Q3 2020 Sally Beauty Holdings Inc Earnings Call
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I would now like to turn the conference over to Mr., Jeff Harken. Please go ahead.
Thank you good morning, everyone and welcome to the Sally Beauty Holdings third quarter earnings Conference call.
Before we again I would remind everyone that we have made a presentation available for today's call that can be viewed from the lake provided on our investor site at Sally Beauty Holdings Dot Com Ford Flash Investor Relations.
In addition, given the impact to cope with my team and consistent with our recent disclosure.
We will be providing limited supplemental disclosure some operating and financial metrics for the month of April may and June within a quarter.
I'd also like to remind you that certain comments, including matters, such as forecasted financial information.
On track for business and trend information made during this call may contain forward looking statements within the meaning of section 27, a that's the other Securities Act of 1933 up amended and section 21. The other Securities Exchange Act of Nike's 34 as amended.
Maybe these forward looking statements can be identified by the use words such as believe project expect can may estimate should plan target and Ted could will we would anticipate potential copper 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 Sally Beauty holdings filings with the 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, a non-GAAP financial measures and its earnings press release it on its website.
With me on the call today, our Chris Workman, President and Chief Executive Officer.
Eric All president of Sally beauty supply and Chief Financial Officer.
And Marlow, <unk> Senior Vice President Finance, and Chief Accounting Officer.
Chris I'll start by operating costs are a third quarter as well is why Sally beauty holdings is uniquely positioned to take advantage to take advantage of consumer trends.
Respond with agility to the cope environment and generate cash.
Eric will then discuss our third quarter consolidated and segment financial result.
Let's turn our liquidity and provides a perspective on our fourth quarter.
Finally, Chris Marlow, Aaron and I will be available for your questions.
Now, let's turn the call over to correct.
Thanks, and good morning, everyone.
One of the incredible couple of months it is bad.
Our last earnings call. We spent time highlighting our aggressive response to the covert 19 <unk> <unk>.
Successes earlier in the second quarter on our transformation initiatives and the positive comps our business experienced prior the onset of Cowen.
During that May call. We also highlighted our views it changes to consumer behavior.
The recession resistant nature of our categories in our company and our aggressive efforts to reduce cash burn and to tap additional sources of liquidity.
Since our last earnings call. We have provided a number of over to related updates on all of these topics and each month. The consistent message has been one of acuity resiliency and decisive action as we continue to grow cash on the balance sheet and maintain liquidity, while quickly getting our store fleet up and running.
Right and our team back on furlough and pushing ahead with our pivot to the future in our digital business.
Progress continues.
But I think our team can be quite proud of their efforts in the quarter.
In the face of everything coupled with a broader we got a lot.
Here are some of the key highlights I want to emphasize per you about the third quarter.
We brought down the entire store fleet and then brought it back up again, so that as of today, we're now operating everywhere, except a handful of stores in international territories.
We pivoted rapidly rapidly to E commerce by Rolling out ship from store in same day delivery.
Quickly set up contract with curbside pickup at many of our source as co been forced us to shutdown customer facing operation.
We saw significant growth in digital over last year, even as our store sales were surging if we reopened.
As the quarter progressed, we saw strong demand while the overall quarter will show a decline in sales due to colder than the stuff down as the network has opened up sales have been coming back strong.
Both Sally beauty and beauty systems group had positive same store sales in June even with parts of the network closed at the start of them up.
Beauty systems group had its highest monthly sales ever with revenue of 155 million in June as stylist and salons refills are supplies in response to strong customer demand.
We exercised incredible discipline relative to both cost and cash control.
We aggressively managed our working capital, including inventory dropping to six year low during the quarter.
We reset our inventory open to buy process and cleared out an overhang of inventory componentry in Europe in the United States.
We grew our balance sheet cash to $839 million.
We executed a restructuring in the United States, which prioritizes, our digital future and capability Bill.
Consistent with the outlines of our transformation plan.
And we do all of that while much of our staff was on furlough, allowing us to regain sales momentum fast and bring back most of our team by mid year.
I would also like to highlight some observations about our consumers.
We have seen data would suggest the consumer sentiment was increasing until the middle of Q largely in line with states Preopening and I hope that the country Eaton Coke.
But sentiment then leveled off and retreated later in the quarter as Cobas fears reemerged in new parts of the country.
In contrast, we also saw consumers change their purchase patterns, while spending early in the quarter was quite depressed as consumers were addressing sudden unemployment and the uncertainty of coated over the quarter, we increasingly so our consumers less cautious of spending even in the face to apply unemployment and fears of or.
Session.
While impossible to quantify with certainty. We believe this increased spending was driven by three thing.
First the historical experience in our categories that consumers will cut other expenses before they stop investing in their appearance.
They want to feel good about himself.
Second the fact that our consumers may have some surplus discretionary spending because they are spending last elsewhere on things like restaurants entertainment or trial or because they received stimulus payments.
Lastly, some of you may have seen third party data like we did suggesting that the beauty consumer is trailing consumers in other categories like housewares Autopart and toys.
We have not see Matt materialize in our own demand and believe it is due to the categories within beauty, where we lead hair color is fundamentally different from cosmetics.
There is no escaping that we are operating in a world of uncertain.
Investors are seeking assurances from companies that achieve.
Oh from companies that do fundamentals are placed to drive performance going forward.
This is particularly true in retail and even more so in specialty retail.
