Sally Beauty Holdings, Inc. announced financial results for the fiscal 2017 first quarter. Consolidated net sales were $999.6 million in the fiscal first quarter, an increase of 0.2% from the prior year’s first quarter. Same store sales growth of 0.4% and incremental sales from new stores were partially offset by the unfavorable impact from foreign currency exchange rates of $15.7 million, or approximately 1.6% of sales.
Gross margin for the quarter was 49.2%, a decline of 30 basis points from the prior year’s first quarter due to unfavorable product and customer mix shift, lower vendor allowances and higher promotions than the prior year.
Selling, general and administrative expense (SG&A) during the quarter, excluding depreciation and amortization expense, was 34.8% of sales, an increase of 80 basis points from the prior year, driven by wage increases for store sales associates, higher expenses due to on-going upgrades to information technology systems and incremental expenses from new store openings.
Operating earnings were $117.5 million, down 10.3% from $130.9 million in the prior year quarter primarily due to an increase in cost of goods sold and SG&A expenses outpacing the increase in sales.
Net earnings were $55.8 million, up 32.2% compared to reported net earnings of $42.2 million in the prior year first quarter and down 14.2% compared to the prior year first quarter adjusted net earnings of $65.1 million.
Diluted earnings per share were $0.39 compared to the prior year first quarter reported and adjusted diluted earnings per share of $0.28 and $0.43, respectively.
Cash flow from operations was $90.5 million in the first quarter compared to $69.1 million, an increase of $21.3 million, over the prior year fiscal first quarter. Operating free cash flow was a strong $62.4 million in the fiscal first quarter, an increase of $33.9 million or 118.7% compared to the prior year quarter. The Company repurchased (and subsequently retired) a total of 2.5 million shares of common stock during the quarter at an aggregate cost of $67.0 million. Approximately $498.2 million authorization remains available under the current $1 billion share repurchase program.
“We had a disappointing start to fiscal 2017, as sales growth and gross margins fell below expectations,” stated Chris Brickman, President and Chief Executive Officer. “In our core Sally business, our financial performance was negatively impacted by the challenging retail environment and promotional activity that failed to drive sufficient traffic to the stores. In response, we are today announcing a comprehensive restructuring plan and other aggressive cost reduction initiatives that we expect will meaningfully lower our cost structure without compromising our ability to serve the customer and execute on our strategic priorities. These actions should enable us to deliver low-to-mid single digit adjusted operating income growth in fiscal 2017 despite lowering our full year same store sales outlook to a range of flat to low-single-digit growth.
“Looking forward, the Sally team will test a new loyalty program this spring and continue to focus on improving customer engagement and conversion, while BSG continues to strive towards gaining channel share and becoming the indisputable partner of choice for both stylists and manufacturers. Over the long-term, we remain focused on evolving our business model to better meet the needs of our customers, drive profitable growth and create value for our shareholders.”
Interest expense for the fiscal 2017 first quarter was $26.8 million, down $37.1 million from the fiscal 2016 first quarter. In the prior year’s first quarter, the Company recorded in interest expense the loss on the extinguishment of debt of $33.3 million in connection with the December 2015 redemption of its $750 million of 6.875% Senior Notes Due 2019 and the overlapping interest expense on such senior notes of $2.1 million.
The Company’s effective tax rate in the fiscal 2017 first quarter was 38.4%, up 150 basis points compared to the prior year’s effective tax rate in the fiscal 2016 first quarter of 36.9%. The increase in the effective tax rate was due primarily to the absence of a prior year tax benefit from the retroactive reinstatement of certain tax credits.
Adjusted EBITDA for the fiscal 2017 first quarter was $148.1 million, a decrease of $11.8 million, or 7.4%, from the prior year’s first quarter. Adjusted EBITDA margin was 14.8% in the quarter vs. 16.0% in the prior year’s quarter.
Inventory at quarter end was $907.8 million, down $4.6 million, or 0.5%, vs. the prior year first quarter, reflecting the Company’s aggressive approach to inventory management during the challenging retail environment. Capital expenditures in the fiscal first quarter were $28.0 million, primarily for information technology projects, new stores openings and distribution facility upgrades.
Restructuring Plan and Other Cost Reduction Initiatives
On January 26, 2017, the Board of Directors of the Company approved a comprehensive restructuring plan (the “Restructuring Plan”) for the Company’s businesses that includes a wide range of organizational efficiency initiatives and cost reduction opportunities.
The Company expects that it will incur total aggregate charges of approximately $12 million to $14 million from the Restructuring Plan, including estimated severance and related costs of approximately $7 million. The Company expects to recognize most of these charges in the second quarter of 2017.
The Restructuring Plan is expected to generate annualized pretax benefits in the range of $17 million to $19 million, with pretax benefits in fiscal 2017 estimated in the range of $10 million to $12 million.
Other cost reduction initiatives, not included in the Restructuring Plan, are expected to further reduce planned operating expenses by approximately $20 million over the remainder of fiscal year 2017.
