Market Overview

Sally Beauty Holdings, Inc. Announces Third Quarter Results

Share:
  • Consolidated same store sales decreased by 2.0%
  • GAAP diluted EPS of $0.48; decrease of 2.0% versus prior year,
    driven by restructuring charges and expenses related to previously
    disclosed data security incidents
  • Adjusted diluted EPS of $0.60; growth of 15.4% versus prior year
  • Global e-commerce sales increased by 30.8% versus prior year
  • Multi-quarter transformation plan underway; continuing to make
    progress
  • Strong cash flow from operations utilized to reduce indebtedness
    and fund share repurchases

Sally Beauty Holdings, Inc. (NYSE:SBH) ("the Company") today announced
financial results for its fiscal 2018 third quarter ended June 30, 2018.
The Company will hold a conference call today at 7:30 a.m. Central Time
to discuss these results and its business.

Fiscal 2018 Third Quarter Overview

Consolidated same store sales decreased 2.0% in the quarter.
Consolidated net sales were $996.3 million in the third quarter, a
decrease of 0.2% compared to the prior year. Foreign currency
translation had a favorable impact of approximately 90 basis points on
reported sales.

GAAP diluted earnings per share in the third quarter were $0.48 compared
to $0.49 in the prior year, a decrease of 2.0%. Adjusted diluted
earnings per share, excluding charges related to the Company's
transformation efforts and expenses from assessments and remediation
costs associated with previously disclosed data security incidents, were
$0.60 in the third quarter compared to $0.52 in the prior year, an
increase of 15.4%. The increase was driven primarily by lower income tax
expense as a result of U.S. tax reform, reduced share count from share
repurchases and lower interest expense.

"Despite the short-term challenges we are facing, we continue to make
progress on the core elements of a transformation plan that we are
confident will put Sally Beauty Holdings on the right track long-term,"
said Chris Brickman, President and Chief Executive Officer. "During the
third quarter, core traffic challenges were exacerbated by material
issues from two of our top manufacturers for Beauty Systems Group and
the impact of significant, but necessary, internal changes in how we
operate."

Update on Transformation Plan

"As we mentioned in April, in partnership with FTI Consulting, we are
undertaking a substantial transformation plan at Sally Beauty Holdings,
which seeks to align our operations to reduce our cost base, refocus our
team on the defensible categories of hair color and hair care, and
improve execution of basic retail fundamentals, all with the goal of
returning the business to growth," Brickman continued. "This effort will
take multiple quarters, but we have already made progress and we are
fully committed to transforming and investing in our business,
controlling our indebtedness, and returning capital to shareholders."

In terms of activities during the third quarter, we accomplished the
following:

  • Implemented significant organizational efficiencies at our central
    operations in the U.S. and Europe, with savings that we can see in the
    operating results notwithstanding the increase in selling, general and
    administrative expenses during the quarter versus the prior year;
  • Completed the roll-out of field structure realignment and store wage
    increases, alongside store labor hour optimization, within Sally
    Beauty Supply;
  • Optimized elements of our freight spend;
  • Kicked off our long-term efforts to improve direct and indirect
    sourcing;
  • Completed the product design work in support of the upcoming launch of
    boxed color;
  • Launched the Sally Beauty Cultivate program in order to connect with
    women entrepreneurs in the beauty space and source new innovation.

In the fourth quarter, our team will focus on the following actions:

  • Executing changes to our owned-brand sourcing to improve profitability;
  • Expanding the focus of our sourcing and store labor work to the Beauty
    Systems Group and our European and Mexican operations;
  • Implementing further cost benefits from our organizational redesign;
  • Making progress in resolving the supply issues from our key vendors
    and reloading our network with the right inventory;
  • Assessing our supply chain operations and vendor partnership efforts
    for further opportunities.

