Q1 2021 Sally Beauty Holdings Inc Earnings Call
Yeah.
Yeah.
Yeah.
Hmm.
Yeah.
Yeah.
Mhm.
[music].
Okay.
Okay.
[music].
Hum.
[music].
Hum.
Yeah.
Your conference will begin momentarily please continue to hold.
The school 'twenty 'twenty, one first quarter earnings call.
At this time all lines are in a listen only mode. Later, we will conduct a question and answer session instructions will be given to you at that time.
If you need assistance during the call you May 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 and welcome to the Sally Beauty Holdings first quarter earnings Conference call with me on the call today are Chris Brickman per.
And then and Chief Executive Officer, and Marlo Cormier Chief Financial Officer.
Before we start I want to remind everyone that we have made a presentation available for today's call that can be viewed from the link provided on our investor site at Sally Beauty Holdings Dotcom Board Slash Investor Relations.
I would also like to remind you that management's remarks on this call may contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
Actual results may differ materially from those indicated by these forward looking statements as a result of various important factors.
And clearly those discussed and the risk factors section of our most recent annual report on form 10-K, and other filings with the Securities Exchange Commission.
Any forward looking statements made on this call represent our views only as of today and we.
And we undertake no obligations to update them.
The company has provided a detailed explanation and reconciliations of its adjusting items and non-GAAP financial measures and its earnings press release and on its web site.
Now I'd like to turn the call over to Chris to begin the formal remarks.
Thank you, Jeff and good morning, everyone.
We hope you are all safe and well that SBA. We are fortunate to have an incredible community of team members customers and partners that continue to help us navigate this dynamic environment and.
And the first quarter, our associates across the organization delivered strong execution. Despite the ongoing challenges of the pandemic.
During a time of significant retail disruption they remain focused on safely serving our customers and continue to implement the key initiatives, we outlined on our year end earnings call in November.
This allowed us to deliver strong gross margins profitability and cash flow. Despite top line headwinds caused by the pandemic.
Indeed for much of the quarter, especially in the latter weeks, we were operating against the backdrop of temporary store closures capacity restrictions salon shutdowns, and an acceleration and COVID-19 rates and most certainly impacted traffic and our open locations.
As a result enterprise same store sales declined three 7%.
For added perspective at the end of the quarter approximately 45% of our store locations were under some level of capacity restriction or closure across the globe.
During the quarter, we saw ongoing strength and hair color, which is our chief recruitment vehicles for new customers, both for the retail consumer and as a professional stylist.
Hair care is closely linked to color, while other categories like nails skin and wax are incremental and drive additions to the basket.
And despite the top line disruptions hair color was up 19% at Sally U S and Canada. In addition, vivid colors remained on trend and delivered another quarter of strong performance up approximately 50% at Sally U S and Canada over the prior year.
In Q1 visits accounted for 25% of our total color sales and they continue to attract new and younger customers to our stores.
Finally nails were up seven percentage Sally U S, Canada, and Salon supplies were up over 50% and BSG compared to the prior year.
Although we were operating under challenging circumstances, our expanded digital capabilities enabled us to serve our customers through multiple fulfillment options and these include buy online pickup and store curbside pickup and ship from store at Sally Beauty and same day delivery and curbside pickup at BSG stores.
Additionally, our ecommerce business achieved strong growth up 48% versus a year ago.
Despite the external pressures of the macro environment. Our teams also did an excellent job on margin and expense control, which resulted in first quarter adjusted EPS of <unk> 50.
Up 6% on a year on year basis.
We ended the quarter with inventories down 10% compared to the prior year and approximately $538 million of cash on the balance sheet.
Subsequent to the close of the quarter, we made the strategic decision to repay the outstanding balance on our fixed rate term loan, making further progress towards deleveraging our balance sheet.
More on this from Marlow later in the call as.
As we reflect back on the investments we've made and the hard work of our teams over the past three and a half years today, we have a business that is well positioned from a strategic operational and financial perspective.
During our successful transformation journey, we accomplished a number of objectives that set us up to scale over the long term.
One we refocused the business on owning professional hair color and care for both the DIY enthusiasts and the professional stylist two we improved our retail fundamentals three.
Three we advanced our digital commerce capabilities for we modernized our supply chain.
We improved the shopping experience both in store and online and six we strengthened our retail leadership team.
Today, we are executing against a well defined operating strategy and growth plan.
In fiscal 2021, we are focusing on three major priorities by the end of the year, we expect to have completed the key elements of our transformation.
Including the full implementation of <unk> and the re platforming of our BSG E Commerce site.
We expect to be leveraging all of our new capabilities and tools and service of our mission to recruit and retain color customers and third we expect to further reduce our debt leverage ratio closer to our target of two five.
From a tactical perspective, and fiscal 2021, our teams are working to optimize the transformation investments, we've made and unlock more robust functionality across retail fundamentals digital commerce and supply chain let.
And let me take you through our key initiatives first is our expanded delivery service model as I mentioned earlier, our new capabilities are enabling us to serve our customers with multiple fulfillment options, which we believe will ultimately foster greater customer loyalty and stickiness. It's.
