Sally Beauty Holdings, Inc. Announces Fiscal 2016 Third Quarter Results

• Consolidated sales of $998 million, growth of 3.1%
• Consolidated gross margin 50.0%, up 30 bps over prior year
• GAAP and adjusted net earnings of $67.9 million and $68.8 million, respectively
• GAAP diluted earnings per share of $0.46, growth of 17.9%
• Adjusted diluted earnings per share of $0.47, growth of 14.6%

DENTON, Texas--(BUSINESS WIRE)-- Sally Beauty Holdings, Inc. (NYSE: SBH) (the “Company”) today announced financial results for the fiscal 2016 third quarter. The Company will hold a conference call today at 10:00 a.m. (Central) to discuss these results and its business.

“In the fiscal 2016 third quarter we delivered solid consolidated results including gross margin expansion and mid-teens earnings per share growth,” said Chris Brickman, CEO. “At a segment level, BSG had another terrific quarter with same store sales growth of 5.4% however, our Sally North American business did not meet our expectations. Sally’s retail traffic is clearly taking longer to return to historical levels than we anticipated. We do believe there were a couple of tactical marketing changes in the quarter that negatively impacted traffic growth and we have moved quickly to address these issues. Going forward, we remain optimistic that Sally can get back to steady, sequential sales improvement.”

“During the quarter, we also completed several of our Sally initiatives such as the brush category reset, the color education center rollout and the completion of owned-brand repackaging. We are now ready to slow down the pace of in-store change at Sally and focus our team on marketing, product merchandising and sales initiatives designed to leverage the improvements we’ve made to transform the customer experience.”

FISCAL 2016 THIRD QUARTER FINANCIAL HIGHLIGHTS

Net Sales: For the fiscal 2016 third quarter, consolidated net sales were $998.2 million, an increase of 3.1% from the fiscal 2015 third quarter. The fiscal 2016 third quarter sales increase is attributed to same store sales growth and the addition of new stores. The unfavorable impact from changes in foreign currency exchange rates in the fiscal 2016 third quarter was $9.1 million, or 0.9% of sales. Consolidated same store sales growth in the fiscal 2016 third quarter was 2.5%.

Gross Profit: Consolidated gross profit for the fiscal 2016 third quarter was $499.0 million, an increase of 3.7% over gross profit of $481.3 million for the fiscal 2015 third quarter. Gross profit as a percentage of sales was 50.0%, a 30 basis point increase from the fiscal 2015 third quarter. On a segment basis, gross profit margin was up 40 basis points in Sally Beauty and up 30 basis points in BSG when compared to the prior year quarter. Gross margin expansion for fiscal 2016 is now expected to finish the fiscal year slightly below the low end of the previously stated guidance range of 35 basis points to 45 basis points expansion over the prior year.

Selling, General and Administrative Expenses: For the fiscal 2016 third quarter, GAAP consolidated selling, general and administrative (SG&A) expenses, including unallocated corporate expenses and share-based compensation, were $339.5 million, or 34.0% of sales, a 10 basis point increase from the fiscal 2015 third quarter metric of 33.9% of sales and total SG&A expenses of $327.9 million. Excluding $1.4 million pre-tax of charges related to the data security incidents, adjusted SG&A expenses in the fiscal 2016 third quarter were $338.1 million or 33.9% of sales.

Fiscal 2016 third quarter adjusted SG&A expenses increased 4.5% or $14.5 million, primarily due to expenses associated with the opening of new stores, higher expenses related to on-going upgrades to our information technology systems and higher credit card fees.

Unallocated expenses, excluding share-based compensation, was $33.2 million in the fiscal 2016 third quarter, down $1.5 million, or 4.2%, from the prior year quarter. This decrease is primarily due to favorable expense adjustments resulting from a decrease in estimated future cash payments in connection with the Company’s self-insurance programs and lower expenses related to the data security incidents than in the prior year. This decrease was partially offset by higher compensation and health benefits, ongoing upgrades to our information technology systems and professional fees.

Note: SG&A expenses include unallocated corporate expenses, as detailed in the Company’s segment information on schedule B.

Interest Expense: Interest expense for the fiscal 2016 third quarter was $26.7 million, down $2.5 million from the fiscal 2015 third quarter of $29.2 million. This decrease resulted from the Company’s December 2015 redemption in full of its $750 million of 6.875% senior notes due 2019 which were replaced by the issuance and sale of $750 million of 5.625% senior notes due 2025.

