Q4 2021 Sally Beauty Holdings Inc Earnings Call
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Good morning, ladies and gentlemen, and welcome to the Sally Beauty Holdings conference call to discuss the company's fiscal 2021.
Fourth quarter and full year results I'll.
All participants had been placed in a listen only mode.
After managements prepared remarks, there will be a question and answer session additional instructions will be given at that time.
Now I would like to turn the call over to Mr. Jeff Harkins, Vice President of Investor Relations and Treasurer for Sally Beauty Holdings. Please go ahead.
Thank you good morning, everyone and thank you for joining us.
With me on the call today are Denise <unk>, our new President and Chief Executive Officer, and Marlin, Tobey as Chief Financial Officer.
Before we begin 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 Dot Com forward 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 $19 95.
Actual results may differ materially from those indicated by these forward looking statements as a result of various important factors.
<unk> discussed in the risk factors section of our most recent annual report on Form 10-K, and other filings with the SEC.
Any forward looking statements made in this call represent our views only as of today 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 in its earnings press release and on this.
Right.
Now I would like to tell I will turn the call over to Denise to begin the formal remarks.
Thank you, Jeff and good morning, everyone I'm thrilled to be here with a little over a month under my belt and I'm looking forward to meeting and talking to our analysts and shareholders in the coming months.
Having served in the Sally Beauty board since 2018, I'm fortunate to be bringing firsthand perspective, and a deep working knowledge of the business on day one.
See a significant opportunity to utilize my leadership skills, and retail and finance background to drive the business into a new era of profitable growth capitalizing on all the new capabilities enabled by the transformation of the business over the past four years.
Virtually every aspect of the company's infrastructure has been retool across technology marketing merchandising supply chain, HR finance and talent, creating a robust platform from which we will grow it.
I'm incredibly proud of our exceptional teams who took on this challenge and helped us evolve into a modern dynamic omnichannel beauty retailer that has now set up for long term success.
Before talking a bit more about our future let me share a few highlights from last year.
In fiscal 2021 full year net sales grew 10% gross.
Gross margins exceeded 50% and adjusted EPS was up over 97% <unk>.
Additionally, we generated strong cash flow from operations of $382 million.
We delivered consistent performance throughout the year and concluded fiscal 2021 with fourth quarter results ahead of expectations, reflecting strong operational execution.
We're particularly pleased to see ongoing momentum and consistency across the business. Despite the various impacts of the pandemic.
As we embark on our new fiscal year, our mission to recruit and retain color customers remains a core component of our roadmap and continued tailwind around sepsis self expression through hair products sustainability and innovation and the growing number of independent stylists continue to reinforce the strength of our color and care.
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Putting the customer first and enhancing their experience with us is critical to our success.
We're continuing to prioritize the customer through personalization inspiration education and training.
We're also focused on creating the easiest shopping experience for our customers through our robust omnichannel platform and multiple fulfillment options our customers can get product, how they want it and when they want it faster than ever before.
Against that backdrop, we will be focusing on four strategic growth pillars to drive the topline in fiscal 2022.
Leveraging our digital platform.
Driving loyalty and personalization <unk>.
Delivering product innovation and advancing our supply chain.
First I will talk about digital as.
As we increasingly become the unrivaled force for color inspiration education and training. Our goal is to create an easy reliable omnichannel platform for our DIY enthusiasts and silos.
At BSG, we completed a critical set of strategic initiatives in fiscal 2021 that positioned us to become the go to platform for salad.
We redesigned the cosmic <unk> website introduced new value added services around ordering and rolled out bogus and two hour delivery.
In addition, we will be conducting our store network to the costume across App. This month to further enhance focus into our delivery.
In short our BSG stylists can now access everything sold by causing process on their phone and within two hours.
Bringing together all of these initiatives truly positions with ESG as a compelling resource for the stylist community, providing them with the tools they need to run their businesses most efficiently and profitably.
At Sally we've seen a positive customer response to our expanded fulfillment model and we're continuing to gain traction across both this ship from store and rapid two hour delivery and.
In our most recent quarter Sally U S and Canada stores fulfilled 34% of E. Commerce sales as both is fulfilled at 34% of E. Commerce sales as both is comprised 22% and ship from store accounted for 8%.
Two our delivery was launched in the middle of the quarter and represented 4% of Sally U S and Canada E Commerce sales.
Additionally, the adoption of these new fulfillment options exhibits firepower of scaling our new tools and capabilities to meet the strong desire our customers have for this incredible convenience.
We're also laser focused on improving in stocks across our store and DC network through our new J D platform. So our customers are able to access our inventory however, they choose to shop and get most products in just two to three hours.
As we continue to scale and optimize our full suite of omni channel services for both our Sally and BSG customers. We believe e-commerce can reach 15% or more of sales in the coming years.
In fiscal 2021 global ecommerce sales penetration was just over 7%.
Importantly, we know that an omnichannel customer at Sally U S and Canada is approximately 75%, 80% more with us annually than our brick and mortar customer. So this is not just a sales channel shifts it is a tremendous opportunity for growth.
Moving now to our second growth pillar loyalty and personalization, which is directly to our digital strategy.
As many of you know the rise of personalization has changed the table Stakes in retail.