It's early days, but adoption rates are growing fast for example at Sally U S and Canada. Both this accounted for 11% of our ecommerce sales for the quarter after launching nature nationwide and November and both the sales surpassed 20% of our E. Commerce sales for the month of December while ship from store represented 31%.
Our ecommerce sales during the quarter.
On the BSG side same day delivery is adding tremendous value to our professional stylist by providing them with the flexibility to quickly react to the needs of their customers and are definitely manage their business.
And the second half, we will be adding the rollout of both the BSG segment, providing another element of convenience for our stylists.
The second initiative is re platforming the BSG digital storefront, which is on track for completion in early Q3.
This new more robust platform will enable deeper and more effective digital engagement with our stylists as we move along the customer funnel from recruitment to transaction.
The digital journey begins with a focus on education innovation and tools that enable them to more effectively and profitably run their business, including features like product Reorders easy bulk orders and simplified tax reporting and navigation enhancements.
Turning now to our third area of focus loyalty and CRM.
We are rapidly gaining traction on the rollout of our private label rewards credit card to both Sally and BSG customers in the U S.
At the end of the first quarter, we had 163000 cardholders and our rewards card accounted for 2% of sales and the Sally segment, and 5% and the BSG segment.
We're capturing critical insights into customer needs and purchasing behavior and expect this program to grow significantly in the coming months and quarters.
In addition, we have bolstered our marketing team in recent months and now have the talent to exploit this data and utilize CRM to develop highly targeted digital programs and strengthen the connected shopping experience across marketing commerce and service.
We expect loyalty to become another critical differentiator for SBA, and <unk> and something that further expands our competitive moat.
The fourth key initiative for fiscal 2021 is completing the rollout of J D day, our new merchandising and supply chain platform.
Both <unk> and our new North, Texas distribution center are running smoothly and the initial months and our teams are working to bring <unk> to a remaining dcs in the latter part of this year.
This will be a significant milestone as it represents the final step and our multiyear transformation journey.
Through our thoughtful investments and strategic repositioning over the past three to four years, we have evolved SBA and to a market leader with a solid infrastructure and robust digital capabilities that position us to own professional hair color and care.
Underlying this is our continued focus on generating strong profitability and cash flow and returning value to shareholders.
There is certainly more work to do as we shift from the heavy lifting of our transformation to a new phase of growth that will see us optimize and drive scale.
And we believe our ability to generate strong cash flow carefully manage inventories and prudently control discretionary spending will allow us to continue to strategically invest in capabilities and tools and teams and support of our mission to recruit and retain color customers.
As we move through the first half of fiscal 2021. It is clear that the environment will continue to be choppy, creating additional top line headwinds at least in the near term.
Today, we are operating under mandated store closures, and Europe, Canada, and Latin America capacity restrictions and several domestic markets and reduced capacity and salons, and California, which were closed for most of January.
Because these disruptions are continuing and there is still a great deal of uncertainty related to potential restrictions going forward, we expect net sales to decline and our second fiscal quarter softening modestly from Q1 levels.
During this time, we have remaining agile and our teams are running the business with operational and financial rigor to preserve profitability and prudently manage cash.
Most importantly, with our transformation journey nearing completion, we feel highly confident and our competitive positioning the strong foundation, we built and the capabilities, we've established and the ability of our teams to execute.
In short we believe SBA is positioned for a return to consistent top line growth when pandemic headwinds abate.
Before turning the call Tomorrow I want to express my appreciation to all of our team members and associates around the globe for playing an important role and our successful transformation and continuing to work hires tirelessly and service of our customers as we navigate the dynamic COVID-19 environment.
I also want to say how pleased we are to have Marlin and the role of Chief Financial Officer. After joining US last spring as senior Vice President of Finance. She is quick Leslie quickly and seamlessly transitioned to the new position and serves as a valuable member of our executive team.
And now over to Mario to discuss the financials.
Thank you, Chris and good morning, everyone I've been at the company now for 10 months has really able to hit the ground running when I assumed the CFO position in November.
And I've enjoyed the opportunity to speak with Sony Vue, and recent virtual conferences and marketing date and look forward to continuing to get to know our SBA shareholders.
Turning now to the financials and you heard from Chris the Covid disruptions put tremendous pressure on the top line quarter.
And our strong start in October and new restricting set and during November and by the end of Q1, approximately 45% of our stores globally, we're operating under capacity restrictions or closures.
This resulted in a consolidated same store sales decline of three 7%.
And our open locations traffic was choppy and declined on a year over year basis.
Despite lower traffic we saw increases in average ticket units per transaction and average unit retail versus the first quarter of fiscal 2020.
Our global ecommerce business remains strong and Q1 with consolidated sales up 48% versus a year ago.
As we continue to optimize our new digital capabilities, we expect E commerce to become an increasingly larger part of the overall business over time.
Looking now and gross profit are fewer bigger deeper strategy continues to drive underlying margin strength.
First quarter gross margin came in at 53% up 190 basis points to last year.
Year over year increase reflects strength and the Sally segment.
And particularly in the U S and Canada. This was partially offset by margin pressure at BSG and lower inventory levels higher capitalized cost.