Provision for GAAP Income Taxes: GAAP income taxes were $39.5 million for the fiscal 2016 third quarter versus $39.2 million in the fiscal 2015 third quarter. The Company’s effective tax rate in the fiscal 2016 third quarter was 36.7%, down 180 basis points when compared to the fiscal 2015 third quarter. This year over year change was primarily due to a decrease in the losses subject to a valuation allowance in the fiscal 2016 third quarter.

Net Earnings and Diluted Net Earnings per Share (EPS): For the fiscal 2016 third quarter, GAAP net earnings were up 8.7% to $67.9 million, or $0.46 diluted earnings per share, from net earnings of $62.5 million, or $0.39 diluted earnings per share in the year ago quarter.

Adjusted net earnings for the fiscal 2016 third quarter were up 5.5% to $68.8 million or $0.47 per diluted earnings per share when compared to fiscal 2015 third quarter adjusted net earnings of $65.2 million or $0.41 per diluted earnings per share. Adjusted net earnings for the fiscal 2016 third quarter excludes $0.9 million, net of tax, of charges associated with charges related to the data security incidents.

Adjusted (Non-GAAP) EBITDA⁽¹⁾: Adjusted EBITDA for the fiscal 2016 third quarter was $163.7 million, an increase of 1.9% from $160.6 million for the fiscal 2015 third quarter.

Financial Position, Capital Expenditures and Working Capital: Cash and cash equivalents as of June 30, 2016 were $91.0 million. The Company’s asset-based loan (ABL) revolving credit facility ended the fiscal 2016 third quarter with no outstanding borrowings. The Company’s debt, excluding capital leases, totaled $1.8 billion as of June 30, 2016.

For fiscal 2016 year-to-date, the Company’s capital expenditures totaled $106.1 million. Capital expenditures for the fiscal year 2016 are projected to be at the high end of the previously stated range of $125 million to $135 million, excluding acquisitions.

Working capital (current assets less current liabilities) decreased $4.9 million to $690.6 million at June 30, 2016 compared to $695.4 million at September 30, 2015. Borrowing capacity on the ABL facility was approximately $478 million at the end of the fiscal 2016 third quarter. The ratio of current assets to current liabilities was 2.47 to 1.00 at June 30, 2016 compared to 2.41 to 1.00 at September 30, 2015.

Inventory as of June 30, 2016 was $909.3 million, an increase of $34.7 million or growth of 4.0% from June 30, 2015 inventory. This increase is primarily due to sales growth from existing stores, additional inventory from new store openings and the introduction of new brands in the BSG and Sally businesses.

Business Segment Results:

Sally Beauty Supply

Fiscal 2016 Third Quarter Results for Sally Beauty Supply

• Sales of $597.1 million, up 1.4% from $588.6 million in the fiscal 2015 third quarter. Sales growth was from net new store openings and same store sales growth. The unfavorable impact of foreign currency exchange on sales was $7.4 million, or 1.3%.
• Same store sales growth of 1.3% versus growth of 2.0% in the fiscal 2015 third quarter.
• Gross margin of 55.3%, expansion of 40 basis points when compared to the prior year quarter.
• Segment earnings of $104.8 million, down 2.3% from $107.3 million in the fiscal 2015 third quarter.
• Segment operating margin was 17.6%, down 60 basis points when compared to the fiscal 2015 third quarter.
• Net store count increased by 95 over the fiscal 2015 third quarter for total store count of 3,750.

Sales growth in the fiscal 2016 third quarter was driven by net new store openings and same store sales growth; this growth was partially offset by the unfavorable impact of foreign currency exchange. Gross profit margin in the quarter was up primarily as a result of selective price increases in certain geographical areas of the U.S., fewer promotions than the prior year and a favorable shift in product mix.

Segment operating earnings and margin were negatively impacted by higher SG&A expenses including compensation related expenses, higher depreciation expense (principally associated with recent store openings and remodels) and higher expenses related to on-going upgrades to our information technology systems.