I recently heard a well known investment manager comment publicly that in his mind companies the deserved investors' attention in this market have three things in how.
They can take advantage of consumer trends initiated by Kobin and changing consumer needs. They have proven they can operate effectively in an environment impacted by cobot and they have strong cash flow and cash on the balance sheet.
Sally Beauty holdings hits, all three of these characteristics, so I'm going to structure my remarks accordingly.
Let's talk about the investment managers prioritization of companies that can take advantage of consumer trends initiated by coded and changing consumer behaviors. We are seeing several trends for which our business is uniquely positioned to respond.
First.
Do it yourself.
Whether in home improvement or hair color consumers have responded to fewer covered by spending more of their time at home taking on past that they previously would have paid others to do for that such as color in their hair or doing there now.
Our Sally beauty retail business is perfectly aligned with this trend.
Sally is the industry leader in professional color for home use our customers can find all of the needed solutions or product either online or in our stores.
Additionally, they can find how to content on our digital sites, starting with hair color. One on one all the way through more complex application techniques.
Alternatively, a consumer can talk to a Sally associated of store, who has been trained in hair color.
We have the right products and the right expertise to respond to the consumer D. I widespread.
Second there is a consumer trend around creative expert experimentation, which is driven by customers with time on their hands as they social distance deal with Florida or rebel and the escape from normal workplace appearance expectations.
With more of our customers working from home or learning online, there's an opportunity to express themselves and how they look which previously may have been constrained.
The result of this strong interest in creative categories like debit colors and now.
Since the start of co bid we have seen increased interest in different colors in our Sally retail business in the U.S. in Canada. The category actually grew 22% in the quarter compared to the prior year despite stores not being open for the entire period.
David colors now represents 27% a total of the total color category compared to 20% in the prior year.
During the quarter. We also observed that many consumers desperately wanted to get back to their stylists. Once restrictions were lifted and our beauty systems group business was ready to provide the needed products for our stylists, hence the law.
We see see signs that we have been more nimble than some of our competitors and getting back up and running and with BSG delivering its strongest month ever in June we believe that we have gained share my better serving the professional during this difficult period.
The second criteria called out by the fund manager was companies that have proven they can operate effectively an environment that we'll continue to be impacted by code.
We believe that the agility with which we have moved in the last three months makes a strong case that we are that type of company.
We have been successful and launching new assortments to allow our retail customers to protect themselves and to allow our professional customers to protect both themselves and their clients.
Whether it was hand, sanitizer harvest side glove mass or case, Sally beauty and beauty systems group for in stock with these items before the crisis hit and quickly move to bring additional assortment and inventory into our network.
It was not by accident that during the crisis, we aren't where identified in the national media as one of the few places the consumers could find hand sanitizer.
While the supply and demand curve is normalize in connection with Sanitizers in mass. We believe that personal protection will continue to be a customer need particularly into law and we will continue to support it in our assortment.
In addition, we rapidly change our service model during the cobot crisis to provide our customers with more choice on how they interact with us and more access to their to our inventory came why.
We have continued to it or eight on the changes to our service model and believe that they will serve us well as consumer preferences change and as we see outbreaks of copel across the country.
We started this journey by putting safety first.
Our team members are required to wear masks and gloves and we are actively monitoring for compliance.
We have been installed the plexiglass screens that the counters created social distancing operating procedures and our stores are regularly clean.
We took similar steps our distribution centers, while increasing capacity.
We also offer flexibility, we created curbside for our customers and have recently re energize that offer in areas team over the increases we rolled out same day delivery of beauty systems group to address the need to be a busy style.
We rolled out ship from store at Sally beauty to increase the inventory that was available to our retail cost consumers.
We have spent time optimizing both efforts and growing our capabilities and expect to continue to add services.
And in contrast, it is also the case that we are able to operate in the cobot environment because of what we are not.
We're not a mall based retailers very few of our stores are attached to a more complex and most of our small footprint stores are located in strip malls worn developments with big box retailers like Walmart or target or other large food retailers that stayed open during the crisis.
This means that we're not dependent upon foot traffic at department stores, where apparel outlets for our business.
It also means that we do not have to rely on others to create a safe environment for our customers.
Finally, let's talk about Sally beauty holdings, as a company with strong cash flow and cash on the balance sheet.
In our last earnings call, we updated the investment committee on our successful efforts to increase liquidity, including increasing the size of our revolver and issuing a 300 million dollar Bob.
We also commented on our aggressive efforts to manage cash.
As you can see from todays earnings and now announcement, we delivered strong positive free cash flow for the quarter up $180 million.
This was by design.
We also continue to increase cash on our balance sheet with our quarterly books now closed we can report that we now have $839 million of cash on the balance sheet as of the end of the third quarter.
At the start of the crisis, we shifted our management focus from profit to cash and that has worked well for us our success in generating cash was driven by several keetac tactics, we deployed in response to a changing environment.
Removing unnecessary promotions limiting advertising adeptly, managing working capital and delivering against key initiatives such as negotiating rent abatements from landlords.
This is all work that the team will continue as we carry forward, but I want to emphasize that our company is an excellent liquidity position.
In closing, let me offer a few final thoughts on why we believe Sally Beauty holdings has a great opportunity to do well, it's a world managers through the ongoing pandemic and the associated economic downturn.
To begin with our categories are in high demand and our customer will sacrifice other things before she sacrifices her hair and beauty Ritchie.
