Q1 2020 Earnings Call
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At this time all lines are in a listen only mode. Later, we'll conduct a question and answer session instructions will be given to you at that time.
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It is being recorded.
I'd now like to Kinda conference over to Mr., Jeff Harkins. Please go ahead.
Thank you good morning, everyone welcome to the Sally Beauty Holdings first quarter earnings Conference call.
For me again, I want to point out that we have made us supplemental slide presentation available for today's call that can be viewed from away from.
What about our Investor site at Sally Beauty Holdings Dotcom.
Backslash Investor Relations. In addition, I watch remind you that certain comments, including matters, such as forecasted financial information contracts for business and trend information made during this call may contain forward looking statements within the meaning of section 27 am securities.
I'd like to 33 as amended and section 20, when he other Securities Exchange Act would like to 34 as amended.
Maybe these forward looking statements can be identified by the use of words such as believe project. We expect can may estimate should plan target and Chad could well.
I would anticipate potential.
With that optimistic and similar words or phrases.
These statements are subject to a number of factors that could cause actual results to differ materially from expectations. Those factors are described in the Sally Beauty Holdings filings with Securities Exchange Commission, including his most recent annual report on form 10.
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, or Chris Workman, President and Chief Executive.
Officer, <unk> President of Sally beauty supply and Chief Financial Officer, and other Pitino group Vice President of fight it.
Chris will start by offer some thoughts on our first quarter and getting an update on our key transformation efforts.
And will then discuss our first quarter consolidated and segment financial results touch on our supply chain.
Hey, modernization efforts and then discuss our views on our full year financial guidance for fiscal 2020.
Now I'd like to turn the call over to Chris.
Thank you, Jeff and good morning, everyone.
During our first quarter, we continue to make significant progress against our transformation plan.
We saw beauty systems group.
And our European operations deliver positive comp growth and improve their gross margins.
Beauty systems group achieved its highest sales revenue in a quarter ever.
More significantly we took important steps towards our goal of becoming a mobile first digital retailers.
Enabled by a.
Through the category physician and National store network and consumer centric fulfillment options.
We did all of this well dealing with a retail calendar with six fewer shopping days, a retail consumer who waited until the last minute to shop around Oh, Thanksgiving and Christmas and a.
He's of significant technology implementation distractions, which impacted our retail topline same store sales and gross margins.
The good news is that we haven't natural hedge between our retail and our professional businesses.
We saw strength security systems group that offset the traffic challenges at Sally beauty.
For the quarter, we delivered only modestly negative same store sales down only 0.3% at the enterprise level.
But with a 1.2% at BSG and a positive comp in Europe as well.
We largely held our gross margin despite headwinds.
But as expected and predicted during last quarters earnings call. We did see higher SGN expenses as we invest in the business and responded to wage inflation.
We recognize that short term challenges have created a gap with respect to earnings expectations.
We've been working over the last six weeks to fill.
Yeah.
Aaron will bridge, our results are responsive actions and our view of the remainder of the year for you later in the call.
While the decline in overall sales and the SGN a increase did result in a declining operating earnings and operating margin and ultimately a decrease in both GAAP and adjusted.
Alluded MPS.
I want to emphasize that these are one quarter's results in the face of a significant transformation that is taking place over multiple quarters.
Unlike many retailers Sally beauty holdings is in the advanced stages of a detailed transformation plan and remains both highly profitable and.
Liquid.
If you take one message away from US today I wanted to be this our first priority is to complete the transformation and put in place the right retail and digital capabilities to set the company up for long term success.
We're focused on unlocking the full potential of are highly differentiated business and we will invest additional resources as appropriate over the year, if that is required to deliver our objectives.
Let's spend some time talking about the specifics of Q1.
As we discussed in prior earnings calls in recent quarters, we've seen stabilizing traffic trends versus comparable comparable periods in prior years.
That changed in Q1.
The first quarters calendar was unique in the Thanksgiving was late with six fewer traditional holiday shopping days than last year.
Retailers generally responded by making black Friday into Black November with high discount offers beginning as early as the first week of November this year.
We did not play that game and held most of our Black Friday oriented offers to the weekend before Thanksgiving.
Our retail traffic was stable in October.
Then drop noticeably in the first three weeks of November as the consumer took their time starting their shopping.
Traffic recovered the we've we can Thanksgiving and cyber Monday, but dropped again until the week of Christmas when it again recovered.
While we no doubt felt some pain, the retail, especially retail traffic index data shows that other specialty retailer traffic trends suffered at the same times and to similar degrees.
The consumer also shifted some of their purchases to digital channels.
We weren't quite pleased with our digital performance over the period.
As a reminder, we have a methodical, but fast process of moving from being an unsophisticated brick and mortar retailer to being a mobile first digital retailer that leverage is it's differentiated category position with a national store network and a full set of fulfillment options.
In our Sally beauty business. Our goal of course is to grab the consumers attention with our expertise and to help her <unk> by filling her need for hair color hair care and related products, where she wants it when she wants it and the cost and price that makes sense for both of us.
We know we are playing catch up so we are moving fast and learning and adapting in real time.
The digital path. We are we are on is the right one and does not change as a result of Q1.
