Q4 2019 Earnings Call
Sally Beauty Holdings fourth quarter earnings conference call before we begin I want to point out to you that we've made a supplemental slide presentation available for today's call that can be viewed from the link provided our investor site at Sally Beauty Holdings Dotcom.
In addition, I would like to remind you that certain comments, including matters, such as forecasted financial information contracts or business and trend information made during this call may contain forward looking statements within the meaning of section 27, a Securities Act of 1933 as amended and section 21. He has a securities Exchange Act of nine.
Hundred 34 as amended.
Many of these forward looking statements can be identified by the use of words such as believe project expect can may estimate should plan target in 10, food will would anticipate potential confident optimistic and similar words or phrases.
These statements are subject to a number of factors that could cause our actual results to differ materially from expectations.
Those factors are described in Sally Beauty holdings filings with the Securities Exchange Commission, including his most recent annual report on Form 10-K .
The company does not undertake any obligation to publicly update or revise its forward looking statements.
The company has provided a detailed explanations and reconciliations of its adjusting items and non-GAAP financial measures and its earnings press release and on its website.
With me on the call today, our Chris Brickman, President and Chief Executive Officer, Aaron All President of Sally Beauty supply and Chief Financial Officer, and head of Latino Group Group Vice President of Finance.
Chris will start by offering some thoughts on our fourth quarter success, giving an update our transformation efforts and.
Margin and lower operating expenses from our cost savings efforts.
All of this yield yielded solid growth and operating earnings and operating margin and ultimately a strong increase in both GAAP and adjusted diluted EPS.
In addition, we generated strong cash flow that was used to invest in the business reduce our debt levels and fund that share repurchases all as promised.
Work remains with the pieces are starting to come together.
The full fiscal year 2019 was marked by significant change and progress.
Despite the scale and complexity of our transformation efforts, we achieved our full year financial guidance.
I'm incredibly proud of the team work of our global Associates.
However, significant work still remains and fiscal year 2020 will market change in focus.
As we expect to build on our fourth quarter results complete and many of our investments and pivot to projects designed to deliver sustainable outlined grower.
On our last earnings call, we discussed the changing landscape of the beauty sector.
Competitors are raising their day customers have gone digital and technology is everywhere, helping demand supply chain stores and customer relationships.
We also spent time discussing how we are aggressively responding with our transformation plan, which builds off our highly differentiated position in hair color and hair care.
We detailed our intentions to quickly build a modern digital platform and a more efficient and responsive supply chain.
We highlighted our drive towards attractive loyalty and marketing programs.
Innovative new brands to speak to a younger consumer and our plans to strengthen our store teams and improve our store experience.
The key message you should take away from our Q4 results is that our efforts to gain traction and we are moving ahead at full speed.
I want to spend a few minutes, providing you an update on our recent account recent accomplishments on three of our key transformation pillars.
First playing to win with our customers.
Differentiation is critical in retail.
We continue to build our innovation pipeline launching new brands as well as building awareness and momentum of prior brand launch its most of which are exclusive to SBH.
These brands are specifically targeted at driving new traffic and expanding the basket.
At Sally we launched my Black is beautiful from PNG all of our curls from Zotos and the exclusive lines of bono's hair and burden French law, which is an up incoming stylus driven blank brand from the UK. These brands further enhance our offering for customers with natural curls.
In addition, we continue to build momentum with our vivid and contemporary colorless.
Brands like Arctic Fox good value on any ROE continue to fuel solid growth and drive new traffic and younger consumers to our stores.
We also launched the cool color line in select stores.
Vivid color sales represented 18% of our total color business in the fourth quarter versus 15% in the prior year with the color business also growing overall.
On the BSG side, our previous launches of the Swedish Swedish begun brand Maria Nila and the Henkel brand Provida continue to demonstrate solid growth.
BSG also launched Ola Plex number six and number seven hair care treatments, which have shown excellent results.
In addition, BSG color growth was accelerated by Schwartzkopf belonged to me product and other high lift lightning and color products, specifically designed for women, who desire fantastic blonde results.
Finally, BSG expanded their men's bartering assortment with the launch of the exclusive line elegant.
Second improving our retail fundamentals.
There is nothing more fundamental to retailed and having the right talent to drive the organization.
We're thankful for the efforts of our existing team and the successes that we have had in fiscal 2019.
As you may have read we're raising our gain and investing in new talent and new capabilities in our marketing and e-commerce teams to carry us forward.
