# Sally Beauty Holdings, Inc. (SBH) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Sally Beauty Holdings, Inc.'s 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1368458/000095017023064558/sbh-20230930.htm
Accession: 0000950170-23-064558
Filing date: 2023-11-16
Report date: 2023-09-30
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/SBH/
All MD&A years: /company/SBH/mda/
Previous year: /company/SBH/mda/fy2022/ (FY 2022)
Next year: /company/SBH/mda/fy2024/ (FY 2024)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following section discusses management’s view of Sally Beauty’s financial condition and results of operations for fiscal year 2023 compared to fiscal year 2022. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II of our Annual Report on Form 10-K for the fiscal year ended September 30, 2022, for a discussion of the financial condition and results of operations for fiscal year 2022 compared to fiscal year 2021. This section should be read in conjunction with the audited consolidated financial statements of Sally Beauty and the related notes included elsewhere in this Annual Report. This Management’s Discussion and Analysis of Financial Condition and Results of Operations section may contain forward-looking statements. See “Cautionary Notice Regarding Forward-Looking Statements” and “Risk Factors” for a discussion of the uncertainties, risks and assumptions associated with these forward-looking statements that could cause results to differ materially from those reflected in such forward-looking statements.

Financial Results Summary of the Fiscal Year Ended September 30, 2023:

•
Consolidated net sales for the fiscal year decreased $87.4 million, or 2.3%, to $3,728.1 million and included a negative impact from changes in foreign currency exchange rates of $9.2 million, or 0.2% of consolidated net sales;

•
Consolidated comparable sales for the fiscal year increased 1.4%, compared to the prior fiscal year;

•
Consolidated gross profit decreased by $21.0 million, or 1.1%, to $1,898.2 million. Gross margin increased 60 basis points to 50.9% compared to the prior fiscal year;

•
Consolidated operating earnings for the fiscal year decreased $12.6 million, or 3.7%, to $325.0 million. Operating margin decreased 10 basis points to 8.7% compared to the prior fiscal year;

•
Consolidated net earnings for the fiscal year decreased $1.0 million, or 0.6%, to $184.6 million;

•
Diluted earnings per share for the fiscal year were $1.69 compared to $1.66 for the prior fiscal year; and

•
Cash provided by operations was $249.3 million for the fiscal year compared to $156.5 million for the prior fiscal year.

Distribution Center Consolidation and Store Optimization Plan

Last fiscal year, we announced our Distribution Center Consolidation and Store Optimization Plan (the "Plan"). The Plan was designed to improve overall profitability by optimizing our store base and distribution network through the planned closing of 330 SBS stores, 35 BSG stores and two BSG distribution centers. This fiscal year, we were able to complete the majority of our planned closures and further optimized our store supply chain network based on our new store fleet, while meeting our sales recapture and cost savings expectations. As of September 30, 2023, we have two BSG stores left to be closed as part of the Plan and expect additional immaterial costs to be incurred in the first half of fiscal year 2024.

See Note 16 in the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report for more information on the Plan.

Trends Impacting Our Business

Global inflationary pressures continued to influence consumer and stylist shopping behavior along with the cost for products and services. In the U.S. and Canada, we saw our SBS retail customers color their hair less frequently and reduce the size of their basket when they shop with us, while at BSG we saw a continuation of stylist demand trends of buying closer to needs we’ve seen over the last several quarters. These inflationary pressures have also impacted wages, especially among retail and hourly employees, as we have experienced an increase in our labor costs in order to attract and retain associates.

During the fiscal year, these headwinds have resulted in lower traffic and conversion in our business and increases in certain operating costs. We continue to monitor these challenges and implement measures to help mitigate their impacts, including managing our inventory levels to reduce out-of-stock items, adjusting our promotional activities, optimizing our store base and expanding our partnerships with delivery service providers. Although these initiatives

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have helped mitigate ongoing macro-headwinds, we cannot reasonably predict the long-term effects of inflation. Furthermore, in a measure to curb inflation, the U.S. Federal Reserve has increased the federal funds effective rate. In turn, these increases have raised the interest expense of some of our customers’ outstanding borrowings which has reduced their discretionary spending.

