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FINACIAL RESULTS IN 2019

MARKET FOR THE REGISTRANT'S COMMON EQUITY

Market Information / Dividends

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 that 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 of Directors and will depend on our financial condition, results of operations, contractual restrictions, cash requirements and other factors that our Board of Directors deem relevant.

We depend on our subsidiaries for cash that we would use to pay dividends. However, the terms of our debtagreements and instruments significantly restrict the ability of our subsidiaries to make certain restricted payments to us and our ability to pay dividends. Additionally, we and our subsidiaries may incur substantial additional indebtedness in the future that may severely restrict or prohibit our subsidiaries from making distributions, paying dividends or making loans to us.

PERFORMANCE GRAPH

The following performance graph and related information shall not be deemed “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under theSecurities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference into such filing.

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 that $100 was invested on September 30, 2014 and that 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.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN

Fiscal year ended 2015 2016 2017 2018
Sally Beauty Holdings, Inc 86.77 99.39 123.25 114.14
S&P 500 71.54 75.33 80.22 122.22
DJ US Specialty Retailers 93.83 123.23 122.55 111.25
Sally Beauty Holdings, Inc 71.54 155.58 123.33 189.99

FINANCIAL CONDITION (AT END OF PERIOD)

  • In the fiscal years 2019, 2018, 2017, 2016 and 2015, selling, general and administrative expenses includedepreciation and amortization of $107.7 million, $108.8 million, $112.3 million, $99.7 million and$89.4 million, respectively
  • In the fiscal years 2017 and 2016, interest expense reflects a loss on extinguishment of debt of $28.0 millionand $33.3 million, respectively, related to our refinancing of certain outstanding senior notes in the ordinary course of our business.
  • For the purpose of calculating our same store sales metrics, we compare the current period sales for storesopen 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 includee-commerce sales from only certain digital platforms, but do not generally include the sales from storesrelocated 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.
  • Stockholders’ deficit for the fiscal years 2019, 2018, 2017, 2016 and 2015 reflects the repurchase and retirement of 3.6 million shares, 10.0 million shares, 16.1 million shares, 7.8 million shares and 8.1 million shares of our common stock at a cost of $46.6 million, $165.9 million, $346.1 million, $207.3 million and $227.6 million, respectively, under share repurchase programs approved by the Company’s Board of Directors.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following section discusses management’s view of the financial condition as of September 30, 2019 and 2018, and the results of operations and cash flows for the three fiscal years in the period ended September 30, 2019, of Sally Beauty. 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-lookingstatements. 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.

HIGHLIGHTS OF THE FISCAL YEAR ENDED SEPTEMBER 30, 2019

  • Consolidated net sales for the fiscal year ended September 30, 2019, decreased $56.2 million, or 1.4%,to $3,876.4 million, compared to the prior fiscal year. Consolidated net sales for the fiscal year endedSeptember 30, 2019, include a negative impact from changes in foreign currency exchange rates of$31.9 million, or 0.8% of consolidated net sales;
  • Consolidated same store sales increased 0.3% and consolidated e-commerce sales increased by 29.4% compared to the prior fiscal year;
  • Consolidated gross profit for the fiscal year ended September 30, 2019, decreased by $33.9 million, or 1.7%, to $1,910.5 million, compared to the prior fiscal year. Gross margin decreased 10 basis points to 49.3% for the fiscal year ended September 30, 2019, compared to the prior fiscal year;
  • Consolidated operating earnings for the fiscal year ended September 30, 2019, increased $31.9 million,or 7.5%, to $458.5 million, compared to the prior fiscal year. Operating margin increased 100 basis points to 11.8% for the fiscal year ended September 30, 2019, compared to the prior fiscal year;
  • Consolidated net earnings increased $13.6 million, or 5.3%, to $271.6 million, compared to the prior fiscal year;
  • Diluted earnings per share for the fiscal year ended September 30, 2019, were $2.26 compared to $2.08 for the prior fiscal year;
  • Cash provided by operations was $320.4 million for the fiscal year ended September 30, 2019,compared to $372.7 million for the prior fiscal year;
  • During the year, we strategically paid down an additional $115.0 million aggregate principle of our term loan B and repurchased approximately $64.8 million aggregate principal amount of our 2023 and 2025 senior notes;
  • We repurchased and retired approximately 3.6 million shares of our common stock under the 2017 Share Repurchase Program at an aggregate cost of $46.6 million; and
  • In September 2019, we entered into a multi-year agreement with Alliance Data’s card services business to launch a private label credit card for both SBS and BSG to benefit our retail and professional customers.

BUSINESS STRATEGY UPDATE

We continue to make solid progress against our transformation as we play to win by focusing on hair color and hair care, improve our retail fundamentals, advance our digital commerce capabilities and drive cost out of the business. As part of this effort, we made progress on our supply chain modernization effort, reduced our debt levels, and rolled out new e-commerce tools such as the Sally Beauty Supply app

During the year, we began rolling out a new point-of-sale system in both SBS and BSG nationwide, which will allow our store associates to better serve our customers.

In February 2019, we announced our supply chain modernization plans to gain efficiencies and cost savings. During the fiscal year 2019, we have closed select fulfillment centers, including in the U.S. and within Europe, and identified a location in Texas and signed a lease agreement for a new approximately 500,000 square foot automated and concentrated distribution center, which we anticipate opening by March 2020. Additionally, we identified a location and signed a lease agreement for a new distribution center that will service operations in Ghent, Belgium.