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SALLY BEAUTY HOLDINGS, INC.
SALLY BEAUTY HOLDINGS, INC.
2013 ANNUAL REPORT
2013 ANNUAL REPORT
THE FUTURE OF BEAUTY
THE FUTURE OF BEAUTY

Table of contents

  • Page 1
    THE FUTURE OF BEAUTY S A L LY B E AU T Y H O L D I N G S, I N C. 2013 ANNUAL REPORT

  • Page 2

  • Page 3
    LOOK ING GOOD !

  • Page 4
    ...beauty supplies with annual revenues of $3.6 billion and net earnings of $261 million. The Company operates primarily through two business segments, Sally Beauty Supply and Beauty... 2013) SALLY BEAUTY SUPPLY An open-line and exclusive-label beauty products retailer offering professional beauty ...

  • Page 5
    Table of Contents LETTER TO SHAREHOLDERS ...2 GLOBAL FOOTPRINT ...7 FINANCIAL HIGHLIGHTS ...8

  • Page 6
    ...of common stock. I am pleased to share the highlights of our FY 2013 in more detail. United Kingdom, Ireland, Belgium, France, Germany, the ... operating margins reached an annual high of 19.6 percent of sales, up 10 basis points from 19.5 percent in FY 2012. Sally Beauty Supply ended the fiscal year ...

  • Page 7
    "Our performance was solid as our business continued to excel"

  • Page 8
    ... MARGIN BEAUTY SYSTEMS GROUP SALLY BEAUTY SUPPLY BEAUTY SYSTEMS GROUP SALLY BEAUTY SUPPLY Regarding marketing for Sally Beauty, Beauty Club ...2013 was somewhat mixed. Sales growth from our BSG, Sally International and Sally U.S. Beauty Club customers was strong. However, traffic PAGE 4 SALLY BEAUTY...

  • Page 9
    G MIN O O GR FOR S! ES CC U S We believe we have all the tools to be successful IN FISCAL YEAR 2014.

  • Page 10
    We now operate 4,209 stores in North America; we operate 460 stores in 8 countries: the United Kingdom, Belgium, Chile, Ireland, France, Spain, Germany and the Netherlands. PAGE 6 SALLY BEAUTY HOLDINGS

  • Page 11
    FOOTPRINT Store Count as of September 30, 2013 SALLY BEAUTY SUPPLY BEAUTY SYSTEMS GROUP TOTAL COMPANY NORTH AMERICA United States Puerto Rico Mexico Canada NORTH AMERICA TOTAL 2,668 42 166 88 2,964 1,119 2 28 96 1,245 3,787 ...

  • Page 12
    ...Sally Beauty Supply Beauty Systems Group CONSOLIDATED SAME STORE SALES GROWTH Number of Stores (end of period) Sally Beauty Supply Beauty...1,243,317 47.2 % $ 296,836 11.3 % 99,117 0.55 0.54 223,333 2013 2012 2011 2010 2009 (1) Same stores are defined as company-operated stores that have been open for...

  • Page 13
    2013 FORM 10-K

  • Page 14
    ...ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED: SEPTEMBER 30, 2013 -OR- អ TRANSITION REPORT...Act: Title of Each Class Name of Each Exchange on Which Registered SALLY BEAUTY HOLDINGS, INC. Common Stock, par value $.01 per share New ...

  • Page 15
    TABLE OF CONTENTS Page ITEM ITEM ITEM ITEM ITEM ITEM 1. 1A. 1B. 2. 3. 4. PART BUSINESS ...RISK FACTORS ...UNRESOLVED STAFF COMMENTS ...PROPERTIES ...LEGAL PROCEEDINGS ...MINE SAFETY DISCLOSURES ...I ...1 16 30 30 31 31 ITEM 5. ITEM 6. ITEM 7. ITEM 7A. ITEM 8. ITEM 9. ITEM 9A. ITEM 9B. ITEM 10. ...

  • Page 16
    ...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 Annual Report... to supply products to us; • the possibility of material interruptions in the supply of...

  • Page 17
    ... of violence or terrorism; • the preparedness of our accounting and other management systems to meet financial reporting and other requirements and the upgrade of our existing financial reporting system; • being a holding company, with no operations of our own, and depending on our subsidiaries...

  • Page 18
    ... the Company is the largest distributor of professional beauty supplies in the U.S. based on store count. We operate primarily through two business units, Sally Beauty Supply and Beauty Systems Group, or BSG. As of September 30, 2013, through Sally Beauty Supply and BSG, we operated a multi-channel...

  • Page 19
    ...beauty supply stores, like BSG and Sally Beauty Supply. We expect that these factors will continue to drive demand for conveniently located professional beauty supply... For example, from September 30, 2012 to September 30, 2013 our international company-operated stores increased from 742 stores to 789...

  • Page 20
    ... and ''We depend upon manufacturers who may be unable to provide products of adequate quality or who may be unwilling to continue to supply products to us.'' Relationships with suppliers. Sally Beauty Supply and BSG, and their respective suppliers are dependent on each other for the distribution of...

  • Page 21
    ... open and profitably operate new stores in existing and additional geographic areas. In the U.S. and Canada, the capital requirements to open a Sally Beauty Supply or BSG store, excluding inventory, average approximately $70,000 and $80,000, respectively, with the capital requirements for stores in...