Our rapid rapidly growing loyalty program and a new push towards personalization, we have a significant opportunity to drive increased customer engagement and sales.
At Sally U S and Canada, approximately 74% of our fourth quarter sales came from our loyalty program.
At BSG, because <unk> have to register to shop with US we have data on 100% of our customers.
Additionally, approximately 8% of our BSG sales in the quarter came from our rewards credit card that was launched about a year ago.
These are remarkable numbers and we've only scratched the surface in leveraging this asset.
In fiscal 2022 will be utilizing data science to engage our customers with inspiration education and personalized offers at every touch point.
At Sally this includes recommendations on product usage reminders to replenish on time, and incorporating DIY and educational components at key moments in their journey.
At BSG. This means showcasing new product arrival, reminding stylus to restock their back bar and notifications to replenish key stylish products.
We believe these actions will drive higher customer lifetime value by minimizing attrition growing spend per transaction and increasing purchase frequency.
Fiscal 2022, we'll also see us investing further in digital marketing and social media campaigns to drive traffic and sales.
Our current marketing campaign, you by Sally continues to generate a tremendous amount of attention from customers and the trade.
Celebrating the transformative power of Haircolor. The campaign has received extensive coverage from beauty editors and generated millions of views on social media.
Our third growth pillar is product innovation.
Fiscal 2022 will be highlighted by a big infusion of innovation across Sally and BSG, and we will be driving a large part of that ourselves.
The pipeline of new products is robust and includes our own and third party brands across multiple categories.
We will continue to emphasize and support sustainable and clean products, which are increasingly being selected and commanding a premium from customers.
Importantly, we believe our authority in color and care provides a logical path and powerful platform for standing up new brands that go beyond our four walls.
The first initiative is our new exclusive brand line of vivid colors at Sally called Strawberry Leppert.
Launch to a positive response in October this is a useful gen Z focused brand that speaks to our ability to increasingly attract younger consumers who value self expression.
Concurrently with the launch we created an individual digital platform for Strawberry Levered that immersive consumers and the brand ethos enables a direct shopping experience.
As the brand gains velocity, we expect to unlock potential opportunities for expansion into additional distribution channels, including mass beauty and third party E Commerce.
The innovation pipeline at BSG is equally exciting starting with <unk>, new toning shampoos that just launched in September.
<unk> is a great example of a high profile brands that continues to innovate and remains a key partner to us.
Looking ahead, we're continuing to focus on being at the forefront of innovation with new product and brand launches to excite the consumer planned for 2022 and beyond.
Turning now to our fourth growth pillar another critical element of our focus on putting the customer first is supercharging our supply chain to ensure that we are in stock in color and care every time.
A great deal of the heavy lifting has been done and we're now executing the final phase of <unk> implementation.
The system is up and running in all <unk> locations and the majority of our Sally stores.
We're currently rolling out <unk> to our remaining locations and fully integrating with our North Texas Cc.
Once completed we will have an highly automated integrated network with the best in class capabilities across inventory forecasting localized assortment pricing and promotions and in stock.
We believe our initiatives under these four growth pillars will allow us to drive top line growth of 3% to 4% and generate strong operating cash flows this year.
This reflects our ability to maintain strong gross margins, while mitigating inflationary pressures through careful cost control pricing levers and store optimization.
To that end, our 90 store optimization pilot remains in progress.
We're continuing to gather and analyze data from the sample and I'm pleased to note that we're significantly exceeding our sales transfer target.
In fiscal 2022, we expect to launch a multi year program designed to maximize the value of our large store portfolio, while offsetting inflationary headwinds.
By rationalizing the fleet, we can improve productivity and profitability, while delivering a convenient omni channel experience that benefits our customers.
We're entering fiscal 2022 with solid infrastructure are well defined roadmap for growth and favorable industry dynamics that support the significant opportunity in front of us.
In the coming months I look forward to working with the team to build out additional growth opportunities that will fuel our business and create meaningful shareholder value in 2023 and beyond.
In addition, I'd like to thank all of our associates across our store networks fueled operations distribution centers and support centers throughout the globe for their passion dedication and hard work, which helped US finished a strong 2021.
For everything you do each day to make us better and for serving our customers.
With that I'll turn the call over to <unk> to discuss the financials and then we will look forward to taking your questions.
Thank you Denise and good morning, everyone. We're pleased to conclude the year with strong fourth quarter performance, which exceeded the expectations. We provided on our last earnings call and refer.
Flex strong consumer demand coming out of the pandemic.
Top line growth solid gross margins and careful cost controls drove strong earnings and cash flow.
Net sales increased three 4% and same store sales rose two 1%, reflecting strong consumer demand with only some minor impact from pandemic related restrictions in Europe.
Fourth quarter traffic and conversion trends remain consistent with what we've experienced throughout the pandemic.
Traffic was down but units per transaction average unit retail and average ticket all increased versus prior year basically customers are still shopping less frequently but are buying more when they transact with us.
Global E Commerce sales were $71 million, representing seven 1% of total net sales as compared to $63 million in the prior year.
The year over year increase reflects ongoing strength as we continue to scale, our digital capabilities and implement our strategic initiatives around fulfillment and customer engagement.
Looking at gross profit.
