Q3 2021 Sally Beauty Holdings Inc Earnings Call
In the quarter, which was up 57% versus the prior year.
Other key categories also performed well in Q3 with hair care up 74% and nails up 47% at Sally U S and Canada and hair care up 65% at BSG.
We.
We have continued to see a strengthening within going out categories at Sally U S.
And while we believe that has the potential to gain further traction over the next 1 to 2 quarters as consumers return to pre pandemic activities. We are mindful of how the new cycle around Delta and other variance may influence consume.
<unk> behavior.
I am pleased to tell you that we are continuing to make significant progress against the 3 major priorities, we outlined for fiscal 2021.
Those include substantially completing the remaining elements of our transformation.
Leveraging all of our new capabilities and tools in.
Of our mission to recruit and retain color customers and bringing our debt leverage ratio closer to our target of 2.5 times.
Across both the Sally and BSG segments, we're providing our customers with a robust omni channel experience and view this as an important growth driver.
As we.
Service to scale and optimize a full suite of omni channel services for our customers, we see e-commerce growing to 15% of sales in the coming years.
In Q3 global ecommerce sales were $71 million and represented approximately 7% of total net sales.
Sally.
We can test in Canada had 43% of e-commerce sales fulfilled by our stores.
And focus continues to gain traction and comprised 22% of Sally U S and Canada e-commerce sales in the quarter.
That's up from 20% in Q2 and 11% in Q1.
Additionally.
Sally you adjust started testing rapid delivery at Sally U S and Canada, which will fully rollout in the next 1 to 2 quarters.
At BSG, we completed the re platforming of our web site on schedule and introduced both focus and rapid 2 hour delivery in all BSG territories.
Both.
Both of these new fulfillment options, which bring tremendous convenience and value to our stylists are currently being tested and refined with the expectation of being fully operational in Q4.
Another significant development at BSG is a new partnership with Regis.
In the coming months will become 1 of their primary distributors.
<unk> as they pivot to a full franchise model.
We have a significant opportunity to continue leveraging our digital capabilities, while optimizing the store portfolio to deliver a superior omni experience for the customer.
We are in the early stages of our initial 90 store test, which as a reminder includes the closure.
<unk> approximately 70, Sally beauty and <unk> locations throughout the U S.
Over the next several months will be proactively engaging with our customers in those markets and analyzing sales transfer to inform our path forward.
Another important area of focus is loyalty and CRM.
<unk> is enabling us to capture tremendous data and drive deeper and more frequent interaction with our customers.
In Q3 purchases from our loyalty members at Sally U S and Canada exceeded 73% on total sales and BSG U S exceeded 8% of total sales the.
The BSG program.
Which is approaching its 1 year anniversary and we're pleased with how quickly the stylist community is adopting our private label rewards card.
Turning now to our <unk> implementation, which represents 1 of the final elements in our multiyear transformation journey.
BSG is currently up and running on both.
Demand and fulfill across its U S network and will be expanding across Canada and towards Sally facilities next.
With the expectation that will be up and running across the entire network by the end of the calendar year.
Additionally, we used excess cash to reduce our debt levels by over 200 million.
Is it from the third quarter, bringing our leverage ratio below 2.5 times.
More on this from Marlow later.
As we approach the final months of our fiscal year, we feel very good about our positioning and capabilities and the exceptional team we have in place to execute on our mission.
That.
And we are aware that the latest consumer sentiment figures at new pandemic variance are creating macro uncertainty.
At the same time supply chain disruptions are persisting.
Looking at the near term picture, we anticipate that fourth quarter net sales will be approximately flat to up 2% versus.
That said year as comparisons normalize.
As a reminder, in the fourth quarter of fiscal 2020, net sales were roughly flat to the prior year, reflecting some pent up demand in the first part of the quarter as restrictions eased and salons reopened.
Looking further ahead, we believe the businesses.
Poised to achieve our long term algorithm of low single digit same store sales beginning in fiscal 2022.
In summary, we remain laser focused on our mission to recruit and retain color customers drive operational excellence and utilize our new capabilities and tools.
To connect more deeply with our customers.
Conventional wisdom says there are 3 key dynamics driving success with the consumer right now innovation convenience and personalization.
We couldnt agree more and we're seeing that play out across both Sally and BSG.
Vivid bonding and lightning are driving innovation and there is more excitement on the horizon from both us and our vendors.
Rapid delivery and <unk> are driving convenience and speed to market.
And on loyalty and data are driving personalization through customer insights engagement.
Conversion.
This is particularly powerful given how sticky are customer assets.