  • Page 22
    ...Data'' contained elsewhere in this Annual Report. Neither the sales nor the product assortment for Sally Beauty Supply or BSG are generally seasonal in nature. Sally Beauty Supply We believe Sally Beauty Supply is the largest open-line distributor of professional beauty supplies in the U.S. based on...

  • Page 23
    ... (please see ''Marketing and Advertising'' below). The following table sets forth the approximate percentage of Sally Beauty Supply's sales by product category: Fiscal Year Ended September 30, 2013 2012 2011 Hair color ...Hair care ...Skin and nail care ...Brushes, cutlery and accessories Electrical...

  • Page 24
    ... alternative to higher-priced leading third-party brands. Exclusive-label products accounted for approximately 45% of Sally Beauty Supply's product sales in the U.S. during the 2013 fiscal year. Generally, the exclusive-label brands have higher gross margins than the leading third-party branded...

  • Page 25
    ... is an important part of its success. The following table provides a history of Sally Beauty Supply's store count (including franchised stores) during the last five fiscal years: Fiscal Year Ended September 30, 2013 2012 2011 2010 2009 Stores open at beginning of period ...Net store openings during...

  • Page 26
    ... percentage of BSG's sales attributable by product category: Fiscal Year Ended September 30, 2013 2012 2011 Hair care ...Hair color ...Promotional items(a) Skin and nail care . . Electrical appliances Other beauty items ...35.8% 30.0% 12.0% 10.2% 5.3% 6.7% 36.4% 37.0% 29.8% 29.6% 12.0% 12.9% 10...

  • Page 27
    ...929 16 46 991 (a) Stores acquired in the fiscal year 2013 represent 12 stores owned by Essential Salon Products, Inc. (''Essential...Beauty Supply Distributor in the U.S. with Multi-Channel Platform We believe that Sally Beauty Supply and BSG together comprise the largest distributor of professional beauty...

  • Page 28
    ... flyers with additional promotional offerings, beauty tips and new product information for a nominal annual fee. Our BSG professional distributor ...operating profit contributions per store, during the past five fiscal years Sally Beauty Supply and BSG have opened an aggregate of 536 and 173 net new...

  • Page 29
    ...our store base. In the fiscal year 2013, we opened 113 and 43 Sally Beauty Supply stores and BSG stores, respectively, excluding ...annual organic store growth between 3% and 4% of our total stores for the foreseeable future. Grow Internationally International sales represent 23% of Sally Beauty Supply...

  • Page 30
    ... In May 2013, we acquired certain assets and business operations of Essential Salon, a professional-only distributor of beauty products operating in... a focus on expanding our exclusive BSG territories and allowing Sally Beauty Supply to enter new geographic areas principally outside the U.S. Please ...

  • Page 31
    ... The operations of each store are supervised by a district manager, who reports to a territory manager. A significant number of our store managers and ...As of September 30, 2013, we operated mainly through 18 distribution centers, nine of which serviced Sally Beauty Supply and nine of which serviced...

  • Page 32
    ... and Executive Officers of the Registrant'' in Item 10 of this Annual Report. Regulation We are subject to a wide variety of laws and regulations... and safety issues. As of September 30, 2013, Sally Beauty Supply supplied 21 and BSG supplied 161 franchised stores located in the U.S., Mexico and...

  • Page 33
    ... types of products and services we sell. Sally Beauty Supply competes with other domestic and international beauty product wholesale and retail outlets, including local and regional open line beauty supply stores, professional-only beauty supply stores, salons, mass merchandisers, on-line retailers...

  • Page 34
    ...in turn, could adversely affect our sales and profitability. We expect the aging baby boomer population to drive future growth in professional beauty supply sales through an increase in the use of hair color and hair loss products. Additionally, we expect continuously changing fashion-related trends...

  • Page 35
    ...retail traffic into our stores and our Sally Beauty Club and ProCard promotions; • seasonal ...quality or who may be unwilling to continue to supply products to us. We do not manufacture any...of the products we sell. During the fiscal year 2013, our five largest suppliers were Procter & Gamble Co.,...

  • Page 36
    ... other reasons, we may not be able to acquire desired merchandise in sufficient quantities or on acceptable terms in the future. Changes in Sally Beauty Supply's and BSG's relationships with suppliers occur often, and could positively or negatively impact the net sales and operating profits of both...

  • Page 37
    If products sold by us are found to be defective in labeling or content, our credibility and that of the brands we sell may be harmed, marketplace acceptance of our products may decrease, and we may be exposed to liability in excess of our products liability insurance coverage and manufacturer ...

  • Page 38
    ... and results of operations. Our e-commerce business may be unsuccessful or, if successful, may divert sales from our stores. We offer many of our beauty products for sale through our websites in the U.S. (such as www.sallybeauty.com and www.cosmoprofbeauty.com) and abroad. As a result, we encounter...

  • Page 39
    addition, our investigation and enforcement of our anti-diversion obligations may result in reduced sales to our customer base, thereby decreasing our revenues and profitability. BSG's financial results are affected by the financial results of BSG's franchised-based business (Armstrong McCall). BSG ...