We achieved fourth quarter gross margin of 56%, reflecting our ability to maintain solid performance above our 50% target level.
On a year over year basis gross margin deleveraged by 50 basis points, reflecting a higher mix of BSG sales, which carried a lower margin profile in the quarter.
Moving to operating expense fourth quarter SG&A totaled $387 million.
Up 5% versus a year ago, primarily reflecting higher labor costs and planned increases in marketing spend.
Looking at the new fiscal year, we anticipate that SG&A dollars will increase and rate will be up slightly on a year over year basis.
Our expectation takes into account increased labor and freight costs.
The increased expense planned in our international markets related to a full reopening in 2022.
As well as investments across our growth pillars that Denise discussed earlier.
We believe our store optimization program will serve as an important offset to wage inflation beginning in the latter part of 2022, and then more significantly in 2023.
Turning now to earnings.
We delivered strong profitability in Q4 adjusted operating margin came in at 11, 7% adjusted.
Adjusted EBITDA margin was 14, 5% and adjusted diluted EPS increased to 64.
Looking at segment results at Sally Beauty, we saw strong consumer demand in the U S.
Same store sales increased two 3% in e-commerce sales totaled $29 million for the quarter.
For Sally U S and Canada, the color category increased 4%, while vivid colors grew 5% representing 28% of our total color sales as comparisons normalized prior year.
Other categories also performed well.
<unk> increased by 31% and textured hair was up 16%.
Gross margin declined slightly at Sally, which reflected strong product margins offset by higher distribution and freight costs.
Segment operating margin increased to 18, 1% compared to 18% in the prior year.
And the BSG segment same store sales increased one 7% as salons returned to more normalized capacity levels in virtually all of our U S market.
E Commerce sales totaled $42 million for the quarter.
The color category grew 9% hair care was up 5% driven by all the blacks and styling tools increased 9%.
Gross margin and profitability at BSG reflect the same dynamics, we saw in Q3.
Specifically, we are experiencing higher sales from our larger volume full service customers coming out of the pandemic and those customers tend to be lower margin.
Segment operating margin was down slightly versus the prior year at 13, 2%.
Moving to the balance sheet and cash flow.
We ended fiscal 2021 and strong financial condition for the full fiscal year, we generated $308 million of free cash flow and retired approximately $420 million of debt.
We ended the quarter with $401 million of cash and cash equivalents and a zero balance outstanding under our asset based revolving line of credit.
Inventories at September 30 totaled $871 million of.
A 7% versus a year ago as we've reinvested in our inventory levels coming out of the disruptions from the pandemic.
In addition, we were pleased that our strong performance over the course of fiscal 2021 helped drive our net debt leverage ratio down to 169 times at the end of September.
Now turning to our full year fiscal 2020, 2022 guidance.
We are confident about how the business is positioned heading into 2022, and we expect to achieve the following.
Net sales growth in the range of 3% to 4%.
Net store count to decrease by approximately 1% to 2% driven primarily by Sally U S stores as we continue to optimize our portfolio.
Gross margin expansion of 40 to 60 basis points.
GAAP operating margin growth of 90 to 110 basis points and adjusted operating margin approximately flat to 2021.
The business has demonstrated remarkable resilience during the past 18, plus months and our teams have done a terrific job of navigating that the dynamic macro environment.
As the business continues to strengthen and generate strong cash flows you can expect to guess prioritize strategic growth investments as well as return cash to shareholders through the restart of our share buyback program.
As a reminder, during the fourth quarter, our board of directors approved an extension of our share repurchase program through September of 2025, which currently has over $700 million remaining under the authorization.
Additionally, we are evaluating opportunities to further optimize our capital structure, which could result in incremental interest expense savings.
Finally, I want to call out a housekeeping item related to disclosure.
Beginning in fiscal 2022, we will be replacing our same store sales metrics with comparable sales.
Which will include sales from our full service divisions and franchise operations, including any related E Commerce sales.
In 2022 for each quarter, we will disclose both current and prior year comparable sales under the new definition.
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. Please press one and then zero.
We hear tone, indicating that you had been placed in Q.
You may remove yourself from queue by pressing the same one zero command.
Once again for any questions or comments. Please press, one and then zero.
And one moment please for our first question.
And our first question will come from the line of Oliver Chen.
And your line is open.
Oh Boy this is a acuity.
Hi, there this is Katie on for Oliver Chen.
I would just love to know.
Sort of the trends in the color cycle and what you guys are seeing particularly in terms of you guys.
We see the world reopening and more people going into the office would just love to know what you guys are seeing in color.
Yes, so we've seen some really really strong trends in the last several quarters and color certainly on the self expression side the visits still continuing to see that remains strong.
Again trending to plus 5% compared to last year.
That was a really strong quarter last year as well.
So really excited to see those those trends continued.
What we have seen now is the styling categories are starting to take hold and gain traction as well.
Starting to see a little bit more comfort I think than people going out the back to school sessions, all started to contribute to that so not only in the styling elements of our care category, but also standing elements within our equipment categories as well.
Okay, Great and then just a follow up really quickly I would love to know more about.
So the margin profile of your ecommerce channel versus the store channel and especially as you ramp up the e-commerce penetration and how you expect to.
