Sally Beauty Holdings, Inc. Announces Fiscal Second Quarter Results

Reports Strong Gross Margin Expansion and SG&A Leverage

DENTON, Texas--(BUSINESS WIRE)-- Sally Beauty Holdings, Inc. (NYSE: SBH) (the “Company”) today announced financial results for its fiscal 2017 second quarter ended March 31, 2017. The Company will hold a conference call today at 7:30 a.m. (Central) to discuss these results and its business.

Fiscal 2017 Second Quarter Highlights

Reported diluted earnings per share in the second quarter were $0.40 compared to $0.41 in the prior year’s second quarter. Adjusted diluted earnings per share, excluding $9.2 million of charges related to the restructuring plan announced by the Company in February 2017 (the “Restructuring Plan”), were $0.44 in the second quarter, up 7.3% vs. the prior year.

Consolidated net sales were $966.5 million in the second quarter, a decrease of 1.4% from the prior year. A 2.0% decline in same store sales was partially offset by incremental sales from new stores. The Company lost a day of selling in the second quarter due to the prior year being a Leap Year, and gained a day of selling in the second quarter due to the shift of this year’s Easter holiday to April. The net result of these two calendar items negatively impacted reported same store sales growth in the quarter by approximately 60 basis points. Additionally, a stronger U.S. dollar negatively impacted reported revenue by $9.8 million, or approximately 1.0%.

Gross margin for the second quarter was 50.5%, an increase of 80 basis points from the prior year, driven primarily by strategic pricing initiatives, decreased promotional activity and increased vendor allowances.

Selling, General and Administrative (“SG&A”) expenses in the second quarter, excluding depreciation and amortization expense, were 34.3% of sales, a decrease of 30 basis points from the prior year’s adjusted SG&A.

Reported operating earnings and operating margin in the second quarter were $119.0 million and 12.3%, respectively, compared to reported operating earnings and operating margin of $122.5 million and 12.5%, respectively, in the prior year.

Adjusted operating earnings in the second quarter, excluding the $9.2 million of charges related to the Restructuring Plan, was $128.2 million, growth of 3.2% from the prior year’s adjusted operating earnings. Adjusted operating margin was 13.3%, up 60 basis points vs. the prior year’s adjusted operating margin.

The Company repurchased (and subsequently retired) a total of 4.4 million shares of common stock during the quarter at an aggregate cost of $101.9 million. Share repurchases through the first two quarters of the fiscal year totaled approximately $169 million.

“Our financial results in the second quarter reflect our teams’ sharp focus on gross margin management and operating expense discipline, both of which enabled us to deliver solid mid-single digit growth in adjusted operating income and even stronger growth in adjusted earnings per share,” stated Chris Brickman, the Company’s President and Chief Executive Officer. “Store traffic was especially challenging in January and February, but improved in the last month of the quarter. Additionally, revenue performance in April – the first month of our third fiscal quarter – was in line with the expectations that are included in the full year revenue guidance being communicated today. We are focused on ‘controlling the things we can control’ and, most importantly, on profitable growth. As such, I was very pleased with the earnings delivery in the quarter.

“We executed on many of our most important initiatives in the quarter, including zone and tactical pricing, as well as the introduction of new brands to BSG and Sally. In early April, we launched the test of our new Sally Beauty loyalty program and early customer feedback has been very positive. Further, we seamlessly executed on the most significant components of the Restructuring Plan that we announced in early February.

“We will continue to execute on our strategic priorities, while being financially prudent in order to protect earnings growth. We have many reasons to be confident going into the second half of the fiscal year and into 2018, despite the continuing challenging retail environment. We recognize there is work to be done, but we believe we are taking the right steps to accelerate growth in both revenue and profitability.”

Additional Fiscal 2017 Second Quarter Details

Interest expense in the fiscal second quarter was $26.8 million compared to $27.0 million in the prior year.

The effective income tax rate in the fiscal second quarter was 38.2%, up 120 basis points vs. the prior year. The higher effective tax rate is due primarily to a non-recurring tax deduction in the prior year’s second quarter.

Reported net earnings in the fiscal second quarter were $57.0 million, a decrease of $3.2 million, or 5.3%, from the prior year. Adjusted EBITDA in the quarter was $158.5 million, an increase of $7.6 million, or 5.0%, from the prior year. Adjusted EBITDA margin was 16.4% in the quarter compared to 15.4% in the prior year.

Inventory at quarter end was $917.3 million, up $16.0 million, or 1.8%, from the prior year. The increase was due primarily to new store growth and the addition of new brands, partially offset by the impact of a stronger U.S. dollar.

Capital expenditures in the fiscal second quarter were $21.0 million, and fiscal year to date capital expenditures were $47.0 million, primarily for information technology projects, new stores openings and distribution facility upgrades.

Restructuring Plan Update

On January 26, 2017, the Board of Directors of the Company approved a comprehensive restructuring plan (the “Restructuring Plan”) for the Company’s businesses that included a wide range of organizational efficiency initiatives and cost reduction opportunities.

The initiatives contemplated by the Restructuring Plan include a reorganization of Sally Beauty’s field and operations teams in the U.S. and Canada to better align with a best-in-class retail model; the consolidation of four remote BSG office locations into corporate headquarters in Denton, TX; the centralization of support functions in continental Europe; and headcount reductions across most corporate backroom functions. Approximately $9.2 million was recorded as restructuring charges in the second fiscal quarter, primarily for employee separation costs.

During the second quarter the Company identified additional cost reduction and profit improvement opportunities to be executed over the remainder of the fiscal year as part of an expanded Restructuring Plan. These opportunities include additional organizational efficiency initiatives in European operations and a revised business model in an unprofitable international market.