  • Page 40
    ... open and profitably operate new stores in existing and additional geographic areas. In the U.S. and Canada, the capital requirements to open a Sally Beauty Supply or BSG store, excluding inventory, average approximately $70,000 and $80,000, respectively, with the capital requirements for stores in...

  • Page 41
    ... trademark and service mark rights used in connection with our business including, but not limited to, ''Sally,'' ''Sally Beauty,'' ''Sally Beauty Supply,'' ''Sally Beauty Club Card,'' ''BSG,'' ''CosmoProf,'' ''Proclub,'' ''Armstrong McCall,'' ''ion,'' ''Beyond the Zone'' and ''Salon Services.'' We...

  • Page 42
    ... from unexpected increases in our volume of business, outages or delays in our service) could result in delays in receiving inventory and supplies or filling customer orders and adversely affect our customer service and relationships. Our systems might be damaged or interrupted by natural or man...

  • Page 43
    ...an adequate work force, the temporary or long-term disruption in the supply of products (or a substantial increase in the cost of those ...in our Annual Report on Form 10-K our management's report on, and assessment of, the effectiveness of our internal controls over financial reporting. Furthermore...

  • Page 44
    ... the future and our ability to react to changes in our business. As of September 30, 2013, certain of our subsidiaries, including Sally Holdings LLC, which we refer to as Sally Holdings, had an aggregate principal amount of approximately $1,690.7 million of outstanding debt, including capital lease...

  • Page 45
    ...prohibit us or our subsidiaries from doing so. As of September 30, 2013, our senior credit facility provided us commitments for additional borrowings of up to...The ABL facility contains covenants that, among other things, restrict Sally Holdings and its subsidiaries' ability to: • change their line ...

  • Page 46
    ... The indentures governing the Notes also contain restrictive covenants that, among other things, limit our ability and the ability of Sally Holdings and its restricted subsidiaries to: • dispose of assets; • incur additional indebtedness (including guarantees of additional indebtedness); • pay...

  • Page 47
    ... for a term of five years with customary renewal options. The following table provides the number of stores in the U.S. and globally, as of September 30, 2013: Sally Beauty Supply CompanyOperated Franchise ...2,668 42 238 38 88 38 49 33 22 166 21 693 3,403 - - 4 6 - - 3 - - - 8 21 21...

  • Page 48
    ... and warehouses and corporate headquarters, as of September 30, 2013: Location Company-Owned Properties: Denton, Texas ...Reno, Nevada...Ontario, Canada ...Lincoln, Nebraska ...Guadalupe, Nuevo Leon, Mexico . (1) Sally Beauty Supply (2) BSG ITEM 3. LEGAL PROCEEDINGS We are involved, from time to time...

  • Page 49
    ... ...December 31, 2011 . (b) Holders As of November 8, 2013, there were 1,084 stockholders of record of our common stock. (c) Dividends We have not declared or paid dividends at any time during the two fiscal years prior to the date of this Annual Report. We currently anticipate that we will retain...

  • Page 50
    ...in the data: $400 $350 $300 $250 $200 $150 $100 $50 $0 9/08 3/09 9/09 3/10 9/10 3/11 9/11 3/12 9/12 3/13 9/13 Sally Beauty Holdings, Inc. S&P 500 Dow Jones US Specialty Retailers TSM 5NOV201318482887 The Dow Jones U.S. Specialty Retailers Index (NYSE: DJUSRS) is a non-managed index and...

  • Page 51
    ... Program at an aggregate cost of $266.4 million, prior to the Company's termination of the 2012 Share Repurchase Program in March 2013. (2) On March 5, 2013, the Company announced that its Board of Directors approved a new share repurchase program authorizing it to repurchase up to $700.0 million...

  • Page 52
    ... $ 143,828 $ $ 0.79 0.78 181,985 184,088 $ $ $ 2013 Results of operations information: Net sales ...Cost of products sold and distribution expenses . ...diluted ...Operating data: Number of stores (at end of period): Sally Beauty Supply ...Beauty Systems Group ...$3,622,216 1,826,953 1,795,263 1,202,...

  • Page 53
    our redemption of outstanding senior notes and our repayment in full of a term loan in connection with such refinancing. Please see Note 13 of the ''Notes to Consolidated Financial Statements'' in ''Item 8-Financial Statements and Supplementary Data'' for additional information about the Company's ...

  • Page 54
    ...2013, of Sally Beauty. This section should be read in conjunction with the audited consolidated financial statements of Sally Beauty and the related notes included elsewhere in this Annual Report... 30, 2013, compared to 6.6% for the fiscal year ended September 30, 2012; • Sally Beauty Supply and BSG...

  • Page 55
    ...were $3,622.2 million and $520.4 million, respectively. We believe Sally Beauty Supply is the largest open-line distributor of professional beauty supplies in the U.S. based on store count. As of September 30, 2013, Sally Beauty Supply operated 3,403 companyoperated retail stores, 2,710 of which are...

  • Page 56
    ...beauty supply stores, like BSG and Sally Beauty Supply. We expect that these factors will continue to drive demand for conveniently located professional beauty supply... For example, during the fiscal year ended September 30, 2013 our international company-operated stores increased from 742 stores to ...

  • Page 57
    ... ''We depend upon manufacturers who may be unable to provide products of adequate quality or who may be unwilling to continue to supply products to us.'' • Relationships with suppliers. Sally Beauty Supply and BSG, and their respective suppliers are dependent on each other for the distribution of...