Get your margin expectations for that channel. Thank you.
Yes, so so E. Com you know you've heard us talk about this some over over several quarters, we've been in a kind.
Kind of pivot in the model if you will as we ramped up E com through the pandemic our first.
Order of business is really to make sure that we can get the product to the customer, especially during shutdown periods. So we ramp that up very quickly I'm really excited about what the team could do on a very short order to be able to turn on a lot of capabilities. We're now at a point, where we have a full suite of capabilities. We are in a position now where through this.
Here, we've turned on.
Start with ship from store Curbside, we now have focus and now we have rapid delivery and two hour delivery on both Sally and BSG on site. The other exciting part. This happened most recently in Q4 BSG launched there their app and we've seen really tremendous.
Traction there we're up to about 25% of our E. Com sales right out of the gate are transacting through that platform. If you look at E com for BSD in the fourth quarter E Comm was up 10% or 30% actually.
Really strong growth there.
<unk> overall was up 6% in the quarter half that was being driven by the E com on strength and the other half is being driven by full service, but so really excited about the traction we're making there from a profitability standpoint.
We are more profitable on the pro side that is approaching more of what you would expect from store margins on the Sally side, we have work to do we've talked about that over the quarters. We did pull back intentionally this last quarter.
Our Sally on site and have repositioned that just really focused on customer satisfaction.
We've seen those results start to take hold and we're starting to see our customer satisfaction scores go up we're seeing our splits go down our cancel rates go down and we're also seeing what.
Our Denise commented in her prepared remarks, we're starting to see more of a shift in a take hold on the focus and the the rapid delivery.
As you know has the same store margins and actually has.
Increased profitability profile and that we ended up with basket at.
Most often there on the the rapid.
Rapid delivery that is mostly paid for by the customer so with the shift towards those fulfillment options. We're also seeing.
An improvement in the profitability of Sally who is starting to gravitate that more towards what we would expect.
To see from a store margin.
The other thing like I said with the with the splits coming down to cancel rates coming down that also helps with profitability.
Thank you.
Thank you.
Our next question will come from the line of <unk> partners.
With Oppenheimer. Your line is open good morning.
Thanks for taking my question and congrats on the nice quarter.
So firstly I just wanted to start with US with your sales guidance that you guys did guide to 3% to 4% increase for the year is there any more color you can provide in terms of the cadence either I don't know maybe by on the quarter Barbie's you by about half in terms of how you guys are thinking about that growth just given how volatile the business was even as we drop these comparisons.
Yes, no good question.
The way the sales pacing as you know, we're not that seasonal but historically our sales are slightly higher in the back half of the year versus the first half.
We would expect the same as we look into fiscal 2022 from an absolute dollar perspective, but.
But when you are looking at it in terms of growth rates the growth rate percentages will be slightly higher in the first half.
To the back half and that's because we're comparing against the prior year Covid disruptions that you just alluded to we had some significant disruption from really the November to February surge and that included a significant international shutdowns.
And then we came out of that with some heavy restrictions, but then as the year progressed things to get better on the on the Covid front.
So back half of the year is expected to have more normalized comparisons.
We will also continue ramping digital and E comm capabilities to grow sales.
As we progressed through the year and we'll also see benefits from.
Well, we think there's supply chain disruptions that'll be tapering and then also as we have growing benefits from leveraging and Supercharging, our supply chain supply chain initiatives that you heard on the call as we.
Better Assortments and our in stocks will improve as well as we go through the year. So inventory will continue to build it'll get healthier in the coming months and when you think about gross margin that's expected to expand between 40 and 60 basis points. It will ramp over the course of the year with the majority of the expansion will be coming in the back half and then as you think about <unk>.
G&A.
Those dollars will vary slightly with sales, but the dollars will be a little bit more level loaded.
When you think about that across the quarters.
That's really helpful color and then as you guys look at the top I mean, you know pretty positive comment just on the innovation front and your business had a lot of pandemic headwinds in this past fiscal year.
Can you just help us frame. How you guys are thinking you know within that 3% to 4% is that a conservative guy just some of the drivers you see there and then international I know as I always I think has not fully recovered. So is there any way to quantify I don't know where international is today versus 19.
IRA you might think.
The color I'd give you on sales as we feel good about the plan that we built the plan is mostly based upon the four key items that I talked about earlier today around digital personalization loyalty and innovation and then the health of our supply chain and continuing to improve with in stocks improving behind that and when we think about the.
Our role that innovation and product will have its certainly one of the pillars, but it doesn't really stand alone. It ultimately has to get through the customer through the channels with the communication around it. So we feel great about our exclusive brand strawberry leopard and what's going to be coming through.
Sally with that and the ability to grow it and as we talk thinking about that as an incubator brands that might be able to go outside the walls of Sally over time, but really building it as a digitally native brand in terms of how we're going to cover with its own E. Commerce channel and then on the BSG front, we continue to see good innovation, there and we expect to continue to see.
Good innovation.
Come through as well so innovation is one of the four pillars that is out there.
As Marlin mentioned, you we did still see some headwinds in Europe last year last year with the pandemic that was there. So part of our plan is hinged upon recovery in Europe into a lesser extent in Mexico, but I would say all the businesses are well poised for growth and when we think about the numbers that we're putting out there we think that they are realistic.