Our transformation work of the past 3 years to 4 years has upgraded our entire operating infrastructure and set us up for long term success.
It's not often that a retailer has the runway to rewrite it.
<unk>, Inc.
We are incredibly proud of our teams for helping us successfully reinvent the business and create a robust platform for future growth.
We know there's more work ahead and plenty of opportunity.
But our mandate now is to optimize and scale.
With that I'll turn the call over.
Play per load to discuss the financials and then we will look forward to taking your questions.
Thank you, Chris and good morning, everyone.
Pleased to reported strong results across the board.
Leading net sales exceeding $1 billion, reflecting a year over year increase of 45% and same store sales came in at $44.
7%.
The quarter was also highlighted by solid gross margin and expense leverage driving strong earnings and cash flow.
Traffic and conversion trends were similar to recent quarters on.
On a year over year basis traffic increased along with other key measures.
Including year on units per transaction average unit retail.
And average ticket.
Global E Commerce sales were $71 million, representing 7% of total net sales.
Reflecting ongoing strength as we continue to scale, our digital capability and implement our strategic initiatives around fulfillment and customer engagement.
Looking at gross gross profit.
We delivered.
Quarter gross margin of 53%, that's up 470 basis points to last year and reflects our ability to maintain solid performance above our 50% target level.
The year over year increase primarily reflects a higher gross margin at Sally beauty, partially offset by a lower gross margin at BSG.
Moving to.
<unk> 30 expense, we drove significant expense leverage in the quarter with SG&A as a percentage of sales coming in at 37, 8%.
An improvement of 680 basis points compared to a year ago.
Third quarter SG&A totaled $386 million.
That's up 23% to last year and is in line with our.
Expectation for higher SG&A spend in the second half.
As a reminder, the year over year increase reflects challenging comparisons to last year when.
When we had the benefit of furloughs and rent Abatements, and addition to wage inflation incremental marketing and <unk> spend in the current year.
Looking at Q4, we expect SG&A dollars to increase.
On both a sequential and year over year basis, primarily driven by additional operating expense and international territories that have reopened as well as investments for growth most notably in our teams and marketing.
We also delivered strong earnings performance in Q3.
Adjusted operating margin came in at 12, 6%.
Adjusted EBITDA more than doubled to $157 million.
Presenting on margin of 15, 3%.
And adjusted and adjusted diluted EPS was <unk> 68 versus a loss of <unk> 11 in the prior year period.
Turning now to segment results at Sally Beauty, we saw strong consumer demand in the U S.
As the pandemic began to recede.
Same store sales increased 43, 3% and e-commerce sales totaled $34 million per quarter the.
The Sally Beauty segment also saw substantial increases in gross margin and operating earnings.
The increase in gross margin was driven primarily by the impact of the prior year's noncash inventory write.
And inventory clearance effort.
But partially offset by higher sales volume coming from our lower margin European operations as a percentage of total segment sales as compared to the prior year.
We're pleased with our ability to achieve this level of performance, despite sporadic closures and capacity restrictions across our international territory.
Down fluid market conditions in general.
In the BSG segment same store sales increased 47, 8% as salon to increase capacity and virtually all of our U S market.
Ecommerce sales totaled $37 million for the quarter.
Gross margin declined at ESG as we saw higher sales volume coming from our large volume.
And lower margin full service customers that rebounded from COVID-19 impacts from the prior year.
Resulting in a 60 basis point decline in operating margin.
Moving to the balance sheet and cash flow.
During the third quarter, we utilized excess cash to reduce our debt levels by $205 million by fully repaying.
Paying the outstanding balance of $197 million on our 5.5% senior unsecured notes due in 2023.
And paying down an additional $8 million of our floating rate term loans.
At the end of the quarter, we had cash and cash equivalents of $270 million and a zero balance outstanding under our asset based revolving.
Moving line of credit.
Inventories at quarter end totaled $935 million.
This is in line with the expectations, we laid out on our Q2 earnings call and reflects our priority to rebuild inventory levels as we came out of fiscal 2020.
Cash flow from operations was $86 million.
Reflecting our strong Q3 performance and the timing of working capital requirements and inventory receipts.
Capital expenditures totaled $18 million.
Putting free cash flow at $68 million.
In May we extended the maturity on our asset based revolving line of credit agreement by 5 years to May of 2026.
The new agreement returned the pricing in terms of back to pre COVID-19 levels and right size the facilities to $500 million.
At the end of the quarter, our net debt leverage ratio stood at 1.9 times.
For comparison purposes, the leverage ratio that we often site as defined in our loan agreements for the impact of cash on hand is capped.