Five quarters ago, we watched our new C.R.M. platform.
Four quarters ago, we want our new Sally loyalty program and tied it into our new P.O.S. systems, and our digital platforms and now has more than 16 million active members.
Three quarters ago, we watched and updated Sally beauty Dot Com mobile first website and also tied into our loyalty program.
Two quarters ago, we launched the new Sally beauty mobile at which now has been downloaded over 900000 times.
We further refine the website and began development of our water management system. So that we get access all of our inventory and where appropriate split shipments.
During the most recent quarter, we started to <unk> all of this together by deploying our new order management system across the Sally beauty and beauty systems group network to allow us to better access our inventory and split shipments cast delivery capabilities that just same day delivery for B.S.G.
Launched the new color of your technology, and 600 stores and on the Sally at.
And it expanded our Sally beauty digital marketplace efforts with ebay, Google and Amazon.
Following the end of a cue one we also executed the consolidation of our digital teams into one team to lead digital efforts for both Sally beauty and beauty systems group.
We have hired two new digital expert leaders, Kevin mess, V.P.B. commerce and been happy Lakshmi VPF digital product together, they bring realize been there done that retail and wholesale digital pedigrees from the likes of Ulta Walmart.
Oh and cache.
Looking ahead by the end of the current quarter, we expect to launch Sally beauty Dot C.A., along with our first iteration of shit from store capabilities and important evolution. Since we do not have or intend to build play traditional distribution building network for our Sally Canada business, all E. commerce shipments to consumer.
Will come from inventory in Canadian stores.
We will test, we will learn and we will expand for both shift from store and B.S. cheese same day delivery.
We were making significant digital progress in the most recent quarter, our global digital business grew 27.6% with the Sally U.S. in Canada business growing the most at 37.8%.
As with many of our initiatives Sally U.S. in Canada is leaving leading the charge and we are now turning to leverage our learnings and capabilities elsewhere first with B.S.G. and then more broadly in Europe as as a further part of project search.
[noise] R.U.S. and Canadian digital retail penetration increased 100 basis points to 3.7% for the core while our overall penetration rates stands at 4.5%, meaning it is still all upside for us as we continue to drive digital capabilities and penetration.
We have a massive amount of change under way.
Much of been tied to technology, and we are operating on aggressive type lines with significant interdependency.
Anytime you combine transformation and technology, you have to be ready and able to learn and adapt.
In the first quarter, we experienced technology integration roadblocks, which together had a significant impact on our first quarter revenue same store sales and gross margin.
We are approximately 60% of the way through our extort P.O.S. implementation across the U.S. in Canada.
Meaning we have reached critical mass.
During the quarter, we discovered design issues within our next door system, which resulted in incorrect pricing data flowing to some of our Sally stores, particularly in Canada on a significant number of items.
Technology issues also resulted in some customers receiving elevated promotional discounts, which resulted in in degradation of sales and gross margin.
Finally, our new loyalty program is tied into our new X. door systems interacts with our promotional kittens and calculation.
As a result of the system implementations, we experienced higher redemptions then expected from our early testing on legacy systems. These redemptions also stacked in ways that we we're not expecting having an unplanned and negative impact on revenue same store sales and gross margin in the Sally beauty business.
Aaron will quantify the impact of these challenges in his remarks.
The good news is that these integration issues were discovered before we implemented P.O.S. chainwide and we were able to pause the x. door rolled out quickly and Sally beauty to mitigate the impacts.
While there is still work to do we believe that we have addressed the majority of the underlying issues, making these issues largely a first quarter learning experience that should not impact the rest of our year.
That said, we will remain watchful given the ongoing transformation and our continued agenda of significance technology change.
We have restarted the P.O.S. roll out and expect to complete the pointed sale effort across the beauty system group by the end of the second quarter and Sally beauty by the end of May.
As I mentioned earlier, our strategy in our priorities remain unchanged.
Play to win with our customers based on our differentiated core improve our retail fundamentals whether through people process or technology advance our digital commerce capabilities and fund our transformation by relentlessly looking for cost savings measures.
To close my remarks, I will highlight if you keep progress points and plans in the business.
For Sally beauty segments.
During the first quarter the business executed a soft launch of the single largest brand investment since I've been with at the company.
Through the relaunch of the Sally beauty brand with unleash or <unk>.
The effort went live and National on January six and you will find our brand building efforts in digital T.V. radio and out of home channels across the country.
Examples of the marketing are available on our website.
As part of this effort. The business also launched are Sally crew influence or development program to further expand our digital reach.
We have received more than 1000 influence or applications for Sally crew.
Newness and innovation continue to be a focus area, we launched cheap professional color she appliances, maybelline cosmetics and waterless dry shampoos during the quarter and tested a number of pro haircare options, such as TG Big Sexy American crew and it's a tad, but do not have exclusive.
Distribution elsewhere.
We will continue these efforts and introduce exciting line extensions from texture I'd shame waste your carols, daughter, My Alley and other brands during the Q. too.
In addition, vivid colors continue to grow and are now 20% of color sales south.
We continued to make progress on our stores, having remodeled most of the Charlotte market.
