UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED: DECEMBER 31, 2023

or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 1-33145

SALLY BEAUTY HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

Delaware	36-2257936
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
3001 Colorado Boulevard
Denton, Texas	76210
(Address of principal executive offices)	(Zip Code)

(940) 898-7500

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, $0.01 par value	SBH	The New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☒	Accelerated filer	☐	Non-accelerated filer	☐
Smaller reporting company	☐	Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Number of shares of common stock outstanding as of January 26, 2024: 104,883,609

TABLE OF CONTENTS

	Page
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements	4
Condensed Consolidated Balance Sheets	4
Condensed Consolidated Statements of Earnings	5
Condensed Consolidated Statements of Comprehensive Income	6
Condensed Consolidated Statements of Stockholders’ Equity	7
Condensed Consolidated Statements of Cash Flows	8
Notes to Condensed Consolidated Financial Statements	9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3. Quantitative and Qualitative Disclosures About Market Risk	21
Item 4. Controls and Procedures	21
PART II — OTHER INFORMATION
Item 1. Legal Proceedings	22
Item 1A. Risk Factors	22
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities.	22
Item 5. Other Information	22
Item 6. Exhibits	23

2

In this Quarterly Report, references to “the Company,” “Sally Beauty,” “our company,” “we,” “our,” “ours” and “us” refer to Sally Beauty Holdings, Inc. and its consolidated subsidiaries unless otherwise indicated or the context otherwise requires.

cautionary notice regarding forward-looking statements

Statements in this Quarterly Report on Form 10-Q 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, which we refer to as the Exchange Act. 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 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 contained in our Annual Report on Form 10-K for the fiscal year ended September 30, 2023, 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.

The events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than we have described. As a result, our actual results may differ materially from the results contemplated by these forward-looking statements.

3

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except par value data)

	December 31, 2023			September 30, 2023
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	120,999		$	123,001
Trade accounts receivable, net		32,164			33,421
Accounts receivable, other		46,325			42,454
Inventory		1,007,628			975,218
Other current assets		55,748			53,903
Total current assets		1,262,864			1,227,997
Property and equipment, net of accumulated depreciation of $811,658 at    December 31, 2023, and $780,212 at September 30, 2023		284,899			297,779
Operating lease assets		551,639			570,657
Goodwill		536,686			533,081
Intangible assets, excluding goodwill, net of accumulated amortization of    $32,121 at December 31, 2023, and $30,587 at September 30, 2023		55,186			55,171
Other assets		40,112			40,565
Total assets	$	2,731,386		$	2,725,250
Liabilities and Stockholders’ Equity
Current liabilities:
Current maturities of long-term debt	$	4,168		$	4,173
Accounts payable		267,479			258,884
Accrued liabilities		139,573			163,366
Current operating lease liabilities		147,069			150,479
Income taxes payable		14,780			2,355
Total current liabilities		573,069			579,257
Long-term debt		1,065,299			1,065,811
Long-term operating lease liabilities		438,928			455,071
Other liabilities		22,465			23,139
Deferred income tax liabilities, net		90,285			93,224
Total liabilities		2,190,046			2,216,502
Stockholders’ equity:
Common stock, $0.01 par value. Authorized 500,000 shares; 104,857 and    106,266 shares issued and shares outstanding at December 31, 2023, and    September 30, 2023, respectively		1,049			1,063
Preferred stock, $0.01 par value. Authorized 50,000 shares; none issued		—			—
Additional paid-in capital		—			5,677
Accumulated earnings		652,247			624,772
Accumulated other comprehensive loss, net of tax		(111,956	)		(122,764	)
Total stockholders’ equity		541,340			508,748
Total liabilities and stockholders’ equity	$	2,731,386		$	2,725,250

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Earnings

(In thousands, except per share data)

(Unaudited)

	Three Months Ended
	December 31,
	2023			2022
Net sales	$	931,302		$	957,055
Cost of goods sold		464,126			468,481
Gross profit		467,176			488,574
Selling, general and administrative expenses		398,138			391,580
Restructuring		(85	)		10,406
Operating earnings		69,123			86,588
Interest expense		17,314			17,923
Earnings before provision for income taxes		51,809			68,665
Provision for income taxes		13,419			18,328
Net earnings	$	38,390		$	50,337
Earnings per share:
Basic	$	0.36		$	0.47
Diluted	$	0.35		$	0.46
Weighted-average shares:
Basic		105,948			107,140
Diluted		108,718			109,460

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(In thousands)

(Unaudited)

	Three Months Ended
	December 31,
	2023			2022
Net earnings	$	38,390		$	50,337
Other comprehensive income:
Foreign currency translation adjustments		16,367			25,941
Interest rate swap, net of tax		(3,088	)		—
Interest rate caps, net of tax		—			203
Foreign exchange contracts, net of tax		(2,471	)		(910	)
Other comprehensive income, net of tax		10,808			25,234
Total comprehensive income	$	49,198		$	75,571

The accompanying notes are an integral part of these condensed consolidated financial statements.

