Q4 2020 Sally Beauty Holdings Inc Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to the Sally Beauty Holdings fourth quarter Conference call. 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.
If you need assistance during the call today Press Star and then zero and an operator will assist you.
Offline and as a reminder, today's conference call is being recorded.
I would now like to turn the conference over to Mr., Jeff Harkins. Please go ahead.
Thank you good morning, everyone welcome to the Sally Beauty Holdings fourth quarter earnings conference call before.
Before we begin I'd like to remind everyone that we are.
Made a presentation available for today's call that can be viewed from the lake provided our earnings press release from this morning.
For our Investor site at Sally Beauty Holdings Dotcom Investor Relations.
I would also like to remind you that certain comments, including matters, such as forecasted financial information contracts of business.
And trend information made during this call may contain forward looking statements within the meaning of section 27, a of the Securities Act of 933 as amended and section 21 E of the Securities Exchange Act of 934 as amended.
Many of these forward looking statements can be identified by the use of words.
And it is believe projects expects can may estimate should plan target and Ted could will would anticipate potential confident 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.
Patients.
Those factors are described in Sally Beauty holdings filings with the Securities and 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 explanation and reconciliations of.
Adjusting items and non-GAAP financial measures in its earnings press release and on its website.
With me on the call today are Chris Brickman, President and Chief Executive Officer, Aaron Hall, President of Sally Beauty supply and Chief Financial Officer, and Marlow Korea, Senior Vice President of Finance and Chief accounting.
The officer.
Chris will start by offering some thoughts on our very respectable fourth quarter.
He will also touch on our thoughts about the current economic environment and our outlook on fiscal year 2021.
And finished with our focus our key focus and investments in fiscal year 2021, as we move towards the completion of our transformation plan.
So Dan will then discuss our fourth quarter and full year financial results touch on our cash liquidity and also provide some perspective on fiscal year 2021.
Finally, Chris Aaron Marlow, and I will be available to answer your questions now.
Now I'd like to turn the call over to Chris.
Thank you, Jeff and good.
Good morning, everyone.
I want to start by thanking all of our SBH team members across the globe, whose dedication and hard work helped us deliver a great fourth quarter.
Your efforts to turn this into an agile operator with real strength in both digital digital and physical retail.
And you have set us up well for the future.
I could not be more proud of our team and what they accomplished in spite of the countless challenges we experienced in fiscal year 2020.
During our last earnings call, we discussed the nimbleness and agility displayed by our teams associates during the third quarter.
As our business responded to store closures and consumer uncertainty our tree our teams quickly pivoted to launch new ecommerce capabilities and service models.
In June we saw strong sales as a majority of our stores reopened.
As we move into July and the fourth quarter we.
Good to see strong sales with the business normalized.
Of course, the environment continued to evolve around us as exemplified by California, shutting down salons in many counties for parts of July and August.
All in we deliver enterprise positive same store sales of one point.
3% with strength in retail helping to compensate for soft, but still positive same store sales in the wholesale business.
Here are some of the key highlights regarding regarding our fourth quarter.
Our Sally beauty retail business in the USA and Canada delivered same store sales growth.
3.7% for the quarter.
We saw continued strength in our core category of hair color, where we continued to gain share in the retail and pro channel.
For the fourth quarter hair color was up over 22% in Sally beauty to us and Canadian retail business with unit growth.
And increase that you are.
We also saw strength in the nail category for Sally beauty to us and Canadian retail business, which was up 11%.
We continue to see solid strength and growth in our global E Commerce business.
We delivered the highest gross margin and.
In SBH history, driven primarily by the us and Canadian retail business and our strategy of fewer deeper bigger promotions.
We grew adjusted EPS over the prior year by 9%.
We ended the quarter with less debt and a strong balance sheet.
We continued our focus on cost controls cash management and liquidity and generated over 131 million in free cash flow.
Operationally, we also continued to invest in our business and launched new programs.
Following our fast launch of ship from store.
And same day delivery in Q3, we launched the buy online pickup in store at Sally beauty and it will reach all us stores nationwide within a few weeks.
We completed the national rollout of our new private label rewards credit card program to both Sally and BSG customers in the U.S.
Hi, Pat.
In just the first month, we had approvals for over 80000, new card members with a slight weighting to the professional stylists over the retail consumer.
We launched the second initiative cultivate which offers financial support product distribution and Mentorship for female.
Beauty brands.
We executed a number of small acquisitions on the BSG side, gaining brand distribution rights, a small number of stores and new customers. We expanded our ship from store capabilities to 2400 stores in the us and nine provinces in Canada.
And we successfully.
Last our new North, Texas distribution center into service in August.
Now, let's turn to our thoughts on the current economic environment and our outlook for next year.
Looking ahead to fiscal 2021.
We will have to remain agile as our consumers continue to deal with the impact of Cove at 19.
While our business is certainly defensive and more resilient than many retail peers, we expect an increased level of volatility, particularly in the first half of the year of the year.
Regardless of Cove in 19, we remain confident in the direction. We are headed the investments we have made in our trends.
Information plan over the past few years and the resiliency of our categories.
As we stated on our last earnings call. We feel we are well positioned to handle the uncertainty in the near term due to three key factors.
First our businesses are on trend.
The Sally beauty business is the industry.
Three liter and professional color for home use and is perfectly aligned with the increasing DIY Trey.
Our customers can find all of their needs solutions or products for hair nail and skin either online or in our stores addition.
Additionally, they can find how to content on our digital sites starting with her.
Our one on one all the way through more complex application techniques.
Alternatively, a consumer can talk to a Sally associate at a store who has been trained in hair color.
We plan to retain and build on the new customers, who have discovered us as they experiment with DIY hair and nails and try.
Our new exciting colors.
And we are ready to serve our traditional customers with more convenient service options as they become increasingly comfortable with returning to stores over time.