Including the new initiatives, the Company now expects total charges related to the Restructuring Plan in the range of $14 million to $16 million; annualized pretax benefits in the range of $19 million to $21 million; and fiscal 2017 pretax benefits in the range of $11 million to $12 million.

Fiscal 2017 Guidance

The Company is revising its guidance for full year fiscal 2017 as follows:

• Consolidated same store sales growth approximately flat to the prior year; and
• Net new store openings growth of approximately 2.0%

The Company is reiterating its guidance for full year fiscal 2017 as follows:

• Full year consolidated gross margin expansion in a range of 20 to 30 basis points;
• Including benefits from the Restructuring Plan and other cost reduction initiatives, adjusted SG&A in a range of 34.1% to 34.4% of sales;
• Adjusted operating income growth in the low-to-mid single digits; and
• Capital expenditures in a range of $115 million to $120 million

Fiscal 2017 Second Quarter Segment Results

Sally Beauty Supply (“Sally”)

• Sales were $576.0 million in the second quarter, down 2.9% the prior year. Unfavorable foreign currency translation reduced Sally’s reported revenue growth by 180 basis points. Same store sales declined 2.4% in the quarter. The net impact of the Leap Year and Easter calendar issues noted above negatively impacted Sally’s same store sales in the quarter by approximately 40 basis points.
• Net store count at quarter end increased by 106, to 3,838, from the prior year’s second quarter.
• Gross margin was 56.3% in the second quarter, a 100 basis point increase from the prior year. Gross margin benefitted from strategic pricing initiatives and decreased promotional activity in the U.S.
• Operating earnings were $96.8 million in the second quarter, down 5.4% from the prior year, driven by the sales decline, labor inflation and new store opening costs, partially offset by the strong gross margin expansion.

Beauty Systems Group (“BSG”)

• Sales were $390.5 million in the second quarter, up 0.9% the prior year, driven by modest growth in full service sales and incremental sales from acquisitions, partially offset by a 1.2% decline in same store sales. The net impact of the Leap Year and Easter calendar issues noted above negatively impacted BSG’s same store sales in the quarter by approximately 100 basis points. Foreign currency exchange rates did not have a material impact on BSG’s reported revenue growth.
• Net store count at quarter end increased by 34, to 1,346, from the prior year’s second quarter.
• Gross margin in the second quarter increased 60 basis points, to 41.9%, due primarily to increased vendor allowances.
• Operating earnings were $62.7 million in the second quarter, up 2.9% from the prior year, driven by modest revenue growth and higher gross margin, partially offset by higher SG&A costs (labor inflation and costs associated with the new store openings).
• Total distributor sales consultants at quarter end were 849 vs. 923 at the end of the prior year’s second quarter. This decrease is primarily due to a decline in the number of distributor sales consultants employed by the franchise business.

Management Changes

On May 1, 2017, Sharon Leite, President of Sally Beauty U.S. and Canada, notified the Company that she was resigning from her position effective immediately.

Chris Brickman, the President and Chief Executive Officer of Sally Beauty Holdings, Inc., will serve as the interim President of Sally Beauty U.S. and Canada until the Company appoints Ms. Leite’s successor. An external firm has been retained to assist with the search process.

“I would like to thank Sharon for her contributions,” said Chris Brickman. “I will immediately assume responsibility for all operations of the Sally Beauty U.S. and Canada business. More importantly, I am excited to work directly with the team to execute on the plans that they have developed, and I feel more confident than ever that we have defined the right strategy for Sally going forward.”

Conference Call and Where You Can Find Additional Information

As previously announced, at approximately 7:30 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 800-230-1093 (International: 612-288-0337). 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 9:30 a.m. (Central) May 4, 2017 through May 19, 2017 by dialing 800-475-6701 or if international dial 320-365-3844 and reference the conference ID number 422878. 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 $4.0 billion annually. Through the Sally Beauty Supply and Beauty Systems Group businesses, the Company sells and distributes through over 5,000 stores, including approximately 182 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 9,000 products for hair, skin, and nails through professional lines such as Clairol, L’Oreal, OPI 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; our ability to efficiently manage and control our costs and the success of our cost control plans, including our recently announced restructuring plan; our ability to implement our restructuring plan in various jurisdictions; our ability to manage the effects of our cost reduction plans on our employees and other operations costs; charges related to the restructuring plan; possible changes in the size and components of the expected costs and charges associated with the restructuring plan; our ability to realize the anticipated cost savings from the restructuring plan within the anticipated time frame, if at all; 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; rising labor and rental costs; protecting our intellectual property rights, particularly our trademarks; the risk that our products may infringe on the intellectual property rights of others; 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 our liquidity needs; 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, 2016, 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 operating income and operating margin; and (3) adjusted diluted earnings per share. 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 announced Restructuring Plan, previously disclosed data security incidents, management transition plan and asset impairment charges for the relevant time periods as indicated in the accompanying non-GAAP reconciliations to the comparable GAAP financial measures.

Adjusted Operating Earnings and Operating Margin – Adjusted operating earnings are GAAP operating earnings that excludes costs related to the Company’s previously announced Restructuring Plan, previously disclosed management transition plan, data security incidents and asset impairment charges for the relevant time periods as indicated in the accompanying non-GAAP reconciliations to the comparable GAAP financial measures. Adjusted Operating Margin is Adjusted Operating Earnings as a percentage of net sales.

Adjusted Diluted Net Earnings Per Share – Adjusted diluted net earnings per share is GAAP diluted earnings per share that exclude costs related to the Company’s previously announced Restructuring Plan, previously disclosed management transition plan, data security incidents and asset impairment charges as indicated in the accompanying non-GAAP reconciliations to the comparable GAAP financial measures.

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

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

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

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

Source: Sally Beauty Holdings, Inc.