Sally Beauty Holdings Inc

Basis of Presentation and Significant Accounting Policies

Basis of Presentation

The consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). All significant intercompany accounts and transactions have been eliminated in consolidation.

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 financial statements and supplementary disclosures. These estimates may use forecasted financial information based on reasonable information available, however they 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.

Cash and Cash Equivalents

Cash represents currency on hand, debit and credit card receivables and third-party online payment systems transactions, while cash equivalents consist of highly liquid investments which have an original maturity of three months or less.

Trade Accounts Receivable and Accounts Receivable, Other

Trade accounts receivable consist of credit extended directly to certain customers who meet our credit requirements in the ordinary course of business and are stated at their carrying values, net of an allowance for doubtful accounts. Our allowance is determined by estimating expected credit losses based on historical trends. At September 30, 2024 and 2023, our allowance for doubtful accounts was $0.8 million and $1.1 million, respectively. Our allowance for doubtful accounts is regularly reviewed on the basis of our historical collection data and current customer information. Customer account balances are written off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

Other accounts receivable consist primarily of amounts due from vendors under various contractual agreements and include volume rebates and other promotional considerations.

Inventory and Cost of Goods Sold

Inventory is stated at the lower of weighted average cost or net realizable value. Inventory cost reflects actual product costs, the cost of transportation to our distribution centers, buying costs and certain shipping and handling costs, such as freight from the distribution centers to the stores and handling costs incurred at the distribution centers. When assessing the net realizable value of inventory, we consider several factors including estimates of future demand for our products, historical turn-over rates, the age and sales history of the inventory, and historic and anticipated changes in stock keeping units.

Physical inventory counts are performed at substantially all stores and significant distribution centers at least annually. Upon completion of physical inventory counts, our consolidated financial statements are adjusted to reflect actual quantities on hand. Between physical counts, we estimate inventory shrinkage based on our historical experience. We have policies and processes in place that are intended to minimize inventory shrinkage.

Cost of goods sold includes actual product costs, the cost of transportation to our distribution centers, operating costs associated with our distribution centers (including employee compensation expense, depreciation and amortization, rent and other occupancy-related expenses), vendor rebates and allowances, inventory shrinkage and certain shipping and handling costs, such as freight from the distribution centers to the stores. All other shipping and handling costs are included in selling, general and administrative expenses when incurred. See Note 17, Restructuring, for more information on the impacts to costs of goods sold in connection with the Plan.

We deem cash consideration received from a supplier to be a reduction of the cost of inventory purchased, unless it is in exchange for an asset or service, or a reimbursement of a specific, incremental, identifiable cost incurred by us in selling the vendor’s products. The majority of cash consideration we receive is considered to be a reduction of inventory and a subsequent reduction in cost of goods sold as the related products are sold.

Lease Accounting

Substantially all of our leases are operating leases and relate primarily to retail stores and warehousing properties with lease terms typically five toten years. Some of our leases include options to extend the agreement by a certain number of years, typically five years. At the lease commencement date, an operating lease liability and related operating lease asset are recognized and typically do not assume renewals unless we are reasonably certain that we will exercise the option.

The operating lease liabilities are calculated using the present value of lease payments. The discount rate used is either the rate implicit in the lease, when known, or our estimated incremental borrowing rate. Our incremental borrowing rate for a lease is the rate of interest we would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. Because we do not generally borrow on a collateralized basis, we derive an appropriate incremental borrowing rate using the interest rate we pay on our non-collateralized borrowings, adjusted for the amount of the lease payments, the lease term and the effect of designating specific collateral with a value equal to the unpaid lease payments for that lease. We apply the incremental borrowing rate on a portfolio basis given the impact of applying it on a lease by lease basis would be immaterial.

Operating lease assets are valued based on the initial operating lease liabilities plus any prepaid rent and direct costs from executing the leases, reduced by tenant improvement allowances and any rent abatement. Operating lease assets are tested for impairment in the same manner as our long-lived assets. No material impairment losses were recorded during fiscal years 2024 or 2023. For fiscal year 2022, we recognized impairment loss in connection with our operating leases assets of $21.6 million in connection with the Plan and are included within restructuring on our consolidated statements of earnings. Please see Note 17, Restructuring, for more information on the Plan.

Property and Equipment

Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are depreciated over the lesser of the estimated useful lives of the assets or the term of the related lease, including renewals considered reasonably assured. Expenditures for maintenance and repairs are included in selling, general and administrative expenses when incurred, while expenditures for major renewals and improvements that substantially extend the useful life of an asset are capitalized.

The following table summarizes our property and equipment balances and their estimated useful lives (dollars in thousands):

Depreciation expense for the fiscal years 2024, 2023 and 2022 was $106.6 million, $99.0 million and $95.9 million, respectively, and is included in selling, general and administrative expenses, or cost of goods sold if associated with our distribution centers, in our consolidated statements of earnings. No material impairments were recorded for fiscal years 2024 or 2023. During fiscal year 2022, we recognized an impairment loss of $3.3 million within restructuring on our consolidated statements of earnings in connection with the Plan. See Note 17, Restructuring, for more information on the Plan.

In August 2024, our Board approved the sale of our corporate headquarters in Denton, Texas. At the end of September 30, 2024, we had entered into an agreement with Denton County, Texas to sell our corporate headquarters, including furniture, fixtures and some equipment currently on the premise. In connection with the sale of the office, we evaluated the disposal of these assets and determined these assets should be classified as held for sale. As of September 30, 2024, we reclassified the following amounts out of property and equipment, net, (disposal group) into other current assets on our consolidated balance sheets for fiscal year 2024 (dollars in thousands):

The fair value, less estimated cost to dispose, of the disposal group was estimated to be $43.6 million based on the terms of the agreement. The sale was completed during our first quarter of fiscal year 2025. See Note 18, Subsequent Event, for more information on the sale of these assets.