On the BSG side, while the salon business seems to be recovering more slowly.
We are the industry leader.
Ryan in stylist safety with our large assortment of PB, including hand, sanitizer Barber side loves masks and case.
In addition, we have added more convenience that we have more convenient store locations more DSC is that are now digitally enabled and many of which are now trained and certified.
In salons safety protocols.
And now we offer improved delivery service options to ensure we are convenient and safe for our professional customers.
We will continue to build on this leadership position.
Second we have the ability to operate effectively in an environment that will continue to be impacted.
Her COVID-19.
Customers and team members can feel confident in our stores, which have instituted the protocols required to operate safely.
We have proven that we can rapidly evolve our service model to provide our customers with more choice on how they interact with us and more access to our inventory chain wide.
Third.
Third we are sitting in an excellent liquidity position with strong cash flow and cash on the balance sheet.
Aaron will discuss this more during his remarks.
Finally, I will spend a few minutes talking about the key projects and investments that we will focus on in fiscal year 2021.
First we will continue.
I do our digital transformation.
By optimizing the guest experience and service offers offerings such as BYOD line pick up in store, which is rolling out across all Sally stores in the us in November and optimizing the impact of digital to the income statement by addressing addressing operating changes, which will lead to cost savings.
We will also re platform the BSG digital experience focused firmly on the pro and add further fulfillment options for BSG in the second half of fiscal year 2021.
Second now that we have completed the rollout of our private label rewards credit card program in the US we will be intensely focused.
On growing and optimizing the portfolio and program.
On the Sally side, the program will enhance the existing Sally beauty rewards loyalty program by adding additional reward points to the customer spend.
Additionally, the Sally E. Commerce site is already set up to provide instant credit for online applications.
And accessibility to shop with their card online.
On the BSD side card benefits include an additional 3% discount on purchases and adds better flexibility for stylists have pros to manage their cash flow and business.
Through benchmark data, we know that private label credit card holders typically spend more.
The transaction as well as having better retention rates.
Therefore, our focus will be on driving activations, while increasing basket size and share of wallet.
This also translates to PNM benefits related to interchange relief from traditional bank cards, as well as adding royalties from new account openings.
Third as a significant part of our company history growth and current assortment. Our Sally Beauty Division is partnered with over 25 Black owned brands in our current textured hair category.
In fiscal year 2021, we have committed to growing these successful partnerships and expanding our offering.
During two additional black owned brands across both the Sally beauty and BSD businesses.
For now that we have J.D.A.R., new merchandising and supply chain platform and our new North, Texas distribution Center, both up and live on a limited scale, our focus will be on expanding both of these initiatives.
Once fully rolled out JT will improve product assortment by store location improve out of stocks and greatly improved visibility and forecasting of inventory.
Once fully functional the north, Texas DC will be our first distribution center that services all channels for both business segments and will deliver the benefits of it.
Increased speed to market lower operating costs and will reduce the demand on our other dcs in our network.
In summary, while we continue to operate in an uncertain environment.
At Sally Beauty Holdings, we believe we are a stronger company with even greater ability to deliver long term sustainable growth.
Driven by our enhanced capabilities and how we connect with our customers digitally through our loyalty and credit card programs and expanded differentiated offerings, our enhanced infrastructure and omnichannel capabilities and increased talent base all of which are supported by a strong balance sheet and cash flow.
The body.
Climb the challenges we faced in 2020 has simply made us better.
They pushed us to accelerate our digital transformation to simplify and focus our business strategy and build a team that is prepared to win in a transformed retail environment.
Now I will turn it over to Aaron to discuss our finance.
Actual results and our liquidity in more detail.
Thank you, Chris and good morning I am.
I'm delighted to be here to talk about the great work that the Sally beauty pro dual and beauty systems group teams accomplished during the fourth quarter.
Consolidated same store sales went up they increased by 1.3% consolidated.
Revenue was $958 million for the quarter, a decrease of less than 1% of the prior year.
The increase in same store sales led by our Sally beauty us and Canadian retail business was offset by Copel nineteens modest impact on parts of our beauty systems group business during the quarter and a smaller store base with 23 fewer.
However, as compared to the prior year.
Finally, we saw favorable impact from foreign currency translation of approximately 20 basis points our reported sales.
During the quarter brick and mortar traffic was choppy and was down to the prior year due to the lingering impact of COVID-19, but average basket remained up due to an increase in unit.
Mr per transactions and an increase in average unit retail, which happened alongside an increase in units in our core differentiated category of hair color.
As expected customers are generally making fewer trips, but buying more when they do come in and shop. In contrast, we did see increased traffic to our digital channels.
At the start of the quarter, even with the vast majority of our store network back open our global ecommerce business grew rapidly for the fourth quarter E. Commerce sales were $63 million representing growth of 69% over the prior year led by our sell us and Canadian ecommerce platform, which delivered growth of over 113%.
Last quarter, we mentioned that during the peak of the Coke prices, we had new ecommerce customers in our online us retail channel that had signed up for Sally beauty rewards loyalty program retaining these new customers is obviously, a key focus for us and in the fourth quarter, we saw repeat purchases from approximately 60% of that new customer group.
Similarly.
Last quarter, we sell opportunity from competitor disruption in the pro channel, where BSG style 40000, new hair color customers walk into our stores during the quarter during the fourth quarter, we saw recur repeat purchases from approximately 50% of those new customers.
Let's turn now to gross margin, which is a simple story it when.
Up dramatically since.
Consolidated gross margin for the quarter was 51.1%, which is the highest gross margin rate at least eight years.
This represented 150 basis point increase as compared to the prior year. The improvement was expected and is a signal of our increasing retail fundamental capabilities. It was driven primarily.
Early buy better coordination and execution of fewer promotions fuel promotions across all businesses and intentional positive mix shift towards higher margin categories like hair color in the quarter, but partially offset by a reduction in vendor allowances from fewer promotions and reduced inventory purchases.