Beauty Systems Group

Fiscal 2016 Third Quarter Results for Beauty Systems Group

• Sales of $401.1 million, up 5.7% from $379.3 million in the fiscal 2015 third quarter. Sales growth was primarily from same store sales growth, sales growth from the sales consultant business and new store openings. The unfavorable impact of foreign currency exchange on sales was $1.8 million, or 0.5%.
• Same store sales growth of 5.4% versus 5.6% in the fiscal 2015 third quarter.
• Gross margin of 42.1%, a 30 basis point increase from 41.8% in the fiscal 2015 third quarter.
• Segment earnings of $65.3 million, up 6.9% from $61.1 million in the fiscal 2015 third quarter.
• Segment operating margin increased by 20 basis points to 16.3% of sales from 16.1% in the fiscal 2015 third quarter.
• Net store count was 1,322, an increase of 36 stores over the fiscal 2015 third quarter.
• Total BSG distributor sales consultants at the end of the fiscal 2016 third quarter were 947 versus 952 at the end of the fiscal 2015 third quarter.

Sales growth for the Beauty Systems Group was primarily driven by growth in same store sales, growth in the sales consultant business and new store openings; this growth was slightly offset by the unfavorable impact of foreign currency exchange. Growth in segment operating earnings and margin expansion was primarily due to gross margin expansion.

⁽¹⁾A detailed table reconciling 2016 and 2015 adjusted EBITDA is included in Supplemental Schedule C.

Conference Call and Where You Can Find Additional Information

As previously announced, at approximately 10:00 a.m. (Central) today the Company will hold a conference call and audio webcast to discuss its financial results and its business. During the conference call, the Company may discuss and answer one or more questions concerning business and financial matters and trends affecting the Company. The Company’s responses to these questions, as well as other matters discussed during the conference call, may contain or constitute material information that has not been previously disclosed. Simultaneous to the conference call, an audio webcast of the call will be available via a link on the Company’s website, investor.sallybeautyholdings.com. The conference call can be accessed by dialing (800) 230-1096(International: (612) 332-0345). The teleconference will be held in a “listen-only” mode for all participants other than the Company’s current sell-side and buy-side investment professionals. If you are unable to listen to this conference call, the replay will be available at about 12:00 p.m. (Central) August 4, 2016 through August 18, 2016 by dialing 1-800-475-6701 or if international dial 320-365-3844 and reference the conference ID number 398712. Also, a website replay will be available on investor.sallybeautyholdings.com

About Sally Beauty Holdings, Inc.

Sally Beauty Holdings, Inc. (NYSE: SBH) is an international specialty retailer and distributor of professional beauty supplies with revenues of $3.8 billion annually. Through the Sally Beauty Supply and Beauty Systems Group businesses, the Company sells and distributes through over 5,000 stores, including approximately 180 franchised units throughout the United States, the United Kingdom, Belgium, Chile, Peru, Colombia, France, the Netherlands, Canada, Puerto Rico, Mexico, Ireland, Spain and Germany. Sally Beauty Supply stores offer up to 10,000 products for hair, skin, and nails through professional lines such as Clairol, L’Oreal, Wella and Conair, as well as an extensive selection of proprietary merchandise. Beauty Systems Group stores, branded as CosmoProf or Armstrong McCall stores, along with its outside sales consultants, sell up to 10,000 professionally branded products including Paul Mitchell, Wella, Sebastian, Goldwell, Joico, and Aquage which are targeted exclusively for professional and salon use and resale to their customers. For more information about Sally Beauty Holdings, Inc., please visit sallybeautyholdings.com.