As we move into fiscal year 2019, our transformation plan will
continue and will be focused around the following key long-term
objectives:

  • Playing to win with our customers by re-focusing our marketing
    and merchandising efforts in service of their needs in our
    differentiated core of the business – hair color and hair care. This
    includes entering a multi-billion dollar category and launching box
    color across our Sally Beauty Supply network. In our Beauty Systems
    Group division, we recently expanded our distribution rights of
    important hair color and hair care brands manufactured by Coty, namely
    Sebastian, Nioxin and Kadus, and we will continue to pursue additional
    new and exclusive brands, which bring new customers to our
    professional distribution business.
  • Improving our retail fundamentals through targeted investment
    in people, processes, technology and our stores. Initiatives include
    the launch of our new Sally Beauty Loyalty Program, a new
    point-of-sale system for both Sally Beauty and Beauty Systems Group
    and launching the first phase of a multi-year JDA supply-chain
    platform implementation, which will dramatically improve our
    merchandising capabilities and our ability to position inventory
    across our nodes.
  • Advancing our digital commerce capabilities: Sally stores will
    be testing "endless aisle" during the fourth quarter, a process where
    a store will be able to order out-of-stock product through a store
    iPad and have it shipped directly to the customer. Over the next
    several quarters, the Sally e-commerce site will undergo a site
    redesign, which will improve the site speed and overall online
    customer experience, including improved educational materials focused
    around hair color and hair care. Lastly, we expect that both Sally and
    Beauty Systems Group will be moving towards enhancing our customers'
    shopping experience through the convenience of "click and collect at
    store" and "click and delivery."
  • Continuing to drive costs out of the business through our
    continuous improvement efforts. We are seeking to achieve additional
    selling, general and administrative expense savings as a result of
    negotiations around benefits and third-party services.

Finally, as part of a portfolio-wide review of existing store locations,
the Company anticipates closing approximately 1% to 2% of its stores in
the U.S. and abroad. The dates of closure of individual stores will be
market and store specific over the coming year.

Additional Third Quarter Financial Detail

Gross margin for the third quarter was 49.5%, a decrease of 90 basis
points compared to the prior year. In the Sally segment, margin declines
were driven primarily by increased coupon redemptions and a geographic
revenue mix shift towards the segment's lower margin international
business. In the Beauty Systems Group segment, margin decreases were
driven primarily by opportunistic purchases in the prior year that were
not repeated this quarter and increased promotional activity.

GAAP operating earnings and operating margin in the third quarter were
$102.2 million and 10.3%, respectively, compared to $130.3 million and
13.1%, respectively, in the prior year. Adjusted operating earnings and
operating margin (excluding restructuring charges in both years and the
data security incident charges from this year) were $122.7 million and
12.3%, respectively, compared to $135.4 million and 13.6%, respectively,
in the prior year.

The Company's effective tax rate for the third quarter was 25.1%
compared to 35.6% in the prior year, with the significant reduction
driven by the impact of U.S. tax reform.

GAAP net earnings in the third quarter were $58.2 million, a decrease of
$8.3 million, or 12.5%, from the prior year. Adjusted EBITDA in the
third quarter was $152.5 million, a decrease of $14.5 million, or 8.7%,
from the prior year, and Adjusted EBITDA margin was 15.3%, a decline of
approximately 140 basis points from the prior year.

At the end of the quarter, inventory was $951.0 million, up 0.4% from
the prior year. The increase was driven by the impact of a weaker U.S.
dollar on reported inventory levels and inventory related to the H.
Chalut Ltée acquisition that closed in the first quarter.

Capital expenditures in the quarter were $23.5 million, primarily for
information technology projects, store remodels and maintenance, and
distribution facility upgrades.

As a result of a focus on the levels of indebtedness, the outstanding
balance on the asset-based revolving line of credit was reduced from
$80.5 million at the end of the second quarter to $63.5 million at the
end of the third quarter. Additionally, the Company repurchased (and
subsequently retired) a total of 3.2 million shares of common stock
during the third quarter at an aggregate cost of $50.1 million.