Consolidated gross profit for the fourth quarter was 489 point.
I'd $1 million, an increase of approximately $10 million from the prior year.
As a percentage of sales selling general and administrative expenses were 38.3% compared to 47.7% in the prior year, driven primarily by higher ecommerce delivery expenses, which were expected and are something that were working speedily.
Upon continued transformation investments and the deleveraging impact of lower sales volume compared to the prior year.
GAAP operating earnings and operating margin in the fourth quarter were $119.7 million, and 12.5%, respectively, compared to 116.1 million and 12% respectively in the prior year effort.
Efforts.
Routing charges related to the company's previously announced restructuring efforts in both years and code 90 related income in the current year from a Canadian wage subsidy adjusted operating earnings and adjusted operating margin were $120.3 million, and 12.6%, respectively compared to $115.3 million in 11.9% respectively.
In the prior year.
Both GAAP and adjusted diluted earnings per share in the fourth quarter went up.
GAAP diluted earnings were 62 cents per share and adjusted diluted earnings were 63 cents per share both compared to 58 cents in the prior year representing growth of approximately seven and 9% respectively as.
Compared to the prior year.
Stronger gross margin rate lower income tax expense and a lower average share count all contributed partially offset by modestly higher selling general and administrative expenses and an increase in interest expense.
In the fourth quarter, the company had net earnings of $70.2 million compared to 60.
<unk> million dollars in the prior year, an increase of 1.7% adjusted EBITDA was modestly higher at $140 million to $146.6 million in the quarter compared to $144 million in the prior year adjusted EBITDA margin also increased to 15.3%.
Let's turn to segment performance.
Global Sally Beauty segment same store sales increased by 1.7% for the fourth quarter as Sally beauty business in the U.S, and Canada, which referee represent 80% of the segment sales for the quarter at a same store sales increase of 3.7% in Q4.
Europe had a decrease in same store sales for the quarter, while Latin America had a significant declines.
Same store sales given approximately 15% of the stores were closed for more than half the quarter due to COVID-19.
The global in Sally Beauty segment generated revenue of $577 million in the quarter, an increase of about 1% compared to the prior year driven primarily by the increase in same store sales a favorable foreign exchange impact.
Of approximately 40 basis points, partially offset by 42 fewer stores compared to the prior year.
Our global Sally beauty ecommerce business continued to show strength with growth of 86% in the quarter led by our us and Canadian ecommerce platforms, which delivered growth of 113%.
For the quarter gross margin for the account.
Counting segment landed at 57.6% an increase of 180 basis points compared to the prior year.
With the Sally beauty beauty business in the U.S and Canada also hitting a record gross margin level of 61%.
Segment operating earnings were $103.9 million in the quarter, an increase of 10.6% compared to the.
Prior year for all the reasons I just discussed.
Segment operating margin increased to 18% compared to 16.4% in the prior year.
Now turning to our beauty systems group segment toll.
Total segment same store sales increased 5.6% for the quarter, while we had higher expectations for the quarter from beauty systems group.
There were a number of headwinds impacting comp sales first the code 90 related shutdown of California salons in many counties in July and August had an unfavorable impact of approximately 90 basis points on the segment same store sales. We also tested a variety of tax tactics in stores, which will set us up for success in subsequent quarters.
Net sales for the segment were three.
$81 million in the quarter, a decrease of 3.3% compared to the prior year the decline in non comp sales was driven by COVID-19 Kobin.
Over 19 in the necessary social distancing guidelines force the cancellation of a significant trade show in which BSP sales guidance and also constrained the reopening and velocity of customer employment.
And our national chain customers.
We also saw the creation of full service back orders during the quarter, resulting from some inventory gaps.
Finally, we saw an unfavorable foreign exchange impact of approximately 10 basis points.
BSD as ecommerce platform grew by 55% for the fourth quarter driven by consistent demand throughout the quarter.
Honey.
PSS gross margin increased by 60 basis points to 41.2% in the quarter, driven primarily by fewer promotions, but partially offset by lower vendor allowances.
Segment operating earnings for BSG were $50.6 million, a decrease of 14.4% compared to the prior year driven primarily by the decrease in net sales, but partly offset.
By the increased gross margin rate.
Segment operating margin declined to 13.3% compared to 15% from the prior year.
Let's talk about cash.
We generated a lot of it.
During the fourth quarter the company delivered cash flow from operations operations of $153 million, an increase of 31%.
For the prior year payments for capital expenditures in the quarter totaled $21 million as we continue to invest against against our business transformation.
Investments in the quarter included further work in our digital capabilities and ecommerce platforms and optimizing our supply chain through our agenda in North, Texas distribution Center efforts.
Free cash flow was 100.
$31 million in the quarter, which represented a 67% increase as compared to the prior year.
I should note that we saw significant cash benefit from a reduction in inventory, which carried over from Q3 into Q4.
The combination of our efforts to manage cash.
Purposeful SKU rationalization as part of our merchandising.
Current information and some sub supplier disruption put us in a position where our inventory levels came down too far and we are acting during Q1 to fix that more in that comp.
During the fourth quarter the company used a portion of its cash to reduce its debt levels by $445 million, including paying off its outstanding balance on its revolving line of credit.
And try $375 million the entire final loan balance of $20 million and $50 million of a fixed portion of its term loan b, but.
The company did not repurchase any shares during the quarter in.
In addition, the company also completed a small acquisition in Quebec, Canada, which added 10 stores 17 direct sales consoles and exclusive distribution rights.
Two premier professional hair color and hair care brands, such as well professional and gold well.
At the end of the fourth quarter. The company remained at a very strong liquidity position with 514 million cash on the balance sheet and is zero balance on $600 million revolving line of credit gender.
Generally the company ended the quarter with a leverage.