Valuation of Long-Lived Assets and Definite-lived Intangible Assets

Long-lived assets, including operating lease assets and property and equipment, and purchased intangibles subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be fully recoverable. The recoverability of long-lived assets and intangible assets subject to amortization is assessed by comparing the net carrying amount of each asset to the total estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its undiscounted future cash flows, an impairment charge may be recognized for the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset using a discounted cash flow approach.

When we commit to an exit plan of scale that we believe will result in the disposal of long-lived assets prior to the end their useful lives, the approval of such plan may be considered a triggering event and therefore require a reassessment of asset carrying values for recoverability, based on projected cash flows. If the carrying values are not recoverable, write-downs or impairment charges may be required to bring carrying values of certain long-lived assets, including operating lease asset, to fair value.

Goodwill and Indefinite-lived Intangible Assets

Goodwill

Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in a business combination. Goodwill is tested for impairment at least annually, as of January 31 st, and whenever events or changes in circumstances indicate its carrying amount may be less than its recoverable amount, to determine whether or not it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount. Furthermore, we considered potential triggering events each quarter, including fluctuations of our stock price and borrowing rates in the debt markets.

Components within the same operating segment are aggregated and deemed a single reporting unit if the components have similar economic characteristics. As of September 30, 2024 and 2023, our reporting units consisted of SBS and BSG. We assign goodwill to the reporting unit which consolidates the acquisition.

When assessing goodwill for impairment, we may perform a qualitative assessment which evaluates macro-economic conditions, current and projected cash flows, and other events or changes in circumstances to determine if a quantitative assessment is necessary. In fiscal year 2023, we performed a quantitative assessment, which indicated no impairment existed. In fiscal year 2024, we performed a qualitative assessment. We havenot recorded any impairment charges related to goodwill in the current or prior fiscal years presented.

Indefinite-lived Intangible Assets

Our intangible assets with indefinite lives consist of trade names acquired in business combinations or asset purchases. Upon acquisition of these identifiable intangible assets, we base our valuation on the information and assumptions available to us at the time of acquisition, using income and market approaches to determine fair value. These assets are evaluated for impairment annually, as of January 31 st, and whenever events or changes in circumstances indicate the asset’s carrying amount may be less than its recoverable amount, to determine whether or not it is more-likely-than-not that the fair value of an indefinite-lived intangible asset is less than its carrying amount. When assessing intangible assets with indefinite lives for impairment, we compare the fair value of each asset against its carrying value. Fair value is based on the relief-from-royalty method. We havenot recorded any impairment charges related to indefinite-lived intangibles in the current or prior fiscal years presented.

Self-Insurance Programs

We self-insure the risks related to workers’ compensation, general liability, and certain employee-related healthcare benefits. We have obtained third-party excess insurance coverage to limit our exposure per occurrence and aggregate cash outlay.

We record an estimated liability for the ultimate cost of claims incurred and unpaid as of the balance sheet date, which includes claims filed and estimated losses incurred but not yet reported. We estimate the ultimate cost based on an analysis of our historical data and actuarial estimates. These estimates are reviewed on a regular basis to ensure the recorded liability is adequate. The current and long-term portions of these liabilities are recorded at their present value and included in accrued liabilities and other liabilities in our consolidated balance sheets, respectively.

Revenue Recognition

Substantially all of our revenue is derived through the sale of merchandise. Revenue is recognized net of estimated sales returns and sales taxes. We estimate sales returns based on historical data. Additionally, we have assessed all revenue streams for principal versus agent considerations and have concluded we are the principal for the vast majority of all our transactions.

See Note 16, Segments and Disaggregated Revenue, for additional information regarding the disaggregation of our revenue.

Merchandise Revenues

We sell merchandise through our company-operated stores, digital platforms, to our franchisees and by using DSCs. These sales generally have one single performance obligation and revenue is recognized at the point of sale or upon shipment of the merchandise, whenever control of items sold transfers to the customer. Shipping fees charged through digital channels are considered a separate performance obligation and are recognized in net sales, while the related shipping cost is recognized in selling, general and administrative expenses.

We extend credit to certain customers, primarily salon professionals, which generally have 30 day payment terms. Based on the nature of theses receivables, no significant financing component exists.

Gift Cards

The revenue from the sale of our gift cards is recognized at the time the gift card is used to purchase merchandise, which is generally within one year from the date of purchase. Our gift cards do not carry expiration dates or impose post-sale fees. Based on historical experience, a certain amount of our gift cards will not be redeemed, also referred to as “gift card breakage.” We recognize revenue related to gift card breakage within net sales in our consolidated statements of earnings over time proportionately to historical redemption patterns. The gift cards are issued and represent liabilities of either of our operating entities, Sally Beauty Supply LLC or Beauty Systems Group LLC, which are both limited liability companies formed in the state of Virginia.

Customer Loyalty Rewards

Our Sally Beauty Rewards Program in the U.S. and Canada, enables customers to earn points based on their status for every dollar spent on qualifying SBS purchases. The program is free to join, and it provides our loyalty customers the ability to earn points on their SBS purchases, that convert to Sally Beauty Rewards certificates when select thresholds are attained. Points earned expire after twelve months of inactivity and certificates issued expire 30 days after earned. Certificates generated from our rewards loyalty program provide a material right to customers and represent a separate performance obligation. As such, we defer revenue for future rewards on a standalone value per point, net of estimated breakage based on historical data, within accrued liabilities on our consolidated balance sheets.