Our business has been relatively recession proof and we've built a built in hedge between Sally beauty and beauty systems group.
As DIY moves to the forefront Sallie Mae benefit over beauty systems group, but we see opportunities within BSG as well with PPD growth and the potential failure or downsizing of smaller distributors.
We do not face the overhang of mall stores and the fear that consumers may have of mall crowds going forward.
In addition, our store footprints are relatively small and social distancing is relatively easy to enforce.
We are building strong digital platforms at an accelerated pace.
And let me be clear that we will continue to prioritize investments in our digital platform and new delivery service models in order to better serve our customers and drive growth into disrupted environment.
Finally, our team has aggressively pursuing our transformation, while leveraging the impact of what we have done with the restart of our continent spanning store networks with an emphasis on safety for our customers and 14.
This all means that we are well positioned to serve our customers strengthen our leadership position in professional color and grow our business. Despite the continuing impact of cobot in coming quarters.
Now I will turn it over to era to discuss our financials and our liquidity in more detail.
Thank you Chris good morning.
I would like to start my comments by thanking the Sally beauty Cosmoprof and pro dual associates in our stores around the world. There are hard work and creativity in the face of the code to challenge was and continues to be frankly in credit.
I'm going to spend my time today, providing some context on the complexity or the puts and takes that are contained within our quarterly numbers.
Let's start with revenues consolidated revenue was $705 million for the quarter now 27.7% to the prior year.
Consolidated same store sales for the quarter were down 26.6%.
Our primary revenue decreased for the quarter of course was driven by the shutdown a customer facing operations due to coated with the shutdown impacting all of April may and June.
We did lose one entire selling day, our largest business the Sally us retail business as a result of a one day total network shutdowns running the civil protests original justice.
We estimate this cost US 5 million in sales for the quarter.
We also operated 27 fewer stores during the quarter given that we have put to stop the store remodels relocations in new store openings due to covance.
Finally, we saw an unfavorable impact from foreign currency translation of approximately 30 basis points on a reported sales.
In contrast on the positive side of the equation, our global ecommerce business showed strong growth.
For the third quarter ecommerce sales were $137 million representing growth of 278% as compared to the prior year.
This growth was naval by three things are quick pivot to digital options for our customers a noticeable channel shift between stores and E. Commerce early in the quarter and a large group of new customers and our online retail channel with almost 50% of the total ecommerce customers being new to us as measured by an email address.
So that we had not previously transacted with.
As our fourth reopened our ecommerce business tapered a bit but still still showed strong growth versus the prior year with E. Commerce growth for April may and June coming in at 353%, 317% and a harder to 15% respectively.
We also saw strong consumer demand in our stores as they reopen.
The disruption from Cobot had a bigger impact on the first two months the quarter, but as our store network starting to reopen we saw outsized improvements evidenced by same store sales being down 72% in April down 90% in may but up almost 11% in June.
The U.S. and Canadian business opened stores faster than the other businesses followed by beauty systems Group, then Europe, and our Latin American business, which still has a few stores closed.
However, as June progressed, we saw significant pent up demand an opportunity from competitor disruption, particularly within beauty systems group.
BSG a business for what you have to have a professional license rights are registered with us. So almost 40000, new customers walk into our stores during the quarter, particularly in June.
Now the strong demand I'm referencing even with new customers was driven by higher overall ticket, which itself was a result of higher units per ticket and higher average unit retail notwithstanding clearance efforts offset in part by lower traffic or the case of BSG lower transaction, count, which has not to get fully recover in stores is.
Consumers react to code.
However, while store traffic is not you have recovered to pre covered levels. Our data suggests that our traffic has recovered at a much faster pace into a much higher level than other non grocery and non mass retailers, whose traffic as measured by the same system.
So as I said the start of discussion there was a complex quarter with multiple moving pieces impacting sales, but we're quite pleased with the agility with which our teams responded and in particular with June and July as a sign of potential things to comp.
Let's turn now to gross margin, which is also a complicated picture for the quarter.
Consolidated gross margin for the quarter was 45.6%, which represented a 390 basis point decrease as compare to the prior year, which landed at 49.5%.
Changes to gross margin results from the interplay of eight factors for which are positive and for which are negative.
On the positive side of the house.
The combination of based price and fewer promotions drove gross margin up by more than 500 basis points.
This increase was a result of relatively stable base price points across categories combined with positive mix shifts towards higher margin categories like hair color and PPD in the quarter as well is vastly reduced promotions across all businesses.
We also saw some slight piano geography benefit to gross margin, resulting from our business over indexing on E commerce during the quarter.
However, because we were not promoting heavily and we were buying this inventory. We also recognize less vendor income in gross margin, which offset about half of the increase I just called out leaving our gross margin before clearance actions hovering around 50% to 52.4% still a very respectable increase over last year.
Somewhat uniquely for the third quarter. We also had three different types of clearance actions, which impacted our results.
First in the absence of other promotions and service of our intentional inventory reduction efforts to maximize cash and reset our inventory position.
We ran aggressive clearance sales within our beauty systems group in Sally beauty U.S. in Canada the network.
These clarence efforts on goods, which sold through during the quarter impacting gross margin by 280 basis points.
Had we stop there our gross margin would have been roughly equivalent to last year.
However, it seems elected to take what I'm, referring to as more aggressive Clarence actions.