$100 million per net debt calculation purposes was $2.1 9.
We are maintaining our focus on liquidity and we will continue to balance that with strategic growth investments debt paydown and returning cash to shareholders in the coming quarters.
As we approach the balance of the year, we feel confident about our position.
<unk> and our ability to continue navigating from both on operational and financial perspective.
That said, we are maintaining a cautious view due to uncertainty around variance supply chain disruptions as well as any potential restrictions and closures across all of our regions.
Notwithstanding any significant pandemic.
Physician options, we expect Q4 net sales to be flat to up 2% compared to last year's Q4, when net sales were down less than 1%.
We appreciate your time this morning, now I'll ask the operator to open the call for Q&A.
Thank you.
And ladies and gentlemen, if you wish to ask a question.
<unk>.
1 zero on your Touchtone phone.
You hear a tone, indicating that you are in queue.
You may remove yourself from queue by pressing the same 1 that you will command once again for questions or comments, it's 1 zero.
And our first question will come from the line of.
Please pardon.
Hamer Your line is open.
Good morning, and thanks for taking my question and congrats on the nice quarter.
So I guess just following up on more or less on your comments just around Q4 is there any more color you can provide in terms of what you guys are built on just given on the COVID-19 risk out there on some of the supply chain disruption.
And I think you would also be helpful to get more color on exactly what the supply chain disruptions are.
Yeah.
To give you a little bit more there I think just to.
Just to make sure the comparisons are a little bit difficult as we go quarter to quarter. So just as a backdrop.
Just to remember in Q4, we had a really strong quarter last year.
Given the circumstances you remember that was the first time that we came out of closures and heavier restrictions and now is the time that we've been benefited from us on pent up demand, especially for Sally.
Back Q4 last year, Sally was up over 3% in Q4 of last year, when we compared to that prior quarter of 19.
Overall, we were flat.
Flat compared to 19 last year's Q4, so when we look at this year, we did guide sales to be flat to up to 2%.
Vs Q4 of last year that is reflective of our long term model, we're expecting to grow in the low single digits overtime, but.
But as we look into Q4 to answer your question Theres, a great deal of uncertainty, especially as.
Go to supply chain disruptions and the pandemic I'm going to go a little deeper on the supply chain disruptions and we've been dealing with the disruptions throughout the pandemic not only within our production supply chain, but also significant delays on.
Bottlenecks within the transportation lines from vendors. So we do expect that that situation could be even more.
It relates weighted as we look into the next 4 to 8 weeks.
Specially with many retailers are loading for holiday, putting even more stress on on our already backup supply chain network.
So we'll continue to operate with meaningful disruptions, especially for certain of our vendors.
But our focus has been on our core categories and that's helped us to mitigate this.
We feel pretty good about inventory levels right now, we do have improving service levels in our most important product offerings are those focused on color and care, but the bottom line is that we are factoring a supply chain uncertainty into our planning and then as for the pandemic and consumer consumer sentiment there is growing uncertainty.
And our minds related to the pandemic. The headlines are a are backing that up we're seeing increasing case counts from variance. There is obviously potential for restrictions and closures, but it could impact us across our global markets, we're already seeing massive restrictions coming back into play in certain areas.
And so while last quarter, we did enjoy some higher levels of optimism.
On the U S. We.
We do now see some downward pressure on consumer sentiment and the Inc.
Further I am placing concerns.
So we were pleased with our top line performance in Q3, but we are expecting the month to month Choppiness to continue.
We are ready to continue really to navigate as we have an uncertain and fluid environment.
As we finished the year. The good news is that we do have a resilient are we operating resilient categories and we do have a proven track record of staying agile and executing during these difficult and very unpredictable times.
Okay, Great. That's really helpful color and then I guess.
I'm not sure if you can comment on Pittsburgh quarter, a day are you.
Seeing any noticeable impacts related to the delta in your markets, Yes, we don't comment inter quarter, but I would say.
Yes, we think it's more of an impact in August and September than July Okay. Okay. And then maybe 1 just last question just in terms of Q4 is there any more granularity you can give in terms of how you think about gross margin.
Yeah on expenses.
Yes gross margin.
All along we've talked about our target of staying at 50% plus we've proven we have a good track record on that.
So that that will hold and we expect that to continue as we look at the SG&A line as expected we expected to spend more on the back.
We saw Q3, and we did have an increase on a sequential basis, we are facing and on some wage inflation at this point on but also investing back as we open up markets back into incremental marketing spend to meet demand and then we also have some it spend that we back half loaded so as we look at Q4.