Launched a Manhattan concept store it will become a dense urban shit from store location and tested store durations in North, Texas, all in anticipation of our <unk>, North, Texas remodel cycle and building out a number of new stores in a variety of markets during q. too.
Now turning to Europe.
At the start of Q1, we launched projects search to turn around our European operations that effort has five key planks customer and customer marketing.
Door operations country specific focus product assortment and technology integration.
We are still in early days of the effort. We are pleased with the results so far, particularly with respect to the store operations work in the U.K.
Europe was a positive contributed to our same store sales for Q1 with improvements driven in the U.K. and Ireland and parts of Continental Europe.
We're also excited to announce.
We have reached agreement to launch the Red can color brand in our European stores in late two three of this year.
Further evidence that our teams remained our team remains focused on driving this turn around and we are looking forward to talking about additional wins at the end of next quarter.
Now beauty systems group.
As a as I commented at the start we're very happy with the progress to B.S.T. made this quarter.
The combination of our innovation pipeline and a new emphasis on retail fundamentals within our stores all help to deliver a positive cop as well as better execution within the full service channel and led to the highest quarterly revenue ever at B.S.G.
In addition, we recently renewed our exclusive three year contract with the Cody organization, giving them and us certain t. on our relationship going forward.
During the quarter Beauty systems group launched Maria dealers expanded care and styling line further supporting our emphasis on clean natural and begun products.
We also expanded distribution of all the plex number six and number seven critical hair treatment lines.
And expanded our men's bartering assortment.
We will continue this innovation push with the E. coup launching later in this in the year as well a new natural line from Europe.
B.S.G. will also be rolling out it's new store concept model two additional territories based on learnings from the successful Las Vegas test in 2019.
The roll out will start in the second quarter in Cincinnati, followed by Charlotte and then the rest of Ohio in the back half of the year.
We continue to work down our path to launch a new loyalty program. It B.S.G.B.R. partnership with alliance data to launch a private label credit card program.
Given our next door efforts testing will now beginning select stores during the third quarter with a national roll out to follow in the fourth work.
Finally, B.S.U. will also look for acquisition opportunities that could expand its distribution rights and add additional brands to its portfolio.
Now I will turn it over to errand to discuss a couple of topics in more detail.
Thank you Chris Good morning, I want to start my comments today by providing some color on our transformation afterwards.
We have a detail transformation plan that is tied to our fiscal 20 strategies annual operating plan.
We are thing significant process progress.
It is where we were in fiscal my pain.
We've been quite open with the scale of the transformation agenda are fast paced stretch, becoming omni channel retail or leveraging both our stores and or digital capabilities requires significant work.
The first quarter and indeed, the second and third quarters or the fulcrum points. So much of our transformation as multiple interdependencies across stores supply chain technology, and retail fundamentals come together, and we turn dials to automate to optimize our efforts.
Notwithstanding the first quarter.
We've got this stick with us.
There is no doubt that the first quarter was a tough quarter and blower expectations.
The impact of the challenges we face is quite a five.
The top line sales decline $9.2 million versus the same quarter prior year.
And it's simplistic this is driven by fewer enough stores, a modest Wheeler acampo same store sales and the impact of effects.
However, the Sally U.S. in Canada business, and the B.S.C. business, we're driving positive calm coming out of Q4.
So in a high level. If you asked me what impact and sales from the trend you were on I would offer the following directional context.
The primary drivers of the change to trend war.
The impact of our technology disruptions on pricing and promotion and rewards.
The traffic issues that the retail business encountered.
See the impact of non recurring benefits that we laugh from prior years that were expected to be offset by marketing and other initiatives that we'd dial back in the face in the technology issues.
Each of these issues had a similar financial impact with all of them, partially offset by continued improvement that B.S.G. and a turnaround in Europe's trend.
On the bottom line are missed two prior year was driven by four factors.
The technology impact on pricing and promotion rewards.
By the resulting profit impact from lower traffic.
Third by increase investments against wages and marketing across the portfolio and lastly by combination of factors such as increase digital shipping costs and lacking prior your benefits.
Each of these four factors had approximately the same impact with all of them, partially offset by increased volume of B.S.C. positive pricing that both Sally and be a story.
Aggressive actions that we took him a quarter.
We have already taken aggressive steps to fix the underlying issues, which will make us better and the medium and long term.
We have centralized start technology and keep project efforts under the leadership of our new Chief Transformation Officer, Mary Beth Edwards.
Cross functional teams are revisiting every interdependency and we've added a new expert support around key initiatives such a <unk>.
Our technology teams are working around the clock to advance the ball and keep limitations.
We have been quite aggressive as a management team and taking steps to shore up our profit plans for the year with no stones unturned.
Notwithstanding the quarter, we've got this stick with us.
Finally, one month well one month does not make a trend we have seen continued improvements in traffic trends in sales to both of retail business and the wholesale business in the U.S. in Canada since Christmas.
With all with all those contacts let's discuss financial results.
First quarter consolidated same store sales decreased by 0.3%.
<unk> revenue with $980.2 million down $9.2 million to the prior year driven by the fact is I'd. Just described we are pleased report that are global E. Commerce business grew by 27.6% versus the prior year.