We wrote off and destroyed aged inventory in Europe and recognize the loss on private label product componentry at key suppliers for our retail businesses as part of executing transitions to lower cost suppliers in our own brand portfolio.
In addition, after driving our inventory down over the course, the quarter and running those percentage our clearance sales I referenced earlier, we still had a pool of inventory largely and retail stores that had an optimal.
Rather than hold that inventory for further percentage off clearance actions in the future. Our merchandising teams took further more aggressive clarence actions and mark that inventory down permanently in our systems.
As a result, we incurred cost loss accounting charge on that inventory, even though it has not yet soul.
This effort is all part of our merchandising transformation, including a resetting the inventory baseline reestablishing key retail fundamentals such as robust open to buy process and having a defined cadence and depth of discounts on clearance inventory. So that we have our exit plan in place reproductive items before we make the inventory purchases from Ben.
Yes.
The combination of the inventory destruction to write off and the cost loss cost loss write off equated to a 390 basis point reduction on gross margin, putting us at the reported 45.6% for the quarter.
Well the final gross margin number for the quarter is below historical levels I want to emphasize that these actions in the third quarter were the right thing to do for the business and set us up for better execution delivering the gross margin line going forward. Because we took these actions in Q3, our chief merchant Cameco and does not anticipate the need for further more aggressive.
The clearance activity in the fourth quarter.
Selling general and administration expenses were good news story for us.
DNA decreased by 45 $45.6 million or 12.7% versus the prior year.
Primarily driven by aggressive cost controls that were slightly offset by $8.8 million of Kobin Nike related personnel expenses as part of the company's furloughs earlier in the quarter.
As a percent percentage of sales as today was 44.6% compared to 36.9% in prior year due entirely to the deleveraging impact from lost sales and the more personal and the higher personnel expenses related to cup is furloughs.
GAAP operating earnings and operating margin in the third quarter were $1.4 million, and 0.2%, respectively compared to 120.1 million and 12.3% respectively in the prior year.
After excluding charges related the company's covered 19, furlough expenses and restructuring charges for fresh mission efforts in both years adjusted operating earnings as adjusted operating margin were $16 million in 2.3%, respectively compared to 122 million 12, 12.5% respectively in the prior year.
GAAP diluted earnings per share in the third quarter were a loss of 21 cents as compared to a profit of 59 cents in the prior year largely due to lost sales from the shutdown of public facing operations in stores across the globe, Andy aggressive inventory clearance actions impacting gross margin I should know.
Note that the noncash inventory write offs.
Itself was the equivalent of approximately 17 cents vps.
These headwinds were partially offset by aggressive cost cutting and ask DNA and lower income tax expense.
Adjusted diluted earnings per share were a loss of 11 cents in the third quarter compared to a profit 60 cents in the prior year.
In the third quarter. The company had a net loss of $23.5 million compared to net earnings of 71.2 million of the prior year.
Adjusted EBITDA was 73.3 million in the quarter compared to 151 million prior year.
Consistent with prior reporting adjusted EBITDA includes add backs for charges related to share based compensation restructuring costs and could not seen expenses really the furloughs.
In addition, this quarter included add backs for the noncash write down of inventory of play 7.1 million and.
And the modest impairment charge not including were struck not included restructuring a point 9 million.
Let's turn to segment performance.
The global Sally Beauty segment generated revenue of $415.5 million in the quarter, a decrease of 27.7 per cent compared to the prior year driven primarily by the decline in same store sales from the impact of Coven 1914, fewer stores and an unfavorable foreign exchange impact of approximately 40 basis points.
Segment same store sales decreased by 25.9% for the full quarter. However, similar to our consolidated same store sales.
As our store network reopened we saw sequential improvement over the quarter with same store sales down 67.3% in April 16.1 in may, but almost 5% in June driven by the us and Canadian business, which delivered same store sales of up 10.2% in June.
Our Sally U.S. and Canadian ecommerce business experienced tremendous growth as the store network shutdown and remains strong despite stores reopening later in the quarter as we mentioned earlier part of the growth was driven by new customers finding Sally beauty for the first time.
Sally Western Canada delivered ecommerce revenue growth of 555% for the entire third quarter with growth rates for April may and June of 872%, 585% and 200% respectively.
Gross margin for the accounting segment was 48.7% in the quarter down 710 basis points compared to the prior year driven by the positive and negative factors I described earlier.
Segment operating earnings were $3.1 million in the quarter, a decrease of 96.8% compared to the prior year driven primarily by lost sales from the impact of Tokenizing and the decline in gross margin related to clean the cleanup and clearance inventory, but partially offset by lower has seen a expenses from aggressive cost controls.
Segment operating margin declined 2.7% compared to 16.7% in the prior year.
Now beauty systems group.
Net sales for the segment were 289.8 million in the quarter, a decrease of 27.6% compared to prior year, driven primarily by the impact of Kobin Nineteena same store sales and our full service business.
Certain fewer stores and an unfavorable impact from foreign currency translation of approximately 20 basis points.
Segment same store sales decreased by 27.9% for the full third quarter.
Similar to the Sally segment as our via store as our BSP stores started to reopen throughout the quarter. We saw sequential improvements as same store sales were down 81.5% in April down 25.4% in may but up 23.1% in June.
Due to strong demand from stylists and slots in the pro channel.
Additionally, BSG is ecommerce platform grew by 158% for the third quarter, driven by strong and consistent demand throughout the quarter.