Fiscal Year 2018 Guidance

Sally Beauty Holdings' updated guidance reflects the impact of the
implementation of its transformation plan, the competitive environment
and the near-term impact of supplier issues.

The Company expects full year consolidated same store sales to decline
in the range of 1.5% to 1.9%.

Full year gross margin is expected to decrease by approximately 50 basis
points compared to the prior year, primarily due to price investments
made in Sally during the first quarter, increased promotional activity
and a business segment mix shift, partially offset by recent price
increases on exclusive brands.

Full year adjusted selling, general and administrative expenses
(including depreciation and amortization expense) are expected to be
approximately 37.7% of sales versus 37.2% of sales in the prior year.
While operating efficiencies from recent restructurings are
identifiable, they will not achieve full run rate status until fiscal
year 2019 and are expected to be offset for the remainder of fiscal year
2018 by investments in the business.

Due to the benefits of U.S. tax reform, the Company expects the
consolidated effective tax rate for fiscal year 2018 to be in the range
of 22% to 23%. Excluding the one-time adjustments from the first quarter
(net impact of the revaluation of deferred income taxes partially offset
by a deemed repatriation tax on previously undistributed foreign
earnings), the Company expects the consolidated effective tax rate for
fiscal year 2018 to be in the range of 28% to 29%. Additionally, the
Company expects a significant portion of the benefits from U.S. tax
reform will flow through directly to net earnings.

Full year GAAP operating earnings are expected to decrease by 11% to 13%
due primarily to the decline in same store sales, gross margin declines,
restructuring costs in fiscal year 2018 and expenses related to the
previously disclosed data security incidents. Full year adjusted
operating earnings are expected to decline by 8% to 10%, driven
primarily by the decline in same store sales, gross margin declines and
slightly higher adjusted selling, general and administrative expenses.

The Company continues to expect full year benefits from its debt
refinancing, lower average share count and the benefits of U.S. tax
reform to result in double-digit growth in both GAAP and adjusted
diluted earnings per share.

Fiscal 2018 Third Quarter Segment Results

Sally Beauty Supply

  • Net sales were $591.6 million in the quarter, a decrease of 0.6%
    compared to the prior year. Foreign currency translation boosted the
    segment's revenue growth in the quarter by 130 basis points. Same
    store sales decreased 1.6%.
  • At the end of the quarter, net store count was 3,775, a decrease of 51
    from the prior year.
  • Gross margin decreased 60 basis points to 55.4% in the quarter, driven
    primarily by increased coupon redemptions and a geographic revenue mix
    shift towards the segment's lower margin international business.
  • GAAP operating earnings were $94.9 million in the quarter, a decrease
    of 9.5% versus the prior year. GAAP operating margin was 16.0%, a 160
    basis point decrease from the prior year.

Beauty Systems Group

  • Net sales were $404.7 million in the quarter, an increase of 0.4%
    compared to the prior year. Foreign currency translation increased the
    segement's revenue growth by approximately 40 basis points. Same store
    sales declined 2.9%.
  • At the end of the quarter, net store count was 1,395, up 33 from the
    prior year, driven by the H. Chalut Ltée acquisition and the net
    increase in CosmoProf stores.
  • Gross margin decreased 110 basis points to 40.9% in the quarter,
    driven primarily by opportunistic purchases in the prior year that
    were not repeated this quarter and increased promotional activity.
  • GAAP operating earnings were $62.0 million in the quarter, a decrease
    of 7.9% versus the prior year. GAAP operating margin in the quarter
    was 15.3%, a 140 basis point decrease from the prior year.
  • At the end of the quarter, total distributor sales consultants were
    837 compared to 839 in the prior year.