Again, where we're expecting to continue that pattern, we will have a bit of an increase from Q3.
And year over year on again.
Related to the items I just mentioned, we will invest back into more store payroll and marketing I'm also have some additional operating expenses.
Our international markets begin to reopen or go into a full.
We reopened mode for the quarter and then again the wage inflation than just operating in a difficult labor environment will continue to put pressure.
And again, you know incremental it spend that's focused on our strategic priorities.
Mainly we're we're in the process of scaling and optimizing the J D. A tool are.
Bringing north Texas.
D C facility and.
And fully on line and then also are continuing to build out our digital platforms as we continue to improve the customer experience.
Thank you and best of luck for the balance of the year. Thank you for the questions or cash.
Thank you we will go to the line of Oliver Chen.
Cowen and your line is open.
Hi, Chris.
Good day.
Talk to you guys on the color Michael.
And then color has been very impressive in terms of what's been happening there how do you see the evolution proceeding and how will you respond to that in terms of the.
An innovation Anniversarying and question we receive is.
Is this just a fad or.
Or not.
How permanent that maybe with those customers.
Would also love your thoughts.
On fourth quarter as it applies to traffic in key comp metrics just more generally.
<unk> B S T vs, Sally and things that you're thinking about it in the guidance planning. Thank you.
Well why don't I take the first 1 on color and just innovation, there and whats happening. So obviously, we're seeing growth across our color business not just in visits but also very much so in lightning and bonding.
Planning and blending.
And there's a lot of innovation coming there as well so we've got a new vivid line coming on.
Early.
Q1 of next year.
There is some terrific innovation on the bonding side thats coming to market.
And some great innovation and blinding that continues to drive growth. So.
1 day.
I think the category is going to continue to grow although it's 29% of our color business, it's actually a pretty modest part of the total color business in the United States.
Less than 10% in total so when I look at that I would say theres plenty of headroom for vivid color to grow in Sally has just become the destiny.
Festination for it.
And it's great because it's nice to see that we're over indexing now with Gen Z consumers, who are coming into that category, but I think the overall color category is seeing a lot of innovation coming to market and we feel confident that's going to continue to drive growth on some of the metrics that traffic metric return on our tomorrow on my heartache on the traffic.
We had.
There are some positives that we saw this quarter consumers seem to be.
More willing and showing some desire to get back to activities that they were enjoying before the pandemic.
Unfortunately.
C that is.
Maybe tempering a bit given the uncertainty with variance and the potential for research.
<unk>.
But we are continuing to see increases in our key metrics on consumers are continuing to reduce their trips that are spending more when they go out. So we expect that to continue but we do expect.
The consumer to come back once they feel comfortable but like I said near term that we can get it.
Going to be pressure on that.
Okay in Marlow inventory versus sales for fourth quarter, what are your thoughts there and as we think about the supply chain disruption will it impact Sally our BSG more or comparably.
Why don't I take the second question I think it's going to impact supply chain Oliver will probably impacts.
BSG more in Q4, but it will have some impact across both businesses.
And let me turn it over to Mario for the other question, yes in terms of inventory.
You've heard us.
Throughout this year, we've been working really hard to build back we left last year.
At levels that were too low.
For the right reasons, we were managing for cash that we spend the good part of this year investing back into inventory.
It's gone reasonably well other than some of the supplier disruption. So like I said, we're in a pretty good place we have improved our service levels in stock positions.
And for those areas where.
We have had smell.
Because we've been pretty successful at moving customers over to alternative products.
But we are still working through the disruptions as we look at them at the end of the year. We continue to expect inventory will be in the kind of the low to mid 9 hundreds.
On which is obviously up quite a bit from last year.
But we expect we'll be in a much better position to meet the improving sales demand as we go forward.
Thank you lastly, thanks for the commentary on sales transfer and thinking.
Acting proactively on the <unk>.
<unk> net.
What are your thoughts about what you would look for.
And what Mike.
That imply in terms of acceleration or deceleration of thinking about closures over the broader fleet.
And what are the parameters you are managing for just to manage risk and maximize transfer as well.
Great question, Oliver and I appreciate it.
Got a very integrated program now we're contacting.
Customers now.
160, 30 days before the store is closed.
We're putting up signage in store, we're running communications and store and obviously then after the store closes we're continuing to follow up with customers. We track how many either shift to another store and do we see them purchased at another store nearby or.
It shifted becoming an online customer if they don't shift to another store, we also contact them and try and encourage them to either shift to another store or online and so it's a very integrated program that the real driver is the most important driver is sales transfer.