BSG is gross margin was 41.2% of the quarter, an increase of 90 basis points compared to the prior year with the combination of both dramatically fewer promotions and the positive TNL geography, resulting from customer channel shift from stores the full service to our E com business.
Which were only partially offset by the clearance activity is as I described earlier.
Segment operating earnings for B, if you were $40.1 million decreased 34.9% versus the prior year driven primarily by lost sales from the impact of code 19, partially offset by higher gross margin in a decrease in SDMA expenses related to the aggressive cost control implement as we pivoted to a focus on cash and liquidity.
Segment operating margin declined by 160 basis points to 13.8%.
Well, it's kind of that cash liquidity.
During the third quarter the company generated a whopping 198 million of cash flow from operations, an increase of 112% versus the prior year.
Payments for capital expenditures in the quarter totaled $18 million, reflecting the fact that while we had initially dial back capital spending for the quarter. We quickly realized that we could both manage the impact of coated grow cash and continue to invest against our business transformation.
This allowed us to complete the rollout of our point of sale system to all Sally Beauty systems group stores in the us in Canada.
Continue our investments in our ecommerce platforms.
Restart our JV in North, Texas distribution Center efforts.
And do the work to launch our private label credit card program at both BSG in Sally which is now in test market.
Free cash flow was $180 million in the quarter, which was up 146% as compared to the prior year.
The company did not retire any debt repurchase any shares during the quarter at the end of the third quarter of the outstanding balance on our recently Upsized $600 million revolver was $375.5 million and included a separate fly low load fully funded at $20 million.
As previously disclosed we did execute a 300 million dollar senior secured note offering back in April and receive proceeds of approximately $295 million, none of which has been spent.
So what I want to take away from this is the company has significant liquid.
We've not fully broader upsized revolver.
We have not met the proceeds of the April secured notes it.
We have aggressively manage cash spend and generation within the business. We have proven that we can dramatically reduce cash burn when necessary.
All in all we are in a good place for liquid.
The company's leverage ratio was 4.81 time quarter of course, we also had 839 million in cash and the balance sheet.
With the uncertainty still throughout encode.
Especially with trends and California, Texas, and Florida, we're sticking with our position of not providing full year fiscal 2020 guidance at this time.
However, I will are few some forward looking perspective on Q4 that may be helpful. As you think about our business.
We will continue to focus on safety for both our teams as our customers and are tracking developments in mass retail.
Demand was strong in June and has been strong in July.
We anticipate mid single digit positive same store sale Comscore beauty systems group, Sally Beauty us the Canada and sell Europe for July the first month of our fourth quarter.
This is the result of all the factors the Chris highlighted earlier.
Of course, we cannot predict how demand will play out in August and September but believe that we have created the right options to service because customer needs and that we may benefit from shifts between our businesses depending on circumstances.
I should note that absent absent a significant change in the current situation, we will not be providing separate July August or September updates and we'll next report in early November four full quarterly results.
During the fourth quarter, we anticipate that gross margin will be at least in line if not exceeding historical levels as the business benefits from its much more modest promotional structure versus prior year.
Cash and liquidity will continue to be a strong focus across the global operations. While we are investing in inventory to catch up with the strong sales we experienced in June and the demand in July.
Maximizing cash remains at the top of our priority list and we will continue to carefully monitor our investments to maintain our flexibility and our strong cash position.
While we hope to avoid store shutdowns at the state or local level due to co business. We have we have proven that we have the agility to act rapidly increased cross channel options for consumers.
To this end, we will benefit from our continued refinements and investments in our new service models and digital capabilities, including surplus FSIC curbside pickup ship from store at Sally insight to deliver it BSG, we expect to see continued digital growth.
Moderated levels as we have our store fleet entirely open and as our consumers respond to a new cobot normal.
We have completed the first phase where a detailed for clean analysis.
Of our detailed store fleet analysis with into Lititz, while the results confirm our hypothesis that our fleet is a strategic assets and then we have the opportunity to drive profitable sales growth by adding to the fleet in conjunction with digital growth. The results also confirmed our internal analysis that we have a number of lower return stores to close and we will we will.
Act on approximately 50 of those stores during Q4, including 23 of our 29 clearance stores, which has sort of their purpose.
And we will continue to invest in our ongoing transformation plan.
Notably we are quickly approaching issuing the first purchase orders for inventory for our new North, Texas facility and expect to take receipts and start servicing a limited number of customers by the end of our fourth quarter.
Finally, let me address capital allocation.
As I have just alluded to we will continue to invest against our business.
With respect to our large cash balance for the foreseeable future, we intend to hold cash on the balance sheet as we see how coven 19 plays out at the end of this calendar year. We will further consider options. So for the moment expect to see us full cash and to see the increased interest expense that comes with it.
Thank you for your time. This morning, now I would like to turn the call back over to the operator for Kristen I'd take your questions.
Thank you and ladies and gentlemen, if you wish to ask a question. Please press one and then he world on your Touchtone phone you had tone, indicating that you had been great tasting Q once again for any questions or comments press, one and then zero on your Touchtone phone.
And our first question will come from the line of Rupesh Parikh with Oppenheimer.
And your line is helping.
Good morning, Thanks for taking my question and congrats on that enter the.
Endemic so far I'm I guess first just on gross margin, but on the gross margin I'm sorry. That's helpful. The color you gave for Q4 of US just hoping you could probably more clarity in terms of the puts and takes you see in Q4 and I'm really interested on the E commerce sites for other retailers ecommerce within a negative to gross margins, but I think you guys actually called a favorable impact so lucky as I understand.