The following table shows the amount of performance-based contract liabilities on our consolidated balance sheets as of September 30, 2024 and 2023 (in thousands):

Changes to our performance-based contract liabilities for fiscal years 2024 and 2023 were as follows (in thousands):

Private Label Rewards Credit Cards

We have a multi-year agreement with a third-party bank (the “Bank”) to provide our customers a private label credit card program in the U.S. Under the agreement, the Bank manages our customer’s credit approval and credit card accounts, while we facilitate credit applications and provide licensing to our brand and marketing services. The Bank accepts all customer default risks associated with these accounts. In connection with signing the agreement, we received a refundable payment from the Bank that we recorded as deferred revenue within other liabilities on our consolidated balance sheets and is being recognize on a straight-line basis, over the initial term of the agreement, into net sales in our consolidated statements of earnings.

Pursuant to the agreement, the Bank will contribute funding for the program marketing expenses and are recognized in net sales in our consolidated statements of earnings. In addition, we earn other immaterial amounts from the Bank, including incentive payments for achieving performance targets and the activation of credit cards.

Advertising Costs

Advertising costs relate mainly to digital and web advertising, in-store and traditional print advertisements, customer relationship management, trade shows and product education for salon professionals. Advertising costs incurred in connection with print advertisements are expensed the first time the advertisement is run. Other advertising costs are expensed when incurred. Advertising costs were $68.4 million, $65.4 million and $69.8 million for the fiscal years 2024, 2023 and 2022, respectively, and are included in selling, general and administrative expenses in our consolidated statements of earnings.

Share-based Compensation

We measure the cost of services received from certain of our employees and Board of Directors in exchange for an award of equity instruments based on the fair value of the award on the date of grant which are expensed ratably over the vesting period, except for awards issued to retirement eligible participants, which are expensed on an accelerated basis. We recognize the impact of forfeitures as they occur. Share-based compensation expense is included in selling, general and administrative expenses in our consolidated statements of earnings.

We recognize deferred income taxes for the estimated future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are anticipated to be recovered or settled. The effect on deferred taxes of a change in income tax rates is recognized in the consolidated statements of earnings in the period of enactment. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets to the amount expected to be realized unless it is more-likely-than-not that such assets will be realized in full. The estimated tax benefit of an uncertain tax position is recorded in our consolidated financial statements only after determining a more-likely-than-not probability that the uncertain tax position will withstand challenge, if any, from applicable taxing authorities.

Foreign Currency

The functional currency of each of our foreign operations is generally the respective local currency. Balance sheet accounts are translated into U.S. dollars (our reporting currency) at the rates of exchange in effect at the balance sheet date, while the results of operations and cash flows are generally translated using average exchange rates for the periods presented. Individually material transactions, if any, are translated using the actual rate of exchange on the transaction date. The resulting translation adjustments are recorded as a component of accumulated other comprehensive loss in our consolidated balance sheets.

Foreign currency transaction gains or losses, including changes in the fair value (i.e., marked-to-market adjustments) of certain foreign exchange contracts we hold, are included in selling, general and administrative expenses in our consolidated statements of earnings when incurred and were not significant in any of the periods presented in the accompanying consolidated financial statements.

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. The Company is currently evaluating the impact of the adoption on its financial statement disclosures.

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

Fair Value Measurements

Our financial instruments consist of cash equivalents, trade and other accounts receivable, accounts payable, derivative instruments, including foreign exchange contracts and interest rate caps, and debt. The carrying amounts of cash equivalents, trade and other accounts receivable and accounts payable approximate their respective fair values due to the short-term nature of these financial instruments.

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 - Unadjusted quoted prices in active markets for identical assets or liabilities;

Level 2 - Unadjusted quoted prices in active markets for similar assets or liabilities; or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs other than quoted prices that are observable for the asset or liability; or inputs that are derived principally from or corroborated by observable market data; and

Level 3 - Unobservable inputs for the asset or liability.

Fair value on recurring basis

Consistent with the fair value hierarchy, we categorized our financial assets and liabilities as follows (in thousands):

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

Other fair value disclosures

Carrying amounts and the related estimated fair value of our long-term debt, excluding finance lease obligations, are as follows:

The fair value of our senior notes was measured using unadjusted quoted market prices. The fair value of our term loan B agreements was measured using unadjusted quoted market prices for similar debt securities in active markets.

Accumulated Stockholders’ Equity

Share Repurchases

The Board approved a share repurchase program authorizing us to repurchase up to $1.0 billion of our common stock through September 30, 2025.

Information related to our shares repurchased and subsequently retired were as follows (in thousands):

The amounts above do not include approximately 194,000,93,000 and 59,000 shares surrendered by grantees to satisfy personal income tax withholding obligations upon vesting of equity-based awards valued at $1.8 million, $1.2 million and $1.2 million during the fiscal years 2024, 2023 and 2022, respectively.

We reduced common stock and additional paid-in capital, in the aggregate, by these amounts. However, as required by GAAP, to the extent share repurchase amounts exceeded the balance of additional paid-in capital prior to such repurchases, we recorded the excess in accumulated stockholders’ equity on our consolidated balance sheets. Share repurchases are typically funded from either cash from operations or borrowings under the ABL facility, as appropriate.

Accumulated Other Comprehensive Loss

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

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

Weighted Average Shares

The following table sets forth the computations of basic and diluted earnings per share (in thousands):

At September 30, 2024, 2023 and 2022, options to purchase approximately 1.6 million,1.9 million and 2.4 million shares, respectively, of our common stock were outstanding but not included in the computation of diluted earnings per share, due to the options being anti-dilutive.