Looking at the remainder of fiscal 2021, we anticipate that our targeted promotional strategy will allow us to continue to deliver strong consolidated gross margin and the range of 50%.
SG&A expenses totaled $366 million, and Q1 down $12 million versus last year.
The savings can primarily be traced to lower field labor and advertising costs and reflects our ability to pull expense levers as needed while pandemic headwinds per se.
As we expected as a percentage of sales SG&A deleveraged on a year over year basis coming in at 39, 1% up 50 basis points from Q1 of 2020 due to lower sales volume.
Looking at Q2, we expect SG&A dollars to be flat to up slightly on a sequential basis from Q1. This primarily.
And reflects investments and digital marketing and both Sally and BSG segment as well as it spending as we continue to deploy and scale, our new tools and capability.
These investments will be partially offset by lower field labor costs and variable expenses.
On a full year basis, we expect SG&A dollars to increase versus fiscal 2020.
With spending primarily directed towards additional marketing and it spend and the back half of the year.
As a reminder, we will also be lapping last year's furloughs and rent abatements.
As Chris said, we are pleased with the success of our transformation journey and the investments we have made to date are clearly bearing fruit.
We began to see pandemic headwinds abating, we will make selective investments and other key growth areas. During the latter part of the year.
Turning to earnings our solid gross margins and careful cost controls allowed us to deliver strong performance across operating income EBITDA and EPS.
And Q1 adjusted operating margin was up 130 basis points to 11, 2% adjusted EBITDA increased 5% to $134 million and adjusted diluted EPS grew 6% to 50.
Moving to segment results I'll start with Sally beauty.
First quarter same store sales decline of three 3% can largely be traced and extensive closures and restrictions and Europe and Latin America.
And the U S and Canada same store sales declined for less than 1% and gross margin remained strong reflecting the effectiveness of our new promotional strategy.
This drove a significant increase and segment operating margin, which expanded 440 basis points to 17, 4%.
E Commerce remains strong up 46% versus a year ago.
And our DSD segment same store sales declines of four 6% primarily reflect restrictions on store capacity across several territories and the U S and Canada, and Salon closures, and California and parts of Canada.
E Commerce remains strong delivering growth of 51% over the prior year.
Gross margin decreased by 40 basis points, reflecting higher capitalized costs due to lower inventory purchases.
Looking at the balance sheet and cash flow.
We ended the first quarter with $538 million of cash on the balance sheet and a zero balance on our $600 million revolving line of credit.
Inventories at quarter end totaled $896 million, that's down 10% versus a year ago and reflects our efforts to return to more optimal level.
As we talked about on our Q4 earnings call, we exited the year with a focus on rebuilding inventory, we made good progress and significantly improved our in stocks during Q1.
That said, we did face some COVID-19 disruption and port delays, particularly in the BSG segment.
As a result first quarter cash flow from operations came in better than we anticipated at $39 million and we anticipate this will pressure cash flow and Q2.
Capital expenditures totaled $15 million and were deployed mostly towards store repair and maintenance and digital capabilities, most notably by online pickup and store, which as you heard from Chris is gaining good traction free.
Free cash flow was $24 million per quarter.
At the end of Q1, our leverage ratio stood at $2 78 for comparison purposes, the leverage ratio that we often site as defined in our loan agreement or the impact of cash on hand is capped at $100 million for net debt calculation purposes was.
With $3 73.
After the close of the quarter, we further reduced our debt levels by another $213 million and early January which is consistent with our philosophy to deleverage the balance sheet.
Going forward, we expect to continue to utilize excess cash to reduce debt and return value to shareholders.
In fiscal 2021, we expect to make additional progress towards bringing our debt leverage ratio closer to our target of two five.
As we look at the balance of the year, we expect the environment to remain choppy as COVID-19 disruptions per cent.
With closures and restrictions continuing thus far into the second quarter, we anticipate that Q2 net sales trends will soften moderately from Q1 levels.
Until we see a definitive shift and the macro factors affecting our top line. We will continue to operate prudently and remain focused on the operating initiatives, Chris talked about which we believe are setting us up to achieve consistent growth and long term success.
We appreciate your time this morning, and now and we'll ask the operator to open the call to Q&A.
Thank you and ladies and gentlemen, if you aren't aware there is a new process to queue up for questions. You May press, one and then zero to queue up from your question.
Only press to one zero command and one time and.
And that again will mean.
Moving from the Q.
So once again, it's one and then zero for any questions or comments and one moment. Please.
Try and get in there and tumors.
Our first question will come from the line.
Simeon Gutman with Morgan Stanley and your line is open.
My first question is on the softer Q2.
Can you talk about is it.
Is it entirely due to closed stores are you seeing anything else and it wouldn't be related to <unk> and.
And then with regard to your omni channel.
Are you seeing that part of the business pick up as the store traffic declines.
Declines given some of the restrictions.
Thanks, Jamie.
And here's what I would say, yes, yes. It is due to store restrictions closures and decline so.
Obviously as we look at Q2 Europes been significant closures across Europe for all of January heading into February and we're not sure how long that will extend it could easily extend into March Canada has had some significant closures that are continuing and we have salons closed and California.