  • Page 58
    ... open and profitably operate new stores in existing and additional geographic areas. In the U.S. and Canada, the capital requirements to open a Sally Beauty Supply or BSG store, excluding inventory, average approximately $70,000 and $80,000, respectively, with the capital requirements for stores in...

  • Page 59
    ... upgraded technology will not have a material adverse effect on our financial reporting, business, financial condition or results of operations. Please see ''Risk ... 2013, the Company acquired certain assets and business operations of Essential Salon, a professional-only distributor of beauty products...

  • Page 60
    ...stock (the ''2012 Share Repurchase Program''). In addition, on March 5, 2013, we announced that our Board of Directors approved a new share repurchase program... of our common stock (under the 2012 Share Repurchase Program and the 2013 Share Repurchase Program) at a cost of $509.7 million. We reduced...

  • Page 61
    ...8-''Financial Statements and Supplementary Data'' contained elsewhere in this Annual Report. Interest Rate Swap Agreements We and certain of our ...periods consistent with the related underlying exposures. At September 30, 2013, the Company held no interest rate derivative instruments. In May...

  • Page 62
    ... predecessor plans, such as the Sally Beauty Holdings 2007 Omnibus Incentive Plan. For the fiscal years 2013, 2012 and 2011, the total...estimate of the potential loss. During the fiscal year ended September 30, 2013, the parties continued to engage in negotiations aimed at resolving the matter and...

  • Page 63
    ... table shows the condensed results of operations of our business for the fiscal years ended September 30, 2013, 2012 and 2011 (in millions): Fiscal Year Ended September 30, 2013 2012 2011 Net sales ...Cost of products sold and distribution expenses ...Gross profit ...Total other operating costs...

  • Page 64
    ...measures we rely on to gauge our operating performance (dollars in thousands): Fiscal Year Ended September 30, 2013 2012 2011 Net sales: Sally Beauty Supply ...BSG ...Consolidated ...Gross profit ...Gross profit margin ...Selling, general and administrative expenses . . Depreciation and amortization...

  • Page 65
    ... profit and gross profit margin data for each reportable segment (dollars in thousands). Fiscal Year Ended September 30, 2013 2012 Increase Net sales: Sally Beauty Supply ...BSG ...Consolidated net sales ...Gross profit: Sally Beauty Supply ...BSG ...Consolidated gross profit ...Gross profit margin...

  • Page 66
    ...Sally Beauty Supply product categories in the fiscal year ended September 30, 2012. Sally Beauty Supply. Net sales for Sally Beauty Supply increased by $31.6 million, or 1.4%, for the fiscal year ended September 30, 2013... distributors in Europe (previously reported in sales from businesses acquired...

  • Page 67
    ... exchange rates did not have a material impact on our consolidated gross profit. Sally Beauty Supply. Sally Beauty Supply's gross profit increased by $24.0 million, or 2.0%, for the fiscal year ended September 30, 2013, compared to the fiscal year ended September 30, 2012, principally as a result...

  • Page 68
    ... indicated, information concerning our operating earnings for each reportable segment (dollars in thousands): Fiscal Year Ended September 30, 2013 2012 Increase Operating Earnings: Segment operating profit: Sally Beauty Supply ...BSG ...Segment operating profit ...Unallocated expenses ...Share-based...

  • Page 69
    ...months. For the fiscal year ended September 30, 2012, Sally Beauty Supply's operating profit reflects a $10.2 million charge resulting from...grant date of, share-based awards during the fiscal year ended September 30, 2013, compared to share-based awards during the fiscal year ended September 30, 2012...

  • Page 70
    ... profit and gross profit margin data for each reportable segment (dollars in thousands). Fiscal Year Ended September 30, 2012 2011 Increase Net sales: Sally Beauty Supply ...BSG ...Consolidated net sales ...Gross profit: Sally Beauty Supply ...BSG ...Consolidated gross profit ...Gross profit margin...

  • Page 71
    ...the annual sales increase than for the fiscal year ended September 30, 2011. Other sales channels (including sales from stores that have been open for less than 14 months) experienced a minor decline in sales compared to the fiscal year ended September 30, 2011. Net sales for Sally Beauty Supply for...

  • Page 72
    ...187 company-operated stores were added since the fiscal year 2011, a 4.5% increase), as well as higher advertising expenses in the Sally Beauty Supply segment of $7.3 million. In addition, for the fiscal year 2012, selling, general and administrative expenses reflect a $10.2 million charge resulting...

  • Page 73
    ... indicated, information concerning our operating earnings for each reportable segment (dollars in thousands): Fiscal Year Ended September 30, 2012 2011 Increase Operating Earnings: Segment operating profit: Sally Beauty Supply ...BSG ...Segment operating profit ...Unallocated expenses ...Share-based...

  • Page 74
    ... 14 of the Notes to Consolidated Financial Statements in Item 8-''Financial Statements and Supplementary Data'' contained elsewhere in this Annual Report for additional information about the Company's interest rate swaps and ''Liquidity and Capital Resources'' below for additional information about...

  • Page 75
    ... 30, 2012 and 2011, respectively. The lower fiscal year 2012 annual effective tax rate, compared to our average historical effective tax rate ...of $65.3 million. The decrease in current assets as of September 30, 2013, includes a decrease of $193.1 million in cash and cash equivalents primarily ...