And we feel confident that it's going to work.
Or did as we planned or better that being said, we want to do the work and capture the data and then you're exactly right as we get into November and beyond.
And we have a fully statistically significant sample that we can draw from then.
It will set the size of the program in terms of optimization based on the data.
Thank you best regards.
You bet. Thanks Oliver.
Thank you.
Next we'll go to the line of Mark Wagner with Baird.
1 moment.
Yes.
Your line is open.
Great.
Thanks for taking my question.
So.
Sales growth of about 5% versus pre pandemic levels, but that is a bit ahead of your target growth algorithm of low single digits. Despite some of the ongoing disruption. It's ahead of the flat growth youre expecting in the fourth quarter. I guess is that primarily the stimulus benefit you saw during the quarter or.
Any other factors you would attribute that to and I guess looking ahead, given the momentum in color and some of the other initiatives underway and we do see potential to per cent to exceed that longer term model in fiscal 2022, presuming some of the supply chain disruptions normalized.
Yes, so Margaret.
So there were a lot of puts and takes this quarter right. So there was some stimulus impact early in the quarter as you noted.
And we clearly saw that Theres also some.
Disruption in places like Canada, where it was salons were shut down for a significant period of time.
And there and the U K only opened up.
Mid April so there were a lot of puts and takes on this quarter.
What gives us caution going into next quarter.
Is more along the lines of the fact that Delta is obviously getting a lot of headlines right now and the supply chain disruptions do seem to be getting worse.
We had been making a lot of progress there throughout this quarter and.
Our worry is that it's going to be tougher to make progress and to maintain service levels. This quarter and that will improve over time, but in the short term it may cause.
Some loss some headwinds off the top.
The reality is yes, I mean, obviously, we're building capabilities to try and exceed that long term algorithm, but we want to set the P&L.
Work at that low single digits algorithm and Thats our job 1 is make sure that we have all the right digital tools in place to serve our customers the right way make sure that we're mitigating the cost headwinds that are coming our way, especially on labor costs and really setting the P&L up to work at a low single digits sales per.
Per sales number and then obviously.
<unk> will be working to exceed that so there may be some upside there, but the number 1 thing we're doing is setting the P&L up to work at that at that level Marvell on.
I think you did.
Great.
That's helpful and on the margin front.
Sally beauty EBIT margins or exceed.
Seeding pre pandemic levels, but BSG, it's still tracking a couple of hundred basis points below.
Can you talk us through some of the factors at play here with BSG is there anything structural that's changed given the digital sales score how should we be thinking about the path back to a mid teens margin rate for PSG.
Yes, I think that's probably to the gross margin line is really where you see happening.
Looking at that.
Relative to this time last year.
We were up 41, plus margin and that was it was definitely a pandemic comparison, there you see a mix of business and the highest margin.
With stores and E com was driving that mix and not so much in the full service now you see that normalizing and full services coming back online.
So that's that's putting that margin back to 40 mm ended at 40 range 40 is the target for US and we were just a sub that this this quarter and on a go.
On a going forward basis, we do expect to see those gross margins on a full year basis there'll be some puts and takes along the way, but on a full year basis, we should see a 40 margin in the BSG business and what gives us confidence in that is we do have improving capabilities in our merchandising team both from a team and.
Channel ability standpoint, as well as tools, we've got 80 day now operational and we have now scaled are starting to scale that from <unk> on the platform.
So as we optimize the Ada and will bring more sophisticated pricing and promotion tools into.
They're not in the not too distant future into the DSD.
The world that gives us confidence that we can get back to that 40.40 plus.
Margin range announced that will transfer right down to net operating margin.
Great. Thanks for all the detail on festival.
Thanks Mark.
Thank you next we will go to the line of Steph Wissink with Jefferies. Your line is open.
Okay, 1 moment.
Okay.
Your line is open. Please go ahead.
Yes.
Hello, Good morning, everyone I wanted to just follow up on Mark's prior question related to BSG margin can you just help us think through on the integration of the Regis contract.
The largest going on multi <unk>.
Unit contracted that burden the gross margins of BSG or is it somewhat neutral.
It is a slight it is a headwind.
And we will provide more details on the size of that but it is it is a mix headwind on operating profit upside, but a mix headwind in terms of margin.
But then as.
Marlow pointed out we expected better management of ins and outs of products product lifecycle promotional management that we can still get BSG back to that 40% range. Despite that that additional volume at a slightly lower margin.
Okay. That's helpful. And then a question on E Commerce I'm just curious how it.