And Latin America has some significant store closures as well so they just seem to be a little deeper and more extensive and lasting longer as we get into this quarter and thats really the driver of why we're being conservative and our view of Q2.
And yes, we are seeing increases and the omni channel.
As an example, and Europe, we're seeing significant increases and our omni channel sales due to the extensive closures statements share in Canada, but the reality is it doesn't make up for the fact, when you have 60% of your stores closed and Europe, youre not going to make up that with omni channel.
Got it Okay and then my follow up is.
But the gross margin is being benefiting right now from fewer promotions can you talk about what you learned on the promotion side, what can you tell us what kind of promotions.
Were most prevalent and prior pandemic one that you may not need to repeat so we can try to assess the sustainability of some of these gross margin trends.
Yes.
Let me start and then Chris will jump in with more color, but what we found is we really don't need to promote and our core category and pillar.
To win the customer from.
<unk> is really not how you recruit a new color customer and so what we found was that the promotions and color and really just leading to pantry loading.
And so and it was pantry loading of our existing customers. So instead, what we're doing is using the promotions on a very selective basis and to drive traffic and the basket at <unk> and <unk>.
So we're seeing that.
Net prove.
Move out and it's working for US we started the shifts kind of at the height of the pandemic last year and we're seeing that play through and we're shifting our marketing on the other hand to drive that traffic and.
And to more meaningful and educational content. So.
And so we think it's working and it's look and it's proving and the margin and and we start to see it last third quarter, we see it in the fourth quarter, where we were above 50% and again, we delivered a solid 50% this quarter as well so.
And so the shift is working and that and we are directed more towards the basket add not to the quarter.
That's right on target and my only extra I'd add to that is we're going to we're still optimizing this I think it's.
One of the things we've learned is that there's probably some promotional activity will return to BSG because so much of it was vendor funded so we think we're probably going to add back a little bit more there, especially in the heavily bended funded vendor funded categories at Sally <unk> correct color doesn't make much sense to promote.
But some of the adjacent categories and brands oftentimes may, especially the ones, where those are well known brands and so we're still optimizing and learning this but the long term trend is definitely fewer deeper bigger.
Alright, Thank you both take care.
Thank you Sammy and.
Thank you. Our next question comes from the line of Patrick <unk> with Oppenheimer and your line is open.
Good morning, Thanks for taking my questions Hey, Chris So I guess my first question with the vivid color very strong growth. This quarter. Just curious how you think about the stickiness as they try and especially coming out of the pandemic.
Yes and.
And this is one we've debated quite a bit so I think it's a great question and the reality is I do think there is a general we have seen the trend by the way before the pandemic hit as well. So there has been a long term trend multiyear trend.
Vivid colors growing so I do think a significant portion of it is sustainable as people just feel more free to express themselves through air, but there may be additional experimentation that was created and opportunities to experiment that was created by the pandemic. So I would guess it will settle some but your guess is as good as mine I think what's great about.
It is that we're the clear leader and a category that is on trend and growing.
A much bigger assortment that anybody else out there and we love, how it's bringing a new consumer to our stores.
Okay, Great and then a follow up question just I guess as we look at the BSG segment.
The decline I.
I would say fairly limited considering some of the restrictions out there and any sense, how your market share held up during the quarter just given some of the restrictions out there.
Here's what I would say I don't I don't know, we don't have any sign that says.
We're losing market share we do believe we do have some indications that we're gaining color accounts.
And we've had a lot of color conversions. So we feel strongly that thats, a core of gaining share and the professional business because colors. So sticky for a stylist. So the best indicator. We have is that we are seeing an increase and color conversions, which would suggest that we're gaining some share.
Okay, Great and then my last question.
Shipping expense has been a headwind in recent quarters, just curious with the buy online pickup and store like how that's progressed versus your expectations and just in terms of how that is helping to reduce maybe some day shipping headwinds that you guys are seeing.
Yes, we have more work to do on this but the reality is is that focus was a key lever for us in terms of driving down our shipping expense. So we're excited about the early adoption were seeing and of course, we're excited to put that into our BSG business as well and the coming months. So the reality and it does that over time, we expect that more of a.
Our business will be supplied from the store and the either in the form of buy online pickup and store curbside or same day delivery and that that will lead to a better average shipping expense overall over time, but this is going to all settle out this behaviour settle out in the coming months.
Our job is to make sure we have all the right fulfillment options available the consumer and then optimize against those.
Okay, great. Thank you I'll pass it along.
You bet, Thanks, Brooks and progression.
Thank you.
Our next question comes from the line of Oliver Chen with Cowen and your line is open.
Got it. Thank you you've done a really good job focusing on standing for hair care and color, Chris What do you think about the non hair care and color categories and.
And how you may focused strategies, there and what's ahead.
Also love your thoughts on traffic and traffic at Sally beauty, what's controllable at the Sally stores and what do you see happening ahead to maximize.
Traffic the traffic opportunity. Thank you.
Thank you Sir.
And really good questions. So.
The first is we're going to continue to build dominance and leadership in our color and care category, especially color because thats the core recruitment and vehicle to our business and we have such a strong leadership position there we want to build on it.