Beyond this we are delighted to welcome to SBH, both Ham cone, our new Chief merchant and April hold our New group Vice President stores for beauty systems group.
Both of these leaders will have an immediate impact and will help accelerate our efforts.
At the beginning in fiscal year 2019, we launched our new loyalty program Sally beauty rewards the Sally beauty rewards program as a free membership where customers earn points towards redeemable cash certificates based on the customer spend.
The program has now grown to 16 million active members and we are pleased with the increasing redemption rates, which should help drive traffic overtime.
A seamless checkout experience is also table stakes in retail.
We exceeded our own.
Right.
250 stores over the next couple of quarters.
Most of the early benefit this effort went to the Sally business BSG will follow.
Europe is also in our sites. We are also we are expecting to optimize our supply chain Europe by closing three distribution nodes in Spain, the Netherlands, and the UK, while expanding capacity in support of our main warehouse in Belgium.
A few brief forwards on stores as we laid out in Q3, we believe there are large network of stores in the USA and Canada is a competitive advantage with almost 4200 corporate owned locations across Sally and BSG, we're close to the consumer and of the pro in the USA and Canada.
Our store locations, providing in meeting convenience when paired with our associated training as color experts are business cannot be wholly replicated in the online channel by others.
On our store network has combined with our own growing digital capabilities and inefficient supply chain, we can really give or what she wants when she wants it where she wants did a cost and a price that makes sense for both of US in this way we are able to can be both with those traditional retailers, who are going digital and with those digital retailers, who are now building out their own fiscal foot.
Correct.
We will continue to invest in our stores as previously announced for Sally Beauty, USA and Canada, we expect to complete the Charlotte market remodel and then to remodel up to 175, Sally beauty stores in the North Texas for State region, consistent with our concept concept design in Las Vegas.
We will also be adding smartly stores to white space opportunities for the first time in several years.
With the exit from the marketplace of less stable retailers, we are being presented with attractive opportunities by landlords landlords, who are eager to partner with a stable retailers such as Sallie who is investing in its overall business.
BSG will also be rolling out its new store concept traditional.
Tim to the impact of the combination of gross margin and SGN, a grocery sales gross margin estriol today to provide.
To.
Call out the low to mid single digit growth.
On the EPS line of course, we would love to we would love to over deliver but for the moment, we're going to stick to our knitting and try to deliver on what we promised and already on the mindset I think hopefully you heard it in the prepared remarks that our focus is on growth.
We will invest in profitable opportunities to drive growth.
And that is our first bias as we go into the year.
Helpful. Thank you if I could just follow up.
Inter quarter coating on that.
Hello.
Our.
No I would love your perspective on how willing are all potentially changing hands again, there was obviously a lot of volatility in.
Over the last few years, given that change so I'm interested in your perspective on.
Okay.
Well you know listen we're the largest customer in the U.S. of that business and they are one of our largest vendors a we've enjoyed a long and strong relationship with them and we're working to drive growth for their brands. We've already managed through one transition and obviously if there is another we'll manage that as well.
Jointly with with our partner.
But.
I think I would hope that most of the supply chain changes are behind them and they get back to that can be done stabilized and we'll work with them to make sure that we support our customers and their customers.
Fair enough. Thanks, so much.
Thank you.
Our next question comes from the line of Rupesh Parikh with Oppenheimer. Your line is open.
Good morning, Thanks for taking my question, so going back to your Sally beauty supply U.S., Canada comp of Q2 percent I was wondering if you can provide more perspectives on what what the contribution was from traffic and ticket and how you're feeling about the sustainability of the recent comps rent.
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Great question, Let me, let me start with some of the causal factors for why we saw the success we did.
I start with.
With our focus on color and care our assortment expansion the returned to newness that really helped drive.
Traffic and increase basket within our business overall, then with some of the improvements we made in other categories as well that was certainly helpful to the comp.
While we don't release traffic numbers per se as part of our disclosure calls what I will tell you is that.
We have seen a rising tide of traffic over the course of the year, particularly in Q4, which we believe is tied to.
The improvements we've been making in the both the customer service model as well as the assortment overall.
As we look at our data what we see as well as that we've been performing better with respect to traffic than other specialty retailers.
In the same regions that we're comparing against and so we are.
We're pleased with that I'd expect that given the changes, we're making that that those positive trend should continue into the next year.