6

SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders’ Equity

(In thousands)

(Unaudited)

													Accumulated
							Additional						Other			Total
	Common Stock						Paid-in			Accumulated			Comprehensive			Stockholders’
	Shares			Amount			Capital			Earnings			Loss			Equity
Balance at September 30, 2023		106,266		$	1,063		$	5,677		$	624,772		$	(122,764	)	$	508,748
Net earnings		—			—			—			38,390			—			38,390
Other comprehensive income		—			—			—			—			10,808			10,808
Share-based compensation		—			—			5,118			—			—			5,118
Stock issued for equity awards		722			7			209			—			—			216
Employee withholding taxes paid    related to net share settlement		(192	)		(2	)		(1,738	)		—			—			(1,740	)
Repurchases and cancellations of    common stock		(1,939	)		(19	)		(9,266	)		(10,915	)		—			(20,200	)
Balance at December 31, 2023		104,857		$	1,049		$	-		$	652,247		$	(111,956	)	$	541,340

												Accumulated
							Additional					Other			Total
	Common Stock						Paid-in			Accumulated		Comprehensive			Stockholders’
	Shares			Amount			Capital			Earnings		Loss			Equity
Balance at September 30, 2022		106,970		$	1,070		$	4,241		$	440,172	$	(151,847	)	$	293,636
Net earnings		—			—			—			50,337		—			50,337
Other comprehensive income		—			—			—			—		25,234			25,234
Share-based compensation		—			—			5,135			—		—			5,135
Stock issued for equity awards		404			4			78			—		—			82
Employee withholding taxes paid    related to net share settlement		(90	)		(1	)		(1,125	)		—		—			(1,126	)
Balance at December 31, 2022		107,284		$	1,073		$	8,329		$	490,509	$	(126,613	)	$	373,298

The accompanying notes are an integral part of these condensed consolidated financial statements.

7

SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Three Months Ended December 31,
	2023			2022
Cash Flows from Operating Activities:
Net earnings	$	38,390		$	50,337
Adjustments to reconcile net earnings to net cash provided     by operating activities:
Depreciation and amortization		28,063			25,285
Share-based compensation expense		5,118			5,135
Amortization of deferred financing costs		637			648
Impairment of long-lived assets, including operating lease assets		—			2,103
Loss on disposal of equipment and other property		2			77
Deferred income taxes		(3,237	)		889
Changes in (exclusive of effects of acquisitions):
Trade accounts receivable		1,715			2,270
Accounts receivable, other		(3,294	)		(3,817	)
Inventory		(24,159	)		(38,019	)
Other current assets		(1,117	)		(4,018	)
Other assets		(1,709	)		4,074
Operating leases, net		(641	)		(10,392	)
Accounts payable and accrued liabilities		(642	)		7,606
Income taxes payable		12,586			12,460
Other liabilities		(692	)		313
Net cash provided by operating activities		51,020			54,951
Cash Flows from Investing Activities:
Payments for property and equipment, net of proceeds		(30,551	)		(25,007	)
Acquisitions, net of cash acquired		(218	)		—
Net cash used by investing activities		(30,769	)		(25,007	)
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt		67,000			229,000
Repayments of long-term debt		(68,052	)		(233,927	)
Proceeds from equity awards		216			60
Payments for common stock repurchased		(20,200	)		—
Employee withholding taxes paid related to net share settlement of equity awards		(1,740	)		(1,125	)
Net cash used by financing activities		(22,776	)		(5,992	)
Effect of foreign exchange rate changes on cash and cash equivalents		523			4,561
Net (decrease) increase in cash and cash equivalents		(2,002	)		28,513
Cash and cash equivalents, beginning of period		123,001			70,558
Cash and cash equivalents, end of period	$	120,999		$	99,071
Supplemental Cash Flow Information:
Interest paid	$	27,272		$	26,758
Income taxes paid	$	3,495		$	3,081
Capital expenditures incurred but not paid	$	5,206		$	5,542

The accompanying notes are an integral part of these condensed consolidated financial statements.