The reality is that the other categories of our basket apps outside of color and care and enthusiast, whether its a stylus or a consumer walks into our store for color. She is going to add to her basket or you just going to add to their basket with these other categories. I think our job is to make sure. They have a good selection there that it's optimized so.
It is sufficient that we don't have too much inventory. So we can get better turns and productivity out of it. So I guess my message to you would be will still be in those categories. We may leave the assortments out some and we make sure that we've got the right brands and products that are most likely to select as theyre coming in but we will focus on winning with color.
And recruit and color customers and then use the other categories as basket sales and Thats. The way if the strategy works and we will continue to do that execute against that strategy.
On traffic and it'll be interesting to see how traffic settles post pandemic and obviously right now what we're seeing is people, making fewer trips book by more when they come.
And that's I think it is across all of retail and the question of course is that some consumers within that mix are probably making almost no trips and you can imagine some of the older consumers who are concerned about their health.
And what we don't know is how much of that will return and the natural course of things as people get vaccinated and feel secure and how much of it will get will people shift to new behaviors that they learn during the pandemic.
And that has all to sort out.
If I have a guess I would guess that traffic will be down some as more consumers use omni channel is their way of purchasing but it won't be down from the level. It is now as some consumers return to their previous behaviors.
Yes.
This evolve as good as mine on that one, but that's how I see it likely settling out.
Okay. That's very helpful and our final question is Chris <unk>.
Think about the store fleet and across both concepts.
What's on your mind in terms of modernization and renovation and and how.
Now refreshes May go and also any evolving thoughts on footprint as the environment continues to rapidly change. Thank you.
Yes, Oliver evolving is exactly the right word to use there right. We're deep into the assessment right now part of what we need to do is put all of these new delivery service and functionalities and place and let the consumer tell us what are they want do they prefer both as to they prefer same day delivery do they prefer visiting the store.
And talking to our associates, we need to put all the right delivery service and fulfillment options and place and then let them kind of guide us in terms of what's the right footprint over time.
Well I guess the message I would say to you is we are deep into analyzing this we're going to watch how behaviors emerge we're going to do a lot of analysis of store profitability as the shift as we do different forecast of omni channel and then from there we'll make the right decision on whats the long term strategy for footprint.
In terms of the store experience. We are working now also on how do we think about our store experience that's truly centered and color.
And also that has omni channel built into it as well as we expect stores to do to play a major role and fulfilling the the <unk>.
Customer water.
And so those two factors. The fact that we want the business to be censored and color as the core recruitment vehicle, that's going to change how we assort, our stores and youre going to see changes there over time and to we have to set up the front of the store such as easy for those omni channel customers, who want to be there or do both source and example have a delay.
Every service line postpaid pick up and it's easy for them to get in and out at the front of the store so theres going to be significant changes at the front of store as well to make that work seamlessly. So all of that is coming we are looking at it and doing the analysis on it some of it is we need to see what post pandemic reality looks like and from there we're going to be setting.
And of course that will involve significant footprint changes and store design changes over time.
Thank you very helpful Best regards.
Thank you Olivia.
Thank you. Our next question comes from the line.
Mark I'll swagger with Baird and your line is open.
Good morning, Thanks for taking my questions.
And to follow up on.
And the margin and EBIT really nice margin performance. This quarter I think the second quarter of solid growth and operating profit.
We haven't seen and some time I guess, how should we think about the sustainability there and just the normalized growth algorithm as the Covid disruption abates.
That number is going to accelerate as we lap COVID-19, but it's moving forward I think you've spoken to and consistent positive comps, obviously, some nice gross margin tailwind.
So maybe it ultimately comes down to what a normalized SG&A growth.
It looks like as we look at all the puts and takes on the cost front. So just.
Any thoughts there would be great.
Yes, So let me start there at the top line I think.
And we've referenced.
The sales disruptions, we've experienced the Choppiness, we're in times, where there is not restrictions pre COVID-19 going into and the lag.
Last March we were positive low single digits.
Q4 was another.
And a period of low single digit growth and again that was a period when the restrictions were lifted.
And it was.
Lower lower issues from the pandemic during that time of course, then in November and restrictions come back on so we've seen that choppiness, but I think the way we're thinking about it and the way we've we've proven to ourselves and I think is that we are a low single digit grower and we believe and the pandemic headwinds abate that we are well positioned we have new capable.
<unk> better tools better teams.
And to continue and we focused on that during the entire time of the pandemic to continue to build out those capabilities. So we believe we are and a great position.
And to deliver consistent sustainable growth and again, we've got to get past the pandemic.
On a margin perspective gross margin perspective again, the sustainability of the around 50%.
It is definitely something that we've proven we believe the promotional strategy is working the shift in marketing.
Strategy is working as well and so we believe that that is something that we will see and continue.
And to deliver going forward from an SG&A point of view that we will have some headwinds there and there is wage inflation overtime.
But we will continue to work to optimize that and we're getting better at the E comm profitability.
We will continue to to look and as Chris mentioned the store fleet is under analysis as well and so we look for improvements that we can make there and then.
In terms of and other things, we can do and margin we've got pricing opportunity. We believe again, we've got a differentiated core and we believe we can leverage so we feel confident that we can drive leverage on SG&A over time once we get to a point past the pandemic, where we can grow the.