Okay, Great and then going back to your comment about restarting store growth for both segments I'm just curious from a timing perspective as you continue to experiment concept stores. So.
I was surprised you need at this juncture in your turn to return to store growth. So maybe if you could just provide more color in terms of the decision to restart growth up at the current juncture juncture.
We have in the background, but aggressively addressing the store portfolio in Sally as wells in BSG over the course of this year going market by market to understand where do we have locations, which are fine where do we have locations, which are great and where do we have a couple places where we need to.
Take some action and as a result, we did close the.
Net 95.
Stores over the course the year, what we've come to realize is with the progress we're making on the model.
And with the offers that are being made to us by landlords in areas, where we have white space that we do have opportunities from a geographic representation of the brands and the business models across the United States in Canada, and so we're going to be quite strategic and where.
We do add those stores, but we have added that pillar to our growth strategy in connection with our continued.
Aggressive recycle the stores that we currently have.
Yes, I guess thinking one last question on on your guidance does that incorporate should include share buybacks.
As our guidance incorporate share buy back yet.
No.
Okay.
And that's just maybe to respond to take advantage of that question refresh.
Our capital allocation strategy has not changed which is the first thing we're going to do is reinvest in the business and you see that with a $120 million of capital that we've called out as we sit here today, we believe that's the right amount of capital dollars to invest over the year.
As additional resources make themselves available to us.
Some success and we will of course look at our debt positions and where we can't opportunistically bring that down and if we do have something materialized like we did in Q4 with an opportunity on the equity will consider that as well, but investing in the businesses is a key priority for us.
Great. Thank you.
Thank you.
And we'll go next to the line Stephanie Wissink with Jefferies. Your line is open.
Morning, Seth Thanks morning, Alright, and running thanks for taking our question.
Just on the hi. Thank you. Thank you talked earlier this year wondering how much of a factor that wise in the improvement in the comp rate and if that's a function of Mick meaning the brands that you brought in carry slightly higher pricing on more premium pricing or if that was a like for like pricing increase that you took a profitably.
What I would tell you is its category specific.
His brand specific as well we were impart responding to price increases at our.
From our vendors, which of course wouldn't be accretive for us.
We did not do a store wide price increase if you will.
And thats about as specific as specific as I can be the one of the thing I will note, though is that we saw unit growth in those areas, where we did take pricing.
Okay. That's very helpful. And then just a follow up to a couple of the earlier question to bridge. The 19 to 29 King performance to 20 guidance.
If you could just help us understand the capex with your net sort of growth looks like your capex is going to be relatively consistent year over year. So where are you pulling back and other investments or where are you in the seasons of investment.
And then also I would say just one more on that with respect to the.
Currency effect, what are you embedding in terms of FX headwinds in your guidance.
Okay.
It was the first question again, sorry step it has to do with our FX, where we cutting back and where are you adding pesos to separate I'd tell you is much of the capital in fiscal <unk>.
19 was not run rate capital per se rather it was project based and so the way you should think about that is.
The substitution of one project for another as what's leading us into.
20, and I would use the digital investments as an example, where we were investing heavily in Q2 in Q3 around Sally digital investment that will tail off to a degree as we move into <unk>.
Into the.
Fiscal 20, but we do replace it with additional projects until there's a mix shift between technology investments in store investments as we ramp up the store investments over the course of the year as well, we're feeling pretty good on that capital number we don't expect to exceed it.
We are of course going after efficiency opportunities as well.
To help ensure that we have the capital available to US and then with respect to your FX question that I was contemplating we have not assume swings in FX in connection with providing guidance.
Okay. Great final one for me just housekeeping your guidance does assume the GAAP to non-GAAP adjustments you. Just wondering if you can help extrapolate where some of those adjustments might be coming from and help us scale that are size that up.
Why don't we talk about it on the call after.
Okay sounds great. Thank you.
Thank you.
Our next question comes from the line of Mark are pregnant with Baird. Your line is open.
Great Good morning, and congratulations on all the progress this past year.
Thanks Bart.
First question just on the international plan for Europe sounds very comprehensive and.
If I did my math correctly, I think you're running maybe low to mid single digit EBITDA margins today versus perhaps mid teens for the for the US Canada business.
How should we be thinking about that margin trajectory in the near to intermediate term would you expect the international margins to get worse before they get better as you make these investments in growth or just bigger picture, how should we thinking about that over the next one to two years.
Yes, Mark good question. The reality is I don't think it gets worse before it gets better but I do think it takes time to get the progress we want to make here.