  • Page 76
    ..., in the aggregate, of $59.3 million. In addition, in the fiscal year ended September 30, 2013, we purchased 46,700 shares of our common stock for approximately $1.2 million, which are included in treasury...share repurchases. As a holding company, we depend on our subsidiaries, including Sally 59

  • Page 77
    ...Sally...Sally...30, 2013, ... this Annual Report. We...30, 2013 have ... 30, 2013, the weighted...2013, borrowings outstanding under the ABL facility were $76.0 million (which were subsequently repaid) and Sally...Sally...2013, we completed several acquisitions at an aggregate cost of $22.5 million, including the May 2013...

  • Page 78
    ..., repayments of long-term debt and share repurchases. The following table shows our sources and uses of funds for the fiscal years ended September 30, 2013, 2012 and 2011 (in thousands): Fiscal Year Ended September 30, 2012 Change 2012 2011 $ 297,582 (112,513) (8,682) $ 12,872 5,536 (388,093) $ 297...

  • Page 79
    ...Net cash used by investing activities during the fiscal year ended September 30, 2013 decreased by $5.5 million to $107.0 million compared to $112.5 million... openings, the opening of a distribution facility in the Sally Beauty Supply segment and ongoing information technology upgrades. Net cash used ...

  • Page 80
    ...2022 using the effective interest method. On October 24, 2013, Sally Holdings and Sally Capital Inc. (collectively, the ''Issuers''), both indirect ...the Company. Interest on the senior notes due 2023 is payable semi-annually. The Company used the net proceeds from this debt issuance, approximately ...

  • Page 81
    ... September 30, 2013, borrowings outstanding under the ABL facility bear interest at the weighted average rate of 2.0%. When used in this Annual Report, LIBOR means the...are secured by substantially all of our assets, those of Sally Investment, those of our domestic subsidiaries, those of our Canadian...

  • Page 82
    ...due 2019-2022 contain terms which restrict the ability of Sally Beauty's subsidiaries to incur additional indebtedness. However, in addition...the indentures) is less than 3.25 to 1.00. At September 30, 2013, the Company's Consolidated Total Leverage Ratio was approximately 2.7 to 1.0. Consolidated ...

  • Page 83
    ...Restricted Payments. More specifically, under the ABL facility, Sally Holdings may make Restricted Payments if availability under the ...As of September 30, 2013, the Consolidated Fixed Charge Coverage Ratio was approximately 3.9 to 1.0. When used in this Annual Report, the phrase ''Consolidated EBITDA...

  • Page 84
    ... by future payment dates at September 30, 2013 (in thousands): Payments Due by Period More...Annual Report for additional information about the Company's operating leases. The amounts reported...The majority of our operating leases are for Sally Beauty Supply and BSG stores, which typically are located...

  • Page 85
    ...GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of... shrinkage expense averaged approximately 1.0% of consolidated net sales in fiscal years 2013, 2012 and 2011. A 10% increase or decrease in our estimate...

  • Page 86
    ...claim payment history, historical trends in claims incurred but not yet reported, and other components such as expected increases in medical costs, projected... basis and adjust our accruals accordingly. As of September 30, 2013 and 2012, our balance sheet included an estimated liability related to...

  • Page 87
    ... ended September 30, 2013, 2012 and 2011, the effective income tax rates were 36.7%, 35.4% and 36.4%, respectively. The lower fiscal year 2012 annual effective tax rate, ... the need to calculate the fair value of a reporting unit in connection with the goodwill impairment test unless the entity 70

  • Page 88
    ... $1.2 million, net of income tax. Recent Accounting Pronouncements In February 2013, the FASB issued ASU No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, to improve the reporting of reclassifications out of AOCI. This amendment requires an entity to...

  • Page 89
    ...income in the statement of stockholders' equity but does not change the items that must be reported. As permitted, the Company adopted the provisions of ASU No. 2011-05 effective January 1, 2013 and its adoption did not have a material effect on the Company's consolidated financial position, results...

  • Page 90
    ... statements of earnings. As such, selling, general and administrative expenses include net losses of $2.8 million in the fiscal years ended September 30, 2013, and net gains of $2.0 million and $0.2 million in the fiscal years ended September 30, 2012 and 2011, respectively, in connection with all...

  • Page 91
    ... and design, our implementation of the controls and procedures and the effect of the controls and procedures on the information generated for use in this Annual Report. In the course of the evaluation, we sought to identify whether we had any data errors, control problems or acts of fraud and to...

  • Page 92
    ...our CEO and CFO have concluded that, as of September 30, 2013, we maintain disclosure controls and procedures that are effective in providing ... decisions regarding required disclosure. Management's Annual Report on Internal Control over Financial Reporting. Management of the Company, including the...

  • Page 93
    ... and Insider Participation.'' ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required by Item 12 of this Annual Report on Form 10-K is incorporated herein by reference from our Proxy Statement related to the 2014...

  • Page 94
    ... information as of September 30, 2013, about our common stock that may...for issuance in connection with past awards under the Sally Beauty Holdings, Inc. 2010 Omnibus Incentive Plan (''the 2010... The information required by Item 14 of this Annual Report on Form 10-K is incorporated herein by reference...