Played versus your internal plan, we've seen some retailers reporting E. Commerce penetration is still elevated but you have kind of tracked back to kind of a pre pandemic level. So just curious hut, it's fairing relative to your internal plan on how should we think about e-commerce penetration in bridging that 7% to 15% I think is your call.
Yes.
So do you want on correct you on 1 thing it didn't track back to a pre pandemic level, we're still well above for a pet pre pandemic levels. We just didnt grow sequentially. So I totally get that the reality is is that as you know when we launched a lot of the new digital service models. During the pandemic, we launched the minimum viable products to rush from.
On the market and we've been really focused on both improving the customer experience and improving the margin delivery and profitability of E. Com, we feel like we've made a lot of headwinds on that and more work to go obviously so.
So we do think we'll get back to growth and that's why we believe that over the next 3 years, we can.
Total the penetration of E com.
We over the last few quarters, we've spent a lot of time really improving the customer experience and getting profitability right and thats part of the reason why we're not seeing the sequential growth right now.
Okay. Thank you.
You bet thanks des.
Yes.
Thank you next we will go to the line of Olivia Tong.
With Raymond James and your line is open.
Thank you good morning.
I wanted to ask you a little bit more about the vivid trend and see if you got anything in terms of studies or surveys or what have you.
And just talk.
A little bit about the positive from risks of about a third of your hair color now on and sort of our fashion category and Thats Youre over index year relative to peer retailers.
It's helped with the innovation cycle.
Going forward it is actually quite strong, but curious your thoughts in terms about low.
Longevity of the demand.
And whether it given that it's more fashion and Gen. Z focus is there a risk that they have it from I don't know if from heritage to their phase or something else. Eventually so just if you could give a little bit more color in terms of the sustainability of that and and what's your what youre doing to drive that that would be helpful. Thank you.
Yeah Olivia.
I think it's a really good point.
The reality is is I think what we believe is that especially amongst gen Z customers. Although it is broader than that it's interesting to see that the.
On the bell curve of who's buying visits although it's centered in Gen Z stretches well into all consumers and in fact, we have a surge in customers even in their <unk>.
780, <unk>, who are using it. So I just think there is a desire for self expression that's driving this.
On a feeling like hey.
I should be free to do what I want where I work, where I go to school or whatever and by the way I think youre seeing a lot of companies and schools and educational facilities and institutions, becoming.
Accepting.
Presenting themselves. However, they want to present themselves and I think that's a long term societal trend that people are going to feel much more emboldened to express themselves the way they want to and not be confined by rules that are set by 1 employer or another.
Think there's legs to the trend.
That being said the other side about it is it's really nice to see a younger consumer in the store.
And experiencing is both digitally and physically in store, they're not just buying vivid colors, they're buying a lightning and blonding products they are buying products to treat their hair.
And to see us in recent a lot of recent survey actually over.
Index versus other retail with consumers in that Gen. Z category is exciting because I think it's teaching a whole new generation of consumers that Sally is the place for DIY pro color at home.
So overall I think it's a great positive trend and then you back it up with the innovation you just mentioned.
And.
There is a terrific.
New bonding added vegan color line vivid color line coming to the stores.
In early Q1, there's some terrific innovation and bond incoming terrific innovation.
Enlightening as well and just have all of that would be coming into the stores at the same time and create more energy around the category I think gives Sally.
Some terrific opportunities and by the way, we're seeing tremendous growth in these categories on the pro side as well, especially bonding enlightening. So.
Overall I feel like it's a category that we have a strategic advantage and we have a much broader assortment than any other <unk>.
Retailer, we have much more expertise in store to coach consumers through the process.
As well as digital experience expertise on line.
So I think it's a great opportunity for us to continue to capture share and equally as importantly, continuing to bring a younger customer who has never experienced sally to the store and let them learn about the full array of options, we can provide for them.
Thank you Catherine.
<unk> 1 model for you on 1 point of clarification. I think you said that Q4 SG&A was going to be up sequentially do you. The margin will be up sequentially on the tolerance will be on sequentially from Q4 dollars. Okay.
Okay.
Got it okay. That's it from me. Thank you. Thank.
Thank you Olivia.
Thank you on.
Our next question comes from the line of.
<unk> <unk> with Morgan.
Stanley.
Your line is open.
Hey, Good morning. This is actually saw on mostly on for Simeon This morning.
Hope you're all well first question I guess on on it.
Yes margin close.
40%.
Do you think that sort of the appropriate run rate going forward or should we sort of be thinking about other puts and takes there.
Yes, I think we're on Sally.
He has throughout the last several quarters really been strong on.