Cautionary Notice Regarding Forward-Looking Statements

Statements in this news release and the schedules hereto which are not purely historical facts or which depend upon future events may be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “would,” 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. Any forward-looking statements involve risks and uncertainties that could cause actual events or results to differ materially from the events or results described in the forward-looking statements, including, but not limited to, risks and uncertainties related to: anticipating and effectively responding to changes in consumer and professional stylist preferences and buying trends in a timely manner; the success of our strategic initiatives including our store refresh program and increased marketing efforts, to enhance the customer experience, attract new customers, drive brand awareness and improve customer loyalty; the highly competitive nature of, and the increasing consolidation of, the beauty products distribution industry; the timing and acceptance of new product introductions; shifts in product mix sold during any period; potential fluctuation in our same store sales and quarterly financial performance; our dependence upon manufacturers who may be unwilling or unable to continue to supply products to us; our dependence upon manufacturers who have developed or could develop their own distribution businesses which compete directly with ours; the possibility of material interruptions in the supply of products by our third-party manufacturers or distributors or increases in the prices of products we purchase from our third-party manufacturers or distributors; products sold by us being found to be defective in labeling or content; compliance with current laws and regulations or becoming subject to additional or more stringent laws and regulations; the success of our e-commerce businesses; diversion of professional products sold by Beauty Systems Group to mass retailers or other unauthorized resellers; the operational and financial performance of our franchise-based business; successfully identifying acquisition candidates and successfully completing desirable acquisitions; integrating acquired businesses; the success of our initiatives to expand into new geographies; the success of our existing stores, and our ability to increase sales at existing stores; opening and operating new stores profitably; the volume of traffic to our stores; the impact of the health of the economy upon our business; conducting business outside the United States; the impact of Britain’s vote to leave the European Union and related or other disruptive events in the European Union or other geographies in which we conduct business; the success of our cost control plans; rising labor and rental costs; protecting our intellectual property rights, particularly our trademarks; the risk that our products may infringe on the intellectual property of others or that we may be required to defend our intellectual property rights; successfully updating and integrating our information technology systems; disruption in our information technology systems; a significant data security breach, including misappropriation of our customers’, or employees’ or suppliers’ confidential information, and the potential costs related thereto; the negative impact on our reputation and loss of confidence of our customers, suppliers and others arising from a significant data security breach; the costs and diversion of management’s attention required to investigate and remediate a data security breach and to continuously upgrade our information technology security systems to address evolving cyber security threats; the ultimate determination of the extent or scope of the potential liabilities relating to our past or any future data security incidents; our ability to attract or retain highly skilled management and other personnel; severe weather, natural disasters or acts of violence or terrorism; the preparedness of our accounting and other management systems to meet financial reporting and other requirements and the upgrade of our existing financial reporting system; being a holding company, with no operations of our own, and depending on our subsidiaries for cash; our ability to execute and implement our common stock repurchase program; our substantial indebtedness; the possibility that we may incur substantial additional debt, including secured debt, in the future; restrictions and limitations in the agreements and instruments governing our debt; generating the significant amount of cash needed to service all of our debt and refinancing all or a portion of our indebtedness or obtaining additional financing; changes in interest rates increasing the cost of servicing our debt; and the costs and effects of litigation.

Additional factors that could cause actual events or results to differ materially from the events or results described in the forward-looking statements can be found in our filings with the Securities and Exchange Commission, including our most recent Annual Report on Form 10-K for the year ended September 30, 2015, as filed with the Securities and Exchange Commission. Consequently, all forward-looking statements in this release are qualified by the factors, risks and uncertainties contained therein. We assume no obligation to publicly update or revise any forward-looking statements.

Use of Non-GAAP Financial Measures

This news release and the schedules hereto include the following financial measures that have not been calculated in accordance with accounting principles generally accepted in the U.S., or GAAP, and are therefore referred to as non-GAAP financial measures: (1) Adjusted EBITDA; (2) Adjusted net earnings, earnings per share and diluted earnings per share; and (3) Adjusted SG&A expenses. We have provided definitions below for these non-GAAP financial measures and have provided tables in the schedules hereto to reconcile these non-GAAP financial measures to the comparable GAAP financial measures.

Adjusted EBITDA - We define the measure Adjusted EBITDA as GAAP net earnings before depreciation and amortization, interest expense, income taxes, share-based compensation, costs related to the Company’s previously disclosed data security incidents, management transition plan, asset impairment charges and expenses from the loss on extinguishment of debt and overlapping interest expense.

Adjusted Net Earnings, Earnings Per Share, Diluted Earnings Per Share and SG&A Expenses – Adjusted net earnings, earnings per share, diluted earnings per share and SG&A expenses are GAAP net earnings, earnings per share, diluted earnings per share and SG&A expenses that exclude costs related to the Company’s previously disclosed management transition plan, data security incidents, asset impairment charges and the loss on extinguishment of debt and overlapping interest expense for the relevant time periods as indicated in the accompanying non-GAAP reconciliations to the comparable GAAP financial measures.

We have provided these non-GAAP financial measures as supplemental information to our GAAP financial measures and believe these non-GAAP measures provide investors with additional meaningful financial information regarding our operating performance. Our management and Board of Directors also use these non-GAAP measures as supplemental measures in the evaluation of our businesses and believe that these non-GAAP measures provide a meaningful measure to evaluate our historical and prospective financial performance. These non-GAAP measures should not be considered a substitute for or superior to GAAP results. Furthermore, the non-GAAP measures presented by us may not be comparable to similarly titled measures of other companies.

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Sally Beauty Holdings, Inc.
Karen Fugate, 940-297-3877
Investor Relations

Source: Sally Beauty Holdings, Inc.