Share-Based Payments

Our Sally Beauty Holdings, Inc. 2019 Omnibus Incentive Plan (the "Omnibus Plan") allows us to grant awards to its employees up to 8.0 million shares of our common stock, plus an additional number of shares based on the number of shares outstanding as of the beginning of the current plan that have subsequently been terminated, expired unexercised, cash-settled, cancelled, forfeited or lapsed for any reason. Currently, we have awarded grants to employees and non-employee directors under the terms of the Omnibus Plan.

The following table presents total compensation cost for all share-based compensation arrangements and the related income tax benefits recognized in our consolidated statement of earnings (in thousands):

The Omnibus Plan award types are as follows:

Performance-based awards: Our performance awards vest over three years upon the satisfaction of the employee service condition and our level of achievement with respect to a mix of certain specified performance targets. For fiscal years 2024, 2023 and 2022, we issued performance awards with a financial performance target based on the growth on adjusted consolidated operating income (“AOI”) for each of the next three years.

For each performance award, a grantee may earn from 0% to 200% of the original awarded amount. Fair value of our performance awards related to the achievement of financial performance targets are based on our stock price on the date of grant. During the fiscal years ended September 30, 2024, 2023 and 2022, the fair value of our performance awards was $8.49, $12.04 and $17.40, respectively. Expense is determined upon issuance and recognized based on projections of future performance and actual results.

Market-based awards: In fiscal years 2024, 2023 and 2022, we issued market-based awards that vest over three years and are dependent on the level of achievement of relative total shareholder return (“rTSR”) against a group of peer companies measured over athree-year period. For each rTSR, a grantee may earn from 0% to 200% of the original awarded amount. The fair value was determined by using the Monte Carlo simulation model due to the award being subject to a market condition. During fiscal years 2024, 2023 and 2022, the fair value of our market-based awards was $11.02, $15.54 and $23.39, respectively. Expense is determined upon issuance and is recognized regardless of whether the market performance target is achieved.

Stock options: Stock option awards are valued using the Black-Scholes option pricing model to estimate the fair value of each stock option award on the date of grant and expense ratably over the vesting period, generally three years. Stock options have aten year life.

Restricted stock: Restricted stock awards (“RSA”) and restricted stock units (“RSU”) are valued using the closing market price of our common stock on the date of grant. Expense is recognized ratably over the vesting period, generally three years for RSAs and RSUs issued to employees andone year for RSUs issued to our independent directors. An RSA award is an award of our shares that have full voting rights and dividend rights but are restricted with regard to sale or transfer. These restrictions lapse over the vesting period. RSUs are awarded to our independent directors who may elect, upon receipt of such award, to defer until a later date delivery of the shares of our common stock that would otherwise be issued on the vesting date. RSUs granted to independent directors prior to the fiscal year 2012, are generally retained by the Company as deferred stock units that are not distributed untilsix months after the independent director’s service as a director terminates.

Performance-Based Awards

The following table presents a summary of the activity for our performance awards assuming 100% payout:

As of September 30, 2024, if we assume a 100% payout for unvested performance-based awards, we would expect to recognize $2.1 million in expense over the weighted average period of 1.6 years.

Market-Based Awards

The following table presents a summary of the activity for our market awards:

As of September 30, 2024, approximately $4.6 million of total unrecognized compensation costs related to unvested market-based awards are expected to be recognized over the weighted average period of 1.7 years.

The assumptions used in the Monte Carlo model relating to the valuation of our TSR awards issued in fiscal years 2024, 2023 and 2022 were as follows:

Service-Based Awards

Stock Option Awards

The following table presents a summary of the activity for our stock option awards:

The weighted average assumptions used in the Black-Scholes model relating to the valuation of our stock options for the fiscal year ended September 30, 2022, were as follows:

The expected life of options awarded represents the period of time such options are expected to be outstanding and is based on our historical experience. The risk-free interest rate is based on the zero-coupon U.S. Treasury notes with a term comparable to the expected life of an award at the date of the grant. Since we did not currently expect to pay dividends, the dividend yield used for this purpose was 0%.

The weighted average fair value per share at the date of grant of the stock options awarded during the fiscal year 2022 was $8.12. No stock options were awarded during the fiscal years 2024 or 2023. The aggregate fair value of stock options vested during the fiscal years 2024, 2023 and 2022 was $1.9 million, $3.2 million and $2.5 million, respectively.

The aggregate intrinsic value of options exercised during the fiscal years 2024, 2023 and 2022 was $0.7 million, $1.4 million and $4.0 million, respectively. The total cash received during the fiscal years 2024, 2023 and 2022 from option exercises was $1.8 million, $1.9 million and $8.1 million, respectively, and the tax benefit realized for the tax deductions from these option exercises was $0.1 million, $0.2 million and $0.8 million, respectively.

At September 30, 2024, approximately $0.1 million of total unrecognized compensation costs related to unvested stock option awards are expected to be recognized over the weighted average period of 0.1 years.

RSUs

The following table presents a summary of the activity for our RSUs:

At September 30, 2024, approximately $12.0 million of total unrecognized compensation costs related to unvested RSUs are expected to be recognized over the weighted average period of 1.7 years.

Leases

Our operating and finance leases consisted of the following (in thousands):

(a)

During fiscal year 2023, we recognized $0.6 million in impairment charges related to the Plan. See Note 17, Restructuring, for more information on the Plan.

Our lease costs consisted of the following (in thousands):

(a)

Certain supply chain-related amounts are included in cost of goods sold.