Conference Call and Where You Can Find Additional Information

The Company will hold a conference call and audio webcast today to
discuss its financial results and its business at approximately 7:30
a.m. Central Time. During the conference call, the Company may discuss
and answer one or more questions concerning business and financial
matters and trends affecting the Company. The Company's responses to
these questions, as well as other matters discussed during the
conference call, may contain or constitute material information that has
not been previously disclosed. Simultaneous to the conference call, an
audio webcast of the call will be available via a link on the Company's
website, investor.sallybeautyholdings.com. The conference call can be
accessed by dialing (866) 233-3845 (International: (612) 234-9959). The
teleconference will be held in a "listen-only" mode for all participants
other than the Company's current sell-side and buy-side investment
professionals. A replay of the earnings conference call will be
available starting at 9:30 a.m. Central Time, August 2, 2018, through
August 9, 2018, by dialing (800) 475-6701 or if international, dial
(320) 365-3844 and reference the conference ID number 451023. Also, a
website replay will be available on investor.sallybeautyholdings.com

About Sally Beauty Holdings, Inc.

Sally Beauty Holdings, Inc. (NYSE:SBH) is an international specialty
retailer and distributor of professional beauty supplies with revenues
of approximately $3.9 billion annually. Through the Sally Beauty Supply
and Beauty Systems Group businesses, the Company sells and distributes
through 5,170 stores, including 184 franchised units, and has operations
throughout the United States, Puerto Rico, Canada, Mexico, Chile, Peru,
the United Kingdom, Ireland, Belgium, France, the Netherlands, Spain and
Germany. Sally Beauty Supply stores offer up to 8,000 products for hair,
skin, and nails through professional lines such as OPI®,
China Glaze®, Wella®, Clairol®, Conair®
and Hot Shot Tools®, 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 10,500 professionally branded products including
Paul Mitchell®, Wella®, Matrix®,
Schwarzkopf®, Kenra®, Goldwell®, Joico®
and Aquage®, intended for use in salons and for resale by
salons to retail consumers. For more information about Sally Beauty
Holdings, Inc., please visit sallybeautyholdings.com.

Cautionary Notice Regarding Forward-Looking Statements

Statements in this news release and the schedules hereto which are not
purely historical facts or which depend upon future events may be
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. 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 successfully implement our long-term
strategic and growth initiatives; our ability to efficiently manage and
control our costs and the success of our cost control plans, including
our recent restructuring plans; 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 the mix of products 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 the 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 and integrating desirable
acquisitions; opening and operating new stores profitably; the volume of
traffic to our stores; the challenges of conducting business outside the
United States; the impact of Britain's separation from the European
Union and related or other disruptive events in the United Kingdom, 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', employees' or suppliers'
confidential information, and the potential costs related thereto; 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 and 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; 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; changes in interest rates increasing the cost of servicing or
refinancing 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, 2017, as filed with the Securities and Exchange
Commission. Consequently, all forward-looking statements in this release
are qualified by the factors, risks and uncertainties contained therein.
We assume no obligation to publicly update or revise any forward-looking
statements.

Use of Non-GAAP Financial Measures

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

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

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

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

Operating Free Cash Flow – We define the measure Operating Free
Cash Flow as GAAP net cash provided by operating activities less 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.

Supplemental Schedules        
 
Segment Information 1
Non-GAAP Financial Measures Reconciliations 2
Non-GAAP Financial Measures Reconciliations Continued; Adjusted
EBITDA and
Operating Free Cash Flow 3
Store Count and Same Store Sales 4
                 
SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
(In thousands, except per share data)
(Unaudited)
 