On the top line broadly are beauty systems group delivered positive cops and positive revenue growth, reaching its highest revenue mark ever and a quarter.
In Europe delivered positive same store sales of elements right transformation started to take effect.
However, in contrast to transmission Poor's, we experience headwinds in the quarter from Sally U.S. in Canada.
Consolidated gross margin for the quarter was 48.4%, which was a 20 basis point decrease compared to the prior year.
Beauty systems group and our European operations, both saw increases in gross margin offset by <unk>, you, you ask from Canada, and or Latin American businesses.
After excluding charges related to the company's transformation efforts in both years selling general administration expenses, including.
Depreciation and amortization expense for $377.9 million in the core.
An increase of $10.9 billion for 3% from the prior year.
As a percentage of sales reported selling general and administrative expenses increased 150 basis points to 38.6% compared to the prior year.
Increase industry and they expenses, mostly the expected and plan increase in salary than hourly wage costs plus a modest increase in marketing spending we did dial back our investments of the challenging the core became visible to us.
Gap operating earnings and operating margin in the first quarter, we're $94.4 million and 9.6%, respectively compared to $109.7 million and 11.1% respectively in the prior year.
Adjusted operating earnings and operating margin were 96.9 billion in 9.9%, respectively compared to $113.7 million and 11.5% respectively in the prior year.
Gap deluded earnings per share in the first or or 45 cents compared to 54 cents in the prior year decrease of 17% driven primarily by low revenue increase operating expenses, but lower interest expense adjusted diluted earnings per share excluding charges related to the company's transformation efforts in both years were 47.
And the fourth quarter compared to 57 cents and the prior year.
Crease of 17.5%.
Our company continues to generate good cat- from operations, which was 62.3 million and a quarter and increase of 24% prior year.
Payments for capital in the capital expenditures in the core coder $40.9 million. The capital's pen was primarily driven by information technology products project projects related to the Oracle based point of sale system.
<unk> and merchandising and supply chain platform and or E. commerce platforms, as well as story models and maintenance.
Free cash flow was $21.4 million in the quarter down $5.1 million, where 19 per cent as compared to the prior largely due to higher cutbacks investments versus prior year.
We used free cash one the first quarter to reduce our debt levels by $16.2 million.
Credit facility has zero balance at the end of the quarter.
Importantly in total we ever do start debt levels by over $200 million since the beginning of fiscal year 2019.
The company's leverage ratio is defined by our credit agreements with 2.68 times with incremental debt reduction offset by a modest declining me but.
In addition, we repurchase 766000 shares as a total cost of $11.4 million early in the corridor.
Turning to segment performance.
For the first quarter Global Sally beauty same store sales decreased by 1.1% driven by decreasing same store sales in the U.S. in Canada of 1.4% Europe delivered positive same store sales would result of progress against project surge.
Sally beauty businesses in the U.S. in Canada represented 77 per cent of the segments sales reporter.
The family segment generated consolidated revenue of fiber in $69.1 million with for a decrease of 2% compared to the prior year with 36 fewer stores six fewer holidays selling days in the U.S. Canadian retail counter in the quarter the unfavorable impact of foreign currency translation of approximately 20 basis points and the technology and consumer trap.
<unk> Sally U.S. in Canada hardly it earlier.
We continue to make meaningful progress with salads, U.S. in Canadian Commerce business and quarter, which health Friday commerce revenue growth of 31.8% for the segment.
Gross margin for the segment declined by 30 basis points in the 454.3% with contraction on the U.S. and candidates their territory 20 based points that contraction and left town, partially offset by margin improvements in Europe.
Segment Opera hearing this where $74.2 million and a quarter a decrease of 17.5% version prior year.
Driven by lower sales and declines and gross margin as well as expected S.G.N.A. increases segment operating margin deteriorated by 250 basis points to 13% compared to the prior year.
Now trying to the beauty systems group segment.
<unk> increased by 1.2% in the first core net sales for the segment war for it and $11.1 million in the quarter and increase of 0.5% compared with prior year foreign currency translation had no impact on the segments revenue growth in the quarter. Additionally, B.S. trees E. commerce slap on route 23.7% quarter.
B.S.P.'s gross margin was 40.3% for an increase of 30 basis points from prior year. This represents continued progress for V.S.G. with more work to do our efforts will continue incoming quarters.
Segment operating for V.S.G. were $62.4 million approximately flap with prior year, driven by increasing same store sales gross margin expansion, but higher S.G. and they expenses driven primarily my personal inflation.
Segment operating margin was flaccid prior year at 15.2%.
Now quick update on our supply chain modernization.
You know small part of the issues business in the West we are in testing by with J.D.A.'s Demandforce casting purchase order install replenishment modules.
Call. The we have said that we were very carefully managed as project with full testing of G.I.D.A. slowly rolling out to other territories and parts of the business only when we are ready.
We are not satisfied that the dirty dirty demand and store replenishment algorithms are responding appropriately to our business. We were going to take further time before running suffered two effects location or new North, Texas Alliance distribution Center.
Well the facility will be ready for operation early enough or or we anticipate start up toward the end of the for for a given the need to test your idea for their before deploying except for.
Facility.