8

Sally Beauty Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Significant Accounting Policies

Basis of Presentation

The unaudited condensed consolidated interim financial statements of Sally Beauty Holdings, Inc. and its subsidiaries included herein have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and pursuant to the rules and regulations of the SEC. Accordingly, certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC, although we believe that the disclosures included herein are adequate for the interim period presented. These condensed consolidated interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2023. In the opinion of management, these unaudited condensed consolidated interim financial statements reflect all adjustments that are of a normal recurring nature and which are necessary to present fairly our consolidated financial position as of December 31, 2023, and September 30, 2023, our consolidated results of operations, consolidated comprehensive income, consolidated statements of stockholders’ equity and consolidated cash flows for the three months ended December 31, 2023 and 2022.

Principles of Consolidation

The unaudited condensed consolidated interim financial statements include all accounts of Sally Beauty Holdings, Inc. and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. All amounts are in U.S. Dollars.

Accounting Policies

We adhere to the same accounting policies in the preparation of our condensed consolidated interim financial statements as we do in the preparation of our full year consolidated financial statements. As permitted under GAAP, interim accounting for certain expenses, including income taxes, is based on full-year assumptions. For interim financial reporting purposes, income taxes are recorded based upon our estimated annual effective income tax.

Use of Estimates

In order to present our financial statements in conformity with GAAP, we are required to make certain estimates and assumptions that impact our interim financial statements and supplementary disclosures. These estimates may use forecasted financial information based on reasonable information available, however 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.

2. Recent Accounting Pronouncements

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. We are currently evaluating the impact of this update, but do not expect the update to impact our consolidated results of operations or financial position.

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 do not expect the update to impact our consolidated results of operations or financial position.

9

3. Revenue Recognition

Substantially all of our revenue is derived through the sale of merchandise at the point-of-sale. Revenue is recognized net of estimated sales returns and sales taxes. We estimate sales returns based on historical data.

Changes to our contract liabilities, which are included in accrued liabilities in our condensed consolidated balance sheets, for the periods were as follows (in thousands):

	Three Months Ended December 31,
	2023			2022
Beginning Balance	$	14,038		$	13,460
Loyalty points and gift cards issued but not redeemed, net of estimated breakage		9,494			6,291
Revenue recognized from beginning liability		(7,942	)		(4,489	)
Ending Balance	$	15,590		$	15,262

See Note 10, Segment Reporting, for additional information regarding the disaggregation of our sales revenue.

4. Fair Value Measurements

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.

The three levels of that hierarchy are defined as follows:

Level 1 - Quoted prices are available in active markets for identical assets or liabilities;

Level 2 - Pricing inputs are other than quoted prices in active markets, included in Level 1, that are either directly or indirectly observable; and

Level 3 - Unobservable pricing inputs in which little or no market activity exists, therefore requiring an entity to develop its own model with estimates and assumptions.

Financial instruments measured at fair value on recurring basis

Consistent with the fair value hierarchy, we categorized our financial assets and liabilities as follow:

(in thousands)	Classification	Fair Value Hierarchy Level	December 31, 2023		September 30, 2023
Financial Assets:
Foreign exchange contracts
Non-designated cash flow hedges	Other current assets	Level 2	$	446	$	1,160
Interest rate swap	Other assets	Level 2		788		4,668
Total assets			$	1,234	$	5,828
.
Financial Liabilities:
Foreign exchange contracts
Designated cash flow hedges	Accrued liabilities	Level 2	$	1,869	$	—
Non-designated cash flow hedges	Accrued liabilities	Level 2		1,543		397
Total liabilities			$	3,412	$	397

The fair value of each asset and liability were measured using widely accepted valuation techniques, such as discounted cash flow analyses and observable inputs, such as market interest rates and foreign exchange rates.

10

Other fair value disclosures

The carrying amounts of cash equivalents, trade and other accounts receivable, and accounts payable and borrowing under our ABL facility approximate their respective fair values due to the short-term nature of these financial instruments. Carrying amounts and the related estimated fair value of our long-term debt, excluding finance lease obligations, debt issuance costs and original issue discounts, are as follows:

		December 31, 2023				September 30, 2023
(in thousands)	Fair Value Hierarchy Level	Carrying Value		Fair Value		Carrying Value		Fair Value
Long-term debt, excluding finance lease obligations
Senior notes	Level 1	$	679,961	$	679,961	$	679,961	$	662,962
Term loan B due 2030	Level 2		397,000		397,993		398,000		398,000
Total long-term debt		$	1,076,961	$	1,077,954	$	1,077,961	$	1,060,962

The fair values of our term loans were measured using quoted market prices for similar debt securities in active markets or widely accepted valuation techniques, such as discounted cash flow analyses, using observable inputs, such as market interest rates.