 
Three Months Ended June 30, Nine Months Ended June 30,
  2018       2017    

Percentage
Change

  2018       2017    

Percentage
Change

 
Net sales $ 996,283 $ 998,043 -0.2 % $ 2,966,568 $ 2,964,122 0.1 %
Cost of products sold   502,913       495,404     1.5 %   1,500,247       1,481,669     1.3 %
Gross profit 493,370 502,639 -1.8 % 1,466,321 1,482,453 -1.1 %
Selling, general and administrative expenses (1) 378,598 367,247 3.1 % 1,118,345 1,101,355 1.5 %
Restructuring charges   12,544       5,054     148.2 %   24,513       14,265     71.8 %
Operating earnings 102,228 130,338 -21.6 % 323,463 366,833 -11.8 %
Interest expense   24,501       26,969   -9.2 %   73,779       80,616     -8.5 %
Earnings before provision for income taxes 77,727 103,369 -24.8 % 249,684 286,217 -12.8 %
Provision for income taxes   19,501       36,830     -47.1 %   46,823       106,860     -56.2 %
Net earnings $ 58,226     $ 66,539     -12.5 % $ 202,861     $ 179,357     13.1 %
 
Earnings per share:
Basic $ 0.48 $ 0.49 -2.0 % $ 1.63 $ 1.28 27.3 %
Diluted $ 0.48     $ 0.49     -2.0 % $ 1.62     $ 1.28     26.6 %
 
Weighted average shares:
Basic 120,901 135,450 124,331 139,888
Diluted   121,673       136,159         125,111       140,634      

Basis Point
Change

Basis Point
Change

Comparison as a percentage of net sales

Consolidated gross margin 49.5 % 50.4 % (90 ) 49.4 % 50.0 % (60 )
Selling, general and administrative expenses 38.0 % 36.8 % 120 37.7 % 37.2 % 50
Consolidated operating margin 10.3 % 13.1 % (280 ) 10.9 % 12.4 % (150 )
 

Effective tax rate

  25.1 %     35.6 %   (1,050 )   18.8 %     37.3 %   (1,850 )
(1) For the three and nine months ended June 30, 2018, selling,
general and administrative expenses include $7.9 million of expenses
incurred in connection with the data security incidents.
       
SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands)
(Unaudited)
 

June 30,
2018

September 30,
2017

 
Cash and cash equivalents $ 76,855 $ 63,759
Trade and other accounts receivable 94,585 92,241
Inventory 950,978 930,855
Other current assets   42,089     55,223  
Total current assets 1,164,507 1,142,078
Property and equipment, net 296,614 313,717
Goodwill and other intangible assets 611,849 618,096
Other assets   22,742     25,116  
Total assets $ 2,095,712   $ 2,099,007  
 
Current maturities of long-term debt $ 68,992 $ 96,082
Accounts payable 310,488 307,752
Accrued liabilities 166,505 166,527
Income taxes payable   3,148     2,233  
Total current liabilities 549,133 572,594
Long-term debt, including capital leases 1,769,314 1,771,853
Other liabilities 33,774 20,140
Deferred income tax liabilities   69,700     98,036  
Total liabilities 2,421,921 2,462,623
Total stockholders' deficit   (326,209 )   (363,616 )
Total liabilities and stockholders' deficit $ 2,095,712   $ 2,099,007  
 
Supplemental Schedule 1
               
SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES
Segment Information
(In thousands)
(Unaudited)
 
 
Three Months Ended June 30, Nine Months Ended June 30,
  2018       2017    

Percentage
Change

  2018       2017    

Percentage
Change

Net sales:
Sally Beauty Supply ("SBS") $ 591,583 $ 594,880 -0.6 % $ 1,757,272 $ 1,760,732 -0.2 %
Beauty Systems Group ("BSG")   404,700     403,163   0.4 %   1,209,296     1,203,390   0.5 %
Total net sales $ 996,283   $ 998,043   -0.2 % $ 2,966,568   $ 2,964,122   0.1 %
 
Operating earnings:
SBS $ 94,912 $ 104,880 -9.5 % $ 271,834 $ 294,245 -7.6 %
BSG   62,039     67,327   -7.9 %   186,553     193,630   -3.7 %
Segment operating earnings 156,951 172,207 -8.9 % 458,387 487,875 -6.0 %
 