Top line and those low single digits. So again, it's we're positioned really well for the long term and again, given all of the capabilities and new tools that we've brought to our business model and we're now at a good pivot point once the pandemic.
Debate, we will we will be able to to.
And to deliver on that.
Thank you for all that detail and just a follow up kind of on the near term here. So as we look at the re closures across various markets.
Thinking back to last year.
You were pretty quick and aggressive about reopening your stores safely leaning into curbside and return to positive comps.
And.
Faster than anybody would have anticipated.
Yes. The question is and how do the learnings from last spring and the investments that you've made last year really affect the near term strategy as you face. These new closures I guess, maybe I'm wondering if you could speak to your ability to maybe better capture demand through some of these tools and just how that might impact.
Your near term outlook.
Yes, Mark it's one of those things, where we've gotten better at it and it's one of those things you wish you didn't have to get better at it but we have gotten a lot better at this right. So our teams are pretty agile at this point. They can adapt of course, it's a little easier. When you are not closing down all of your stores at the same time as well, but the reality is our European team.
Is working this on a day to day basis, our Canadian teams are working this out and day to day basis and they adjust accordingly in terms of what is the federal and the local jurisdictions signaled to us what can we do can we move to curbside or not how much digital can we push.
Do we need to furlough teams during us which of course, we have and then how do we get them back and we've built a lot of muscle around moving quickly and.
And dynamic environment, and I think that has helped us and the quarter. We just finished its going to help us and the second quarter as we go through more of the disruption and.
And then I am hoping that we can move that muscle onto other things because dealing with local shutdowns is obviously not the best not the most fun part of the business.
For me, what's most exciting is it just proves to me that we have built a much stronger retail leadership team. We've added a lot of talent over the course of the last year year and a half.
And we just have a team that just better able to cope with whatever comes at us and that team will also be better enable expert to execute as we come out of the pandemic and drive our long term strategy.
Thanks for all the detail and best of luck.
You bet. Thanks Mark.
Thank you.
Our next question comes from the line.
And with bank with Jefferies and your line is open.
Thank you good morning, everyone. Just a couple of follow up questions actually two prior questions that have been the first is on margins and maybe Chris you could talk a little bit about the penetration of color and the business now and how that margin of that category compared to the overall company average and and the same question on channel mix and how deeply.
Penetrated and E com and the business today, and how does that margin look relative to maybe what has been the company average over time.
You bet and thanks for the question Steph I appreciate it and the reality is is that color is obviously growing faster than all the other categories and it has a higher margin category.
And by the way it has proven over time to be a very price and elastic category because cut both consumers and stylists are very sticky to their color line.
So.
And historically color was in the high <unk> or 30 for Sally.
And that share is going up from the issue. It's more like 40 and that share is going up as we continue to see color growing faster than the rest of the business.
And it is a higher margin categories and I expect that that mix shift is a positive headwinds for margin over time.
And we continue to focus on colors, our core in terms of E. Com as you as you signal and as other retailers often signals and our BSG business E. Comm is actually quite profitable because the orders are very large so stylus tend to placed very large orders. So the distribution expense is easy to amortize across a large order.
And our retail business.
<unk> is not as profitable as our store business, we have a lot of optimization that we're working on now and obviously, both this significantly improves that profitability focus and the same day delivery or very close to our store margins. So part of this is we've got to get better at delivering from the store and then the other part is we've got to optimize our ship from store and <unk>.
Warehouse delivery as well so.
And that's where we're at today is E com across the whole business is about 7% of our total, but it's going to be growing fast as we should expect and so.
We've got to continue to make it more profitable so that we're more and different to the two channels and I would just.
Add to that that the.
The way that we approach promo on E. Com now is across the board.
With the company and the total so before it was more of a promotional channel it's not that anymore. Its more of a content delivery method plus.
Product and we're delivering online is very similar to our our product margin structure that we have and.
And store as well so I think there is an improvement there and the other thing that we're doing and optimizing the assortment that we're offering online as well so all of that in E comm profitability is improving and.
And so we look forward to to actually adding more and getting it to quite neutral, but more closer to neutral.
That's great and then just two quick follow ups from some of your recent initiatives. If you could talk a little bit about the DIY Haircolor trend and then you recently launched a new digital marketing campaign using from Influencers are.
Opinion leaders can you talk a little bit about what you're learning from that venture what you're learning about your social traction and how that might affect marketing mix going forward. Thank you.
No I appreciate that step and so I'm glad you noticed that day.
And we actually launched the DIY University.
The reality is as we think thats the way to grow color at Sally is to provide education and training and tools. So that it's easy the barrier to entry is less because correct. We sell professional color to the consumer as opposed to other retailers sell box color and all in one solution doesn't give you as good.
As a result, but.
And the perceived risk is lower for the consumer and so one of our real focus is to create more DIY education to the consumer feels more comfortable with it and we think there's a strong desire for the consumer to absorb that information both digitally as well as in store and to try and do that themselves.