(b)

Includes common area maintenance, real estate taxes and insurance related to leases

As of September 30,2024, the approximate future lease payments under our leases under ASC 842, Leases, are as follows (in thousands):

The table above does not include operating leases we have entered into of approximately $4.0 million that have not commenced, primarily related to future retail stores.

Other lease information is as follows (dollars in thousands):

Goodwill and Intangible Assets

The changes in the carrying amounts of goodwill during the fiscal years 2024 and 2023 are as follows (in thousands):

(a)

See Note 13, Acquisitions, for additional information regarding goodwill acquired during the fiscal year.

(b)

Measurement period adjustment of the prior year acquisition.

The following table reflects our other intangible assets, excluding goodwill, on our consolidated balance sheets. Once an intangible becomes fully amortized, the original cost and accumulated amortization is removed in the subsequent period. As of September 30, 2024 and 2023, we had the following (in thousands):

(a)

See Note 13, Acquisitions, for additional information regarding distribution rights recorded during the fiscal year.

Our definite-lived intangible assets are amortized on a straight-line basis over the period that we expected an economic benefit, typically over periods ofthree toten years. For fiscal years 2024, 2023 and 2022, amortization expense related to intangible assets totaled $3.2 million, $3.4 million and $4.1 million, respectively and are included within selling, general and administrative expenses on our consolidated statements of earnings.

As of September 30, 2024, the expected future amortization expense related to definite-lived intangible assets is as follows (in thousands):

Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

Commitments and Contingencies

Commitments

Letters of Credit

We had $17.5 million and $17.4 million of outstanding letters of credit as of September 30, 2024 and 2023, respectively.

Contingencies

Legal Proceedings

From time to time, we are involved in various claims and lawsuits incidental to the conduct of our business in the ordinary course. We do not believe that the ultimate resolution of these matters will have a material adverse impact on our consolidated financial position, results of operations or cash flows.

Liabilities for loss contingencies arising from claims, assessments, litigation, fines, penalties, and other sources, are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated. We have no significant liabilities for loss contingencies at September 30, 2024 and 2023.

Debt

Short-term Debt

In fiscal year 2023, we entered into a fourth amendment to ourfive-year asset-based senior secured loan facility (the "ABL facility") with a syndicate of banks, which has a revolving commitment of $500.0 million anda maturity date of the earlier of (i)May 11, 2026, or (ii) the date which is ninety-one (91) days prior to the maturity date of any indebtedness arising under the TLB 2030, as defined below, and any refinancing thereof. The interest rate on the ABL facility is variable and determined at our option as (i) prime plus 0.25% or 0.50% or (ii) Secured Overnight Financing Rate ("SOFR") plus 1.25% or 1.50%. In addition, the terms of the ABL facility contain a commitment fee of 0.20%on the unused portion of the facility. Borrowings under the ABL facility are secured by a first-priority lien in and upon the accounts and inventory (and the proceeds thereof) of the Company and its guarantor subsidiaries. Furthermore, the ABL facility is also secured by a second-priority lien in and upon the remaining assets of the Company and its guarantor subsidiaries.

At September 30, 2024 and 2023, there wereno outstanding borrowings under our ABL facility. At September 30, 2024, we had $482.5 million available for borrowing, thereunder, including our Canadian sub-facility, subject to borrowing base limitations, as reduced by outstanding letters of credit.

Long-term Debt

Long-term debt consists of the following (dollars in thousands):

Maturities of our debt, excluding finance leases and our ABL facility, are as follows at September 30, 2024 (in thousands):

Term Loan B

In fiscal year 2023, we entered into a credit agreement for a term loan B facility (“TLB 2030”) in an aggregate principal amount equal to $400.0 million, the net proceeds of which were used to repay our term loan B due 2024 (“TLB 2024”). The TLB 2030 bears interest at a floating rate equal to, at our option, either the Adjusted Term SOFR Rate plus 1.75% or an adjusted base rate plus 0.75%, see below for additional information. Interest on the TLB 2030 is payable quarterly on March 31, June 30, September 30 and December 31 of each year. The TLB 2030 matures on February 28, 2030 (the “Maturity Date”), but may be prepaid without penalty or premium, other than customary breakage costs for prepayments that are made prior to the last date of an interest period. The principal of the TLB 2030 isrepayable in quarterly installments equal to 0.25% of the original principal amount of the TLB 2030, with a final installment equal to the entire remaining outstanding principal amount due on the Maturity Date. The TLB 2030 was issued at a discount of 0.75%, and we incurred $4.7 million in issuance costs; both of which are being amortized using the effective interest method based on the effective interest rates at the time of issuance.

The TLB 2030 is secured by a first-priority lien in and upon substantially all of the assets of the Company and its domestic subsidiaries other than the accounts, inventory (and the proceeds thereof) and other assets that secure Sally Holdings’ existing ABL facility on a first-priority basis (the “ABL Priority Collateral”). Additionally, the TLB 2030 is secured by a second-priority lien in and upon the ABL Priority Collateral. The TLB 2030 does not contain any financial maintenance covenants, but is subject to a covenant package that is substantially consistent with the covenant package governing our senior notes. The TLB 2030 is subject to customary asset sale mandatory prepayment provisions and excess cash flow mandatory prepayment provisions.