On the margin front the biggest driver of that was really our shift.
Promotion.
And on strategy and that started we're about to lap it really it's been about a year now when we started in earnest on a Q3 of last year and so it's been it's been pretty much a sustained margin going forward. So.
Think we feel pretty comfortable that they will continue to contribute to the strength of the margin on on overall basis.
The BSG.
<unk> expenses in the international businesses come back on line kind of makes that down.
Thanks Sally.
Stay tuned.
Okay.
It's Simeon sorry to jump on it and I guess, sorry for the tag team.
I wanted to ask I don't know Christian we could talk about the SBS business and.
But any way to look at the customer mix parse out new versus existing on anything surprising you about other shopping you.
Yeah, I mean, I think the biggest and most interesting changes.
The increased penetration with very young customers, especially Gen Z. So we just talked about that but that is.
And they use.
It is a big shift.
I do think the other side is is that the diversity of our customer base remains.
Highly diverse.
So.
So I think our continued need to have to drive store clustering, which is something the team is working on and have stores that really reflect the local.
Community a much more meaningful way is a big priority for us on a big opportunity for us going forward, but thats 1 thing we clearly see on the customer data is incredible diversity.
And high penetration with these diverse segments and as a result of that a real need to tailor the store and the store both the store expertise as well as the store merchandising and assortment and.
That is all merchandising to the local customer.
And I guess if.
I know I saw you expect to get back to low single digits in your fiscal 'twenty 2 if your existing customer, let's say is continuing to come back and it's a pretty steady category on business and now you're getting these new customers does that low single digit reflect.
Even before I mean.
This could be a newer run rate post COVID-19 I know, it's a little early to get there, but that's what I was sort of getting out with in terms of the patterns of existing versus new.
Yes.
Excuse me, yes, Jimmy and I think we have a lot of things coming at US next year. Obviously, we don't know whether this is going to be our last bout with COVID-19 or.
That we will find out hopefully it will be.
Who knows we don't know how long supply chain disruptions will last and we're clearly dealing with labor inflation and so with all of that we're really trying to set the P&L up to operate at that low single digit number and be successful there and.
And obviously, we'll be working to exceed that.
We've put a lot of capability in place in the last year, whether that's digital capability merchandising capability, and CRM and targeting capability and we're going to be bringing all that to bear next year, which is the exciting part to be finishing off years of investment and some disruptive implementations and actually be able to bring all of that capability.
<unk> to bear on the business that's exactly what we've been working for for 3 years 4 years, maybe and it's nice to see it all kind of come to fruition and it will in 'twenty 2.
That being said I think.
We need to be cautious and set the P&L up to work at a relatively modest topline number so that we can.
Deal with whatever comes our way.
In terms of additional disruption.
Okay. Thanks, very much take care.
Thank you.
We do have a follow up from the line of cash.
Got it from Oppenheimer. Your line is open.
Thanks for taking my follow up question. So on the on the vendor front I'm just curious.
If you guys are starting to see vendor price increases what level Youre seeing right now versus history and I'm. Just curious if you guys expect to pass through higher prices going forward as well.
We expect a number of vendor price increases on both sides of the business and we do expect to pass those through.
Many of those will happen in the next few months.
Some have already happened and others will happen as we get towards the end of the year. So we are seeing that now and we fully expect to pass it through and obviously take pricing on our own products as well as we experienced cost inflation there as well.
Great and then 1 more follow up just on the promotional Brian we have sorry, if you.
Maybe a few more promotions year over year. So I just wanted to get us on if you look at the promotional discipline that you guys have had in recent quarters. It seems like it's continuing continuing but just any thoughts there just on the promotional backdrop in terms of our Sally is doing and then what you guys are seeing overall.
Refresh I think we are so laser focused on our core categories of color and care.
And then nails also in Sally and pro supplies. The reality is is that we're still.
<unk> unique and many of those categories, whether it's because we're the only 1 in Sally beauty sales professional color for home use or whether it's because we have so many exclusive contracts at BSG are so many exclusive brands across the Sally business.
We don't see.
Any need to be increasing promotional activity right now the focus is on delivering great expertise a great customer experience being in stock.
And just executing on the customer expectations, we think thats more important than promotional activity right now.
Okay, great. Thank you.
Thank you and we have a follow.
So up from the line of Albert Chen with Cowen Your line is open.
Hi, again, thank you regarding your cash flow and then pay down the debt that's been very attractive, but what are your thoughts on priorities in terms of shareholder returns at large.
And then on the on.
On the innovation.
Pet stores and planning and allocation as well.