<unk> of the facility will be focused on the beauty systems group E. Commerce full service and Armstrong Mccall businesses. Eventually this distribution center will this distribution center will also service, both Sally and costs across doors, and Sally's E. commerce platform that expansion will come in future borders.
Separately, we're on track with respect to the European supply chain changes that we call that list or.
Now trying to our full your financial guys for fiscal year 2020.
We are holding our top line guidance of revenue up 1.2% in sense for sales up 0.5% to 1.5%.
I didn't have abundance of caution notwithstanding many steps we were taking to offset the Q1 in back we think is prudent and transparent to modify our guidance on adjusted operating earnings it'd be approximately flat prior years.
We are taking this step to ensure that if we need to invest further during the year for the transformation we have the room.
However, even with that step when combined with the benefits of the debt reduction in shared repurchases today.
We are holding Harry P.S. guides for the year, though at the lower end of our guides.
Thank you for your time. This morning, now I would like to try to call back over the operator for customizing your questions.
<unk>.
<unk> please <unk> on your home phone.
<unk> Oh come on once again for any questions or comments press one zero.
And our first class Hmm.
We will go to.
Oh My <unk>.
Go ahead with your question.
I'm just wondering if we could dig into that.
<unk>.
Look how we know what has been different in those stores, where you have put the money and put a lot of your learnings into it.
The rest of it and you know how how can we take those learning to move the mouse to the national.
Mhm.
Request and were quite excited by the remodeled cycles that we have wonder wipe off in Las Vegas, and in Charlotte and now and each story that we were model or the news story. So we have popping up across the country. You know we have been quite focused on the assortment really leading with our differentiated core which color and care with color and David.
A particular being it's part of the store with the technology integration west or whether it's on the app or on the kiosks relative to color view, and then just got or retail fundamentals around sightlines guidance guidance through the store, we finding if you will and focusing more on.
<unk> portfolio like nail and man's et cetera.
The Charlotte market isn't aeration off of what we're doing in Las Vegas, as we continue to improve and wall, we have all but three or four the stores in that market now remodeled I'll worry of course are going to continue to learn evolve eyes, we carry forward.
And then how are those stores.
Being relative to the national insane.
<unk> Commerce penetration, you know where they stand today.
I'll I'll answer the question can actually went to Las Vegas market, because it's too soon on Charlotte for me to have a statistically significant answer for you. When they are copping positive to the control group that we're measuring it against I'm. We are seeing good left relative to other parts of the portfolio you commerce et cetera, that's right we do we.
I still have things, we need to improve around somebody cosmetic categories as well as some of our inventory positions, but we're quite pleased with the results so far.
Okay.
<unk> three year contract with Cody I mean, <unk> have you thought about emanating on yourself on your own side or their brands that you would like to add to your portfolio bone brands or exclusive.
You know, we always look at at granted they come available, but in general we've been mostly focused on a acquiring regional distribution rights and we have some more of those that we're working on now but the reality as they tend to be smaller acquisitions of distributors, who have exclusive rights and we acquire those rights and add those two are existing stores, which drive Sam so.
Sales I.
<unk>.
Would add one of the benefits of your organization. We have is a robust pipeline of owned brand technology at home brand.
Product for the Sally part of the portfolio, we're very careful how that translates to B.S.T. given our partnerships.
But we have significant capability from home brand developments in house.
Thank you very much guys free.
Oh, Yeah, I'm not quite remote copper mine are <unk>.
Corn incompetent.
Good question.
Hey, good morning, Ross on for all of our it's a question on the farm guidance.
Person is the first first our results.
Yeah, that's some plans how they might have also balance a year or just.
Versus your original plan you you mentioned in the first part tempered on the marketing spend give them the top line.
Onto your thoughts and I'm thinking about the rest of the year. Thanks, <unk> happy to I think if you go back to our last earnings call. While we don't issue quarterly guidance I went out of my way to talk about the fact that the investment profile for us.
Whether on the you know supply chain side or on the marketing investment side was particularly heavy and cute too, but also heavier into one and so with much of our brand investment in Sally launching January six.
And with much of our capability investments, Brad 2122, and a little bit into Q3, our expectations for growth work more back and loaded I think I was clear on that both from a sales perspective and from a profit perspective, no escaping. The fact that you know we had some challenges into one but.
We are able to reaffirm.
Buttons based on what we believe the impact of those investments to be.
Right Yeah.
Up on your marks on the yes.
Capabilities are brand.
Library, a bit more on on what you might be looking for their the timing around that actually and then.
How.
Ties into the broader capital allocation strategy moving forward with with a dot in the in the repurchases. Thanks so much.
And I said I I think the reality is and you've seen this in past years, we have consistently found one or two acquisitions ear with N.B.S.G. that are good regional fits where we acquire distribution rights to brands, perhaps some stores and then we layer that brand distribution rights onto our existing footprint.
So we continue to look for that we have opportunities in the pipeline I can't give timing on those at this point in time, but will continue to work on those and I expect there'll be some this year.
I believe the last acquisition, we did for B. or she was late twenties 17 early 2018, and so like I said, we're back in the Hunt and this has been part of the business model.