The dynamics with ecommerce as well.
I think your question is how are we thinking about gross margin for Q4, if I'm that's carrier.
And in particular on E Commerce, and what I can tell you is as we are benefiting from all the actions that we took in Q3.
As we carry into Q4, our promotional environment isn't changing dramatically and that we are in contrast for prior years running much meant.
Far fewer promotions than we have historically in the consumer has still been totally up to buy and so we've learned from that and Thats true across both the E com business and these store platform.
We're also benefiting from the actions that we took in Q3 and as you heard me alluded to in the comment in my comments, our merchandising teams do not expect further more aggressive clearance action in Q4. The way we did in Q3 in part because we took the action in one fell swoop in Q3.
So we're feeling pretty good about our gross margin opportunity in Q4, and I guess I would I would add as well you also heard me allude to the fact that we are buying into inventory being very careful about it we're buying into it and as we buy into it as well that will offset some of the diminished in gross margin we saw around vendor allow.
To the vendor income.
Okay, then I would just on E. Commerce, I think you mentioned that the positive for gross margins. If you can explain why I guess for other retailers gross margins breach related to Congress I've been negative negative impact I was just what I can tell us more thought about I guess, a couple of thoughts right as we look at the business setting aside.
Shipping costs were second right. If you said if you set that aside your pricing tends to be consistent across both stores and E com.
Last majority of of items.
And the TNL is burdened by some additional marketing, which hits SDMA, it's burden by some additional.
Distribution costs as well, but the only real difference for US is the cost of shipping and given during the quarter, what we did around minimum caught minimum free shipping threshold.
And our.
Efforts to get the goods to the consumer as fast as possible, while we saw some higher costs and higher variable cost next few nay tied to that shipping costs. It didnt hit gross margin and Weve and just given the how rpls starts we don't expect it to hit gross margin in.
Q4, if anything it's a modest positive to gross margin because with the way. Our accounts are set up we take some of those costs next year that now I would observe that ecommerce for us grew exponentially in the quarter and we are really pleased with the effort with the results of quick pivot the best of the future the crew.
Refers to in that respect we have more work work to do but we also do believe that by enabling our continent spanning store network to be distribution points to our consumers that we'll be able to deliver increased feed at lower cost because of course, we don't have to add to the late.
Hello.
Labor hours to service the orders that go to our stores that is effectively sunk labor cost already that were just better optimizing so it's improving our economics in store as wells with E com.
Okay, Great and then just one quick follow up question. So just on geographical performance. So if you look at March like Florida, California, Texas.
When you when you tend to see the spikes and.
Open infections.
Any color you can shares in terms of what you end up seeing in your business I.
I guess and especially in these markets given the recent spikes.
Yes, no refresh if it's something we deal with and what we expect we're going to continue to deal with when you first get the Spike you tend to get a period, where consumers are more cautious about going out.
And that can last for a couple of weeks or so and then it seems like it begins to rebound some but yes. There is a consumer reaction when the spikes occur we see it and reduced traffic in Sally or reduce transactions and BSG and then it tends to normalize after awhile.
One thing which has been.
Interesting to watch and react to patches.
With the different parts of the country being in different states relative to reaction to covert Dan.
No restrictions et cetera.
We see.
Slowing traffic in Texas in many times for instance, and many times, it's offset by increasing traffic in.
New York.
Right and so we are we are managing the portfolio on a metro by Metro state by state basis, and the aggregation of the puts and takes for.
The end of Q3 and certainly July this you heard me reference twice in the script.
Has been positive notwithstanding.
Some concerning trends in particular parts in the country.
Okay, great. Thank you.
Yes, Thanks your best.
Thank you. Our next question comes from the line Mark Altschwager with Baird. Your line is open.
Good morning, everyone and thanks for taking my question.
Nice job managing through these challenging times.
I want to date to start off Im just asking us today with stores reopened how should we be thinking about the normalized SGN a run rate from here and I'm wondering if you anticipate any catch up spending as you shift from the.
Aggressive cash management back to your broader transformation agenda.
Markets a great question, we are being incredibly careful right. We had already been in the process of optimizing our labor hour.
Investments before Covance.
And then as part of bringing the network backup we've been very careful to focus on.
Number of people in the stores.
Focusing on our power hours as well as.
When when do we need to be open and so while parts of our fleet is back at.
Pretty coded hours for instance, right.
That does not true for other parts the fleet as we are testing.
Where where we are the consumers coming out when do we need be open and what's the return on the labor hours that we're allocating and I offer that as an example, because it helped to drive the decline in absolute SGN $8 that we that we saw it was 44 $45 million I believe.
Now.
And we expect to continue to keep very careful control over ish DNA.
As we carry forward.
That's very helpful. Thank you and then just wanted to follow up related to just topline trends. So I'm curious as salons reopened are you seeing any weighting of the DIY trend.
Just how sustainable is bad and then separately but related the.
Yes G bigger picture do you think Kogut has impacted the growth potential of the professional industry moving forward.
Whether that be a permanent shifted yet why or an accelerated shift boots ratchet just any bigger picture comments and how you're thinking about the industry outlook. Thanks, well Mark why don't I take the first second question now I'll turn it over to Aaron that kind of talk about some of the DIY trends we're seeing.
Hi, I listen I do believe that.