Comparable Sales

The Company’s initiative to invest in our digital platforms support our omni-channel strategy to provide customers an enhanced shopping experience. As such, we believe that comparable sales is an appropriate performance indicator to measure our sales growth compared to the prior period. Our comparable sales include sales from stores that have been operating for 14 months or longer as of the last day of a month and e-commerce revenue. Additionally, comparable sales include sales to franchisees and full-service sales. Our comparable sales metric excludes the effect of changes in foreign exchange rates and sales from stores relocated until 14 months after the relocation. Revenue from acquired stores are excluded from our comparable sales calculation until 14 months after the acquisition. Our calculation of comparable sales might not be the same as other retailers as the calculation varies across the retail industry.

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Results of Operations

Key Operating Metrics

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

[[GREPCENT_TABLE]]
[["","","","","","","","","2023 vs. 2022"],["","","Fiscal Year Ended September 30,","","","Amount","","","%"],["","","2023","","","2022","","","Change","","","Change"],["Net sales:"],["SBS","","$","2,139,206","","","$","2,193,044","","","$","(53,838",")","","","(2.5",")%"],["BSG","","","1,588,925","","","","1,622,521","","","","(33,596",")","","","(2.1",")%"],["Consolidated","","$","3,728,131","","","$","3,815,565","","","$","(87,434",")","","","(2.3",")%"],["Gross profit:"],["SBS","","$","1,265,683","","","$","1,273,882","","","$","(8,199",")","","","(0.6",")%"],["BSG","","","632,497","","","","645,283","","","","(12,786",")","","","(2.0",")%"],["Consolidated","","$","1,898,180","","","$","1,919,165","","","$","(20,985",")","","","(1.1",")%"],["Segment gross margin:"],["SBS","","","59.2","%","","","58.1","%","","","110","","","bps"],["BSG","","","39.8","%","","","39.8","%","","","\u2014","","","bps"],["Consolidated","","","50.9","%","","","50.3","%","","","60","","","bps"],["Net earnings:"],["Segment operating earnings:"],["SBS","","$","358,474","","","$","350,884","","","$","7,590","","","","2.2","%"],["BSG","","","181,275","","","","193,407","","","","(12,132",")","","","(6.3",")%"],["Segment operating earnings","","","539,749","","","","544,291","","","","(4,542",")","","","(0.8",")%"],["Unallocated expenses and restructuring (a) (b)","","","214,720","","","","206,651","","","","8,069","","","","3.9","%"],["Consolidated operating earnings","","","325,029","","","","337,640","","","","(12,611",")","","","(3.7",")%"],["Interest expense","","","72,979","","","","93,543","","","","(20,564",")","","","(22.0",")%"],["Earnings before provision for income taxes","","","252,050","","","","244,097","","","","7,953","","","","3.3","%"],["Provision for income taxes","","","67,450","","","","60,544","","","","6,906","","","","11.4","%"],["Net earnings","","$","184,600","","","$","183,553","","","$","1,047","","","","0.6","%"],["Number of stores at end-of-period (including franchises):"],["SBS","","","3,148","","","","3,439","","","","(291",")","","","(8.5",")%"],["BSG","","","1,338","","","","1,355","","","","(17",")","","","(1.3",")%"],["Consolidated","","","4,486","","","","4,794","","","","(308",")","","","(6.4",")%"],["Comparable sales growth (decline)"],["SBS","","","3.4","%","","","(0.6",")%","","","400","","","bps"],["BSG","","","(1.3",")%","","","2.3","%","","","(360",")","","bps"],["Consolidated","","","1.4","%","","","0.6","%","","","80","","","bps"]]
[[/GREPCENT_TABLE]]

(a)
Unallocated expenses represent certain corporate costs (such as payroll, share-based compensation, employee benefits and travel expense for corporate staff, certain professional fees and corporate governance expenses) that have not been charged to our segments and are included in SG&A expenses in our consolidated statements of earnings.

(b)
Restructuring primarily relates to the Plan.

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The Fiscal Year Ended September 30, 2023, compared to the Fiscal Year Ended September 30, 2022

Net Sales

SBS. The decrease in net sales for SBS was primarily driven by the following (in thousands):

[[GREPCENT_TABLE]]
[["Comparable sales","","$","69,253"],["Sales outside comparable sales (a)","","","(121,284",")"],["Foreign currency exchange","","","(1,807",")"],["Total","","$","(53,838",")"]]
[[/GREPCENT_TABLE]]

(a)
Includes closed stores, including stores closed under the Plan, net of stores opened for less than 14 months.

SBS's sales decrease was primarily driven by the impact of store closures in connection with the Plan in an amount of approximately $112.0 million, partially offset by a significant portion of these sales being recaptured in other locations including within comparable sales. The increase in SBS's comparable sales was a result of growth in our average unit retail, primarily from inflationary impacts and pricing leverage, partially offset by a decrease in our average units per transaction.

BSG. The decrease in net sales for BSG was driven by the following (in thousands):

[[GREPCENT_TABLE]]
[["Comparable sales","","$","(20,117",")"],["Sales outside comparable sales (a)","","","(6,086",")"],["Foreign currency exchange","","","(7,393",")"],["Total","","$","(33,596",")"]]
[[/GREPCENT_TABLE]]

(a)
Includes closed stores, including stores closed under the Plan, net of stores opened (or acquired) for less than 14 months.

BSG's sales decrease was primarily driven by the impact of store closures in connection with the Plan in an amount of approximately $8.8 million and the negative impacts of exchanges rates, partially offset by a significant portion of these sales being recaptured in other locations, including within comparable sales. Additionally, BSG’s comparable sales were impacted by the continuation of stylist demand trends seen over the last several quarters, which resulted in fewer transactions and units per transaction, partially offset by an increase in our average unit retail.

Gross Profit

SBS. SBS’s gross profit decrease was driven by lower net sales, partially offset by a higher gross margin. SBS’s gross margin grew as a result of pricing leverage, increased penetration of our owned-brand products and adjustments to our expected obsolescence reserve related to the Plan.

BSG. BSG’s gross profit decreased as a result of lower net sales, while BSG’s gross margin was unchanged. Gross margin included lower product margin resulting from an unfavorable sales channel mix between stores and lower-margin Regis e-commerce sales, and a shift in some distribution center costs from selling, general and administrative expenses into gross margin, offset by adjustments to our expected obsolescence reserve related to the Plan.

Selling, General and Administrative Expenses

SBS. SBS’s SG&A expenses decreased $15.8 million, or 1.7%, to $907.2 million for fiscal year 2023, which includes the favorable impact from foreign exchange rates of $0.6 million due to the weakening of the U.S. Dollar compared to currencies in our foreign operations. As a percentage of SBS net sales, SG&A for fiscal year 2023 was 42.4% compared to 42.1% for fiscal year 2022. The increase as a percentage of sales was driven by higher wage and bonus expenses, partially offset by cost savings from the closure of stores in connection with the Plan and lower advertising expenses.

BSG. BSG’s SG&A expenses decreased $0.7 million, or 0.1%, to $451.2 million for fiscal year 2023 and includes a favorable impact from foreign exchange rates of $2.5 million. As a percentage of BSG net sales, SG&A for fiscal year 2023 was 28.4% compared to 27.9% for fiscal year 2022. The increase was primarily driven by higher labor and bonus expenses, partially offset by a shift in some distribution center costs from selling, general and administrative expense into gross margin.

Unallocated. Unallocated SG&A expenses, which represent certain corporate costs that have not been charged to our reporting segments, increased $18.4 million, or 10.3%, to $197.5 million, primarily due to higher wage and bonus

- 30 -

expenses, insurance costs and information technology expenses. These increases were partially offset by prudent cost control and the lapping of disposal costs for obsolete personal-protective equipment inventory.

Restructuring

For fiscal year 2023, we substantially completed the planned closures under the Plan and incurred $17.2 million in restructuring charges, primarily from lease termination costs. For fiscal year 2022, we incurred $27.6 million in restructuring charges, which includes $24.8 million in asset impairments related to the Plan and other expenses in connection with a prior restructuring plan. See Note 16 in the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report for more information on our restructuring plans.

Interest Expense

The decrease in interest expense was primarily due to the lapping of debt extinguishment costs related to the repayment of our 8.75% Senior Notes due 2025 in fiscal year 2022, partially offset by debt extinguishment costs related to the repricing of our Term Loan B, higher interest rates on our variable rate debt and an increase in our average borrowings outstanding under our ABL facility. Additionally, our interest rate derivatives have helped mitigate some of the impacts from higher interest rates on a portion of our variable rate debt.

Provision for Income Taxes

For fiscal year 2023 and 2022, our effective tax rate was 26.8% and 24.8%, respectively. The increase in our effective tax rate was primarily due to additional taxes and interest recorded in the current fiscal year in connection with the one-time transition tax on unrepatriated foreign earnings ("Repatriation Tax") related to fiscal year 2018, and the net benefit recognized in the prior fiscal year from the release of $19.9 million of valuation allowances against foreign subsidiary net operating losses in the prior year for which a tax benefit was recognized, offset by $7.0 million in expense arising from uncertain tax positions. See Note 14, Income Taxes, for more information on our effective tax rate.

Our effective tax rate may fluctuate on a quarterly and/or annual basis due to various factors including, but not limited to, total earnings and the mix of earnings by jurisdiction, new tax laws, as well as changes in valuation allowances and uncertain tax positions.

Liquidity and Capital Resources

Our principal sources of liquidity are cash from operations, cash and cash equivalents, and borrowings under our ABL facility. A substantial portion of our liquidity needs arise from funding the costs of our operations, working capital, capital expenditures and debt-servicing. Additionally, under our share repurchase program (see below for more details) we will from time-to-time repurchase shares of our common stock on the open market to return value to our shareholders. At September 30, 2023, we had $605.6 million in our liquidity pool, which includes amounts available for borrowings under our ABL facility of $482.6 million and cash and cash equivalents of $123.0 million. Based upon the current level of operations and anticipated growth, we anticipate existing cash balances (excluding certain amounts permanently invested in connection with foreign operations), as well as cash expected to be generated by operations and funds available under the ABL facility, will be sufficient to fund working capital requirements, potential acquisitions, anticipated capital expenditures (including information technology investments and store projects) and service our debt obligations over the next 12 months.

Our working capital (current assets less current liabilities) increased $184.2 million to $648.7 million at September 30, 2023, compared to $464.5 million at September 30, 2022. The increase in our working capital was driven by higher inventory balances, resulting from $17.2 million from foreign exchange rates and inflationary vendor cost increases, partially offset by the optimization efforts to improve inventory stocking levels. The increase was further driven by an increase in cash and cash equivalents, fewer outstanding borrowings under our ABL facility, a reduction in our accounts payable due to the timing of payments, and impacts of optimization efforts around inventory purchases. The ratio of current assets to current liabilities was 2.12 to 1.00 at September 30, 2023, compared to 1.70 to 1.00 at September 30, 2022.

- 31 -

Share Repurchase Programs

During the fiscal years 2023 and 2022, we repurchased and subsequently retired approximately 1.5 million shares and 6.8 million shares of our common stock under our share repurchase program at a cost of $15.0 million and $130.3 million, respectively, excluding the impact of excess taxes on share repurchases. Share repurchases are funded primarily with cash from operations and, occasionally, with borrowings under the ABL facility. As of September 30, 2023, we had approximately $580.8 million of additional share repurchase authorization remaining under our Share Repurchase Program, that expires September 30, 2025.

Historical Cash Flows

The following table shows our sources and uses of cash for the periods presented (in thousands):

[[GREPCENT_TABLE]]
[["","","Fiscal Year Ended September 30,"],["","","2023","","","2022","","","Change"],["Net cash provided by operating activities","","$","249,311","","","$","156,500","","","$","92,811"],["Net cash used by investing activities","","","(99,776",")","","","(102,419",")","","","2,643"],["Net cash used by financing activities","","","(100,824",")","","","(373,679",")","","","272,855"],["Effect of foreign currency exchange rate changes on cash and cash equivalents","","","3,732","","","","(10,803",")","","","14,535"],["Net increase (decrease) in cash and cash equivalents","","$","52,443","","","$","(330,401",")","","$","382,844"]]
[[/GREPCENT_TABLE]]

Operating Activities

The increase in net cash provided by operating activities for fiscal year 2023, compared to fiscal year 2022, was primarily driven by fewer inventory purchases in the current year as a result of the Plan and the additional inventory purchases related to BSG's growth through distribution partnerships in the prior fiscal year.

Investing Activities

The decrease in net cash used by investing activities for fiscal year 2023, compared to fiscal year 2022, was primarily due to fewer capital expenditures, partially offset by cash paid for acquisitions this fiscal year compared to last fiscal year. During the fiscal year ended 2023, we had total capital expenditures of approximately $97.8 million, excluding amounts paid in connection with the prior year, primarily in connection with investments in technology and store leasehold improvements.

Financing Activities

Net cash used by financing activities decreased as a result of fewer debt repayments during the fiscal year, compared to prior fiscal year, and fewer shares repurchased under our share repurchase program.

Debt and Guarantor Financial Information

During fiscal year 2023, we entered into a seven-year term loan facility agreement in the aggregate principal amount of $400.0 million and used the proceeds to subsequently repay our previously existing term loan facility. Subsequently during the fiscal year, we were successfully able to negotiate a reduction in the fixed interest rate spreads on borrowings under the term loan facility.

At September 30, 2023, we had $1,078.0 million in outstanding debt, excluding finance lease obligations, unamortized debt issuance costs and discounts, in the aggregate, of $8.0 million. Our debt consists of $680.0 million in 2025 Senior Notes outstanding and $398.0 million remaining on our term loan. At September 30, 2023, there were no outstanding borrowings under our ABL facility. We utilize our ABL facility for the issuance of letters of credit, certain working capital and liquidity needs, and to manage normal fluctuations in our operational cash flow. In that regard, we may from time to time draw funds under the ABL facility for general corporate purposes, including funding of capital expenditures, acquisitions, debt servicing and, occasionally, share repurchases. Amounts drawn on our ABL facility are generally paid down with cash provided by our operating activities. During fiscal year 2023, the weighted average interest rate on our borrowings under the ABL facility was 6.1%.

We are currently in compliance with the agreements and instruments governing our debt, including our financial covenants.

- 32 -

See Note 10 of the Notes to Consolidated Financial Statements in Item 8 contained in this Annual Report for additional information about our debt.

Guarantor Financial Information

Our 2025 Senior Notes were issued by our wholly-owned subsidiaries, Sally Holdings LLC and Sally Capital Inc. (the “Issuers”). The notes are unsecured debt instruments guaranteed by us and certain of our wholly-owned domestic subsidiaries (together, the “Guarantors”) and have certain restrictions on the ability of our subsidiaries to make certain restrictive payments to Sally Beauty. The guarantees are joint and several, and full and unconditional. Certain other subsidiaries, including our foreign subsidiaries, do not serve as guarantors.

The following summarized consolidating financial information represents financial information for the Issuers and the Guarantors on a combined basis. All transactions and intercompany balances between these combined entities has been eliminated.

The following table presents the summarized balance sheets information for the Issuers and the Guarantors as of September 30, 2023 and 2022 (in thousands):

[[GREPCENT_TABLE]]
[["(in thousands)","","September 30, 2023","","","September 30, 2022"],["Cash and cash equivalents","","$","66,148","","","$","23,325"],["Inventory","","$","735,853","","","$","714,477"],["Intercompany receivable","","$","1,658","","","$","\u2014"],["Current assets","","$","890,462","","","$","827,155"],["Total assets","","$","2,076,413","","","$","1,982,982"],["Current liabilities","","$","468,202","","","$","549,415"],["Intercompany payable","","$","\u2014","","","$","4,431"],["Total liabilities","","$","2,011,075","","","$","2,085,169"]]
[[/GREPCENT_TABLE]]

The following table presents the summarized statement of earnings information for fiscal year 2023 (in thousands):

[[GREPCENT_TABLE]]
[["Net sales","","","","$","3,011,054"],["Gross profit","","","","$","1,551,214"],["Earnings before provision for income taxes","","","","$","209,632"],["Net Earnings","","","","$","154,584"]]
[[/GREPCENT_TABLE]]

Contractual Obligations

The following table summarizes our contractual obligations at September 30, 2023 (in thousands):

[[GREPCENT_TABLE]]
[["","","Payments Due by Period"],["","","Less than 1 year","","","1-3 years","","","3-5 years","","","More than 5 years","","","Total"],["Long-term debt obligations, including interest(a)","","$","","72,247","","","$","","791,675","","","$","","65,881","","","$","","413,561","","","$","","1,343,364"],["Obligations under operating leases(b)","","","","175,327","","","","","262,059","","","","","147,651","","","","","105,786","","","","","690,823"],["Obligations under finance leases","","","","174","","","","","144","","","","","\u2014","","","","","\u2014","","","","","318"],["Purchase obligations(c)","","","","23,345","","","","","21,824","","","","","\u2014","","","","","\u2014","","","","","45,169"],["Other long-term obligations(d)(e)","","","","7,716","","","","","8,142","","","","","1,630","","","","","1,532","","","","","19,020"],["Total","","$","","278,809","","","$","","1,083,844","","","$","","215,162","","","$","","520,879","","","$","","2,098,694"]]
[[/GREPCENT_TABLE]]

(a)
Long-term debt obligations include future interest payments on our debt outstanding as of September 30, 2023. The amounts shown above do not include deferred debt issuance costs reflected in our consolidated balance sheets, nor do they include the impact of any interest received from the impact of our interest rate swap.

(b)
The amounts reported for operating leases do not include common area maintenance (CAM), property taxes or other executory costs. The amounts shown above do not include immaterial contingent liabilities for operating leases for which we are liable in the event of default by a franchisee.

(c)
Purchase obligations reflect legally binding agreements that are entered into by us to purchase goods or services, that specify minimum quantities to be purchased and with fixed or variable price provisions. Amounts shown do not reflect open purchase orders, mainly for merchandise, to be fulfilled within one year, which are generally cancellable or contracts that tend to be reoccurring in nature and similar in amount year over year.

- 33 -

(d)
Other long-term obligations, including current portion, principally represent obligations under our insurance and self-insurance programs. These obligations are included in accrued liabilities and other liabilities, as appropriate, in our consolidated balance sheets.

(e)
The table above does not include an estimated $8.3 million of unrecognized tax benefits due to uncertainty regarding the realization and timing of the related future cash flows, if any.

The information contained in the table above with regards to our long-term debt obligations is based on the current terms of such debt obligations and does not reflect any assumptions about our ability or intent to refinance any of our debt either on or before their maturity. In the event we refinance some or all of the debt either on or before maturity, actual payments for some of the periods shown may differ materially from the amounts reported herein. In addition, other future events, including potential increases in interest rates, could cause actual payments to differ materially from these amounts.

Off-Balance Sheet Financing Arrangements

At September 30, 2023, we did not have any off-balance sheet financing arrangements other than obligations under letters of credit, as discussed above.