As we are working across all parts of their PNM now in terms of store execution marketing execution gross margin performance.
As well as new brands in assortment innovation, and finally technology stabilization. So our view is hey, this will take time and it will build but I don't think it gets worse before it gets better.
Okay. Thank you and then on the loyalty front spent a little over a year since the rollout just hoping you could give us.
An assessment of how the various aspects of it have trended versus your expectations sounds like sign ups of the program has been had been positive very little disruption in very little pushback from the pricing curious if you're seeing incremental trips that were anticipated and and just if theres a broader way to summarize the the overall impact on the TNL it out over the past year given all these moving piece.
Yes.
Well I guess, a couple of thoughts more than 70% of sales and more than 60% of transactions are we're now within the loyalty program. That's a positive.
And I can get the exact percentages.
As we called out previously.
We are seeing excitement.
With the customers who are participating in the program protection when they discover that it's free.
In that respect and so we would we view the last 11 months as being a successful implementation of the program really getting as to the baseline because the real magic. The loyalty program will be okay. Now that we built it how do we take advantage of.
The more direct connection we have with our consumers within Sally carrying forward that means better marketing that means better engagement.
And all of those are part of our plan for 20 some of the investment we've been talking about.
So far on this call is tied to.
Building greater granular visibility into the data to allow us to optimize the assortment allows to optimize of as offers regardless of channel whether its digital or in stores, because we'll have the well the one view of the consumer whether she is in the store on the app or in the digital or in the on the web site.
Let's say.
So we view that as part of the build for 20.
Mark one of the exciting things about all this is that it's as we talk about pieces coming together when you think about having relaunch that program and reached the scale of transactions and participation that weve reached combined with our new Pos system that allows us to recognize the customer in store combined with better CRM tools and more exact targeting of customers.
When all as all of that comes together in the next few months and quarters, that's where you get the real payoff from all this and in terms of being able to offer make really relevant offers and recognize the customer at purchase so all of Thats now starting to come together, which is what's exciting there's still more work to be done, but we are close.
That's great.
Thank you maybe one last one from me if I could curious if you could talk a little bit more about the strategy of bringing.
More pro here brands to Sally beauty.
Is this targeting primarily a retail customer or pro customer and how do you think about the potential cannibalization of BSG stores, if you're successful and attracting a pro customer to Sally.
It's a great question, Mark and here's what I'd tell you is.
Pros are shopping in both Sally and BSG already right they are coming for.
Different reasons different types. The we've done a fair amount of research over 19 to confirm that to us and so as it relates to the probe consumer Sally has always service the pro and what we view this is doing whether they're coming in for a ion color packet or.
She or anything else is we're serving a different part of the market than BSG is as we carry forward. It is also the case that we have retail customers, who don't want to go to the slot they want to do it themselves their creative theyre being economical.
And they're looking for a higher level offerings that they wouldn't have access to at BSG and so we believe some of the.
More.
The higher end pro like offerings like GE.
Like some of the care products, we've talked about that that will be bill supportive of the pro and supportive of our retail business and not cannibalistic to BSG.
That's helpful. Thanks for all the detail today.
You bet.
I should take one moment and just.
Reflect on a number that I tongue tied as I was talking earlier the of course the segment sales for BSG were 394.1 not 39.4.
Thank you we would go to the line Simeon Gutman with Morgan Stanley . Your line is open.
Thanks, Good morning, everyone. All morning want to ask this morning I wanted to ask.
Maybe a follow up I guess on on this quarter and the improvement in Sally Beauty, which I think is pretty notable if you look back on the two in the three year stacks, they've been getting better but this quarter really.
It looked like it abruptly improve pretty sharply and I realize its lowest level the innovation.
In the brands for the whole year.
But going Bob thinking about what else.
Could have occurred animals.
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Sure.
Well, it's just the culminating quarter, but biology.
Sure a couple of thoughts.
First I want to call out that while we're very pleased with the quarter for Sally beauty supply. We are not declaring this to be a breakout quarter right. It was a good quarter for us and we need to build on the successes that weve that we've achieved it was driven by a couple of things. The first thing is the retail discipline, where the stores teams across.
Patient in Sally beauty have been focused on training have been focused on retail fundamentals have been focused on how do we serve the customer better better and while we've been making good steps over the course of the year.
Q4 was the first point, where we're we're seeing the real benefit that across the enterprise.