5. Stockholders’ Equity

Share Repurchases

In August 2017, our Board of Directors (“Board”) approved a share repurchase program authorizing us to repurchase up to $1.0 billion of our common stock, subject to certain limitations governed by our debt agreements. In July 2021, our Board approved a term extension of our share repurchase program to September 30, 2025. As of December 31, 2023, we had approximately $560.8 million of additional share repurchase authorizations remaining under our share repurchase program. For the three months ended December 31, 2023, we repurchased 1.9 million shares of our common stock at a total cost of $20.0 million, excluding the impact of excise taxes. For the three months ended December 31, 2022, we did not repurchase shares under our share repurchase program.

Accumulated Other Comprehensive Loss

The change in accumulated other comprehensive loss (“AOCL”) was as follows (in thousands):

	Foreign Currency Translation Adjustments			Interest Rate Swap			Foreign Exchange Contracts			Total
Balance at September 30, 2023	$	(124,846	)	$	3,716		$	(1,634	)	$	(122,764	)
Other comprehensive income (loss) before     reclassification, net of tax		16,367			(2,257	)		(3,895	)		10,215
Reclassification to net earnings, net of tax		—			(831	)		1,424			593
Balance at December 31, 2023	$	(108,479	)	$	628		$	(4,105	)	$	(111,956	)

The tax impact for the changes in other comprehensive income (loss) and the reclassifications to net earnings was not material.

6. Weighted-Average Shares

The following table sets forth the reconciliation of basic and diluted weighted-average shares (in thousands):

	Three Months Ended December 31,
	2023		2022
Weighted-average basic shares		105,948		107,140
Dilutive securities:
Stock option and stock award programs		2,770		2,320
Weighted-average diluted shares		108,718		109,460
Anti-dilutive options excluded from our computation of diluted shares		1,804		2,123

11

7. Goodwill and Intangible Assets

For the three months ended December 31, 2023, we considered potential triggering events and determined there were none during the period. No material impairment losses were recognized in the current or prior periods presented in connection with our goodwill and other intangible assets.

As of September 30, 2023, we determined that due to the recent decline in the Company's share price and market capitalization, among other factors, a quantitative assessment was required. Based on our September 30, 2023 quantitative assessment using a discounted cash flow, we estimated the fair value for our BSG reporting unit to be approximately 18% more than its carrying value. The critical assumptions used as part of our evaluation included a projected long-term revenue growth rate of 2.0% and a discount rate of 11.25%, based on a weighted-average cost of capital analysis (adjusted for company specific risk). Our September 30, 2023 quantitative assessment indicated that the fair value of our SBS segment was substantially higher than its carrying value. Goodwill allocated to our SBS and BSG reporting units, which are also defined as our SBS and BSG segment, was $86.4 million and $450.3 million, respectively, as of December 31, 2023.

	Three Months Ended December 31,
(in thousands)	2023		2022
Intangible assets amortization expense	$	860	$	1,008

For the three months ended December 31, 2023, changes in goodwill reflects the effects of foreign currency exchange rates of $4.0 million and adjustments of $0.4 million from the completion of our Goldwell of NY, Inc. acquisition fair value assessment. Additionally, the changes to other intangibles included effects of foreign currency exchange rates of $0.9 million.

8. Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

	December 31, 2023		September 30, 2023
Compensation and benefits	$	49,846	$	69,915
Deferred revenue		20,422		18,259
Rental obligations		11,368		11,266
Insurance reserves		6,805		6,656
Interest payable		3,898		13,447
Property and other taxes		2,271		2,617
Operating accruals and other		44,963		41,206
Total accrued liabilities	$	139,573	$	163,366

9. Derivative Instruments and Hedging Activities

During the three months ended December 31, 2023, we did not purchase or hold any derivative instruments for trading or speculative purposes. See Note 4, Fair Value Measurements, for the classification and fair value of our derivative instruments.