Average ratio of 2.8 times, reflecting our significant cash balance for comparison.
Some purposes, the leverage ratio that we often cite as defined in our loan agreement where the impact of cash on hand is capped at $100 million per net debt calculation purposes was 3.79 times.
Turning to our.
Consolidated full year financial results for the full fiscal year consolidated same store sales decreased by 8.1% due almost entirely to covance.
Consolidated net sales were $3.51 billion, a decrease of 9.3% driven primarily by the impact of COVID-19, shutdowns operating 23 fewer stores.
And an unfavorable impact from foreign currency translation of approximately 10 basis points.
Global ecommerce sales grew by 103% compared to the prior year once again led by our us and Canadian ecommerce platforms, which delivered growth of 184%.
GAAP diluted earnings per share for the full fiscal year were 99 cents a decline.
56.2% compared to the prior year, driven primarily by the disrupted operations caused by COVID-19 adjust.
Adjusted diluted earnings per share, excluding COVID-19, net expenses in the current year and charges related to the company's transformation efforts in both years were $1.22 a decline of 46% compared to the prior year.
For the full fiscal year cash flow from operations was $427 million, an increase of 33% compared to the prior year.
Net payments for capital expenditures totaled $111 million on.
Operating free cash flow was $316 million, an increase of 39% compared to the prior year.
For the full fiscal year, the company repurchased 4.7 million shares at an aggregate cost of $61.4 million.
Let's turn now to our observations on fiscal year 2021.
Whether it is lingering COVID-19 concerns or how long it will take the economy to fully recover where possible.
A follow up from the November elections fiscal year, 2021 will certainly present its share of twists and turns we.
We can already see this in the current operational status of the fleet.
All stores in the United States and Canada are currently operating however stores the few metropolitan areas like El Paso can only operate as curbside locations.
Additionally, we are seeing occupancy restrictions in parts of new Mexico and Colorado.
Europe has been more aggressive we have seen stores in Belgium, Northern Ireland, and Wales close due to local restrictions only to reopen shortly thereafter words.
Currently of our 450 stores in Europe, approximately a 180 stores are completely.
We closed two to COVID-19ien restrictions with the remaining stores either fully opened or operating curbside were permissible. So.
The majority of the closures currently ARINC, England and France.
The result is we are seeing ecommerce accelerate again in Europe similar to what we saw back in the third quarter.
Given all of this we are not able to provide detailed financial guidance for fiscal 2021.
However, the company can offer a couple of broad observations.
Without adjusting for the impact of coated restrictions, which.
Which are impossible to predict.
The company would expect that sales in 2021 should be.
Higher than 2019, even with the fewer stores in the fleet.
While we can't predict program, we are far better prepared than we were in fiscal 19 or even in March for fiscal 2020.
Regarding our store fleet. The company has revised its short term plans with respect to new stores the company now.
We expect that net store count will be approximately flat for the year with a small number of new stores being added to the footprint, which will be offset by a similar number of store closures as we optimized for locations.
The company will however, take advantage of the current leasing environment and relocate approximately 70 stores.
Remodels will mostly put on hold for the time.
Hi, BTIG.
We expect our digital business to continue to grow and are continuing to invest in that area.
The company expects continued strength in gross margin, particularly in the first three quarters compared to last year, and particularly in Sally beauty U.S and Canada.
The company expects SPM investments.
It's built.
For the full year basis rise to reflect our continued investments, particularly in labor and ecommerce distribution. However.
However, the company is working hard on offsets to those investments and use it as an area of opportunity with more work for us to do.
The company expects to continue to generate strong cash flow. So also expect.
We'll bakken be backend loaded given this company's significant upfront investment in inventory that I referenced earlier.
Finally lets address capital allocation.
Our priorities are relatively unchanged.
The company, we will invest in its business as I noted earlier in Q. While this will take the form of investing in new inventory. We will also continue.
So our business transformation.
So with some efforts scaled back to reflect the uncertain environment total vaccine is available.
We will continue to hold significant cash on our balance sheet. While we monitor October 19 plays out over the first and second quarters as we grow increasingly confident that the environment has stabilized to our satisfaction, we will consider deploying additional.
All excess cash to reduce our debt levels in the direction of moving our leverage ratio to 2.5 times.
That all being said as we look at the stock price versus our underlying business fundamentals, we may smartly consider share repurchases and time to time.
We have not repurchased any shares so far this fiscal year.
Thank.
You for your time. This morning, now I would like to turn the call back over to the operator for Chris side to take your questions.
Thank you and ladies and gentlemen, if you lease to ask a question. Please press one and then zero on your Touchtone phone you will hear a tone, indicating that you've been placed in Q you may removed himself from queue by pricing.
Pound key.
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So once again for questions or comments press, one and then zero on your Touchtone phone.
And one moment please.
And our first question will come from the.
The line of Steph Wissink with Jefferies and your line is open.
Hi, Good morning, everyone I of course, an error in my first question for you is just related to the color and nail strength that you saw which would imply that the other category within your product mix were down pretty sharply said you can just help us contextualize.
The composition of that category performance wise across just change that would be great and then secondly, I recall on the last quarterly conference call you had talked about July being up in the mid single digits.
And with the full quarter came up just a little under 2% would imply a pretty sharp deceleration in August and September as if you can maybe help us think about the cadence.
And then if you've seen any change in that cadence as we have rolled into the first fiscal quarter that would be very helpful. As well. Thank you.
Sure. Good morning, I'll address the questions in reverse order, what we saw from a quarter was a barbell quarter, where we saw strong July much softer August as for reasons Weve talked about.
And in September.
Recovered as a carry forward so it's a barbell quarter with respect to your categories, you're right. It's actually the case that we had some real strength that are defensible core and hair color hair and nail, but we did see weakness in other categories part of it's driven by the consumer for instance, we.