See as it relates to capital allocation. Our view has not changed again, if you go back to what I said last quarter I assume the course for that as well. The first priority is investing their business and the <unk> reality is is we have plenty on our plate.
Investing further dollars against that we will lander year, where we expected to from a capital perspective, and where where we have our predicted.
We are going to get our debt down to 2.5 I've been cleared up that's our our target as well animal only look at share repurchase. After we've taken we've taken advantage of investing in the business, where we need to where we've found opportunity to bring our got down at the market presents us with an opportunity.
[noise] [noise] great. Thank you.
Thank you.
<unk> Morgan Stanley.
Hmm.
Hi, This is <unk> and thanks for taking out questions. There are a lot of positive things going on on the transformation, but the initiatives on a range of different timelines can you maybe talk about when you expect to see positive comps in both segments of the same time and what needs to a couple that to happen.
Well, we you know we got into positive comps for this year and we continue to maintain that guidance. So you know we expect that to happen pretty quickly as you can imagine I I'm not going to give a specific times and quarters and numbers, but you know listen we're disappointed with what happened in Q1, there were a lot of things that contributed to that.
And you know we feel obviously with our revise guidance that we still feel positive about the the year overall, we do feel like we fixed a number of the issues that contributed to the Q1 performance and now we've got to go deliver.
I think it's important to add all that one of the benefits. We have we are increasingly getting at I.S.P.H. is the combination of the work that you know Pam counters doing across our merchandising organization organization in support of the greater hole. The work that marks banks are doing with the B.S.G. team. The work that the Sally team is drive.
As well, it's additive to each other versus being and silos and while there's more work to do part of what gives me confidence in the guidance that we have to shoot a reissued today is that Oh, you're right. The time, he's a little different in different places by will all come together and it'll be in service or the greater portfolio.
I think you and then just as a quick follow up you know we've seen some of the P.L.S. transition issues as recently as 2018 I know some of the head ones in this quarter were a little bit for different reasons. We can you maybe talk about how you were evaluated technology investments and the time lines. Following the issue and whether you identified any other risks around the transformation. So 2020.
Well, let me start by saying I think there's always risk surround technology transformations, especially when you're touching as many pieces. The platform is we are at the same time, we experienced that to a large degree and Q1 and again I believe we've we've fixed the majority of those.
Working very hard to try and consolidate to make sure that we're looking at all interdependencies and that's very much. The reason why we put together a chief transformation office and that we're putting the resources against it and creating headroom and R.P.N.L. to make sure we have the resources against addressing issues as they call up and avoiding issues wherever we can't so I I think we're we're well positioned x.
The projects that being said I walked claim that there's no risk, but at the same time I think we're putting the appropriate level of resources ended to make sure that we're looking for interdependencies and and addressing them proactively and obviously Q1 was a wakeup call that we're we're working hard on.
Alright, thank you.
Thank you make for a girl.
Huh.
Please go ahead.
<unk>.
<unk>, if you could provide a little bit more disruption because you're <unk>, while it came in light of our expectations, but.
Declined was more pronounced or or the the delta was more pronounced <unk>.
Yeah. It sounds like the big surprise, he was incorrectly price promotions, which presumably would've had a bigger impact ingress Martin. So just would appreciate your help on if I'm missing something there.
Then specifically to tally beauty.
I know that traffic was down because of the shorn holiday, but how about tickets because I always thought of Sally beauty is kind of a little bit less exposed to holiday given the.
Nature of hair maintenance, so what's the weaknesses Fortunately tied to like appliances and do you now have a lot of.
Durables inventory to work down thank you.
There was a lot.
[laughter] I mean attempt to unpack and Chris will keep me as as far as what pieces of the question that I may have missed as recovery forward as it relates to your question gross margin industry in a the answer is the following <unk>, let me start from a reversed R.S.G.N.A. was up versus prior year, but.
We had expected it to be up and we had <unk>, we had expected to be up in connection with the wage and personnel inflation that we knew what was coming our way given the position within our team portfolio.
We had expected to be up with modest investments more modest investments in marketing as well as somebody AAPEX components of the implementations we have underway.
Reality is that while it was up it wasn't as up as much as we had planned for it to be because as we got I into November we realized we had a problem and we started optimizing to attempt to mitigate the impact.
The gross margin line, you're right the impact versus last year was prior was lower lower than S.G.N.A. versus the prior year, but wow. What's important understand is from a from a what we were targeting or what we were after perspective, we were expecting higher.
Sales growth same for sales growth as well as increased gross margins, which were which was what was impacted by the factors other factors that I called out.
The P.O.S. issues. The integration issues, you know, we had pricing dropping which unexpectedly which it was a direct it to our top line right. Similarly, with some of the elements of the promotional strategy in there and the reward that was a direct impact to the top line into the gross margin as well let me let me just stepping for mobile.
Kickback Aaron Yeah, so articulate right, we'd expect and gross margin to be up more as part of it and we were planning on investing more in the business at which we did do the reality is is it just testament to the durability of our business that despite all these disruption issues in pricing issues cross market actually held up it just didn't increase as much as we expect.