We don't know yet theres going to be a lot of puts and takes in the salon industry here as we call out there there are areas of the country like California, where salons still can't operator or have been forced to shut down again.
We also are seeing lots of disruption with some of our competitors and supply situations and of course, there's new categories like PB that we're selling that have grown significantly as a percentage of the spend of stylist.
There are salons that will go out of business, but that doesn't mean the demand goes away in many cases those Milan those stylus. So on the other salons are they become both renters are suite renters and they still buy from us. So what I would say is I think.
It's not it's hard to predict where this will all settle out there will be a lot of puts and takes.
We think we're better positioned than most but I think it's going to be.
Where it takes some time before we really fully understand how demand shakes out in the pro chat and then the pro channel and asked for DIY and on the retail side of the house, we're really pleased with.
Both the consumer.
Desire to go DIY.
And.
How there how they're shopping at our stores.
And there is an incredible of creativity evolved crystal call out earlier the growth in the vivid color category, which is which has been across.
Virtually every brand we offer in vivid color.
And we see that increasingly nails as well.
And.
From the enterprise perspective, we have the good news of BSG is up in performing well against its competitive set.
Supporting the stylist and those that aren't going to their stylists and there are many of them still are coming to Sally although I should also point out that Sally.
Somewhere between 15 and 20% of its sales are also to professionals and so as soon as salons potentially breakup as stylists go on their own and go to be issue or they can come to Sally and is driven in part by convenience. So the fact that we have the nationwide network of stores that we do and the new ecommerce options I think is good news for the.
The enterprise, whether its BSG or Sally servicing the pro.
Great. Thanks for all the detail.
Thanks, Martin Keith.
Our next question comes from the line Oliver Chen with Collyn and your line is open.
Thanks quarters. Thank you regarding the clearance activities and the strategy. There why was it the right time now and as you look forward what are the biggest changes in the assortment and how that may apply to how you sort the stores execution and pricing good better best.
We are also curious about going forward.
We expect the BSG trends to outpace Sally in terms of modeling and what you're seeing with that customer dynamic. Thank you.
Well why do I take that last one and then I'll turn it over to err on the gross margin side I.
I think we don't know.
We don't know how this is all going to sort out.
We do feel that both businesses are performing well right now we'll see we'll see how that we think the DIY trend is one that's very much tied to a consumer trend that will last.
But we don't know how how the competitive market in the pro channel will settle out and how much the economic impact of the virus will impact salon demand. So that part I think is one of the reasons why we want to continue to to be cautious and stay focused on serving our customers focused on conserving cash.
Cash and focused on driving our digital agenda.
To make sure we're doing the right things for our customers long term.
But.
The DIY trying to certainly strong and we'll see how the compare the pro channel settles out over the next few months on gross margin sure three observations.
The first is the key mine that I'd like a lot of retailers. We are at a six year low at our inventory base and that was that is driven by the aggressiveness that we applied in the face the crisis to turn off the spigot. If you will be rental relentlessly focused on making all.
Sorry, wherever it may be available to consumers through the commerce options, if they weren't able to come.
To the stores so part of managing our inventory. So aggressively also meant that we had a.
Ringside seat to.
Consumer behavior, and we got insights that we were not did not have as much visibility to before particularly around switching.
As we brought our inventory down if the consumer was willing to switch and we saw a lot of switching over the over the course of other quarter that gave us better insight into the value of various categories are various skews. If you will that we still hasnt changed on the shelf what they weren't switching to certain parts of the business. It was.
The resulting from the observation of.
Consumer reaction to the assortment, we had there and then that visibility the second thing going on was of course.
We are in the midst of merchandising transformation that we've talked about a number of times in the past and having put in place during the quarter interfaces or anything else going on a much more rigorous open to buy process much better collaboration between the stores organizations. The merchandising organization DNA supply chain et cetera. So now is the time for us.
To reset the base line.
As as we carry forward and lastly, I would just say, it's just focus on what sells and where can we drive the profitability. We did take a write off on some private label Componentry that was frankly driven by the fact that we set as we look to maximize our cash in that maximize our operating income now with the time to switch those.
Suppliers switch to new lower cost suppliers.
And as a result, when you do that sometimes you're left with componentry do you have to deal with and so we chose to write it off in the quarter.
Thank you and you've done a great job managing promotions.
This quarter and during this time, what are you seeing with competition, such as Amazon and others that have.
That are more broad line retailers like target in Walmart in terms of their online businesses and how the overall environment looks and your ability to compete thank you.
I Wonder I do think in general it's been a less promotional environment up to and I don't know how that all progress we assume that will slowly work its way back in.
Perhaps not the previous levels I think the more important thing to focus on is what is the customer walk right now right and they want multiple delivery service models. They want to make sure your stores are safe and that they feel safe and your stores interacting with your your associates.
And they want to make sure that.
You have the products in the expertise they want as they pursue new things like DIY. So we're very much more focused on that and leveraging our expertise and our strengthen these core categories and so I think.
Youre going to QCS continue to try and whittle down or or keep below the promotional.
Pick cadence.
As we go forward and focus more on that Aaron out if you want to add Theres no escaping the fact that many of our competitors, particularly in mass continued to be much more promotional than we are much more promotional.
And we have made we have taken the strategic approach that with the differentiation we provide in our assortment with the differentiation we provide.
With the advice historic etcetera.