In fiscal years 2024 and 2023, we entered into second and first refinancing agreements, respectively, where we negotiated basis point reductions of 50 and 25 basis points, respectively. No other terms of the TLB 2030 were amended. In connection with each repricing, we evaluated the fair value of the debt before and after the amendment for each syndicate loan and accounted for each transaction as both a partial extinguishment of debt and a modification. As a result, we recognized losses on extinguishment of debt of $1.7 million and $1.8 million in fiscal years 2024 and 2023, respectively, within interest expense. In connection with the repricing, we incurred additional immaterial costs, of which, the majority was recorded to interest expense. Furthermore, the extinguishment of debt and subsequent issuance of new debt with existing creditors resulted in non-cash financing activities of $20.5 million and $7.9 million for fiscal year 2024 and 2023, respectively.

Senior Notes

On February 27, 2024, we issued a public offering of 6.75% senior notes due 2032 ("2032 Senior Notes") pursuant to a shelf registration statement on Form S-3 filed with the SEC on May 10, 2021. As a result, we received $594.0 million in cash proceeds, net of underwriter fees, which were used towards the repayment of the outstanding $680.0 million principal balance on the 5.625% senior notes due 2025 (the “2025 Senior Notes”). The 2032 Senior Notes were issued at par and bear interest at a fixed interest rate of 6.75%. Interest is paid semi-annually during our second and fourth fiscal quarters. The 2032 Senior Notes mature on April 1, 2032. The 2032 Senior Notes are prepayable beginning March 1, 2027, at a price of 103.375, at a price of 101.688 after March 1, 2028, and at par after March 1, 2029. The 2032 Senior Notes are guaranteed on a senior unsecured basis by the guarantors who have guaranteed obligations under our ABL facility and our existing term loan. In connection with the issuance, we incurred approximately $8.5 million in debt issuance costs that are being amortized using the effective interest rate method through the life of the notes.

Additionally, on February 12, 2024, we issued a notice to redeem the entire $680.0 million aggregate outstanding principal amount of the 2025 Senior Notes that remained outstanding on March 13, 2024, at a redemption price equal to 100.00% of the principal amount of the 2025 Senior Notes, plus accrued and unpaid interest to, but not including, the redemption date. On March 13, 2024, we redeemed the 2025 Senior Notes with the proceeds from our 2032 Senior Notes, cash on hand, and borrowings under our ABL facility. In connection with this redemption, we recognized a $2.0 million loss on the extinguishment of debt within interest expense related to unamortized debt issuance costs.

Covenants

The agreements governing our debt contain a customary covenant package that places restrictions on the disposition of assets, the granting of liens and security interests, the prepayment of certain indebtedness, and other matters and customary events of default, including customary cross-default and/or cross-acceleration provisions.

Derivative Instruments

As of September 30, 2024, we didnot purchase or hold any derivative instruments for trading or speculative purposes. See Note 3 for the classification and fair value of our derivative instruments.

Designated Cash Flow Hedges

Foreign Currency Forwards

During fiscal year 2024, we entered into foreign currency forwards to mitigate the exposure to exchange rate changes on inventory purchases in USD by our foreign subsidiaries. As of September 30, 2024, all of our foreign currency forward derivatives instruments had settled. We record, net of income tax, the changes in fair value related to the foreign currency forwards into AOCL and recognize realized gain or loss into cost of goods sold based on inventory turns. As of September 30, 2024, we expect to reclassify approximately $0.1 million in net losses into cost of goods sold over the next 12 months.

During fiscal year 2024, 2023 and 2022, we reclassified a net loss of $2.9 million, a net loss of $1.9 million and a net gain of $0.1 million, respectively, into cost of goods sold.

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 fiscal years 2024 and 2023, we recognized income of $3.3 million and $1.3 million, respectively, into interest expense on our condensed consolidated statements of earnings related to the interest rate swap. At September 30, 2024, we expect to reclassify gains of approximately $0.1 million out of AOCL and into interest expense over the next 12 months.

Interest Rate Caps

In July 2017, we purchasedtwo 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, which were being hedged, no longer occurring as a result of the repayment of our prior term loan. For fiscal years 2023 and 2022, we recognized income of $2.8 million and expense of $1.7 million, respectively, into interest expense on our condensed consolidated statements of earnings related to the caps.

Non-Designated Cash Flow Hedges

We also use foreign exchange contracts to mitigate our exposure to exchange rate changes in connection with certain intercompany balances not permanently invested. At September 30, 2024, we held forwards, which expire on various dates during the first four months of fiscal year 2025, with a notional amount, based upon exchange rates at September 30, 2024, as follows (in thousands):

We record changes in fair value and realized gains or losses related to the foreign currency forwards into selling, general and administrative expenses. The effects of these foreign exchange contracts on our condensed consolidated financial statements were losses of $1.1 million, $2.2 million and $9.6 million for fiscal years 2024, 2023 and 2022, respectively.

Acquisitions

Exclusive Beauty Supply, Inc.

On September 20, 2024, we acquired certain assets and business operations from Exclusive Beauty Supply, Inc. ("Exclusive Beauty"), a distributor of professional beauty products operating in the State of Florida, for approximately $7.5 million, subject to certain holdback adjustments related to inventory. Under the terms of the agreement, we acquired the operations ofthree stores and a direct sales force, inventory, and non-exclusive product distribution rights. As part of BSG's growth strategies, this acquisition complements its existing lines of business and increases the size and geographic scope of operations.

This acquisition was accounted for using the acquisition method of accounting for business combinations and funded with cash from operations. As of September 30, 2024, the purchase price of the acquisition has been allocated to all assets acquired based on their estimated fair values at the date of acquisition. Based on our fair value estimates, we recorded $6.4 million in intangible assets subject to amortization, $0.8 million for inventory (preliminary), and $0.3 million in goodwill, which has been allocated to BSG and is expected to be deductible for tax purposes. Subsequent to the acquisition date, all operating results were included in BSG and were not material to the consolidated results of operations. Pro forma information has not been provided as the effects were not material to our consolidated results of operations.