Designated Cash Flow Hedges

Foreign Currency Forwards

We regularly enter into foreign currency forwards to mitigate our exposure to exchange rate changes on forecasted inventory purchases in U.S. dollars by our foreign subsidiaries. At December 31, 2023, we held forwards, which expire ratably through September 30, 2024, with a notional amount, based upon exchange rates at December 31, 2023, as follows (in thousands):

Notional Currency	Notional Amount
Mexican Peso	$	16,538
Euro		8,742
Canadian Dollar		8,404
Total	$	33,684

Quarterly, the changes in fair value related to these foreign currency forwards are recorded into AOCL. As the forwards are exercised, the realized value is recognized into cost of goods sold, based on inventory turns, in our condensed consolidated statements of earnings. For the three months ended December 31, 2023 and 2022, we recognized a loss of $1.4 million and a gain of $0.3 million, respectively. Based on December 31, 2023 valuations and exchange rates, we expect to reclassify losses of approximately $2.2 million out of AOCL and into cost of goods sold over the next 12 months.

12

Interest Rate Swap

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 interest payment based on the 1-month Adjusted Term SOFR Rate. The interest rate swap will mature in April 2026 and is designated as a cash flow hedge. Changes in the fair value of the interest rate swap are recorded quarterly, net of income tax, and included in AOCL.

For the three months ended December 31, 2023, we recognized income of $0.8 million into interest expense on our condensed consolidated statements of earnings related to the interest rate swap. At December 31, 2023, we expect to reclassify gains of approximately $1.9 million out of AOCL and into interest expense over the next 12 months.

Interest Rate Caps

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 being hedged no longer occurring as a result of the repayment of our prior term loan. The effects of our interest rate caps on our condensed consolidated statements of earnings were not material for the three months ended December 31, 2022.

Non-Designated Derivative Instruments

We also use foreign exchange contracts to mitigate our exposure to exchange rate changes in connection with certain intercompany balances not permanently invested. At December 31, 2023, we held forwards, which settle on various dates in the first month of the next two fiscal quarters, with a notional amount, based upon exchange rates at December 31, 2023, as follows (in thousands):

Notional Currency	Notional Amount
British Pound	$	44,723
Mexican Peso		21,517
Euro		20,679
Canadian Dollar		17,275
Total	$	104,194

We record changes in fair value and realized gains or losses related to these foreign currency forwards into selling, general and administrative expenses. For the three months ended December 31, 2023 and 2022, the effects of these foreign exchange contracts on our condensed consolidated financial statements were losses of $1.3 million and gains of $0.4 million, respectively.

10. Segment Reporting

Segment data for the three months ended December 31, 2023 and 2022, is as follows (in thousands):

	Three Months Ended December 31,
	2023			2022
Net sales:
Sally Beauty Supply ("SBS")	$	523,238		$	549,472
Beauty Systems Group ("BSG")		408,064			407,583
Total	$	931,302		$	957,055
Earnings before provision for income taxes:
Segment operating earnings:
SBS	$	77,629		$	99,174
BSG		44,627			49,647
Segment operating earnings		122,256			148,821
Unallocated expenses		53,218			51,827
Restructuring		(85	)		10,406
Consolidated operating earnings		69,123			86,588
Interest expense		17,314			17,923
Earnings before provision for income taxes	$	51,809		$	68,665

Sales between segments, which are eliminated in consolidation, were not material during the three months ended December 31, 2023 and 2022.

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Disaggregation of net sales by segment

Periodically, we make minor adjustments to our product hierarchy, that impacts the roll-up of our merchandise categories. As a result, certain prior year amounts have been reclassified to conform to current year presentation. The following tables disaggregate our segment revenues by merchandise category.

	Three Months Ended December 31,
SBS	2023			2022
Hair color		39.1	%		38.7	%
Hair care		24.6	%		23.4	%
Styling tools and supplies		18.2	%		19.5	%
Nail		10.1	%		10.3	%
Skin and cosmetics		7.4	%		7.4	%
Other beauty items		0.6	%		0.7	%
Total		100.0	%		100.0	%

	Three Months Ended December 31,
BSG	2023			2022
Hair care		42.9	%		43.5	%
Hair color		39.4	%		38.3	%
Styling tools and supplies		10.7	%		10.8	%
Skin and cosmetics		4.3	%		4.4	%
Nail		2.4	%		2.7	%
Other beauty items		0.3	%		0.3	%
Total		100.0	%		100.0	%

The following tables disaggregate our segment revenue by sales channels:

	Three Months Ended December 31,
SBS	2023			2022
Company-operated stores		93.3	%		93.6	%
E-commerce		6.7	%		6.4	%
Total		100.0	%		100.0	%

	Three Months Ended December 31,
BSG	2023			2022
Company-operated stores		68.6	%		66.3	%
E-commerce		13.8	%		13.6	%
Distributor sales consultants		10.6	%		12.6	%
Franchise stores		7.0	%		7.5	%
Total		100.0	%		100.0	%

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11. Restructuring

Restructuring expenses, included in Cost of Goods Sold (“COGS”) and Restructuring for the three months ended December 31, 2023 and 2022, are as follows (in thousands):

	Three Months Ended December 31,
	2023			2022
Included in COGS (a)
Distribution Center Consolidation and Store Optimization Plan	$	—		$	(2,680	)
Included in Restructuring (b)
Distribution Center Consolidation and Store Optimization Plan	$	(85	)	$	10,406

(a)Amounts included in COGS relate to adjustments to our expected obsolescence reserve related to the Plan (as defined below).

(b)For the three months ended December 31, 2022, restructuring consisted of closing costs related to lease terminations, employee termination benefits and $2.1 million in impairment charges.

Distribution Center Consolidation and Store Optimization Plan

In the fourth quarter of fiscal year 2022, our Board approved the Distribution Center Consolidation and Store Optimization Plan (“the Plan”) authorizing the closure of 330 SBS stores and 35 BSG stores, and the closure of 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.

The Plan has been substantially completed, as the remaining two BSG stores were closed during the quarter. However we may still incur future immaterial charges related to store closures such as exit costs, lease negotiation penalties and adjustments to estimates. As of December 31, 2023, there were no material outstanding liabilities for exit costs or involuntary employee termination benefits.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This section discusses management’s view of the financial condition, results of operations and cash flows of Sally Beauty for the periods covered by this Quarterly Report. This section should be read in conjunction with the information contained in our Annual Report on Form 10-K for the fiscal year ended September 30, 2023, including the Risk Factors sections therein, and information contained elsewhere in this Quarterly Report, including the condensed consolidated interim financial statements and notes to those financial statements.

Financial Summary for the Three Months Ended December 31, 2023

•Consolidated net sales for the three months ended December 31, 2023 decreased $25.8 million, or 2.7%, to $931.3 million, compared to the three months ended December 31, 2022. Consolidated net sales included a net positive impact from changes in foreign currency exchange rates of $8.6 million;

•Consolidated comparable sales decreased 0.8% for the three months ended December 31, 2023;

•Consolidated gross profit for the three months ended December 31, 2023 decreased $21.4 million, or 4.4%, to $467.2 million, compared to the three months ended December 31, 2022. Consolidated gross margin decreased 80 bps to 50.2% for the three months ended December 31, 2023, compared to the three months ended December 31, 2022;

•Consolidated operating earnings for the three months ended December 31, 2023 decreased $17.5 million, or 20.2%, to $69.1 million, compared to the three months ended December 31, 2022. Operating margin decreased 160 bps to 7.4% for the three months ended December 31, 2023, compared to the three months ended December 31, 2022;

•For the three months ended December 31, 2023, our consolidated net earnings decreased $11.9 million, or 23.7%, to $38.4 million, compared to the three months ended December 31, 2022;

•For the three months ended December 31, 2023, our diluted earnings per share was $0.35 compared to $0.46 for the three months ended December 31, 2022; and

•Cash provided by operations was $51.0 million for the three months ended December 31, 2023, compared to $55.0 million for the three months ended December 31, 2022.

Comparable Sales

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 excludes the effect of changes in foreign exchange rates and sales from stores relocated until 14 months after the relocation. Revenue from acquired stores are 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.

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Overview

Key Operating Metrics

The following table sets forth, for the periods indicated, information concerning key measures we rely on to evaluate our operating performance (dollars in thousands):

	Three Months Ended December 31,
	2023		2022		Increase (Decrease)
Net sales:
SBS	$	523,238	$	549,472	$	(26,234	)	(4.8	)%
BSG		408,064		407,583		481		0.1	%
Consolidated	$	931,302	$	957,055	$	(25,753	)	(2.7	)%
Gross profit:
SBS	$	306,559	$	323,475	$	(16,916	)	(5.2	)%
BSG		160,617		165,099		(4,482	)	(2.7	)%
Consolidated	$	467,176	$	488,574	$	(21,398	)	(4.4	)%
Segment gross margin: