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LEASES | 6 Months Ended
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Dec. 31, 2022
Leases [Abstract] |
LEASES | LEASES: At contract inception, the Company determines whether a contract is, or contains, a lease by determining whether it conveys the right to control the use of the identified asset for a period of time. If the contract provides the Company the right to substantially all of the economic benefits from the use of the identified asset and the right to direct the use of the identified asset, the Company considers it to be, or contain, a lease. The Company leases its company-owned salons and some of its corporate facilities under operating leases. The original terms of the salon leases range from one to 20 years with many leases renewable for an additional five to 10-year term at the option of the Company. In addition to the obligation to make fixed rental payments for the use of the salons, the Company also has variable lease payments that are based on sales levels. For most leases, the Company is required to pay real estate taxes and other occupancy expenses. Total rent includes the following:
|  | Three Months Ended December 31, |  | Six Months Ended December 31,
|  | 2022 |  | 2021 |  | 2022 |  | 2021
|  | (Dollars in thousands)
Office and warehouse rent |  | $ | 834 |  |  | $ | 1,202 |  |  | $ | 1,706 |  |  | $ | 2,815 |
Lease termination expense (1) |  | 848 |  |  | 238 |  |  | 1,306 |  |  | 1,578 |
Lease liability benefit (2) |  | (615) |  |  | (496) |  |  | (1,217) |  |  | (2,927) |
Franchise salon rent (3) |  | 9 |  |  | 246 |  |  | (44) |  |  | 575 |
Company-owned salon rent |  | 1,014 |  |  | 1,852 |  |  | 2,092 |  |  | 2,748 |
Total |  | $ | 2,090 |  |  | $ | 3,042 |  |  | $ | 3,843 |  |  | $ | 4,789 |
_______________________________________________________________________________ (1)During the three and six months ended December 31, 2022, the Company incurred costs of $0.8 and $1.3 million, respectively, to exit salons before the lease end date in order to relieve the Company of future lease obligations. During the three months ended December 31, 2021, the Company incurred costs of $0.2 million to exit salons before the lease end date to relieve the Company of future lease obligations. During the six months ended December 31, 2021, the Company paid $0.9 million to exit its distribution centers before the lease end dates and incurred costs of $0.7 million to exit salons before the lease end dates in order to relieve the Company of future lease obligations. (2)Upon termination of previously impaired leases, the Company derecognizes the corresponding ROU assets and lease liabilities, which results in a net gain. In addition, the Company recognizes a benefit from lease liabilities decreasing in excess of previously impaired ROU assets for ongoing leases that were previously impaired. (3)Franchise salon rent in fiscal year 2023 includes the benefit of incurring less cost to terminate a lease than estimated. The Company leases salon premises in which the majority of its franchisees operate and has entered into corresponding sublease arrangements with franchisees. All lease-related costs are passed through to the franchisees. The Company records the rental payments due from franchisees as franchise rental income and the corresponding amounts owed to landlords as franchise rent expense on the unaudited Condensed Consolidated Statement of Operations. For the three months ended December 31, 2022 and 2021, franchise rental income and franchise rent expense were $28.9 and $33.8 million, respectively, and $59.2 and $67.5 million, respectively, for the six months ended December 31, 2022 and 2021. These leases generally have lease terms of approximately five years. The Company expects to renew the SmartStyle® master lease and some leases for locations subleased to our franchisees upon expiration of those leases. Other leases are expected to be renewed by the franchisee upon expiration. All the Company's leases are operating leases. The lease liability is initially and subsequently measured at the present value of the unpaid lease payments at the lease commencement date, including one lease term option when the lease is expected to be renewed. The ROU asset is initially and subsequently measured throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, less any accrued lease payments and unamortized lease incentives received, if any. Expense for lease payments is recognized on a straight-line basis over the lease term, including the lease renewal option when the lease is expected to be renewed. Generally, the non-lease components, such as real estate taxes and other occupancy expenses, are separate from rent expense within the lease and are not included in the measurement of the lease liability because these charges are variable. The discount rate used to determine the present value of the lease payments is the Company's estimated collateralized incremental borrowing rate, based on the yield curve for the respective lease terms, as the interest rate implicit in the lease cannot generally be determined. The Company uses the portfolio approach in applying the discount rate based on the original lease term. The weighted average remaining lease term was 5.77 and 6.02 years and the weighted average discount rate was 4.34% and 4.25% for all salon operating leases as of December 31, 2022 and June 30, 2022, respectively. A lessee's ROU asset is subject to the same asset impairment guidance in ASC 360, Property, Plant, and Equipment, applied to other elements of property, plant, and equipment. The Company has identified its asset groups at the individual salon level as this represents the lowest level that identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. Poor salon performance in fiscal years 2023 and 2022 resulted in ASC 360-10-35-21 triggering events. As a result, management assessed underperforming salon asset groups, which included the related ROU assets, for impairment in accordance with ASC 360. The first step in the impairment test under ASC 360 is to determine whether the long-lived assets are recoverable, which is determined by comparing the net carrying value of the salon asset group to the undiscounted net cash flows to be generated from the use and eventual disposition of that asset group. Estimating cash flows for purposes of the recoverability test is subjective and requires significant judgment. Estimated future cash flows used for the purposes of the recoverability test were based upon historical cash flows for the salons, adjusted for expected changes in future market conditions related to the COVID-19 pandemic, and other factors. The period of time used to determine the estimates of the future cash flows for the recoverability test was based on the remaining useful life of the primary asset of the group, which was the ROU asset in all cases. The second step of the long-lived asset impairment test requires that the fair value of the asset group be estimated when determining the amount of any impairment loss. For the salon asset groups that failed the recoverability test, an impairment loss was measured as the amount by which the carrying amount of the asset group exceeds its fair value. The Company applied the fair value guidance within ASC 820-10 to determine the fair value of the asset group from the perspective of a market-participant considering, among other things, appropriate discount rates, multiple valuation techniques, the most advantageous market, and assumptions about the highest and best use of the asset group. To determine the fair value of the salon asset groups, the Company utilized market-participant assumptions rather than the Company's own assumptions about how it intends to use the asset group. The significant judgments and assumptions utilized to determine the fair value of the salon asset groups include the market rent of comparable properties and a discount rate. In the three and six months ended December 31, 2022, the Company did not recognize long-lived asset impairment charges related to ROU assets in the unaudited Condensed Consolidated Statement of Operations. In the three and six months ended December 31, 2021, the Company recognized long-lived asset impairment charges of $0.1 and $0.2 million, respectively, primarily related to ROU assets in the unaudited Condensed Consolidated Statement of Operations. The impairment loss for each salon asset group that was recognized was allocated among the long-lived assets of the group on a pro-rata basis using their relative carrying amounts. Additionally, the impairment losses did not reduce the carrying amount of an individual asset below its fair value, including the ROU assets included in the salon asset groups. Assessing the long-lived assets for impairment requires management to make assumptions and to apply judgment, which can be affected by economic conditions and other factors that can be difficult to predict. The Company does not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions it uses to calculate impairment losses for its long-lived asset, including its ROU assets. If actual results are not consistent with the estimates and assumptions used in the calculations, the Company may be exposed to future impairment losses that could be material. As of December 31, 2022, future operating lease commitments, including one renewal option for leases expected to be renewed, to be paid and received by the Company were as follows (in thousands):
Fiscal Year |  | Leases for Franchise Salons |  | Leases for Company-owned Salons |  | Corporate Leases |  | Total Operating Lease Payments |  | Sublease Income to be Received from Franchisees |  | Net Rent Commitments
Remainder of 2023 |  | $ | 54,914 |  |  | $ | 1,292 |  |  | $ | 1,061 |  |  | $ | 57,267 |  |  | $ | (54,914) |  |  | $ | 2,353 |
2024 |  | 99,860 |  |  | 1,617 |  |  | 1,301 |  |  | 102,778 |  |  | (99,860) |  |  | 2,918 |
2025 |  | 83,570 |  |  | 536 |  |  | 1,334 |  |  | 85,440 |  |  | (83,570) |  |  | 1,870 |
2026 |  | 69,825 |  |  | 290 |  |  | 1,367 |  |  | 71,482 |  |  | (69,825) |  |  | 1,657 |
2027 |  | 59,363 |  |  | 63 |  |  | 1,401 |  |  | 60,827 |  |  | (59,363) |  |  | 1,464 |
Thereafter |  | 122,479 |  |  | 36 |  |  | 4,417 |  |  | 126,932 |  |  | (122,479) |  |  | 4,453 |
Total future obligations |  | $ | 490,011 |  |  | $ | 3,834 |  |  | $ | 10,881 |  |  | $ | 504,726 |  |  | $ | (490,011) |  |  | $ | 14,715 |
Less amounts representing interest |  | 56,953 |  |  | 121 |  |  | 1,500 |  |  | 58,574 |  |  |  |  |
Present value of lease liability |  | $ | 433,058 |  |  | $ | 3,713 |  |  | $ | 9,381 |  |  | $ | 446,152 |  |  |  |  |
Less short-term lease liability |  | 90,342 |  |  | 2,246 |  |  | 1,352 |  |  | 93,940 |  |  |  |  |
Long-term lease liability |  | $ | 342,716 |  |  | $ | 1,467 |  |  | $ | 8,029 |  |  | $ | 352,212 |  |  |  |  |
LEASES | LEASES: At contract inception, the Company determines whether a contract is, or contains, a lease by determining whether it conveys the right to control the use of the identified asset for a period of time. If the contract provides the Company the right to substantially all of the economic benefits from the use of the identified asset and the right to direct the use of the identified asset, the Company considers it to be, or contain, a lease. The Company leases its company-owned salons and some of its corporate facilities under operating leases. The original terms of the salon leases range from one to 20 years with many leases renewable for an additional five to 10-year term at the option of the Company. In addition to the obligation to make fixed rental payments for the use of the salons, the Company also has variable lease payments that are based on sales levels. For most leases, the Company is required to pay real estate taxes and other occupancy expenses. Total rent includes the following:
|  | Three Months Ended December 31, |  | Six Months Ended December 31,
|  | 2022 |  | 2021 |  | 2022 |  | 2021
|  | (Dollars in thousands)
Office and warehouse rent |  | $ | 834 |  |  | $ | 1,202 |  |  | $ | 1,706 |  |  | $ | 2,815 |
Lease termination expense (1) |  | 848 |  |  | 238 |  |  | 1,306 |  |  | 1,578 |
Lease liability benefit (2) |  | (615) |  |  | (496) |  |  | (1,217) |  |  | (2,927) |
Franchise salon rent (3) |  | 9 |  |  | 246 |  |  | (44) |  |  | 575 |
Company-owned salon rent |  | 1,014 |  |  | 1,852 |  |  | 2,092 |  |  | 2,748 |
Total |  | $ | 2,090 |  |  | $ | 3,042 |  |  | $ | 3,843 |  |  | $ | 4,789 |
_______________________________________________________________________________ (1)During the three and six months ended December 31, 2022, the Company incurred costs of $0.8 and $1.3 million, respectively, to exit salons before the lease end date in order to relieve the Company of future lease obligations. During the three months ended December 31, 2021, the Company incurred costs of $0.2 million to exit salons before the lease end date to relieve the Company of future lease obligations. During the six months ended December 31, 2021, the Company paid $0.9 million to exit its distribution centers before the lease end dates and incurred costs of $0.7 million to exit salons before the lease end dates in order to relieve the Company of future lease obligations. (2)Upon termination of previously impaired leases, the Company derecognizes the corresponding ROU assets and lease liabilities, which results in a net gain. In addition, the Company recognizes a benefit from lease liabilities decreasing in excess of previously impaired ROU assets for ongoing leases that were previously impaired. (3)Franchise salon rent in fiscal year 2023 includes the benefit of incurring less cost to terminate a lease than estimated. The Company leases salon premises in which the majority of its franchisees operate and has entered into corresponding sublease arrangements with franchisees. All lease-related costs are passed through to the franchisees. The Company records the rental payments due from franchisees as franchise rental income and the corresponding amounts owed to landlords as franchise rent expense on the unaudited Condensed Consolidated Statement of Operations. For the three months ended December 31, 2022 and 2021, franchise rental income and franchise rent expense were $28.9 and $33.8 million, respectively, and $59.2 and $67.5 million, respectively, for the six months ended December 31, 2022 and 2021. These leases generally have lease terms of approximately five years. The Company expects to renew the SmartStyle® master lease and some leases for locations subleased to our franchisees upon expiration of those leases. Other leases are expected to be renewed by the franchisee upon expiration. All the Company's leases are operating leases. The lease liability is initially and subsequently measured at the present value of the unpaid lease payments at the lease commencement date, including one lease term option when the lease is expected to be renewed. The ROU asset is initially and subsequently measured throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, less any accrued lease payments and unamortized lease incentives received, if any. Expense for lease payments is recognized on a straight-line basis over the lease term, including the lease renewal option when the lease is expected to be renewed. Generally, the non-lease components, such as real estate taxes and other occupancy expenses, are separate from rent expense within the lease and are not included in the measurement of the lease liability because these charges are variable. The discount rate used to determine the present value of the lease payments is the Company's estimated collateralized incremental borrowing rate, based on the yield curve for the respective lease terms, as the interest rate implicit in the lease cannot generally be determined. The Company uses the portfolio approach in applying the discount rate based on the original lease term. The weighted average remaining lease term was 5.77 and 6.02 years and the weighted average discount rate was 4.34% and 4.25% for all salon operating leases as of December 31, 2022 and June 30, 2022, respectively. A lessee's ROU asset is subject to the same asset impairment guidance in ASC 360, Property, Plant, and Equipment, applied to other elements of property, plant, and equipment. The Company has identified its asset groups at the individual salon level as this represents the lowest level that identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. Poor salon performance in fiscal years 2023 and 2022 resulted in ASC 360-10-35-21 triggering events. As a result, management assessed underperforming salon asset groups, which included the related ROU assets, for impairment in accordance with ASC 360. The first step in the impairment test under ASC 360 is to determine whether the long-lived assets are recoverable, which is determined by comparing the net carrying value of the salon asset group to the undiscounted net cash flows to be generated from the use and eventual disposition of that asset group. Estimating cash flows for purposes of the recoverability test is subjective and requires significant judgment. Estimated future cash flows used for the purposes of the recoverability test were based upon historical cash flows for the salons, adjusted for expected changes in future market conditions related to the COVID-19 pandemic, and other factors. The period of time used to determine the estimates of the future cash flows for the recoverability test was based on the remaining useful life of the primary asset of the group, which was the ROU asset in all cases. The second step of the long-lived asset impairment test requires that the fair value of the asset group be estimated when determining the amount of any impairment loss. For the salon asset groups that failed the recoverability test, an impairment loss was measured as the amount by which the carrying amount of the asset group exceeds its fair value. The Company applied the fair value guidance within ASC 820-10 to determine the fair value of the asset group from the perspective of a market-participant considering, among other things, appropriate discount rates, multiple valuation techniques, the most advantageous market, and assumptions about the highest and best use of the asset group. To determine the fair value of the salon asset groups, the Company utilized market-participant assumptions rather than the Company's own assumptions about how it intends to use the asset group. The significant judgments and assumptions utilized to determine the fair value of the salon asset groups include the market rent of comparable properties and a discount rate. In the three and six months ended December 31, 2022, the Company did not recognize long-lived asset impairment charges related to ROU assets in the unaudited Condensed Consolidated Statement of Operations. In the three and six months ended December 31, 2021, the Company recognized long-lived asset impairment charges of $0.1 and $0.2 million, respectively, primarily related to ROU assets in the unaudited Condensed Consolidated Statement of Operations. The impairment loss for each salon asset group that was recognized was allocated among the long-lived assets of the group on a pro-rata basis using their relative carrying amounts. Additionally, the impairment losses did not reduce the carrying amount of an individual asset below its fair value, including the ROU assets included in the salon asset groups. Assessing the long-lived assets for impairment requires management to make assumptions and to apply judgment, which can be affected by economic conditions and other factors that can be difficult to predict. The Company does not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions it uses to calculate impairment losses for its long-lived asset, including its ROU assets. If actual results are not consistent with the estimates and assumptions used in the calculations, the Company may be exposed to future impairment losses that could be material. As of December 31, 2022, future operating lease commitments, including one renewal option for leases expected to be renewed, to be paid and received by the Company were as follows (in thousands):
Fiscal Year |  | Leases for Franchise Salons |  | Leases for Company-owned Salons |  | Corporate Leases |  | Total Operating Lease Payments |  | Sublease Income to be Received from Franchisees |  | Net Rent Commitments
Remainder of 2023 |  | $ | 54,914 |  |  | $ | 1,292 |  |  | $ | 1,061 |  |  | $ | 57,267 |  |  | $ | (54,914) |  |  | $ | 2,353 |
2024 |  | 99,860 |  |  | 1,617 |  |  | 1,301 |  |  | 102,778 |  |  | (99,860) |  |  | 2,918 |
2025 |  | 83,570 |  |  | 536 |  |  | 1,334 |  |  | 85,440 |  |  | (83,570) |  |  | 1,870 |
2026 |  | 69,825 |  |  | 290 |  |  | 1,367 |  |  | 71,482 |  |  | (69,825) |  |  | 1,657 |
2027 |  | 59,363 |  |  | 63 |  |  | 1,401 |  |  | 60,827 |  |  | (59,363) |  |  | 1,464 |
Thereafter |  | 122,479 |  |  | 36 |  |  | 4,417 |  |  | 126,932 |  |  | (122,479) |  |  | 4,453 |
Total future obligations |  | $ | 490,011 |  |  | $ | 3,834 |  |  | $ | 10,881 |  |  | $ | 504,726 |  |  | $ | (490,011) |  |  | $ | 14,715 |
Less amounts representing interest |  | 56,953 |  |  | 121 |  |  | 1,500 |  |  | 58,574 |  |  |  |  |
Present value of lease liability |  | $ | 433,058 |  |  | $ | 3,713 |  |  | $ | 9,381 |  |  | $ | 446,152 |  |  |  |  |
Less short-term lease liability |  | 90,342 |  |  | 2,246 |  |  | 1,352 |  |  | 93,940 |  |  |  |  |
Long-term lease liability |  | $ | 342,716 |  |  | $ | 1,467 |  |  | $ | 8,029 |  |  | $ | 352,212 |  |  |  |  |

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- Definition The entire disclosure for operating leases of lessee. Includes, but is not limited to, description of operating lease and maturity analysis of operating lease liability. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 842 -SubTopic 20 -URI http://asc.fasb.org/subtopic&trid=77888251 + Details
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