About what we can go and do and the plan is really built to deliver on it.
Great and I'll sneak in one quick last one just on the supply chain I know last quarter, you guys called out supply chain headwinds there wasn't much mentioned in that though is that is that a significant headwind going forward or do you guys generally feel like you've been able to manage it.
We entered this year yes.
Yes, refresh I'd say both.
It is a headwind there is no doubt that we can't overlook the fact that whether its ocean freight domestic freight.
Labor to fill fulfill and working both the Dcs and drive the trucks that it's a real concern for all of us out there.
We feel like we have got a good plan to mitigate all the parts that are within our control to mitigate so I think as you know we're not as exposed as some other specialty retailers in terms of overseas markets only about 10% of our business really comes.
In from overseas, so a little less exposure there we've been working really hard with our vendor partners and they've been great partners in helping us understand what lead times need to be and when we need to get orders placed to be able to keep things on the shelf. So we're working hard around that as well.
We're also working to consolidate our peers.
When trucks.
Votes arrive, we're able to move them as quickly as possible as full as possible across the country in and manage that as well.
So all in all I'm working the levers that we can best control and I think we still have a bit of a tailwind from our implementation of a pooling delivery system that we did here in the U S and where we've just taken a little bit less over the road trucking going forward and a little bit more localized shipping as it seems to be a bit more.
<unk> today. So by no means are we overlooking is a headwind, but I think that we have a really well thought out plan how to manage as much as we possibly can.
Thank you best of luck.
Thank you.
Our next question will come from the line of Mark all quicker with Baird.
Your line is open.
Good morning, Thanks for taking my question and congrats on the solid quarter here.
So the first question is you come in here with fresh eyes would love to just get your initial view on what's left to be done to really position the company for success and you know what.
Do you see as maybe the top incremental opportunities medium to longer term.
Yeah happy to talk about that I was absolutely thrilled with the opportunity to come and join the organization and and I started a little bit with what I'm. Most excited about because I think it's things that we've actually already done or a real tailwind that are going to help drive the business I think the combination of a strong team and a strong foundation has set us up so that initiatives we undertook.
<unk> have a real chance of success and by that we have a team that successfully navigated through the pandemic and delivered a transformation changing our ability to execute against CRM loyalty E Commerce merchandising technology assets. The short end of the list, but when you think about the initiatives that we're talking about today.
Continuing to propel our digital and e-commerce business, having in building and personalization program and the way that we can speak to our customers knowing 74% of our sales and where they are coming from from customers and the ability to reach that.
I think it is one of the biggest untapped opportunities that we have to really leverage our ability to know our customers I can't say it enough for a 74% across Sally and 100% of our customers across the ESG. We can have a direct conversation with which is I think just a fantastic a statistic and something I'm very excited about.
And a big opportunity I also think that we're playing in the right space right the hair category.
It has a ton of resiliency good economy bad economy, everybody still wants to take care of their hair and theres, a great tailwind so of tier ones around self expression. So some of that is the dividend, but some of that's also just about people feeling great about themselves and wanting to think about their hair as being part of that product innovation is probably ramping in some of the fastest rates that I think.
We've seen in the industry and then with independent stylist is a very different go to business model and we're really set up well to serve them. So another real.
Good point for us to be able to build on and drive growth go forward. So you when I think about the pillars that we have out there.
Knowing our customers at the top of the list I'm getting after that customer with personalization with our digital capabilities clearly at the top of our list and then I think some of our most untapped potential remains in leveraging our supply chain. The foundation that we've set up is absolutely phenomenal we need to finish a little bit of work in GBA.
Early in the fulfillment to our stores using the <unk> platform and as we get that going and we get all of our stores in stock as supply chain pressures ease.
We have a nice opportunity to continue to build customer satisfaction and loyalty, which we hope will build lifetime value of the customer.
That's really helpful. Thank you for all that detail.
Follow up for me.
Just wanted to ask you about the labor backdrop.
You could provide a little bit more color on.
The level of incremental investment in wages youre anticipating in the coming year, if youre able to quantify that and maybe the levers that you seek to offset that inflationary pressure.
Yeah.
Yes.
Yeah. So.
<unk> been talking about this.
For several quarters as well and even in the last probably back half of 2021, and we certainly felt some wage increases.
As we look into 2022, we noted that will be even more intense so we've certainly planned that in.
<unk> plans and increases in freight and other distribution and supply chain costs. So we are seeing inflationary pressures, we have planned that in <unk>.
We've also planned in to return marketing back to kind of more pre COVID-19 levels as a percent of sales so you'll see incremental marketing spend in there as well. So and then if you compare the year over year I, just don't want to forget that we will have international markets that will we will be back to a fully opened and so we'll have to see that there too but most.
Shortly we've created capacity to be able to invest in our growth initiatives and we still have more technology investments that we want to make some that'll be about scaling and optimizing it.
And Supercharging, our supply chain with supply chain tools, we'll be implementing more pricing and promo tools and then we will continue to enhance and evolve our digital platform. So excited that we're we're continuing to focus on our priorities continuing to invest in our most strategic initiatives that are going to drive the topline topline.
If you think about the offsets.