Goldwell of NY, Inc.

On September 22, 2023, we acquired certain assets and business operations from Goldwell of NY, Inc. (“Goldwell of NY”), a distributor of professional beauty products operating in the State of New York, for approximately $9.0 million. Under the terms of the agreement, we acquired the operations offive stores and a direct sales force, inventory, and exclusive and non-exclusive product distribution rights.

This acquisition was accounted for using the acquisition method of accounting for business combinations and funded with cash from operations. As of September 30, 2023, the purchase price of the acquisition was allocated to all assets acquired based on their estimated fair values at the date of acquisition. We recorded $6.6 million in intangible assets subject to amortization, $1.7 million in inventory and $0.6 million in goodwill, which has been allocated to BSG and is expected to be deductible for tax purposes. Subsequent of the acquisition date, all operating results were included in BSG and were not material to the consolidated results of operations. In fiscal year 2024, we finalized the purchase accounting, and no material adjustments were made. Pro forma information has not been provided as the effects were not material to our consolidated results of operations.

During fiscal year 2022, we didnot acquire any substantial businesses.

401(k) and Profit Sharing Plan

We offer 401(k) Plans to our U.S. and Puerto Rico employees who meet certain eligibility requirements. The U.S. 401(k) Plan allows employees to contribute immediately upon hire, while the Puerto Rico 401(k) Plan allows employees to contribute afterone year of employment. Under the terms of each 401(k) Plan, employees may contribute a percentage of their annual compensation up to certain maximums, as defined by each 401(k) Plan and by statutory limitations. We currently match a portion of employee contributions, as defined by each 401(k) Plan. We recognized expense of $7.6 million, $7.3 million and $6.8 million in the fiscal years ended September 30, 2024, 2023 and 2022, respectively, related to such matching contributions and these amounts are included in selling, general and administrative expenses in our consolidated statements of earnings.

In addition, pursuant to the 401(k) Plans, we may elect to make voluntary profit sharing contributions to the accounts of eligible employees as determined by the Compensation Committee of the Board. During the fiscal years ended September 30, 2024, 2023 and 2022, we didnot make a profit sharing contribution to the 401(k) Plans.

The provision for income taxes for the fiscal years 2024, 2023 and 2022 consists of the following (in thousands):

The difference between the U.S. statutory federal income tax rate and the effective income tax rate is summarized below:

The tax effects of temporary differences that give rise to our deferred tax assets and liabilities are as follows (in thousands):

We believe that it is more-likely-than-not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets, net of the valuation allowance. During fiscal year 2024, existing valuation allowances were decreased by approximately $1.6 million, primarily for net operating loss carry-forwards of various members of the affiliated group in foreign jurisdictions and foreign tax credits. We continue to record a valuation allowance to account for uncertainties regarding recoverability of certain deferred tax assets, primarily foreign loss carry-forwards and tax credit carry-forwards.

Domestic earnings before provision for income taxes were $175.2 million, $217.7 million and $205.2 million in the fiscal years 2024, 2023 and 2022, respectively. Foreign earnings before provision for income taxes of $31.1 million, $34.4 million and $38.9 million in the fiscal years 2024, 2023 and 2022, respectively.

Tax reserves are evaluated and adjusted as appropriate, while taking into account the progress of audits by various taxing jurisdictions and other changes in relevant facts and circumstances evident at each balance sheet date. We do not expect the outcome of current or future tax audits to have a material adverse effect on our consolidated financial condition, results of operations or cash flow.

Applicable deferred tax liabilities have been provided for undistributed foreign earnings in excess of foreign working capital and cash requirements. As a result of U.S. Tax Reform, the repatriation of cash to the U.S. is generally no longer taxable for federal income tax purposes but could be subject to foreign withholding taxes and state income taxes. If undistributed earnings of our foreign operations were not considered permanently reinvested as of September 30, 2024, an immaterial amount of additional deferred taxes would have been provided.

At September 30, 2024 and 2023, we had total operating loss carry-forwards of $106.6 million and $119.4 million, respectively, of which $52.5 million and $62.7 million, respectively, are subject to a valuation allowance. At September 30, 2024, operating loss carry-forwards of $106.6 million have no expiration date. At September 30, 2024 and 2023, we had tax credit carry-forwards of $15.2 million and $15.5 million, respectively. This includes a U.S. foreign tax credit carry-forward of $13.3 million, primarily as a result of the deemed repatriation tax under U.S. Tax Reform. This credit expires in 2028. We do not believe the realization of the U.S. foreign tax credit is more-likely-than-not, so a valuation allowance has been recorded against its full value. Of the remaining tax credit carry-forwards, at September 30, 2024, $0.3 million expire between 2025 and 2029, $0.3 million expire between 2033 and 2037 and $1.3 million have no expiration date. Total tax credit carry-forwards of $14.8 million and $14.2 million are subject to a valuation allowance at September 30, 2024 and 2023, respectively.

The changes in the amount of unrecognized tax benefits are as follows (in thousands):

If recognized, these positions would affect our effective tax rate.

On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) enacted comprehensive amendments to the Internal Revenue Code of 1986. Among other things, TCJA provided for a deemed repatriation of undistributed foreign earnings by U.S. taxpayers giving rise to a one-time transition tax on those earnings (“Repatriation Tax”). The U.S. Treasury Department issued final regulations (“Regulations”) addressing certain aspects of how the Repatriation Tax is calculated. In our view, certain guidance included in the Regulations is inconsistent with our interpretation of the statutory language contained in the TCJA. In fiscal year 2023, we remitted $4.3 million in tax and interest to the IRS. Income tax expense of $2.7 million was recorded in fiscal year 2023 related to the payments. Previously, $1.6 million had been reserved for this issue. We maintain our tax positions are fully supportable.