So a lot of cosmetics, it's not a core it's not a core truck driver for us, but we did see a decline in the cosmetics category and some categories like hair extensions offset by the growth we saw in hair color in particular, which was both consumer driven end strategy driven as we've increasingly focused our assortment.
Into an inventory spend in those areas around hair color and hair care, Greg and Steph just to point you back to Sallie finished with a 3.7 comp for the quarter, which was very strong a little bit of the barbell impacted Aaron but less of it.
But remember that BSD dealt with significant salon closures throughout the network as.
An example, California, we closed for approximately six weeks during that period.
And obviously that was a significant hit and we expect there'll be more volatility like that where regions or areas of the country may close to launch again.
That's great and then just one follow up on your E Commerce business, but I'm wondering I know, it's only about 16.
That million dollar, but as you look at that.
In terms of the sales what do you expect that to be as you look ahead, and then are you learning anything about the composition of online orders versus your in store order in store transactions is there a unique composition or are they very similar across all channels.
Well.
Our aspiration continues to be what it was which is we want to get to the 10% penetration figure for our categories. We're not there yet we have more opportunity. Although we are seeing nice increases in penetration across.
The entire business and with respect to the basket.
Our answer now is different than it would have been a year ago a year ago.
So the answer would have been that the.
Online consumer is typically very deal driven is looking for more.
More commodity like.
Categories like appliances now what we're seeing is real strong presence in color, helping to drive that growth.
And nail as well as care.
Care, we drive a lot we drive a lot of those categories for the digital.
Channels, we're quite pleased with that it's in part also though driven by a change in strategy or strategy, where we are far less promotional online than we were and far more focused on content. The how to write in the world in which we're operating where the consumer is not as.
Linked to go out the door go to a stylist, even though that.
The retail business is responding by.
Making it easier for her to try it our understanding or evolving or fix it right that thats really the strategy and on the wholesale side step I'll add that in general it has been much more like our.
When retail business, all along but Aaron's right on the retail side those two businesses are converging and becoming much more similar in and that's what we should be in an omni channel business.
Thats, great lesson for us and just on inventory I think Aaron you mentioned that it was a bit lower than you would have expected maybe just help us think about remediation.
Buying back.
And the inventory and planning in Q more stability in the business going forward.
Yeah.
Well what I can tell you is we're at I think a six year low from inventory we were in Q3 and we were in Q4, even though we have been aggressively buying inventory back into.
The fleet for both Sally beauty and to BSG.
And.
All that activity started in.
Q4, right is certainly carried into Q1 and we believe that.
That we have sales upside, resulting from being back in stock.
In color and BSG.
In particular brands and as well as in key cat.
Categories like Clippers and retail some of it was driven as I called out by our efforts to manage cash given the crisis earlier in the year. Some of it was driven by a very thoughtful and purposeful.
Set of assortment changes driven by our merchandising organization and some of it was driven by some supplier disruption as our supply.
Please also deal with COVID-19, so we're confident we're back on the right track. It will however be a use of cash.
For the for the first quarter in particular.
As we carry forward, but we think it's we think results upside.
Thank you.
Thanks, Dan Thank you.
Our next.
Next question comes from the line of Oliver Chen with Cowen.
Your line is open.
Hi, the gross margin performance has been impressive what do you what do you see ahead for what's driving that and also in the context of managing inventories and the composition and freshness of inventories.
Some of the supply.
Flight disruption may or may not be out of your control above your thoughts there.
I'll take a first shot and then hand over to Aaron listen I think.
As we said and as we stated Oliver we've really made a big focus on.
Fewer deeper bigger promotions and much more focus on content dynegy.
Location is how we want to serve our customers as opposed to using promotions to drive volume and.
And as a result of that that's translating into much higher margins there.
There is some geography shift in the TNL as well associated with delivery expense falling down lower and as Aaron mentioned in his comments that will be a major focus for us and obviously we expect.
Buy online pickup in store to be to play a major role in helping us address that.
In terms of freshness of inventory I do think we can it addressed most of the issues. We have in terms of out of stocks ourselves. It's within our control there are a few vendors.
That are struggling to keep up or get back into full stock.
And that will take longer just because that's out of our control, but I would say the majority of it we can fix and we are in the process of fixing right now and they are and I know if you want to add anything to that so I think it's I think it's well said and its core Oliver the gross margins on the retail side, we believe that we have a differentiated core that we're conveying.
Value in that we don't need to over promote in those categories and weve been gradually moving that direction in Q4 saw us get to real turning point that.
Final question that the engagement of new customers was impressive in some of the statistics you mentioned on the ecommerce front what are your thoughts on Jenna.
Rating incrementality relative to cannibalization of retail and also whats ahead in terms of managing margins.
That segment. Thank you.
Ah I believe your question was on retail over the what I would tell you is we believe there is opportunity for Incrementality.
Said on prior calls once we once we can get the consumer to in our store or buy from US online the quality of our product and the different experienced speaks for itself and so once we've gotten we've really gone up and so we believe that we have the opportunity to continue to build those build.
Build those baskets with them and drive more trips with respect.
Back to your question on gross margin what I would say is this is part of a concerted strategy in the retail business.
We believe that we will have continued strength in gross margin as we carry forward.
Particularly as we manage through the holiday season here, we're not a terribly holiday focused business. So.
So I expect good things to continue.
And Oliver just to add to that real quick I mean, with now with ship from store scaled up across the network and with buying online picking pickup in store scaling up now the stores are integrally are fully integrated into our ecommerce business. It's all want it truly is an omnichannel business and the stores are going to serve a major part of our.
On business and what we're excited about is that allows us to really leverage the expertise in store leverage recommendations add to the basket and we see that as the as how we want to grow the business long term as it is it's one seamless way of interacting whichever way the consumer wants to interact will interact with them and will offer both.
Expertise and our products through those.
Thank you very helpful Best regards.