Unallocated expenses (1) (42,179 ) (36,815 ) 14.6 % (110,411 ) (106,777 ) 3.4 %
Restructuring charges (12,544 ) (5,054 ) 148.2 % (24,513 ) (14,265 ) 71.8 %
Interest expense   (24,501 )   (26,969 ) -9.2 %   (73,779 )   (80,616 ) -8.5 %
Earnings before provision for income taxes $ 77,727   $ 103,369   -24.8 % $ 249,684   $ 286,217   -12.8 %
 
 
Segment gross margin:   2018     2017  

Basis Point
Change

  2018     2017  

Basis Point
Change

SBS 55.4 % 56.0 % (60 ) 55.2 % 55.8 % (60 )
BSG 40.9 % 42.0 % (110 ) 41.0 % 41.6 % (60 )
 
Segment operating margin:
SBS 16.0 % 17.6 % (160 ) 15.5 % 16.7 % (120 )
BSG 15.3 % 16.7 % (140 ) 15.4 % 16.1 % (70 )
Consolidated operating margin   10.3 %   13.1 % (280 )   10.9 %   12.4 % (150 )
(1) Unallocated expenses, including share-based compensation
expense, consist of corporate and shared costs and are included in
selling, general and administrative expenses. For the three and nine
months ended June 30, 2018, unallocated expenses include $7.9
million of expenses incurred in connection with the data security
incidents.
           
Supplemental Schedule 2
 
SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES
Non-GAAP Financial Measures Reconciliations, Continued
(In thousands, except per share data)
(Unaudited)
 
 
Three Months Ended June 30, 2018

As Reported
(GAAP)

 

Restructuring
Charges (1)

 

Charges from
Data Security
Incidents (2)

 

As Adjusted
(Non-GAAP)

 
Selling, general and administrative expenses $ 378,598 $ - $ (7,935 ) $ 370,663
SG&A expenses, as a percentage of sales 38.0 % 37.2 %
Operating earnings 102,228 12,544 7,935 122,707
Operating margin 10.3 % 12.3 %
Earnings before provision for income taxes 77,727 12,544 7,935 98,206
Provision for income taxes (3)   19,501       3,324     2,301       25,126  
Net earnings $ 58,226     $ 9,220   $ 5,634     $ 73,080  
 
Earnings per share:
Basic $ 0.48 $ 0.08 $ 0.05 $ 0.60
Diluted $ 0.48     $ 0.08   $ 0.05     $ 0.60  
 
Three Months Ended June 30, 2017

As Reported
(GAAP)

 

Restructuring
Charges (1)

     

As Adjusted
(Non-GAAP)

 
Selling, general and administrative expenses $ 367,247 $ - $ 367,247
SG&A expenses, as a percentage of sales 36.8 % 36.8 %
Operating earnings 130,338 5,054 135,392
Operating margin 13.1 % 13.6 %
Earnings before provision for income taxes 103,369 5,054 108,423
Provision for income taxes (3)   36,830       1,162         37,992  
Net earnings $ 66,539     $ 3,892       $ 70,431  
 
Earnings per share:
Basic $ 0.49 $ 0.03 $ 0.52
Diluted $ 0.49     $ 0.03       $ 0.52  
 
(1) Restructuring charges represent costs and expenses incurred in
connection with the 2017 Restructuring Plan disclosed in February
2017 and the 2018 Restructuring Plan disclosed in November 2017.
 
(2) Charges from data security incidents are included in selling,
general and administrative expenses and represent expenses
(including assessments by credit card networks, remediation costs,
and other costs and expenses) incurred in connection with the data
security incidents disclosed earlier.
 
(3) The income tax provision associated with restructuring charges
for the fiscal years 2018 and 2017 was calculated using a 26.5% and
23.0% tax rate, respectively, since realization of a tax benefit for
portions of these expenses are currently not deemed probable. The
income tax provision associated with charges from data security
incidents was calculated using an effective tax rate of 29.0%.
             