We recognize interest and penalties, accrued in connection with unrecognized tax benefits, in provision for income taxes. Accrued interest and penalties, in the aggregate, were $0.7 million and $0.5 million at September 30, 2024 and 2023, respectively.

Because existing tax positions will continue to generate increased liabilities for unrecognized tax benefits over the next 12 months, and the fact that from time to time our tax returns are routinely under audit by various taxing authorities, it is reasonably possible that the amount of unrecognized tax benefits will change during the next 12 months. An estimate of the amount of such change, or a range thereof, cannot reasonably be made at this time. However, we do not expect the change, if any, to have a material effect on our consolidated financial condition or results of operations within the next 12 months.

Our consolidated federal income tax return for the fiscal years 2022 and 2023 are currently under IRS examination. Our statute remains open for the fiscal year ended September 30, 2021, forward. Our U.S. state income tax returns are impacted by various statutes of limitations and are generally open for the fiscal year ended September 30, 2021, and future years. Our foreign income tax returns are impacted by various statutes of limitations, which are generally open from 2019 forward.

In December of 2021, the Organization for Economic Cooperation and Development (OECD) established a framework, referred to as Pillar 2, designed to ensure large multinational enterprises pay a minimum 15 percent level of tax on the income arising in each jurisdiction in which they operate. The earliest effective date is for taxable years beginning after December 31, 2023, which for us is fiscal year 2025. Numerous countries have already enacted the OECD model rules, and several other countries have drafted legislation. We do not expect this legislation to have a material impact on our consolidated financial statements. We will continue to monitor and evaluate new legislation and guidance, which could change our current assessment.

Segments and Disaggregated Revenue

Our segments are defined on how our chief operating decision maker, which we consider the CEO and CFO together, regularly reviews performance and allocates resources to our operating segments.

Our business is organized intotwo reportable segments: (i) SBS, a domestic and international chain of retail stores and a consumer-facing e-commerce website that offers professional beauty supplies to both salon professionals and retail customers primarily in North America, Puerto Rico and parts of Europe and South America and (ii) BSG, including its franchise-based business Armstrong McCall, a full-service distributor of beauty products and supplies that offers professional beauty products directly to salons and salon professionals through its professional-only stores, e-commerce platforms and its own sales force in partially exclusive geographical territories in the U.S. and Canada.

The accounting policies of both of our reportable segments are the same as described in the summary of significant accounting policies contained in Note 1. Sales between segments, which were eliminated in consolidation, were not material for the fiscal years ended September 30, 2024, 2023 and 2022.

Business Segments Information

Segment data for the fiscal years 2024, 2023 and 2022 are as follows (in thousands):

a)

In the fiscal years 2024, 2023 and 2022, no single customer accounted for 10% or more of revenue.

b)

Unallocated expenses consist of corporate and shared costs and are included in selling, general and administrative expenses in our consolidated statements of earnings.

Geographic Area Information

Certain geographic data is as follows (in thousands):

Disaggregated Revenues

The following tables disaggregate our segment revenues by merchandise category. We have reclassified certain prior year amounts to conform to current year presentation.

The following table disaggregates our segment revenue by sales channels:

Restructuring

Restructuring expenses, included in cost of goods sold and restructuring for the fiscal years ended September 30, 2024, 2023 and 2022, are as follows (in thousands):

(a)

Amounts related to the Plan included favorable adjustments to our expected obsolescence reserve within costs of goods sold and costs associated with the closure of stores and distribution centers during the period.

Distribution Center Consolidation and Store Optimization Plan

In fiscal year 2022, our Board approved the Plan consisting of the planned closure of 330 SBS stores and 35 BSG stores and 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.

As of September 30, 2024, the Plan has been substantially completed, as the only two remaining BSG stores to be closed were closed during the fiscal year. However, we may still incur future immaterial charges related to store closures such as exit costs, lease negotiation penalties, termination benefits and adjustments to estimates. As of September 30, 2024, there were no material outstanding liabilities for exit costs or involuntary employee termination benefits. In fiscal year 2023, we closed 294 SBS stores and 26 BSG stores, as well as the two BSG distribution centers. In fiscal year 2022, we closed 36 SBS stores and 7 BSG stores.

Transformation Plan

We previously disclosed a plan to focus on certain core business strategies. In addition to optimizing our supply chain network with changes to our transportation model and network of nodes, we improved our marketing and digital commerce capabilities and advanced our merchandising transformation efforts. In addition, we expanded our plan and announced a reduction in workforce within our field and headquarters. Furthermore, our Board approved the divestiture of our operations in Peru, which was not material to our results of operation. All these together made up our Transformation Plan. We did not incur any additional expenses or liabilities related to our Transformation Plan in fiscal years 2024 or 2023.

Subsequent Events

On October 24, 2024, we sold our corporate headquarters located in Denton, Texas to Denton County, Texas for $45.5 million, excluding $1.5 million in closing costs. As of September 30, 2024, the assets included in the sale were classified as held for sale within other current assets on our consolidated balance sheets. As a result of the sale, we recognized a gain of approximately $26.8 million from the sale of these assets during our first quarter of fiscal year 2025. Additionally, we entered into a lease agreement with Denton County, Texas, to lease the building for $35,000 per month fortwelve months, with the option to extend three additional months. At this time, we do not anticipate exercising this option.