Critical Accounting Estimates

The preparation of our consolidated financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”) requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and disclosure. Actual results could differ from the estimates and assumptions used, which could have a material impact to financial statements. We believe the following are our most critical accounting estimates that require subjective judgments, estimates and assumptions:

Valuation of Inventory

Our inventory is stated at the lower of weighted average cost or net realizable value. In assessing the net realizable value of inventory, we will adjust the carrying value of inventory for estimated shrinkage, damage and obsolescence using several key factors including estimates of the future demand for our products, historical turn-over rates, the age and sales history of the inventory, and historic as well as anticipated changes in SKUs.

We estimate inventory shrinkage between physical counts and product damage based upon our historical experience. Actual results differing from these estimates could significantly affect our carrying value of inventory and cost of goods sold. Inventory shrinkage, in the aggregate, has remained less than 1.0% of consolidated net sales over the past two fiscal years. A 10% change in our estimate of inventory shrinkage and obsolescence reserves at September 30, 2023, would impact net earnings by approximately $2.1 million.

Vendor Rebates and Concessions

We deem cash consideration received from a vendor to be a reduction of the cost of goods sold 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. We consider the facts and circumstances of the various contractual agreements with vendors in order to determine the appropriate classification of amounts received in our consolidated statements of earnings. We record cash consideration expected to be received from vendors in accounts receivables, other when earned and at the amount we believe will be collected. These receivables could be significantly affected if the actual amounts subsequently collected differ from our expectations. Historically, adjustments between the amount recorded and the amount collected have not had a material impact to our results of operations.

Insurance

We retain a substantial portion of the risk related to employee health (primarily in the U.S.), workers’ compensation and general liability. However, we maintain stop-loss coverage to limit the exposure related to certain insurance risks. We base our health insurance liability estimate on trends in claim payment history, historical trends in claims incurred but not yet reported and other components such as expected increases in medical costs, projected premium costs and the number of plan participants. Additionally, we base our estimates for workers’ compensation, general and product

- 34 -

liability on an actuarial analysis performed by an independent third-party actuary. We review our insurance liability on a regular basis and adjust our accruals accordingly.

Changes in facts and circumstances may lead to a change in the estimated liability due to revisions of the estimated ultimate costs that affect our liability insurance coverage. Our liabilities could be significantly affected if actual results differ from our expectations or prior actuarial analyses. A 10% adjustment in our insurance liabilities at September 30, 2023, would impact net earnings by approximately $1.6 million.

The changes in our insurance liabilities were as follows (in thousands):

[[GREPCENT_TABLE]]
[["","","Fiscal Year Ended September 30,"],["","","2023","","","2022"],["Balance at beginning of period","","$","20,555","","","$","20,596"],["Self-insurance expense","","","74,788","","","","68,695"],["Payments, net of employee contributions","","","(73,331",")","","","(68,736",")"],["Balance at end of period","","$","22,012","","","$","20,555"]]
[[/GREPCENT_TABLE]]

Income Taxes

We record income tax provisions in our consolidated financial statements based on an estimate of current income tax liabilities. The development of these provisions requires judgments about tax positions, potential outcomes and timing. If we prevail in tax matters for which provisions have been established or are required to settle matters in excess of established provisions, our effective tax rate for a particular period could be significantly affected.

Additionally, deferred income taxes are recognized for the future tax consequences attributable to differences between our financial statement carrying amounts of 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 estimated to be recovered or settled. We believe it is more-likely-than-not that our results of operations in the future will generate sufficient taxable income to realize our deferred tax assets, net of the valuation allowance currently recorded. We have recorded a valuation allowance to account for uncertainties regarding the recoverability of certain deferred tax assets, primarily foreign loss carryforwards and tax credit carryforwards. In the future, if we determine certain deferred tax assets will not be realizable, the related adjustments could significantly affect our effective tax rate at that time. An estimated tax benefit related to 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.