How are you just minimize store disruption and what's ahead for what Youre doing with the stores and is there another chapter in a post J D E.
In terms of those systems and supply chain or are you in a good place.
Relative to where you wanna be thank you.
I'll start on the priority.
Throughout the pandemic.
Laser focused on liquidity.
Right now, it's still important to maintain a conservative strategy.
Really until the pandemic is more fully behind us and some of the macro uncertainties.
<unk> had been removed and we made a great deal of progress on the balance sheet. We're in a great position right now and we have some good options coming up on debt pay down on the coming year.
We will continue to prioritize growth investments and debt pay down in the near term.
As we come out of the pandemic and the environment begins to stabilize that will again continue to evaluate.
And be evaluating optimal path.
On your shareholders right now.
It's best to remain.
At this point.
And then on store disruptions Oliver.
No I don't I don't think were going to have significant disruption in our store activity as a result of continuing to optimize our systems at this.
Point, we do need to complete the rollout of <unk>, which is great, but fully leveraging that tool fully leveraging in terms of store clustering fully leveraging our new pricing tools and CRM tools. I don't think these are going to be disrupted the store activity and in fact, I hope that we will be seeing further stabilization in terms of our overall system.
In supply chain and ability to meet our customer needs. So we're very much into the mode now of fully scale optimize get full value out of the tools and capabilities, we've invested in and.
And we think that will lead to more consistency over time.
Okay and the E Commerce comments were helpful on.
And also your focus on customer convenience as you know <unk> been doing this on an ongoing basis. So on the margin profile on E Commerce what.
What should we focus on are what are you focused on.
On in terms of thing that.
As you continue to need to make sure to offer convenience digitally as well.
We've made a lot of progress here actually in just the last couple of quarters and a lot of that is just being able to set up a really convenient delivery options that work and work consistently the first time. So focus obviously is quite profit profitable rapid delivery from Sally which is rolling out now and rapid.
From BSG those are effectively add store margins are very close to and yet and yet created a really high value service model to the customer. We've also centralized our supply from warehouses and ring fenced a lot of inventory in warehouses. So that we have much fewer splits so that we get the full order delivered consistently the first.
Time, a that is better for the customer because they get it all on 1 shipment as much as possible and be it reduces your delivery cost because youre not splitting shipments. So there's been a lot of progress made here at our E. Comm margins have been improving significantly in the last few quarters we.
We will continue to optimize that but I think right now the real focus is.
Delivery, if we've done a lot of optimization on the full warehouse side now that we want to do is really focus on how do we bring some of these new delivery service models to market that are effectively an equivalent store margin, but create great value of the customer and we're getting those commercialized right now and I'm I'm really excited about what that can do for our E comm business going forward.
Thank you and.
Absolutely Youre marketing has been very modernized in the past there was a focus on lifts in the customer base, but what are the next focus areas and how are you thinking about different decisions on return on that spend on customer acquisition cost as well as making sure you're relevant a new channel like to talk on others.
Lafeyette Oliver it's something we're putting a really close eye on right now, which is how do we spend to drive traffic and how do we spend to inspire the customer.
<unk> marketing team has so many great ideas. They are working on right now including affiliate programs that engage our associates broader micro influencer programs that really targets some of the new.
On slide <unk>, so inspiring to our customers.
And then also additional campaigns that really are organic the way.
You buy Sally was in having colored hair doesn't make you per end professional was so I'm inspired by what's happening with our marketing right now I think it's exciting to see us.
Really penetrate these new channels and a much more organic way be very authentic about it.
Actually in some cases lower costs. It just takes more creativity to do it. So I think the customer acquisition costs shouldnt be going up but I do think that theres, a great opportunity to make it much more authentic and much more powerful and I think youre going to see more.
Things like this you buy Sally event that you joined US 4 in New York.
Youll see a lot more investment in tech talk on some of those areas, especially given the growth in Gen Z that we're seeing in our stores.
Thank you best regards.
You bet. Thanks.
Thanks Oliver.
And Im showing no further questions at this time.
Please continue.
Well I just it to end I'd like to thank everybody for joining us today.
Really excited about where we're at and the trajectory of the business. The business is really healthy obviously, we have some additional headwinds we might have to navigate in the short term, but we've proven that we can navigate those and that our categories are quite resilient. So we're optimistic about.
How the business is going and we're equally as excited about bringing all of the investments we've made over the last 4 years to bear to drive growth future growth from the business and we're ready and set to do that thank you very much.
Thank you and ladies and gentlemen that does conclude your conference call for today. Thank you for your participation and for using AT&T.
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