We're very focused on offsetting of mitigating the cost pressures.
Store optimization will be a key element to that we'll start to see benefits now that will continue to gain traction more towards the back half of this year and then further into 2023 and beyond I've talked about E. Com profitability that also helps but a big lever for us is pricing and we will pull pricing levers we started to do that over last year.
The good news is we haven't seen a whole lot of change in volume or spending behaviors or consumer behaviors. There so with a differentiated core product and being very very strategic about the pricing that we take.
We believe that we've already had success and have confidence that we'll have that going forward. So with art with our business returning to a strong top line. We think we're positioned really well to continue to invest in growth.
We will drive leverage in the model, we will expand margins over time, but in the near term will offset the cost when the cost headwinds.
We'll deliver the operating margins near last year and pre pandemic 2019 levels.
But it will be strong sales and we'll grow profit dollars and will generate a significant amount of cash. So I'm really looking forward to this year and I think we're positioned really well to deliver some really strong results.
Thank you best of luck and Denise welcome.
Okay.
Thank you. Our next question comes from the line of Steph Wissink with Jefferies. Your line is open.
Margin, so that fiscal year 'twenty two guidance called for operating margins to be flat, but guide 40 to 60 basis points of gross margin expansion. So just wondering what's offsetting the SG&A drag and then I have one.
My follow up afterwards.
Yeah, so yeah.
You mentioned gross margins, you kind of a little bit in the beginning but I think.
Gross margins were guiding to 40 to 60 basis points expansion.
Again, we're going to be offsetting costs, both in that line item with supply chain and freight costs.
We will overcome with some some pricing levers that will help drive that expansion.
In terms of SG&A I, just I just mentioned some really strong headwinds there when it comes to inflation both from wage and other costs like freight and then also making sure that we continue to invest in our growth initiatives. So so.
So that's where you get the offset so again pretty excited about the model. We believe we're set up well.
To continue to generate really strong cash flows and position ourselves well for long term profitable growth and then over time, we will be able to leverage and continue to expand operating margins over time.
Okay. Thank you and then could you just talk about the fleet rationalization. So what are you seeing in terms of transfer rates pick up in E com and your ability to retain those customers when a store closes.
Sure. We're really excited about the program and where it is headed we're still in the very early stages. So we have 90 stores that we've put through a closure test we're continuing to evaluate that it's still a little early for a full read but early indication is promising that the sales transfer rate is there interesting.
Really the sales are not transferring necessarily all the E. Com, we're seeing a good mix of transfers to stores as well as E. Com. We're also seeing transfers in our BSG business over to full service and.
And with the growth of the App in our BSG business as well yet another vehicle for folks to continue to access the brand. So it's not one size fits all and good to see that customers are finding us in different ways and I'd also say, we've gone through a pretty concerted marketing effort to be certain that our customers know where to find us when we have.
And to close a store.
So I think a really good execution there in doing that the key to US is now watching this a little bit longer over time to understand if the transfer rate. We are seeing is temporary or is it remains consistent at these high levels.
We do have plan to continue to close some stores in fiscal 'twenty, two net store count will be down around 50 stores, or so which is a 1% or a little over 1%.
Thats, a really a mix of closing about 100 stores across Sally and BSG, but being offset by some opportunistic new store openings. This is a real opportunity for us to position, where our customer is and where we think that growth potential is and so we will continue to open new stores very selectively where it would make sense to do so.
Then as we work through this year, we'll hope to be able to talk to all of you guys. A little later this year about the longer term program around where we are.
On a longer term optimization plan like I said, we're just a little early to call. The final results, but we have a good batch of stores that we're monitoring now and so more to come in 'twenty two to be able to make that call and if we can make all of that work, which I think we're feeling pretty good about as Marcelo mentioned as one of the key offsets we have in terms of driving some efficiencies.
CS into the P&L, while continuing to grow the business.
Great. Thank you so much.
Thank you. Our next question comes from the line of Simeon Gutman with Morgan Stanley and your line is open.
Good morning, everyone, Hey, Denise how are you at Marlin.
So I wanted to ask around the fourth quarter and then within the guidance. If you could I know you mentioned.
The transactions on the ticket.
<unk> were consistent with the prior run rate can.
Can you give us a little more color on that can you talk about comp transactions versus ticket in SBS and in particular for the U S. And then within the guidance for next year.
The total sales guidance of up three to four how much is price versus volume.
Yes.
Let me start with the last one I'll come back to the to this.
Detailed questions.
When we look at the three to four I think.
Denise hit on on the main growth pillars, there and so we're coming into the year pretty excited and we have a great foundation that we're going to be able to leverage.
We're going to we've got a great roadmap going through the fourth the four growth pillars, we've really favorable industry dynamics as well, we've got a resilient category or categories are in demand we have trends that are in our favor.
So all of that's pointing to some nice tailwind I think that it gives us confidence into the top line pricing is an important lever.
I've talked about both through margin enhancement as well as driving top line, but it is not the majority the majority of our growth is coming from.
The growth initiatives, whether it be via the digital initiatives. The innovative initial innovation initiatives and then also the supply chain and really improving our in stock and our offerings to the customer.
In terms of the of.
What we're seeing in spending it's really a lot of the same that we've been seeing.