So we're really excited about where that's going and of course, you just mentioned the Sally crew, which is our Influencer program and we have some terrific Influencers suite I'd encourage you to go look at I watch them every day Influencers like charity Grace and Emily Boots <unk> and.
And the reality is that they're doing fantastic content.
And it really highlights in many cases, David colors, but other techniques as well.
And it excites the consumer gets them excited about what they can to look they could generate themselves and gives them some DIY and hence about how they can get it done and do it quickly and so I think Sally crew is just in its infancy, its going to get bigger from here, we will probably add more influencers over time, and we will continue to look for people who are good educators is.
Well as demonstrators.
That's the big difference linked to that of previous strategy I discussed around DIY and we've got to have Influencers, who are good educators as well.
Part of what we've got to do a share. This is an impossible as easy to do you can do it yourself and we can help you get there. So I am glad you noticed that we're going to continue to invest into and I would expect it to grow as a marketing investment and channel for us.
And hopefully it will continue to have the impact and we want which is to really recruit new color customers.
Thanks, Chris very helpful.
Net.
Thank you <unk>.
Next we will go to the line of.
Olivia Tong with Bank of America.
And your line is open.
Great. Thank you and good morning, I wanted to ask a few questions first just a really quick housekeeping one when you say sales decline and.
In Q2 more than Q1, do you mean down more than four and 5% year over year, our net sales will be below the $936 million and fiscal Q1, and then I'll follow up and my other questions.
Yes, it's more of the comparisons and so your first thought so.
The way to think about it.
The way, we said as we expect it to soften moderately from the decline in Q1 and <unk>.
So what we're saying is the continuing disruption and the Choppiness that we're seeing going into Q2, that's going to offset the easy compares that we saw last March.
But you also have to remember that last year, we are trending positive and the pre Covid times and before March.
And when we put it together and what we're expecting is that the continued disruption in Q2. This year up against the strong pre COVID-19 compare and Q2 last year and is going to offset that easier compare to last year's March.
So that's where you get to Q2 sales softening moderately from the four 5% decline and we saw in Q1.
Got it that's very helpful. Thank you.
And then I am.
And.
I got disconnected and middle of the call. So I apologize. If this was asked but just wanted to get a better feel in terms of.
And the footprint and the retail landscape.
Beauty and her because there are a number of new partnerships and geared more towards the face and here, but what's your view on how the competitive landscape changes with target Ulta and also as far as move to Coles from Jcpenney.
In fact, it's not a direct comparable but does this create more competition.
For you or are potentially and a positive way does it put additional focus on the categories.
And in personal care beauty hair, and you get a halo benefit from that so just kind of curious how you are thinking about.
And the increased.
And retail partnerships and focus on beauty within.
And within the store.
Across the store footprint.
Thanks.
I've been thinking about it a lot obviously these get a lot of press. The reality is we're in a very different category our category focus as color first.
And neither of those partnerships are really focused there they are pretty much focused on cosmetics and skin care and those areas. So the reality is is I don't see it as a major impact or really affects our strategy relative to our focus on color and that being said is immediately.
It makes you think about what do you want to do with your own footprint and are there creative ways to recruit how are customers.
In other locations that we should be considering so I certainly think it has spurred interest in terms of Where's the best place for us to reach color customers and are there. Other places that we should be in order to do that but I don't see it as much and the way a direct competition to us because it is so much more focused on cosmetics.
Which is not a core category for us and it's really just a small basket and category.
Got it thanks I appreciate it.
You bet. Thank you.
Thank you.
Next question comes from the line of.
Carla Casella with JP Morgan and your line is open.
Great. Thank you my first question's on the J D. A rollout and there were additional Dcs any more color you can give us in terms of the timing and how many dcs over which quarters.
Yes, I'm not going to go quarter by quarter, We're obviously in North, Texas and one other DC is starting up now.
And we obviously like any implementation what you do is you start it up and then work the bugs out of it and then once you've work the bugs out of it and you then expanded across the platform because it's working well.
We're well down the path of working and the bugs out of it and feeling comfortable and scaling it to full scale.
And then as we get past that phase will go a facility by facility and it will move pretty quickly because again once you've worked with all the bugs out you can scale quickly without fear of disruption so.
We're in the heavy problem solving phase, it's working well.
And we expected by the end of the year it'll be fully implemented and.
And how many total facilities will get it everyone, yes, everyone.
Okay and then.
Deferred rent low.
Last year.
Did you get any abate rent abatements as well and could you just give us any financials in terms and how much rent will be made up in 'twenty one.
Yeah, no actually there is not much where the only thing we did when we when they deferred rent was they would add an extra few months onto the end of previous leases. So there is no incremental payment that has to be paid there is no deferred payments, yes. So so it's a compare and where you're going to see the difference right. So we had abatements.
Last year. So this year, you will see and increased relative to last year, but nothing above normal correct.
In general and this trend as we re signed leases as we are beginning to see lease rental rates come down which is what you would expect right.
And then you did a good job with your inventory low.
And if that's the right level down, 10% and did I hear correctly. It sounds like working capital, we should expect to be and use of cash as we go into second quarter.
Yes, yes, no inventory level is definitely down home working towards optimal level, but not quite to where we want them to be we did improve our in stocks and quite a bit.