Matt.
Thank you.
Our next question will come from the line of Rupesh Parikh with Oppenheimer. Your line is open.
Good morning, Thanks for taking my question.
I guess I wanted to start out.
Just at a high level just curious as you look at the category as you compete in what type of growth rates. You think you saw or sorry, whatever declines you think your thoughts during the last quarter and then any sense, whether you gain market share. During this period on both the Sally beauty supply and the BSG side.
Refresh good morning, Great question.
I'm not.
I'm going to give you category specific decline numbers, but what I can tell you broadly is this we did see growth in hair color.
We saw growth in nail as we called out we saw good business and care and these are the three core categories for US we saw declines in sales.
In most of the rest of the portfolio not all of it.
There and in particular I would point to cosmetics, we don't have prestige or even master lease in the in the business and so we weren't terribly surprised by that we also saw some declines in areas like.
Like hair extensions right where.
We have not seen for the last couple of years played heavily there and so on balance as I think about the portfolio, we're winning where we're focused and we have work to do in the basket filled categories that are around.
The core I think the other thing I would add Rupesh is some of this is just.
Hi did changes in consumer behavior in lifestyle right now right. So we're seeing declines in appliances like curling irons and styling tools, we're seeing declines in things like Hairsprays, if youre not going out as much whether that be to dinner or two events and things like that then your need to significantly style your hair and purchase.
Styling tools in styling AIDS is there is going to decline so as Aaron points out we're really excited about the strength that we're seeing in our core we assume those other things will come back as the consumer returns to normal behavior. Sometime later next year and I would be a bad CFO and if I did not point out we're past that the areas, where we are seeing.
Leading our growth are our higher margin categories.
Okay great.
In our in that's a good segue into my next next question, So really strong gross margin improvement this quarter.
As you look forward any sense of the improvement that we're seeing now there any portion of that could be like.
More of a sustainable improvement.
As longer term.
We do believe it's a sustainable improvement carrying forward, but particularly in the retail business now at some point call. It Q4 next year, we will lap where we are but as we think about the year ahead. We do believe we do believe that we have continued opportunity in this is not a one off quarter on the gross margin.
In line, we've rationalized our inventory, we've rationalized our promotional structure the merchandising team and the planning and allocation team is working better together between themselves and with breadth and the rest of the organization than they ever have and so we view it we view it as real opportunity.
Okay, Great and my last question I mean, maybe.
I guess just this one is for Chris on the if you look at Salon demand out there any sense of where we are in salon demand versus creeping down there. We've got in our were down 20% or I'm. Just curious as you look at the industry maybe were under the SEC filings.
When you talk just salon owners and stylistic where you think the industry is from versus damage levels.
And I don't have a lot of data sharing and Scott will track I do believe it is down I don't think it down as 20%.
I think the reality is there is disruption in the market. There are restrictions in some markets salons, often can't operate at the same capacity a great example is our chain business, where we use handled.
Panel distribution.
Two large changed that are focused on lots of of volume high volumes of clients. They are down more significantly because they just can't process as many clients in a day given the restrictions. So I do believe it is down.
We're not we're down just a little bit.
And as you saw the BSG.
Actually had positive same store sales overall, which is great and I think the net result of that as I am hoping we're gaining share. We're certainly working hard at it we've seen a lot of color conversions, where we've been able to pick up new accounts, but I expect that it's going to take some time before the salon business returns to normal it'll be the back half of the year or even later.
Sure.
Okay, great. Thank you for all the color.
Thank you. Our next question comes from the line of Mark Altschwager with Baird. Your line is open.
Hi, good morning, Thanks for taking my questions I.
I guess just to start out and I apologize if I missed it but is there.
Any color you can share on the quarter to date comp trends you are seeing.
Mark during our last earnings call, we announced that we would not be providing monthly updates thereafter.
Okay, Okay fair enough.
And then on to grow.
Gross margin that's a.
Got to keep beating on it here, but.
Yeah, just concluded I guess very volatile year on the gross margin front I think Sally beauty. There is nearly 900 basis point spread between Q3, and Q4 rate understanding a lot of kind of onetime factors at play.
You outlined a lot of the positive changes here with inventory.
Corey and what you're doing promotions I guess.
Yes, how do you feel about kind of just the ability to deliver a steadier gross margin trends in the future do you think we're kind of past some of this this volatility and then.
Just as you kind of think higher level, how should we be thinking about kind of the normalized.
Bye.
Qiss line gross margin rate Sally.
Sally beauty supply and consolidated basis.
As all these changes take hold.
You raise a series of great questions Mark Let me, let me attempt to address them.
Yes, I can what I would tell you is is.
You're right we had a.
The significant difference in Q3 and Q4 from a gross margin rate perspective in Sally beauty. If you look back at our transfer from Q3, you'll see our walk.
Through a very detailed bridge of the onetime actions, we were taking in connection with our inventory at that time.
Q4 reflects more.
Of a steady state margin structure for Sally.
Judy.
In the Us and Canada right.
We saw particular strength there.
In the European business, we believe we have some more opportunity to work on our gross margin structure. There. We had of course is a little bit different businesses and it's more of a mix. So.
While professional and retail and then BSG, we continue to look to optimize that as well.
So I take a fair amount of comfort from where Sally beauty in the USA and Canada is that 80% of the effects of the segment.
Sales as we carry forward and we're not anticipating additional ones.
Actions to what we saw in Q3.
Okay. That's that's very helpful and I guess, just finally I was hoping to also just going to.
Ask a big picture question on sort of the state of the pro style is to market.
Do you Jim sense of how many salons close to maybe how many have permanently closed.
I would think the pressure on salons, and maybe just accelerated the shift to boost renting is that something you're seeing and if so is that a headwind to BSG, but tailwind to Sally beauty or things not quite that simple. So obviously, a very volatile period.