It it too and so I think you know the reality is now we've got most of those issues fixed and we are expecting gross margin to expand and we continue to expect and need to invest in the business, which we articulated at the beginning of the year I'm going to let air an answer the issue around our our traffic issues route to the quarter and how that effect is specific categories and ticket.
I think what I would say this we do have we have a lot of inventory right. It's one of our key and issues internally up how are we going to bring our admonitory down we've seen more progress there at Sally in the U.S. in Canada than we have in Europe, and I M.B.S.G. and those businesses are well aware and.
We're working hard on their plans I wouldn't call. It I wouldn't call our inventory position to be tied directly to the traffic issues. I think we did a better job than prior years of managing our Admonitory and frankly that businesses were better prepared for the calendar fourth quarter of than they've ever band. We just ran into a couple of things along the way.
Way, which were distracting is we carry forward and so in the context of our portfolio in the Cox our business, we will work on a resolving the inventory dealing with human Tory that we have.
<unk> had all Youngish was ticket, we see a declining ticket and of course, not really yeah I could think so.
Thank you that's really helpful. And then just lastly, any kind of weather.
No you know sort of price promo issues may determine some potential pantry loading by consumers and could that potentially impact future quarters.
Kind of capitalize on.
On lower than expected prices and then I'm sorry.
Did the leap year provide any benefit to specifically say next quarter sorry, that's it for me.
So let me chart, where the first one I think it's unlikely it it did much pantry loading in many cases the customer received the benefit.
As they got to the register and we're checking out and ended up paying less than they expected. So I I don't think we're going to see much in a way of pantry loading and we haven't seen it affect our sales post Christmas.
So I don't I don't think we're going to see much from that as her leap year I don't know air and if you have any thoughts on that you know not much it won't have a material impact yep.
Thank you.
Thank you.
Mmm.
Oh and France with.
<unk>.
<unk>.
Thanks for taking my question.
I would I take a little deeper into Europe that region.
Track on salary results last year, but it seemed like there was a pretty solid function in the first square.
<unk>.
Your strategy out there and how confident that performance has reached more stable level now thank you.
Well Ellison I think we would say we have more work to do but we're we're pleased with the progress thus far as I mentioned in my opening remarks, you know the the <unk>. The the project surge cuts around multiple platforms. So a lot of progress is being made especially in the U.K. on store and store ops. We're excited about that the team is is obviously.
Working on some of their customer marketing and direct marketing activities and and getting crisper in terms of how we communicate with our customers they're working on product assortment they've made good product on progress on adding to their product assortment issues, which I think that will help and we've got more information coming as I mentioned with the launch of Red color coming in the latter half of the year.
Obviously, we've had some disruption there with technology that they've been working on and made a lot of progress stabilizing their I.P. platform. So I didn't you know the timing to team feels good about where they're at they've got lots of work left but it was nice to see the progress in the quarter and we expect to see more as we move to the year.
Back to a points I made earlier one of the reasons why I have competence and where we're going where this is taking US is the team is the leaders are working better together than they ever have before with a Olivier is leadership in Europe and with the benefit of some of the learning as we've already had in the U.S. on the retail side.
Particularly around store operations first in the U.K. and increasing on the content as well we are really starting to get back to the to get the expertise in retail fundamentals that we need to succeed as we carry forward. So good progress, but more work to do.
How much.
Thank you.
<unk>.
Hmm.
Hi, I'm wondering you you talking about the Cozy agreement, which grants is that related to and what's it's similar to your past agreement.
It was and it covers all of the professional brands itself through B.S.G.. So all over the Weller color line I believe <unk> as well as there are other lightning lines.
And Sebastian product. So it's it's a <unk> all the professional products could flow through B.S.G.
Okay, well that preclude you from buying those fans.
And there are for sale.
Painted a buyer buys them.
<unk> it does not and I know that it's nor does it preclude us from buying them either.
Well I guess, but for the later I put it on that we'll all of course, we don't comment on any I'm, an a. anyone who does by that business will inherit the contract with us and so that's our comment on our.
Script was it provides us with certainty.
It would it gives them the certainty that one of the largest customers is in hand. It gives us a certainty that we don't have to worry about keep brands like that in our portfolio for a three year period.
Okay, Great. That's really help and then you mentioned a inventory being little having post holiday.
How long do you can go take to bring that down in it or anything.
Yeah rescued aging you need to mark down in new more quickly.
I guess, here's how I would answer the question.
Teen here is very clear that inventory has an impact on cash right and the team here is increasingly clear that we need to ensure that we were imagine the business both to the income statement and of the cash flow and so we are going to do everything we tend to bring the inventory down without impacting our business to maximize our cash and whatnot.
Out having to take a a hit to the gross margin line that we want to avoid and so I I am not here today to call out an impact of guidance of our inventory I don't want to overstate.
The concern by based on based on earlier answer we view it as something we just have to managed through everyday as where retailer.
Okay. Just one last one <unk> head now they want to go into that usually business. It seems there hey did not heard much about it lately is there any updates from what you're seeing from competitive standpoint, 18 professional beauty competitive landscape.
I haven't seen much I mean, we've we watch it costs as you can imagine as we look at the web site is looks the same when it originally launched most of the brands that are carried on there actually sold through resellers.