The traffic patterns are getting better, especially as you compare to last year when youre looking at the end of the pandemic periods, but when you compare to the pre pandemic periods, we're still in the the high teens.
Kind of low twenties, it gets a little choppy here and there you get some some spikes.
Whether it be stimulus or maybe mid months child care credit.
Check hits, so we see a little bit of Choppiness, but for the most part I would say the traffic patterns are fairly <unk>.
Consistent theyre getting a little bit more consistent month to month and.
I would say that they are probably more on the pivot to improving and then obviously the other way so.
In terms of spending metrics again, we're seeing reduced trips.
But we are seeing more spend per item.
And so we and we do see our our average ticket and average unit retail is going up.
Got it.
Maybe to follow on to that can you. If you look across the Sally the Sally beauty business.
Can you talk about the range of of inflation across the store I don't know if you can talk about product categories, but which categories are seeing the greatest versus which categories are seeing the lease and then if you could talk about how well you understand the elasticity there because I think.
We'll be in an inflationary environment, the lower income consumer may be under some pressure at least in the first half of the calendar 'twenty two I'm curious how that could be managed how you've thought about that into your plan.
Sure Simeon I'll start off with a little bit on elasticity in Marlow can cover off on a little bit of where we're seeing more or less inflation.
I think the team has done a great job over the past year, we've had a good chance as we've sort of moved prices across various categories in stores and geographies to be able to look pretty closely at where that elasticity is and for the most part first.
First I'd start by saying I think we have the tools to continue to watch it and the team spends a lot of time talking about what unit movement is looking like particularly looking where we've taken price and where we haven't to date. We have we have seen it be relatively inelastic for the most part across the places that we have right.
List price I mean at the end of the day people are still choosing to buy and we haven't necessarily seen a trade away from a specific product or brand what I would say going forward is it's also a focus for us for this year and being able to be very.
Tuned to what people are choosing and not choosing and the great news is with the basket data that we have we can actually look at specific customer baskets and be able to diagnose for that customer are they trading down a brand are they trading away from something where we might have done price.
So we're going to be really focused on it as we work our way through the year I will turn it over to Mario just to talk a little bit about where more or less inflation might be coming yes, yes, I think it's probably.
We do see it coming obviously wages hitting everybody.
As we look through to our vendors.
As they continue to pass pricing on to US, which is a normal course, it might be a little bit more intense as we hit these inflationary periods, but we have the ability to pass those costs on and we've done that and we've actually now talked about with more informed tools that.
And he was just referring to being able to expand on top of that as well so.
We feel like we're in a pretty good spot there. The only thing I would say is just in terms of the consumer.
Consumer behavior.
In terms of tough times, whether it be recessionary, whether it be pandemic.
It would be tough economic times.
I think that the priority is still our consumer we find they prioritize their beauty.
They aren't going to let her go so that's been a good thing to see again and again to continue through the pandemic that theres such resiliency in this category.
Gives us confidence that we'll be able to continue to service the customer even when the times get tough.
One final point and Thats, specifically on the color business. When we think about the color business, whether it be for a retail customer or a pro there are generally quite loyal to a brand. They figured out what works for them. They know how to use the product they are comfortable with the outcome and results. So in all places where you think about the stickiness of our customer <unk>.
Particular brand you'd probably see that more in color than you do in many consumer categories out there just because they're they want that outcome that they want so we also see that being a piece of traction.
In both businesses to be able to mitigate would've been a price increase might do in terms of how consumers might think about their choices.
Okay. Thanks, everyone.
Thank you.
Our next question comes from the line of Olivia Tong with Raymond James and your line is open.
Great. Thanks. Good morning, first question is actually on share repurchase, which obviously you've got the authorization program in place, but you haven't done much in terms of the program of late.
As you're thinking about next year and sort of a recovery in place and a little bit more of a return to normal vivek, it's still pretty strong.
Are you thinking about.
Share repurchase and other decisions on capital allocation and then I've a follow up thank you.
Yeah, I think we're in the best position, we've been we have $400 million of cash on the balance sheet. We don't have anything outstanding on our ABL, you've seen us pay down over $400 million of debt. This past year, and we're really pleased about our debt our net debt leverage ratio at 169 times.
And our liquidity is well above pre COVID-19 levels. So all of that said, we are well positioned to deploy excess cash.
It has not been our goal to keep cash on the balance sheet, we generally run somewhere.
Somewhere under $100 million, if you go back to historical pre pandemic levels.
So so we're pretty excited.
Lighted about our positioning here, we're going to continue to stay committed to investing in our growth priorities, but now we are in a great position to be able to start to add buybacks to our capital allocation priorities we.
We will restart our share repurchase program in 2022, and as you mentioned the board did.
Authorized.
$700 million, which is left on our authorization plan to be extended into September of 2025.
And the other thing I'd mention is we do have some good options coming up on our debt. So.
We will take a look at further opportunities to optimize our capital structure and look for some interest savings along the way as well.
Great. Thank you and then Denise welcome first and then Bob.
As you think more about what you might do differently.
You mentioned more on technology, but perhaps can you give a bit more color on on a few other areas for example like stores.
Foot print assortment.
And then also your thoughts on.
On product mix and your ability to push price points from here. Thanks.