  • Page 95
    ...reference from Exhibit 3.1 to the Company's Current Report on Form 8-K filed on August 27, 2012 Credit Agreement dated as of November 12, 2010 among Sally Holdings LLC, Beauty Systems Group LLC, Sally Beauty Supply LLC, as domestic borrowers, Beauty Systems Group (Canada), Inc., as Canadian borrower...

  • Page 96
    ... as of December 20, 2011, by and among Sally Holdings LLC, Beauty Systems Group LLC, Sally Beauty Supply LLC, Beauty Systems Group (Canada), Inc., SBH Finance B.V., the Guarantors named therein, Sally Beauty Holdings, Inc., Sally Investment Holdings LLC and Bank of America, N.A., as administrative...

  • Page 97
    ... April 27, 2007 2009 Form of Stock Option Agreement for Employees pursuant to the Sally Beauty Holdings, Inc. 2007 Omnibus Incentive Plan, which is incorporated herein by reference from Exhibit 10.23 to the Company's Annual Report on Form 10-K filed on November 20, 2008 2009 Form of Restricted Stock...

  • Page 98
    .... 2010 Omnibus Incentive Plan, which is incorporated herein by reference from Exhibit 10.25 to the Company's Annual Report on Form 10-K filed November 15, 2012 Form of Sally Beauty Holdings, Inc. 2012 Annual Incentive Plan, which is incorporated herein by reference from Exhibit 10.34 to the Company...

  • Page 99
    ... effective as of November 12, 2013* 2012 Form of Restricted Stock Unit Agreement for Independent Directors pursuant to the Sally Beauty Holdings, Inc. 2010 Omnibus Incentive Plan, which is incorporated herein by reference from Exhibit 10.37 to the Company's Annual Report on Form 10-K filed November...

  • Page 100
    ...the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 14th day of November, 2013. SALLY BEAUTY HOLDINGS, INC. By: /s/ GARY G. WINTERHALTER Gary G. Winterhalter Chairman of the Board, President...

  • Page 101
    ... the Securities Exchange Act of 1934, this report has been signed below by the following persons...2013 Director November 14, 2013 President of Beauty Systems Group and Director Director November 14, 2013 November 14, 2013 Director November 14, 2013 Director November 14, 2013 Director November 14, 2013...

  • Page 102
    SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES Financial Statements Years ended September 30, 2013, 2012 and 2011 INDEX TO FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm ...Consolidated Financial Statements: Consolidated Balance Sheets as of September 30, 2013 and ...

  • Page 103
    ... Public Accounting Firm The Board of Directors and Stockholders Sally Beauty Holdings, Inc.: We have audited Sally Beauty Holdings, Inc.'s (the Company) internal control over financial reporting as of September 30, 2013, based on criteria established in Internal Control-Integrated Framework...

  • Page 104
    Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders Sally Beauty Holdings, Inc.: We have audited the accompanying consolidated balance sheets of Sally Beauty Holdings, Inc. (the Company) and subsidiaries as of September 30, 2013 and 2012, and the related ...

  • Page 105
    SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES Consolidated Balance Sheets September 30, 2013 and 2012 (In thousands, except par value data) 2013 Assets Current assets: Cash and cash equivalents ...Trade accounts receivable, net . Accounts receivable, other ...Income taxes receivable ...Inventory ......

  • Page 106
    SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statements of Earnings Fiscal Years ended September 30, 2013, 2012 and 2011 (In thousands, except per share data) 2013 Net sales ...Cost of products sold and distribution expenses ...Gross profit ...Selling, general and administrative ...

  • Page 107
    SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statements of Comprehensive Income Fiscal Years ended September 30, 2013, 2012 and 2011 (In thousands) 2013 Net earnings ...Other comprehensive income (loss): Foreign currency translation adjustments ...Deferred gain on interest rate swaps ...

  • Page 108
    SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Fiscal Years ended September 30, 2013, 2012 and 2011 (In thousands) 2013 Cash Flows from Operating Activities: Net earnings ...Adjustments to reconcile net earnings to net cash provided activities: Depreciation and ...

  • Page 109
    SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity (Deficit) Fiscal Years ended September 30, 2013, 2012 and 2011 (In thousands) Accumulated Other Total Common Stock Additional Paid-in Accumulated Treasury Comprehensive Stockholders' Shares Amount Capital ...

  • Page 110
    ...2013, 2012 and 2011 1. Description of Business and Basis of Presentation Description of Business Sally Beauty Holdings, Inc. and its consolidated subsidiaries (''Sally Beauty'' or ''the Company'') sell professional beauty supplies, through its Sally Beauty Supply... affect the reported amounts of ...

  • Page 111
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2013, 2012 and ... estimates will be collected. Inventory Inventory consists primarily of beauty supplies and related accessories, and salon equipment for sale in the...

  • Page 112
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2013, 2012 and 2011 least annually, and sooner when management has reason to believe that the risk of inventory shrinkage at a particular location is heightened. Upon ...

  • Page 113
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2013, 2012 and 2011 combinations. Goodwill and intangible assets with indefinite lives are reviewed for impairment at least annually...but not yet reported. The Company ...

  • Page 114
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2013, 2012 and 2011 ...million, $79.8 million and $70.9 million for the fiscal years 2013, 2012 and 2011, respectively, are included in selling, general and ...

  • Page 115
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2013... in each component of AOCI for the periods presented, to separately report significant amounts reclassified from each component of AOCI and to disclose among...

  • Page 116
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2013, 2012 and 2011 ... items that must be reported. As permitted, the Company adopted the provisions of ASU No. 2011-05 effective January 1, 2013 and its adoption did ...

  • Page 117
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2013, 2012 and 2011 Consistent with this hierarchy, the Company categorized certain of its financial assets and liabilities as follows at September 30, 2013 and 2012 (...

  • Page 118
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2013, 2012 and 2011 ... capital, in the aggregate, by that amount. Please see our Annual Report on Form 10-K for the fiscal year ended September 30, 2012, for more ...

  • Page 119
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2013, 2012 and 2011 The following table sets forth the computations of basic and diluted earnings per share (in thousands, except per share data): Year ended ...

  • Page 120
    ..., under the provisions of the 2010 Plan and certain predecessor share-based plans such as the Sally Beauty Holdings, Inc. 2007 Omnibus Incentive Plan (the ''2007 Plan''). For fiscal years 2013, 2012 and 2011, the total income tax benefit recognized in our consolidated statements of earnings in...

  • Page 121
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2013, 2012 and ... issued to the Company's grantees at the date of grant during the fiscal years 2013, 2012 and 2011 was $11.29, $9.60 and $5.74, respectively. The total...

  • Page 122
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2013, 2012 and 2011 The fair value of the Company's restricted stock awards is expensed on a straight-line basis over the period (generally five years) in ...

  • Page 123
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2013, 2012 and 2011 The following table presents a summary of the activity for the Company's RSUs for the fiscal year ended September 30, 2013... 30, 2013 2012 2011...

  • Page 124
    ...operating segment for the fiscal years 2012 and 2013 are as follows (in thousands): Sally Beauty Supply Balance at September 30, 2011 ...Acquisitions ....... The Company completed its annual assessment of goodwill for impairment during the quarter ended March 31, 2013. No impairment losses were ...

  • Page 125
    ... provisions of ASU No. 2012-02 effective January 1, 2013. The Company completed its annual assessment of intangible assets, other than goodwill and including ...segment at September 30, 2013 and 2012 (in thousands): Sally Beauty Supply Balance at September 30, 2013: Intangible assets with indefinite ...

  • Page 126
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2013, 2012 and 2011 Amortization expense totaled $12.8 million, $13.7 million and $12.4 million for the fiscal years ended September 30, 2013, 2012 and 2011, ...

  • Page 127
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2013, 2012 and 2011 12. Commitments and Contingencies Lease Commitments The Company's principal leases relate to retail stores and warehousing properties. At September...

  • Page 128
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2013, 2012 ... Annual Report, LIBOR means the London Interbank Offered Rate. (b) Includes unamortized premium of $8.4 million and $9.3 million as of September 30, 2013 ...

  • Page 129
    ...26, 2018 and improved certain other covenant terms. At September 30, 2013, borrowings outstanding under the ABL facility were $76.0 million (which ...-2022 is payable semi-annually. Please see Note 19 for certain condensed financial statement data pertaining to Sally Beauty, the Issuers, the guarantor...

  • Page 130
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2013, 2012 and 2011 Maturities of the Company's long-term debt are as follows at September 30, 2013 (in thousands): Fiscal Year: 2014 ...2015 ...2016-2018 . Thereafter...

  • Page 131
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2013, ...As of September 30, 2013, the Consolidated Fixed Charge Coverage Ratio was approximately 3.9 to 1.0. When used in this Annual Report, the phrase ''Consolidated...

  • Page 132
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2013, ...amount of certain foreign assets and obligations relative to its functional and reporting currency (the U.S. dollar) or relative to the functional currency of ...

  • Page 133
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2013, 2012 and 2011 The Company uses foreign exchange contracts including, at September 30, 2013, foreign currency options with an aggregate notional amount of $12.0 ...

  • Page 134
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2013, 2012 and...Company's consolidated statements of earnings for the fiscal years ended September 30, 2013, 2012 and 2011 (in thousands): Amount of Gain or (Loss) ...

  • Page 135
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2013, 2012... the terms of the 401k Plan, employees may contribute a percentage of their annual compensation to the 401k Plan up to certain maximums, as defined by the ...

  • Page 136
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2013, 2012 and 2011 16. Income Taxes The provision for income taxes for the fiscal years 2013...below: Year Ended September 30, 2013 2012 2011 Statutory tax rate ...State...

  • Page 137
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2013, 2012 ... carry-forwards of $71.1 million have no expiration date. At September 30, 2013 and 2012, the Company had tax credit carry-forwards of $2.0 million and $1.1...

  • Page 138
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2013, 2012 and 2011 The changes in the amount of unrecognized tax benefits for the fiscal years ended September 30, 2013 and 2012 are as follows (in thousands): 2013 ...

  • Page 139
    ... Area Information The Company's business is organized into two separate segments: (i) Sally Beauty Supply, a domestic and international chain of cash and carry retail stores which offers professional beauty supplies to both salon professionals and retail customers primarily in North America, Puerto...

  • Page 140
    ...2011 is as follows (in thousands): Year Ended September 30, 2013 2012 2011 Net sales: Sally Beauty Supply ...BSG ...Total ...Earnings before provision for income taxes: Segment operating profit: Sally Beauty Supply(a) ...BSG(a) ...Segment operating profit ...Unallocated expenses(a)(b) ...Share-based...

  • Page 141
    ... of cash flows for each of the three fiscal years in the period ended September 30, 2013 of: (i) Sally Beauty Holdings, Inc., or the ''Parent;'' (ii) Sally Holdings LLC and Sally Capital Inc., or the ''Issuers;'' (iii) the guarantor subsidiaries; (iv) the non-guarantor subsidiaries; (v) elimination...

  • Page 142
    ... Financial Statements (Continued) Fiscal Years ended September 30, 2013, 2012 and 2011 Condensed Consolidating Balance Sheet September 30, 2013 (In thousands) Sally Holdings Sally Beauty LLC and NonHoldings, Sally Capital Guarantor Guarantor Consolidating Inc. and Inc. Subsidiaries Subsidiaries...

  • Page 143
    ... Financial Statements (Continued) Fiscal Years ended September 30, 2013, 2012 and 2011 Condensed Consolidating Balance Sheet September 30, 2012 (In thousands) Sally Holdings Sally Beauty LLC and NonHoldings, Sally Capital Guarantor Guarantor Consolidating Inc. and Inc. Subsidiaries Subsidiaries...

  • Page 144
    ..., 2012 and 2011 Condensed Consolidating Statement of Earnings Fiscal Year Ended September 30, 2013 (In thousands) Sally Holdings NonSally Beauty LLC and Sally Guarantor Guarantor Consolidating Holdings, Inc. Capital Inc. Subsidiaries Subsidiaries Eliminations and Subsidiaries $ - - - - 434 - (434...

  • Page 145
    ... Statements (Continued) Fiscal Years ended September 30, 2013, 2012 and 2011 Condensed Consolidating Statement of Earnings Fiscal Year Ended September 30, 2012 (In thousands) Sally Holdings NonSally Beauty LLC and Sally Guarantor Guarantor Consolidating Holdings, Inc. Capital Inc. Subsidiaries...

  • Page 146
    ... Statements (Continued) Fiscal Years ended September 30, 2013, 2012 and 2011 Condensed Consolidating Statement of Earnings Fiscal Year Ended September 30, 2011 (In thousands) Sally Holdings NonSally Beauty LLC and Sally Guarantor Guarantor Consolidating Holdings, Inc. Capital Inc. Subsidiaries...

  • Page 147
    ..., 2012 and 2011 Condensed Consolidating Statement of Cash Flows Fiscal Year Ended September 30, 2013 (In thousands) Sally Holdings NonSally Beauty LLC and Sally Guarantor Guarantor Consolidating Holdings, Inc. Capital Inc. Subsidiaries Subsidiaries Eliminations and Subsidiaries $(229,002) $ 30,386...

  • Page 148
    ... Statements (Continued) Fiscal Years ended September 30, 2013, 2012 and 2011 Condensed Consolidating Statement of Cash Flows Fiscal Year Ended September 30, 2012 (In thousands) Sally Holdings NonSally Beauty LLC and Sally Guarantor Guarantor Consolidating Holdings, Inc. Capital Inc. Subsidiaries...

  • Page 149
    ... Statements (Continued) Fiscal Years ended September 30, 2013, 2012 and 2011 Condensed Consolidating Statement of Cash Flows Fiscal Year Ended September 30, 2011 (In thousands) Sally Holdings NonSally Beauty LLC and Sally Guarantor Guarantor Consolidating Holdings, Inc. Capital Inc. Subsidiaries...

  • Page 150
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2013, 2012 and 2011 20. Subsequent Event On October 24, 2013, Sally Holdings and Sally...senior notes due 2023 is payable semi-annually. The Company used the net proceeds...

  • Page 151
    ...that: (1) I have reviewed this Annual Report on Form 10-K of Sally Beauty Holdings, Inc.; (2) Based on my knowledge, this report does not contain any untrue statement ...in the registrant's internal control over financial reporting. Date: November 14, 2013 By: /s/ GARY G. WINTERHALTER Gary G. ...

  • Page 152
    ...that: (1) I have reviewed this Annual Report on Form 10-K of Sally Beauty Holdings, Inc.; (2) Based on my knowledge, this report does not contain any untrue statement... in the registrant's internal control over financial reporting. Date: November 14, 2013 By: /s/ MARK J. FLAHERTY Mark J. Flaherty...

  • Page 153
    ... 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Sally Beauty Holdings, Inc. (the ''Company'') on Form 10-K for the fiscal year ended September 30, 2013 as filed with the Securities and Exchange Commission on the date hereof (the...

  • Page 154
    ... 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Sally Beauty Holdings, Inc. (the ''Company'') on Form 10-K for the fiscal year ended September 30, 2013 as filed with the Securities and Exchange Commission on the date hereof (the...

  • Page 155
    ...Stockholders. A copy of the Sally Beauty Holdings, Inc. 2013 Form 10-K, as filed with the Securities and Exchange Commission, is available on the investing section of the Company's website at investor. sallybeautyholdings.com. Investor inquiries or a copy of the Company Annual Report or Form 10-K or...

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