And I you know our view is obviously weren't continue to sign agreements such as the Cody agreement that are exclusive agreements with our vendors. So in our mind. If it continues to be about the same and you know our our view is we're going to continue to execute a again I would go back to the point, which is from our vendors perspective, it doesn't bring anything incremental.
Up to the business.
In terms of helping them recruit new stylist to a color line they need personal contact and training to accomplish that so all Amazon would do would be transfer customer from an existing channel to another channel as opposed to help them recruit new customers. So our job is to add the right digital on service capabilities.
Existing business and help them build their brands and obviously, we continue to do that and I think that's why you're seeing our customers renew their contracts.
That's great. Okay. Thank you so much.
<unk>.
Go to line up with.
Bank of America.
<unk>.
Hi, I'm just a couple with regard to your exclusive brands or private label. However, you describe them are there any that have grown to the point, where you started distribute them and and other channels or do you. Just few those is I guess ways to drive traffic to your own retail stores.
We view the own brands that Sally, which is about 45% of our portfolio and our exclusive brands at B.S.G., which was about 53% of our portfolio.
Being key points are differentiation to us why they need to come to south why didn't come to Sally or to B.S.G.
And what the digital business there are places where work as we are participating and market places, where we are participating in the marketplace is leading with our own brands because they stay within our control in that way.
As we sit here today, our focus has been on taking advantage of the technology the brand.
Inhouse that we have a cross our businesses and so leveraging Europe in the U.S.M.U.S. into Europe for instance.
Not on driving sales of those on brands through other channels beyond our own digital efforts.
Okay, I wouldn't I would just comment I'm Erin has it exactly right that we will we continue to use these as a way to drive traffic to our existing stores and businesses. The eye on Grand in Sally has become a major and a significant brand as a global brand and we sell it only to our outlets, but it is of escape.
Well that that is quite large and I think it's an under appreciated part of Sally.
Would you ever consider acquisitions of brands that would be so large that it would probably not makes sense to have them be largely exclusive to a brick and mortar deer brick and mortar stores as opposed to being another brick and mortar stores.
I think that's hard I I'm, not saying, we would never consider it but it's hard to do because in most cases those brands have global footprints that are extend well beyond our footprint and they wouldn't be very hard for us to sustain the brand. So I think I think that would be talked to do but we will always look at them as they come available.
Okay, and then just lasley, you're talking about the the traffic challenges in in the first three weeks of November as well as December.
Those as being somewhat unique to the holiday periods in it that will be continue challenge during that period as a year or do you think this is something which could be a challenge and the other kind of timing court or something here as well.
Well I guess I would answer it this way.
I observed earlier my remarks that following Christmas we saw Ah traffic.
Revert to the positive revert to the more positive trends that we had been calling out on early earnings early earnings calls and so it is our hope without you know being if when I certainty that with everything we have going on with the impact on marketing with the impact on better operations retail fundamentals that indeed.
Traffic that queue for our rather Q1, often actually for US was a a unique set of circumstances.
And that we are repeated in that.
Alright that makes sense.
Thank you.
And we will go to the line.
Marlene with Goldman Sachs.
Okay.
I think so much I appreciate squeezing men I just wanted to you know follow up a little bit more I'm of technology in the P.M.S. implementation.
Is there any way you could maybe quantify that.
Sales and the gross margin impact then I guess <unk> have been positive if we didn't have these issues Mccarthy.
And it I guess you call that and number of times that there was I'll probably expectations I guess, excluding the tech issues, what would they really have been more <unk> expectation. Thanks.
You know I'm I'm not going to put a dollar figure on each of the impactful the quarter. Although if you review my comments pretty carefully how you may be able to do the map around you know, where we landed versus where we where we expected to be the three or four factors.
I called were roughly equal in a significant signs that we was three in the top line for on the bottom line and you can get you can get some good assumptions around that.
Okay. That's helpful. And then I just I know you reaffirmed I mentioned, the two and a half time leverage.
You're thinking about acquisitions, I guess, how high would you be willing to take the leverage in the interim I rarely for for such an acquisition just to kind of give us a sense.
The size and scale that you're thinking about it I'd be okay.
I I think I would leave you with this we are not here today to announce acquisition we're not.
And our operating plans put us in a place where are we get back to the 2.5.
So.
Someday, if we have something to announce which has a material impact on our leverage plans of course, we'll talk about that but as we sit here today, we were focused on a investing our business Springer that down and then I don't know down at the market presents with an opportunity here buying back some shares.
The <unk> the good news as we have plenty to do from at investing our business perspective of the teams are a head down focused on getting us to write transformation with <unk> with everything under way okay.
Thanks, how much.
[noise]. Thank you I'm, telling no further questions at this time please continue.
Well then thank you for your questions today to summer starts to summarize while a challenging quarter, we continue to make progress against our transformation efforts and we're focused on landing the year consistent with the revised guidance we have provided.
I want you I want to leave you with this notwithstanding the first quarter, we got this and we will deliver our transformation objectives.
Thank you for joining us today.
Thank you and they didn't include.
Include your conference call for today. Thank you for your participation. If he is an 18 P. executive teleconference service you may marbles cannot.
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