Sure. Thank you for the welcome a lot built into that question and.
I will say there are many many ideas that we have underway in under discussion and kind of four weeks in lots of places where I think that we have we have room to grow and expand the couple of things that are on my very near term priority lists are around digital and E. Commerce. We now have the capability to maximize how we utilize those two.
<unk> and those areas of our business, taking that modernized approach and getting it into the hands of our customers, which is about transacting, but it's also about education and influence in the ways that we can communicate.
And make things more simple for our DIY customers, but also reach our stylists with more messages about what's more new and different and training opportunities I think that the tools that we have today are poised to be better utilized and poised to do more messaging for us and as we can start things.
Personalized journey, you can think about a customer who for the first time comes into Sally they buy color because they want to try to do their own hair. When we now have the opportunity to follow up with them and be able to tell them about how to Dow take care of their colored here, what the right care products might be and how to think about when it's going to be time to come in <unk>.
And try again give them videos to help them make that whole experience easier, we can actually connect to that with people and so as I mentioned in my prepared remarks, and one of the things that I'm. Most excited about and I think we have the most opportunity to push on it is how many of our customers. We know how many of them we can talk to.
It's a really untapped potential for us to grow in that space.
I also think about the opportunity that we've talked about where we are definitely leading with color and care. It's who we are but we have the ability to expand that conversation with the customer to the more peripheral spaces of how we serve them.
Marlin mentioned with people trending back to going out and kids being back in school things like styling tools are becoming more relevant and theres more innovation there to come too so even pushing around here I think we have some great opportunity and tailwind.
But one of the things that we are working on and we'll have more to come and talk about over the next few quarters is a much broader definition of where our growth could come from and what we are poised and have capabilities to be able to do that others might not be able to do in this space a lot of it can still touch around here and that could also be a bit broader than that.
In terms of leveraging the relationships that we have in and more of a teaser of work underway. So I'd just say more to come on some other gross building opportunities that we are thinking about internally right now.
Great Best of luck. Thank you.
Thank you. Our next question comes from the line of William Reuter with Bank of America and your line is open.
Hi, I just talked to the first is you mentioned the wage pressure.
I guess I was wondering if we could try and put that into a little better context.
Would it be in the kind of 5% range that youre seeing.
Are there stores, where you are having trouble staffing where you may be having to operate with reduced hours.
Yeah, Let me start I think overall I think wage pressures.
It's a universal problem and Universal Challenge right now and in terms of just the labor market, we're not immune to having some of those pressure points and we do have different areas of the country, where maybe theres a little bit more pressure than not in terms of staffing I will say that the team does a great job in thinking about this at a very localized approach so.
Youre not going to hear us talk about a standardized increase in wages that you might hear from some of the largest retailers, but looking very locally in terms of what the appropriate reach wages are for the markets that we're in.
Thinking hard about what our definition of flexibility means in terms of hours and shifts in our Dcs as well as in our stores.
And then we have what is a natural benefit to us in our stores in particular in that many people who work in our stores are tied to a larger.
Beauty environment, they might work in our stores part time and also be a stylist and they might be in school and learning to become a stylist and they have a bit more of a natural affinity to the products that we sell and then also creates a different sense of.
Of opportunity when we think about going to market. So.
So seeing things that a lot of other folks are seeing but I think managing it very much on a localized basis to be working to keep our stores kind of fully staffed our team members developing.
I'll turn it over to Marcelo to talk a little bit more about overall wages and what we've built into our plan. Yes, I guess, if you think about it from a P&L structure wages, obviously, one of our largest components.
Of our cost structure.
I think we've talked about a little bit and Pat in the past trying to kind of give some sort of context to size.
If you look at it from a segment point of view it runs anywhere from 35% to 50% of the total cost structure.
It would be related to payroll.
Talk about we have taken some very strategic wage increases to invest in our best talent as we went through this year and saw that intensify a bit in the back half.
As we look into next year, it's another.
Probably 6% upwards of 9% just depending on where you are in this localized grid.
Further our wage.
Cost pressure that we built into the plan.
That is very helpful. And then secondarily with regard to I think your net leverage target of two five times you guys are at one seven.
Should we kind of assume that these shareholder friendly activities.
Pursue this year well what kind of gets you back towards that target.
I think our comment on is we're in a very very good place with our leverage ratio right now and so with our cash generation and cash on the balance sheet, we have tremendous runway to do at all to invest in the business.
To return.
Shareholder value back through buybacks potentially other means.
As well as continue to look at our capital structure look at our debt stack continue to optimize that so we think we're in a good place with our leverage ratio.
Just kind of leave it there.
Okay. Thank you.
Yes.
Thank you and at this time I'm showing no further questions speakers. Please continue with any closing remarks.
Well, we thank you all for joining us today and we are incredibly excited about how we ended our fiscal 2021 year, we feel like we're set up for a great fiscal 2022 as well.
We look forward to being able to talk and meet with as many of you as we can in the coming year and a final. Thank you to all the teams for everything that they do every day to help us grow our business and serve our customers so with that thanks for participating on the call today.
Thank you and ladies and gentlemen that does conclude your conference call for today. Thank you for your participation and for using AT&T Executive Teleconference Service you may now disconnect.
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