Supplemental Schedule 3
 
SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES
Non-GAAP Financial Measures Reconciliations, Continued
(In thousands)
(Unaudited)
 
 
Three Months Ended June 30, Nine Months Ended June 30,
Adjusted EBITDA:   2018       2017    

Percentage
Change

  2018       2017    

Percentage
Change

 
Net earnings $ 58,226 $ 66,539 -12.5 % $ 202,861 $ 179,357 13.1 %
Add:
Depreciation and amortization 27,419 29,255 -6.3 % 81,428 83,972 -3.0 %
Interest expense 24,501 26,969 -9.2 % 73,779 80,616 -8.5 %
Provision for income taxes   19,501       36,830     -47.1 %   46,823       106,860     -56.2 %
EBITDA (non-GAAP) 129,647 159,593 -18.8 % 404,891 450,805 -10.2 %
Share-based compensation 2,387 2,378 0.4 % 8,237 8,590 -4.1 %
Restructuring charges 12,544 5,054 148.2 % 24,513 14,265 71.8 %
Charges from Data Security Incidents   7,935       -     100.0 %   7,935       -     100.0 %
Adjusted EBITDA (non-GAAP) $ 152,513     $ 167,025     -8.7 % $ 445,576     $ 473,660     -5.9 %
 

Basis Point
Change

Basis Point
Change

Adjusted EBITDA as a percentage of net sales

Adjusted EBITDA margin   15.3 %     16.7 %   (140 )   15.0 %     16.0 %   (100 )
 
 
Operating Free Cash Flow:   2018       2017    

Percentage
Change

  2018       2017    

Percentage
Change

Net cash provided by operating activities $ 102,480 $ 63,440 61.5 % $ 281,930 $ 222,847 26.5 %
Less:
Payments for property and equipment, net   (23,492 )     (17,209 )   36.5 %   (62,171 )     (66,529 )   -6.6 %
Operating free cash flow (non-GAAP) $ 78,988     $ 46,231     70.9 % $ 219,759     $ 156,318     40.6 %
 
Supplemental Schedule 4
               
SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES
Store Count and Same Store Sales
(Unaudited)
 
 
As of June 30,
2018   2017   Change
 
Number of stores:
SBS:
Company-operated stores 3,758 3,807 (49 )
Franchise stores 17 19 (2 )
Total SBS 3,775 3,826 (51 )
BSG:
Company-operated stores 1,228 1,196 32
Franchise stores 167 166 1  
Total BSG 1,395 1,362 33  
Total consolidated 5,170 5,188 (18 )
 
Number of BSG distributor sales consultants 837 839 (2 )
 
BSG distributor sales consultants (DSC) include 265 and 257 sales
consultants employed by our franchisees at June 30, 2018 and 2017,
respectively. In addition, at June 30, 2018, DSC count includes 38
sales consultants employed by Chalut, a Canadian distributor of
professional beauty products, prior to the Company's acquisition of
Chalut in December 2017.
     
Three Months Ended June 30, Nine Months Ended June 30,
2018     2017    

Basis Point
Change

2018     2017    

Basis Point
Change

Same store sales growth (decline):        
SBS -1.6 % -0.8 % (80 ) -1.9 % -1.3 % (60 )
BSG -2.9 % 2.8 % (570 ) -1.8 % 1.4 % (320 )
Consolidated -2.0 % 0.3 % (230 ) -1.9 % -0.4 % (150 )
 
For the purpose of calculating our same store sales metrics, we
compare the current period sales for stores open for 14 months or
longer as of the last day of a month with the sales for these stores
for the comparable period in the prior fiscal year. Our same store
sales are calculated in constant U.S. dollars and include
internet-based sales and the effect of store expansions, if
applicable, but do not generally include the sales from stores
relocated until 14 months after the relocation. The sales from
stores acquired are excluded from our same store sales calculation
until 14 months after the acquisition.

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