Went through and are continuing to go through so we just love your.
Hi level thoughts on some of the more structural shifts in the market that are going on versus some of the factors that might kind of normalize here in the coming months.
Yeah, I mean, Mark I think you're right. There is it is a disrupted market. It's disrupted most in high volume change as I mentioned, it's also.
Hi, disrupted in large urban salons.
That obviously have try to put a lot of people through in a very tight space.
Those are the most disruptive, but even salons that might have had 12 chairs the more mid market city, maybe or operating eight now in order to maintain space restrictions and then those stylists are displaced.
So what that does mean is you're exactly right. It doesn't mean that there probably will be a surge in booth renting a surgeon suite rentals as well as small salon, starting up and maybe six months is stylist go out on their own in general that's probably good for the BSD business because it supports the retail side of BSD some of the largest law.
On some larger accounts are often served directly by brands and manufacturers and so fragmentation over time should help our retail our store business, but I think it's going to take time for all that to shake out.
That's very helpful. Thanks for all the color.
Thank you. Our next question comes from the line of.
Simeon Gutman with Morgan Stanley and your line is open.
Hey, good morning, everyone I want to ask again on a gross margin in SBS. If you look at the roughly 200 basis point improvement year over year can you talk about how much.
Roughly help lower promotions and then they are in your.
A lot and better mix of product can you talk about those buckets.
We have not historically disclosed a.
Next analysis that way and so I think what I would observe is.
Most of the benefit so I'm not going to quantify further comes from rationalizing our pricing promotional structure.
Second aspect of that would be mix.
Got it okay, and and when we're speaking to sustainability of all of the things I don't know if you want to pin a number to it but you know the gross was at that.
The seven I think level and I think the U.S. was even stronger.
That is the right way to think so what we saw in the fourth quarter is it is it is a fair gauge of sustainable.
Sustainable gross margin for that business going forward.
Oh, yes.
Great. Okay, and then look we I wanted to ask Chris I know, we've known this the Wello may have been you know separated.
Cody for some time curious if there's any implications you know good bad indifferent to think about you know for one of your your pro brands moving changing hands.
The reality is that separation hasn't occurred yet I believe it occurs early next year. So it's coming soon.
I don't expect.
That it'll change much we re signed a long term contract with them earlier this year.
And obviously, we're focused on growing their color brand their professional color brand.
Exclusively through BSG, and then obviously, we sell a color brands on a nonexclusive basis through Sally that.
They also own so our plan is to work with the new management team there to grow their brands and to to work together to continue to expand the business and grab market share, where we can and so at this point I don't see any change in operating strategy other than I am hoping we'll see more innovation from that business over time with more focus.
Great. Okay. Thanks, guys.
Thank you.
Our next question comes from the line of Jonathan Seaport.
With Bank of America, and your line is open.
Hi, good morning, everybody. Thanks for the question.
Just wanted to get a little bit of a.
Information on how you guys are thinking about the holiday.
Season, coming up I know you mentioned that it's not usually.
It's not a very big part of it.
Of the year, but I just wanted to know how you are seeing demand you know into that quarter or how you're thinking about.
How it might play out and whether or not there'll be any even small incremental promotion compared to.
What we saw.
This quarter.
And then after that if you could touch on given the strength of your E.
Ecommerce business, so far is there a longer term.
Change in how you're viewing.
Store footprints and maybe.
Thinking about the ability to to sort of translate those.
In store purchases more online and then you have a smaller cost and footprint in all that thank you.
Great question I'll, let me attempt to address the first one Chris will take the second with respect to Sally beauty and the our second quarter, which is already underway.
The difference I would point you to.
Difference not versus Q4, but our fiscal Q4, but rather versus prior year, we are not a terribly.
Holiday oriented.
Enterprise that said, if you walk into Sally beauty store or two if you went on to Sally beauty dot com or Sally beauty that Ta what you would see.
He is a very tailored merchandise assortment to actually speak to gifting right. Our merchants have taken a much more selective cut at what goodness looks like there and so while while we will have holiday offers.
There will be narrower than they were in previous years, Similarly from a promotional cadence and the state maybe.
As the point of the gross margin questions. The folks have been asking we're.
We're going to be very careful about it right. We are not participating in a race to the bottom that a lot of retailers have under way right now I think about not black Friday, but rather you know black.
November right, we will there will be promotions right. We are focused on what the right promotions are but.
We have moved to a strategy, which is much more content focused helping.
Helping our consumer emphasizing the categories in which we have a differentiated core and go from there and that will be our consistent strategy at the carryforward.
Yes on a broader basis to be just thinking about holiday from what I've seen and I have a circle of retail.
We chose that I talk to regularly.
You know, obviously, it's going to be spread out right, rather rather than being concentrated in specific days or weeks, it's going to be much more spread out.
I actually don't think its going to be as promotional as people are worried about because I believe a lot of retailers did not biased heavily into inventory during the summer months than before.
As they were conserving cash as they went to the crisis and I've heard that from a number of my peers.
Because they don't have as much inventory.
Even if demand is a little softer they don't have a lot to get rate up.
So I just don't think you're going to see quite the level of clearance sales or panic sales.
In previous years, because I just don't.
Or inventory sitting in the stores are in warehouses that needs to be sold off.
Great. Thank you.
You bet.
Thank you.
Our next question comes from the line of William Reuter with Bank of America and your line is open.
[noise].
Hi.
I know there's been a lot of questions about this.
But I'm just going to ask one more and it kind of reverts to a comment you. Just made there you mentioned you're going to continue to remain fewer in deeper.
I would have expected that many competitors and other channels, where customers can shop for these products that they would have.
Been pulling back on promotions too and that this may be a permanent opportunity, but then your last comment sounded like you believe that other retailers may not be pulling back in the same way on promo I guess, what are you seeing in the promotional environment from any other competitors and expectations for that.