Assessment of Long-Lived Assets for Impairment and Restructuring

We review long-lived assets, including operating lease assets, for impairment whenever events or circumstances indicate the carrying amount of an asset may not be fully recoverable based on estimated undiscounted future cash flows. Long-lived assets are reviewed at the lowest level of identifiable cash flows, which typically is at the store level. In assessing for impairment, we determine the fair value of each individual store by discounting projected future cash flows. There are certain estimates and assumptions used to arrive at estimated future cash flows, including projected earnings and growth rates. The carrying amount of a long-lived asset or asset group is considered impaired when the carrying value of the asset or asset group exceeds the expected future cash flows from the asset or asset group. The impairment loss recognized is the excess of the carrying value of the asset or asset group over its fair value.

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. In connection with facility and store closures, we typically will also incur charges for employee severance, disposal costs and other expenses incurred with closures. These charges are accrued and estimated based on facts and circumstances at the time. Actual cash flows and expected payments could be significantly different from our estimates.

For fiscal years 2023 and 2021, no material impairment losses were recognized. For fiscal year 2022, we recognized an impairment loss of $24.8 million in connection with the Plan within restructuring.

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Assessment of Goodwill and Intangible Assets for Impairment

We review goodwill and intangible assets for impairment annually, or when events or circumstances indicate it is more-likely-than-not that the value of the asset may be impaired. In assessing these types of assets for impairment, there are significant estimates and assumptions used to determine the fair value, including relevant market and economic conditions, anticipated future revenues and cash flows, royalty rates and discount rates.

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. During quantitative assessment, we use a discounted cash flow model to determine an estimated fair value. If it is determined that the fair value of a reporting unit is less than its carrying value, an impairment charge will be recorded to bring the carrying value down to its fair value.

At the end of September 2023, we determined that a triggering event had occurred, due to the recent decline in the Company's share price and market capitalization, among other factors. As a result, we conducted a quantitative assessment at September 30, 2023. The analysis requires management to make estimates and assumptions, which may differ significantly from actual results, particularly if there are significant adverse changes in our operating environment.

Based on our discounted cash flow analysis, we estimated the fair value, at September 30, 2023, for our BSG reporting unit to be approximately 18% more than its carrying value. Goodwill allocated to the BSG reporting unit, which is also defined as our BSG segment, was $457.8 million as of September 30, 2023. The critical assumptions used as part of our evaluation include a projected long-term revenue growth rate of 2.0% and a discount rate of 11.25%, based on a weighted-average cost of capital analysis (adjusted for company specific risk). The assumptions used to estimate fair value were based on the past performance of the reporting unit as well as the projections incorporated in our strategic plan, adjusted for consistency with the valuation objective of estimating the fair value of the reporting unit under ASC 350. Assuming all changes are isolated, a decrease of 100 bps in our long-term revenue growth rate would reduce our estimated fair value to be approximately 8% more than its carrying value, while a 100 bps increase to our discount rate would reduce our estimated fair value to be approximately 7% more than its carrying value.

Additionally, we determined our estimated fair value for SBS reporting unit was substantially higher that its carrying value. Goodwill allocated to the SBS reporting unit, which is also defined as our SBS segment was $75.3 million as of September 30, 2023.

Based on our quantitative analysis, we determined that no impairment existed with either reporting unit. As such, no impairment was recorded for the fiscal years 2023, 2022 or 2021.

Like goodwill, our indefinite-lived intangible assets are tested for impairment by comparing the fair value of each asset to its carrying value, but only if a triggering event exists. As of September 30, 2023, our indefinite-lived assets were comprised of only trade names. To determine the fair value of each trade name, we use the relief-from-royalty method, which estimates what a third-party would be willing to pay in royalties to receive a benefit from the use of the asset. If it is determined the asset’s fair value is less than its carrying value, then an impairment charge is recorded to reduce the carrying value down to its fair value. Due to the aforementioned goodwill triggering event, during the three months ended September 30, 2023, the Company determined that a triggering event had occurred for its intangible assets. As a result, we conducted a quantitative assessment for these intangibles at September 30, 2023, and determined that the estimated fair value for all of our material trade names were substantially higher than their carrying values. No impairment losses were recognized in fiscal years 2023, 2022 or 2021.

Recent Accounting Pronouncements

There have been no recent accounting pronouncements issued that will have a material impact to our business.