That the consumer will continue to purchase with us even in the absence of abroad promotional calendar. So if you compare year on year Q3 to Q4, and I would observe coming Q4 versus Q4 last year, our promotional cadence is much smaller than it was previously that's intentional honest strategy, Italy.
True in stores with a truly commerce because I go back to we're using the benefit of Q of Q3 to reset our operations and our number of ways and Thats wonderful.
Thank you very helpful Best regards.
Thank you.
Next question comes from the line of Steph Wissink with Jefferies. Your line is open.
Thanks.
Good morning follow up question. Good morning, I wanted just to close the loop on repressions earlier question I think his questions. One we're getting as well, which is this concept of margin comparability across channels. Im wondering if you can just take us.
Through to the operating margin level I think Aaron you mentioned, some higher marketing and higher shipping I'm at the DNA line, but how does the operating margin compare across channels and then one follow up on your inventory efficiency.
Sure. It would we don't disclose the channels. So I'm not going to provide you with the number is fair to say that the operating margin on ecommerce is of course lower than the operating margin on stores because of the delivery costs.
Okay. That's helpful. And then Chris you talked a lot about kind of inventory as an agenda and that it strikes me that would be commerce, you may need fewer weeks of supply to begin with and then all the omnichannel initiatives really creates more dynamic to them out of inventory as an asset. So can you talk a little bit about your system, how you see your inventory.
If we may be able to see some improvement in working capital as a contributor to free cash flow going forward from both a channel mix, but also just a hyper focus on inventory efficiency.
Yes, and I think Theres a lot of puts and takes there right. So as Aaron alluded to we're changing our open to buy process and putting in a much more professional process there.
We're thinking much harder about SK, you productivity and making sure. We're only buying the skews that are really going to turn in our stores and online.
Where obviously.
Managing our promotional cadence differently. So we don't have quite the surges in demand and ups and downs in demand. So there's a lot of things changing which I do believe over time should allow us to continue to improve our our overall working capital efficiency, but there's a lot of puts and takes there. It's not just one thing. It's a it's a lot of composed even the JT a process that.
Our Texas will be part of that as well over time. So if you want to build on that but in my mind I think were that this is all the pieces, we're working on and there's a lot of work left to go teams continue to be aggressive it looking across every element of working capital and we're going to reinforce what Chris said, we're just going to have to further dials everyday to make sure that we.
The right level of inventories in support of the demand, but we remain very careful about it.
Just on recently that if you walk into store in CA gap on shelf for a period of time, that's probably intentional because we're being very careful to ramp our inventory up consistent with sales while maximizing our cash for the number one priority as we as we look at the future of code for the next few months.
Thank you.
You bet.
Thank you.
Next question will come from the line Joe Altobello. Please state your company in your question.
Hey, Good morning, guys. This is Adam on for Joe I.
I was just curious from more of a housekeeping standpoint looking at it appears that EPS included that 27 million in noncash inventory write down or what the 17 cents that you mentioned.
But even it seems to back the number out is there any reason for this given seems to be obviously nonrecurring.
And then was the charge of on the salary or the BSG side. Thank you.
Well look.
We are remaining loyal to our reporting practices on EBIT EBITDA and so we did adjust out at 27 million dollar noncash charge.
Two.
The inventory for which we took a cost loss accounting charge right. So that is that is consistent with our historical practice. There and then remind me. The first for the question was well that was it out was the 27 million adjust for that right, yes, but thats, where we report and we view it as cash when we're going to take it out.
Got you, Okay, that's right ticket and then if possible.
I know you guys may not break it out you gave a lot of good detail on ecommerce is particularly in cadence by month.
But is it possible.
You guys could share how brick and mortar comps looked in June and maybe how much ecommerce, particularly contributed to that plus 11% for the month.
We were pie all I can tell you is we were positive comp.
Both E com and.
Mark and more.
In all of.
BSG, Sal USA, and Canada and Europe.
That's very helpful and if I could ask one more question I was curious if you can provide some additional color on on a Sally international both for US both for Q O Q3, and maybe for just more recently in terms of trends and.
Things are picking up a little bit in July versus versus the third quarter. Thank you, yes, yes. So the European business did open at a slower pace, especially specifically in the UK.
We're seeing good strong demand there as it opens but it did open later in the quarter and as a result of that it didnt have a strong of a month, obviously as we did in the U.S., where we got our stores opened faster and Latin America as trailed Europe and is still have some stores closed although they are slowly reopening both in Mexico and in South America.
So there are there trailing by a little bit, but we fully expect I'll get up and running here in the in the coming months.
Great Thats really helpful. Good luck, thanks, a lot guys.
And with that I'd like to thank everybody for their questions today.
If I could summarize we executed exceptionally well during a disrupted third quarter. The team aggressively managed costs and cash drove an accelerated pivot to support digital growth and scale, our key digital transformation initiatives.
And we reopened the store network faster than competitors.
Because of the speed and agility of our team we are well positioned to take advantage of emerging customer trends and gained share in a disruptive environment.
As we enter the fourth quarter, we will continue to invest in our digital transformation take advantage of the strong demand for our key categories and adapt quickly to any new local restrictions or changes in consumer shopping behavior tied to the pandemic and of course, we will stay disciplined in terms of cost and cash may.
Management.
Thank you for joining us today.
Thank you and ladies and gentlemen that does conclude your conference call for today. Thank you for your participation in fees in 18 T. <unk> executive teleconference you.
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