Great question.
Thank you for asking and clarify that Mike.
Some of it was speaking to retail broadly not necessarily to.
Retailers with which we directly competes and of course, we have a very diverse competitive set you know as we carry forward.
I agree with your observation that there is a structural opportunity industry.
But it is the case that some for those retailers.
That are not as well situated as we are that don't have as strong a financial foundations that that they will be tempted to promote more heavily.
That's very helpful. And then just one big picture question in terms of the moves online and.
I guess I'm wondering how you view, particularly given.
I kind of store closures in Europe industry, moving online may change behavior of stylist permanently and I guess, how you are making sure that you are well positioned for any of those changes and that's it. Thanks.
Yes, I mean, we think the stylist, they're going to want more convenient to service options actually not unlike.
Given consumers. So we've already launched same day delivery and our BSD stores, we're going to be bringing buy online pickup in store in Q3. After we re platformed the BSG web site around the pro and make it much more pro friendly. So I think they want many of the same thing consumers want because convenience is going to be key and obviously safety.
He plays a role in this two now so.
So were investing in those in those delivery options, we will make it easier for them to do business with no matter, how they do that being said I think our stores will continue to play a very valuable role as well our DSD. So our stores theres, many stylists to who and I was in stores this week watching it coming.
I am in the morning before they go to work and by their schedule for the day.
And that's how they manage cash obviously and if our store is perfectly suited for that because we opened it am in our pro stores than they can come in and buy the day services the colors needed for each customer and then turn around and turn that immediately into cash for.
Themselves through services, so I don't think thats going to change and I think the fragmentation that's going on in the industry is going to make that even more necessary as more stylist end up becoming independent.
And obviously Theres also then going to be an increasing role for our Dcs, but in a more digitally enabled way, they're going to be visiting more and more accounts through virtual.
I will visit they're going to be pushing more of those orders are going to actually happened online than previously might have happened in a handwritten way and we think that actually will drive both efficiency as well as effectiveness.
Hard to have our full service teams as well.
I want to add on one thought really for us it's we have increasingly.
Digitally savvy customer on both the retail side and the professional side.
Our effort is to match that with a much more digitally savvy partner within Sally beauty holdings, whether it be in the form of accruals for profit the issuers Sally beauty supply one while our business is relatively small compared.
To sum one piece of uncertainty that we don't have to address that some ecommerce retailers are having to address these days is our ability to ship.
Just signed a new agreement with U.P.S., ensuring that we have the shipping.
Capacity that we need for our growing ecommerce business as we as we carry into our fiscal.
So Q1, so we're delighted with that as well.
Thank you very much.
Thank you.
Thank you and we will go to the line.
The casella with JP Morgan Your line is open.
Hi, just a couple of clarifications on some of the prior questions on on.
On the BSG side.
How much of that business overall is the national accounts versus the brick front or he broken that out.
We don't break it out, but it's not particularly large.
Okay, it's primarily been thriving then.
The stores tend to serve the smaller independent stylists, the booth renter the sweet.
Rather and the small salon and then we have a full service business that serves larger independents along.
Okay and then.
On the vendor side.
And the lower vendor allowances I missed.
Assuming that is mostly related to the promotional environment I am wondering if there is.
If it if it's a signal or a change based on just the vendor mix that you have today versus the Knicks and the path no no its not undermining it vendors no.
100% tied to lower less promotions.
Okay, and then any thoughts on you talked about.
Their capital allocation any.
It's on refinancing the 23 2023 notes since it's a relatively short maturity.
I think we are very focused on our towers right and we'll take the right action at the right time as we see it we're going to get through this quarter, we'll see work see where we go hopefully you can take from the.
He took proactive actions we took in March April and May that.
Our.
Finance and Treasury teams are always looking to optimize that.
Okay.
Just forgot one question related to the vendors.
Given the changes you've made in terms of bringing new vendors have how's your top five vendor mix changed.
And can you provide those.
No it hasn't changed I don't know if we have released had previously.
But.
It's all the big ones you would know so it's henkel its l'oreal, it's Cody and.
Hey, Paul Mitchell is that true.
Okay great.
Thank you.
Thank you.
We will go to Rupesh parikh from Oppenheimer.
The line is open.
Good morning, Thanks for taking my follow up question I've been getting this question from a few investors. So there's there's commentary in your prepared comments just like you would expect sales and I believe that by 21 to be.
Higher than up why 19, I'm just curious what gives you that confidence just given obviously the volatility out there and you are seeing store closures and some of your different markets.
Thank you refresh for the clarification my remarks were purposely they purposely said unadjusted for Covance right. We can't we can't predict what Cove. It is but the point we're trying.
I'd make is we have made such great progress on the transformation, we have and we've driven so much change our capabilities our talent to our process our technology everything isn't such.
Such a different place that unadjusted for coated even with the smaller fleet. We would have expected sales to be higher in 21 than 19 I can.
Hi, predict covert none of us can.
But we are going to manage with the better capabilities and assets that we have.
Okay, great. Thanks, you'll have to ask my question.
Thank you and I'm showing no further questions in queue. Please continue.
Great well thank you all.
And your questions today in summary, as we begin fiscal year 2021, we are focused on complete completing our transformation plan, while maintaining stringent financial discipline and ample liquidity liquidity as uncertainty remains as to the duration and severity of the pandemic.
Our strategic initiatives will.
Will involve capitalizing on strong consumer interest in DIY hair color building and refining our digital customer experience, including the addition of Biod line pick up in store.
Growing our new private label rewards credit card program, expanding and the rollout of JD to the rest of the distribution centers and growing.
And our partnerships with female owned and black on brands.
This will provide our company with a strong platform as we navigate past covance and achieve our goal of sustained long term profitable growth. Thank you very much.
Thank you and then.
Ladies and gentlemen that does conclude your conference call for today. Thank you.
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