Second thing going on is of course, the assortment better assortment around what are we offering to the guest.
Third as we've made significant improvements in the connection point between our marketing organization and how we're talking to our consumer and then how we're showing up in stores online or otherwise and so those three things.
I think are the primary factors that are helping to drive the Sally beauty numbers up and of course, they should be translatable as we carry forward.
Got it helpful.
Just give us a sense of what the professional.
Month growing up market, the BSG operates and and then.
For next year your assumption.
You gained share goal for.
One versus the other.
Yes, I mean, assuming we really it's hard to track that and get good numbers on on just the pro category three stylists.
That being said, we see growth opportunities for BSG some of that is better execution on our part.
And were slowly improving both execution on both the margin side and the sale side and that will continue and obviously one of the reasons. We've we've continued to add new talent into our BSG team is to continue improve our execution both in store.
As well as through our digital platforms.
And we're going to add new service models, and we're going to add new innovation. So it's like anything in retail. It's all the pieces that have to add up to get Ted to total performance, but we see growth in the channel.
Great Okay.
Thanks Simeon.
We'll go to the line Linda Bolton Weiser with D.A. Davidson. Your line is open moorland up morning, when hi, how are you.
I was wondering if we could just.
Revisit your strategy to have.
Percentage of your products and exclusive.
Brian can you update us on what their percentage was just for Sally beauty enough why 19 versus Fyeighteen exclusive brands.
Yes, so Sally is about 45% owned an exclusive with a bias towards owned and BSG I believe is low fiftys, 53% for the bias towards exclusive.
And for Sally how did that did that percentage stayed flattish or did it go up or down versus prior year.
I would call it roughly flattish over the last couple quarters, one of our initiatives has been to bring in some national brands to help drive some.
Basket fill in key areas and Maybelline is a good example, where we have historically been a largely.
Private label or owned brands business in cosmetics and Maybelline, while late in the quarter is an example of where weve.
We're spreading it out.
In other exciting example that his color, where we've been bringing in influence or back brands like Arctic Fox and good day young which.
Our driving growth in bringing any younger consumer, but our overall color business is up as well as well, which is well that's the terrific story, there and are larger largest vivid colorblind is still eye on a GAAP rent business absolutely.
Okay. Thanks very much.
Thank you Linda Thanks, Linda Thank you.
Our next question comes from the line of Lawn Frat with Wells Fargo. Your line is open.
Good morning, everyone congratulations great quarter.
All that quick follow up on gross margin staff Sally beauty could you talk a little better about your approach to promotional strategy and anything driving margin improvement in the U.S. from catcher shifting that ran a little but if it gets more difficult to try this gross margin expansion in this segment as you lap these initiatives.
Thank you.
I think it's a fair question, you're asking where we are now a little bit over a year into the change in our promotional cadence where were mofo, where we've been more focused on driving impact with fewer deeper promotions than driving.
Breadth of promotion so to speak we did see gross margin improvement as a result of that effort over the course of.
This year, what I would tell you is by category, we still have some opportunities there, but the magnitude of the opportunity driven just by promotional cadences smaller than it was in 19 in that puts it more on us too.
I really find the other opportunities there.
Thanks.
Thank you.
Our next question comes from the line of Adam Kozak with Raymond James Your line is open.
Oh, yes, I got to pull my name in instead of Joe is but I just kind of wanted to give a quick update on the target leverage last last time you guys. I believe pointed at 2.7 I was wondering if that was still consists and maybe a timeframe on that I notice you guys were at two Sixthree, which was an improvement from last quarter. So just quickly on that would be great. You landed last quarter to six nine we land.
This quarter to six three we continue to I'll bring the leverage down we have the cash flow. We certainly have the strong cash flow that is that.
Can support our leverage but our goal is to bring the leverage ratio down overtime, you saw that this quarter as well.
And then just a quick follow up I know you guys have talked a lot on Europe and gave a lot of good color.
On the headwinds of course in the improvement potentially.
But just the fact with a deadline for Brexit keep getting pushed back is that prolong. The uncertainty here are you seeing signs that consumers of adjusted to this.
I would I would say in general.
I think consumers are kind of unjust adjusting to the uncertainty we are seeing some improvement in our UK business.
And so I would argue.
It's a little bit of.
Wait for the wait for it to happen at this point in time, I guess as it will be.
Less impactful than the original news and fears that we were going after let it happened before we know that.
I will set.
Okay.
So we lose a call.
One moment please.