operate The earliest effective date is for taxable years beginning after December 31 2023 which for us is fiscal year 2025 Numerous countries have already enacted the OECD model rules and several other countries have drafted legislation We do not expect this legislation to have a
Our business is organized into two reportable segments i SBS a domestic and international chain of retail stores and a consumer facing e commerce website that offers professional beauty supplies to both salon professionals and retail customers primarily in North America Puerto Rico and parts of Europe and South America and ii BSG including its franchise based business Armstrong McCall a full service distributor of beauty products and supplies that offers professional beauty products directly to salons and salon professionals through its professional only stores e commerce platforms and its own sales force in partially exclusive geographical territories in the U S and Canada
In fiscal year 2022 our Board approved the Plan consisting of the planned closure of 330 SBS stores and 35 BSG stores and two BSG distribution centers in Clackamas Oregon and Pottsville Pennsylvania Stores identified for early closure were part of a strategic evaluation which included a market analysis of certain locations where we believed we would be able to recapture demand and improve profitability
As of September 30 2024 the Plan has been substantially completed as the only two remaining BSG stores to be closed were closed during the fiscal year However we may still incur future immaterial charges related to store closures such as exit costs lease negotiation penalties termination benefits and adjustments to estimates As of September 30 2024 there were no material outstanding liabilities for exit costs or involuntary employee termination benefits In fiscal year 2023 we closed 294 SBS stores and 26 BSG stores as well as the two BSG distribution centers In fiscal year 2022 we closed 36 SBS stores and 7 BSG stores
We previously disclosed a plan to focus on certain core business strategies In addition to optimizing our supply chain network with changes to our transportation model and network of nodes we improved our marketing and digital commerce capabilities and advanced our merchandising transformation efforts In addition we expanded our plan and announced a reduction in workforce within our field and headquarters Furthermore our Board approved the divestiture of our operations in Peru which was not material to our results of operation All these together made up our Transformation Plan We did not incur any additional expenses or liabilities related to our Transformation Plan in fiscal years 2024 or 2023
On October 24 2024 we sold our corporate headquarters located in Denton Texas to Denton County Texas for 45 5 million excluding 1 5 million in closing costs As of September 30 2024 the assets included in the sale were classified as held for sale within other current assets on our consolidated balance sheets As a result of the sale we recognized a gain of approximately 26 8 million from the sale of these assets during our first quarter of fiscal year 2025 Additionally we entered into a lease agreement with Denton County Texas to lease the building for 35 000 per month for twelve months with the option to extend three additional months At this time we do not anticipate exercising this option

Company Name	Sally Beauty Holdings, Inc. Vist SEC web-site
Category	RETAIL-RETAIL STORES, NEC
Trading Symbol	SBH