But we did.
And when we did go a little bit low and we are still trying to fill in and some of our areas certain areas, mainly it was and the BSG and side of the business and.
And most of the problem or part and promise to say and as <unk>.
<unk> disruptions from Covid.
But we also are having some delays from the California port issues that are going on so.
So we didn't get all the inventory that we wanted in Q1, we expected and that's a little more heavily and.
And we also saw our operating cash flow was better than we anticipated and that's the reason and.
So we do have some of that inventory and that has been delayed will be received in Q2, so and it's spilling over into Q1 from Q1 to Q2. So really it's just a it's a timing issue between Q1 and Q2 on the cash side.
And we're trying to get better at our in stocks and this will help us as we get to a course corrected and Q2.
And to continue the thought on cash we do still expect strong cash generation for the year. It's back half loaded time, just as we expected before and.
And we will continue to to maintain really strong liquidity.
Okay, and then just one other on hair color.
And what percentage of your total Sally and BSG sales on was that last year and where can it go this year with.
Renewed focus on that area.
No it's up with the growth there obviously as I mentioned, we're seeing 19% growth and Sally.
And BSG is positive as well, even with all the disruptions as as Europe amazingly.
So it's growing as a percentage of our category. It has been historically and the high Twenty's at Sally It's more like 30 above 30, now and BSG has always been and the <unk> 40 range and its growing as well. So again, it's our core recruitment vehicle and will continue to grow as a share of our total and it also has higher margin which is great.
But it's just a very sticky category and it's where we have the greatest expertise.
That's 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.
Good morning can.
Can you remind us when the changes to the promotional strategy were made and so we can think about when those comparisons are going to be a little more challenging and then I'm wondering whether you believe that there may be some component of this that is related to the environment.
Covid environment and reduced promotions across most.
And consumer products and I guess your confidence that this won't revert to legacy promotional levels once we get out of it.
Yeah first question as to when we really started to.
And to shift the promotional strategy and really at the height of the pandemic in Q3 of last year.
You can see it in those in that margin, although I'll tell you. It's a little complicated when you go back and look at that we did have some write offs associated with some clearance activity.
Cleansing, our inventory position, but when you Peel that back and we did try and and show you those pieces in.
In our script last quarter.
When you Peel that back already.
50% plus margin. Then then you go to Q4 and you can clearly see it and we're above 50% there and then again now and you see it and our Q1. So it's really once you Peel back Q3, you see there.
And you see it flowing through the financials.
Okay and then on your leverage target is that two five times, our net number and or a gross number and do you have and internal expectation of when you might be able to achieve this this level.
Yes, the leverage is a net number.
And as far as timing and it's all dependent on the disruptions.
Our performance there so as we've stated before and we are.
Positioned really well as the pandemic.
Disruptions subside and to really get back to top line.
Growth and that will continue to flow through the cash flow home and will put us in a position.
To continue to work towards that leverage on the on the EBITDA side on the.
The debt Paydown side, which the other side of that equation, we are and a great cash position and you saw us pay down debt here just this past January.
And we look to continue to and we build cash and re read the environment, we look forward to making more progress towards that target.
And then lastly from me.
And I had seen an article that suggested that there may be styles that have left the industry based upon more people doing DIY.
DIY and home and.
All of the disruption and some areas kind of affected their livelihood and do you guys have any indications that there may be a reduction and the number of stylus.
I'm sure. There is some of that some of it may be that people are taking time off because they are reluctant to work and an environment, where they don't feel as safe and what we're seeing much more of though is fragmentation. So we're seeing larger salons break apart.
And stylus either go on their own as suite renters Booth renters, who are mobile and that actually is good for our business because many of the larger salons were served directly by the big brands.
And as they.
Become independents, they're more likely to be store customers and BSG customers. So we think that's the bigger trend thats going to it was it was already a trend that was happening, but it's going to be accelerated as you see I think a lot of salons that just don't make it through the pandemic and especially in places like California, where you have seen.
Waves of shutdowns or New York city, or some of the big environments that really suffered here lot of salons won't make it those styles still so want to earn a living and they'll go is either suite renters are mobile and Thats, a great target market for BSG and our store platform.
That makes sense alright, that's all from me. Thank you.
Thank you very much thank.
Thank you and.
And I'm showing no further questions in queue. Please go ahead with any closing remarks.
Well. Thank you for all for joining us for our Q2, our Q1 fiscal 2021 earnings call.
We appreciate your support and your questions, we feel really strongly about the strength of our business as we manage through the end.
And of the pandemic, which we hope is coming and coming quarters.
And we feel like we've positioned the business to really focus on a differentiated core of color and added a lot of new capability and talent to support that and so we feel quite strongly about our long term trajectory.
And there'll be some choppiness in the quarter right in front of us, but once we get past that.
We're excited about where we're going to land here coming out the back of all of this that we're going to be a better and stronger company with a more differentiated core and greater capabilities to serve that core. Thank you very much.
Thank you and ladies and gentlemen that does conclude your conference call for today. Thank you for your participation for using AT&T Executive Teleconference Service you may.
Now disconnect.
We're sorry your conferences ending now please hang up.